My wife asked me if I had talked to the reporter who wrote last Saturday’s seminal piece on the state of the housing market. She commented that it pretty much covered my views on where we are including the quip in the first paragraph.

You have to wonder sometimes what they’re smoking over there at the National Association of Realtors.

This quote really shouldn’t be taken as a slight against NAR, but rather against their chief economist and whomever is enabling him to depict the market this way. Members continually mention to me about being embarrassed by this positive at all costs outlook by “Sunny Yun.”

And that doesn’t mean a gloom and doom depiction of housing would suffice either, but come on – the American consumer is a lot smarter than being given credit for.

The New York Times article was written by Joe Nocera: Widespread Fear Freezes Housing Market.

The article is essential reading, especially for real estate brokers and agents because it lays out the proper context of the key factors in the current housing market. Understand and embrace it to be successful in today’s economic environment.

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This weekend, I rehashed the “double dip” Seinfeld bit with my kids and then it dawned on me – with all this talk about double dip economics and double dip housing markets, it brought to mind this clip.

Better yet, it parallels consideration of additional massive federal spending attempts via job creation to get the economy and housing moving - it’s like placing your entire mouth in the dip.

[click to open study]

In the just released paper from the Boston Fed: “Reasonable People Did Disagree: Optimism and Pessimism About the U.S. Housing Market Before the Crash” by Kristopher Gerardi, Christopher Foote and Paul Willen.

I loved this paper! and could name most of the economists who took the actions outlined in the abstract below before I read the paper its self – to the uninitiated the paper names the names.

You’ve got the Optimists, the Pessimists and the Agnostics.

Many economists, skeptical that a bubble existed, attempted to justify the historic run-up in housing prices based on housing fundamentals. Other economists were more uncertain, pointing to some evidence of bubble-like behavior in certain regional housing markets. Even these more skeptical economists, however, refused to take a conclusive position on whether a bubble existed. The small number of economists who argued forcefully for a bubble often did so years before the housing market peak, and thus lost a fair amount of credibility, or they make arguments fundamentally at odds with the data even ex post. For example, some economists suggested that cities where new construction was limited by zoning regulations or geography were particularly “bubble-prone,” yet the data shows that the cities with the biggest gyrations in house prices were often those at the epicenter of the new construction boom.

In other words, economic theory has to catch up to the housing market’s gyrations and we have to sort out a heckava alot of very smart chatter.

[click to open report]

The Council on Foreign Relations released their quarterly chartbook on foreign ownership of US assets with a lot of great visuals – summarized:

The charts show how foreign ownership of low-risk assets has grown especially quickly in the 2000s, mainly reflecting purchases by governments, notably China’s. The United States, on the other hand, tends to buy riskier assets abroad. As a result, U.S. holdings overseas collapse in value faster than foreign holdings in the United States during a financial crisis.

Lots of interesting charts showing how interconnected we really are.

Foreign investment is front and center in the residential New York market in particular due to its linkage with international business and tourism as it relates to real estate demand. Implications for housing price trends and mortgage rates are abound explored in a related paper: “How Dangerous Is U.S. Government Debt?:The Risk of a Sudden Spike in U.S. Interest Rates.”

[click to open report]

Last week, the Obama Administration, via Secretary Donovan at HUD launched a monthly recap of key data on the health of the housing dubbed the “Monthly Housing Scorecard.”

The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of the Treasury today introduced a monthly scorecard on the nation’s housing market. Each month, the scorecard will incorporate key housing market indicators and highlight the impact of the Administration’s unprecedented housing recovery efforts, including assistance to homeowners through the Federal Housing Administration (FHA) and the Home Affordable Modification Program (HAMP).

“Scorecard”? They got game of transparency, no? Ok that’s harsh – nevertheless it captures a lot of great housing data captured in one location to show the “Obama Administration’s efforts to stabilize the housing market and help American Homeowners.”

Monthly Housing Scorecard – June 2010 [HUD]

A great article in Multifamily Executive (hat tip) seems to hit the nail on the head:

Multifamily Acquisition Market Heats Up as Cap Rates Fall

The acquisition market has been gathering steam in the second quarter, with cap rates declining nationally and the gap between buyers and sellers narrowing.

For the last two years, the typical sellers seemed to be only those who had to sell. And the perception that rents and values will escalate two years from now has kept many owners who bought at the height of the market from listing their properties.

But among longer-term holders, there’s been a shift in attitudes in the past 90 days. The bidding on high-quality assets has become so frenzied that owners are beginning to ask themselves if now really is such a bad time to sell.

We are already seeing this on an individual apartment and single family home basis, with investors comprising the lion’s share of the purchase activity for speculative purposes. Record low mortgage rates and a precipitous drop in housing prices made the purchase decision pretty easy.

Economically speaking, nothing has changed in a meaningful way in the short term, although the consensus seems to be that we are going in the right direction.

After raising fresh capital over the past 18 months from investors hungry to recoup their losses of the past few years, funds looking to invest in multi-family and distressed assets have been waiting on the sidelines afraid of their own shadow, looking for the right time to make a move. But the problem is, everyone seems to be doing it at the same time and they seem to be more concerned about what their colleagues are doing rather than the fundamentals.

That’s because investors want their money working for them and are tired of waiting for the fund managers to get in the game so to speak.

The surge in SFR and condo sales activity nationwide as a result of the tax credit, sharp declines in prices and rising foreclosures are bringing more affordability and falling borrowing costs to the housing market. It’s not clear whether this can be sustained. If this level of activity can be, I’m not sure how to do that math.

This “happy” real estate news for the past 6 months has played a role in the new unbridled optimism by fund managers looking to acquire multi-family and distressed assets and are under pressure from their investors and who don’t want to be left behind.

Our commercial group Miller Cicero is seeing this sentiment first hand when speaking with investors.

It feels like the beginning of a new asset bubble because the math simply isn’t there. There are a lot of smart analysts punching key strokes on their HP12c’s trying to do the math.

Of course they don’t seem to know how to do the math and in a bubble, that’s besides the point.

Robert Moses, the Master Builder of New York, famously uttered these words at the groundbreaking of Lincoln Center in NYC.

You cannot make an omelet without breaking eggs.

I highly recommend The Power Broker by Robert Caro (and his LBJ trilogy) that chronicles Moses’ life but make sure you dedicate a lot of time – it’s a long read.

Amid the scrambled (sorry) state of financial reform going on in Washington right now is the underlying newly realized immovable object and the likely outcome for Wall Street:

Lower Risk = Lower Compensation

Ok, eggs not a great analogy but I needed to squeeze one of my favorite quotes of all time in somehow. Lower leverage is in the future of Wall Street. Take lower risks and there are lower returns to firms eventually translating into lower compensation, translating into tempered housing demand.

This Monday federal regulators finalized guidance on a hot topic as of late: executive compensation:

The final guidance is similar to what the central bank proposed in October, but would now apply to the entire banking industry. Previously, its efforts targeted only holding companies and state-member banks…

The final guidance did not change the three initial goals of the Fed’s proposal: providing incentives that appropriately balance risk and financial results and discourage risk taking; matching “effective controls and risk management”; and supporting corporate governance.

Risk, risk, risk

Senior Economist David Belkin of NYC’s Independent Budget Office received a flurry of media coverage for his post titled “Wall Street Wages: A Rough Ride on Easy Street:”

Much has been made in recent months of last year’s record profits on Wall Street, the myriad ways (near-zero interest rates, bailouts, accounting rules changes) that government policy boosted those profits, and the seven or eight figure bonus packages that some Wall Street executives awarded themselves from those profits. There has been less said, however, about what happened to aggregate wages and salaries across the securities industry in New York City in 2009. Not only did wages fall, but the fall was the steepest in modern history—including the Great Depression.

Adjusted for inflation, average wages in the securities industry plummeted 21.5 percent in 2009 and 24.6 percent over two years.

A key economic engine in the New York City metro area that provides 25% of personal income and 5% of the employment and creates 2.5 private sector jobs for each securities job, this should also be a concern for sustainability of the current level of housing demand.

Ironically Wall Street has been telling us this for years: past performance does not guaranty future returns.

source: GS Investment Strategy Group

Current improvement seems to be on the low end of the range…but it’s not clear to me how this occurs at meaningful levels until excess supply is cleared.

From their Investment Strategy Group

The key changes to our 2010 outlook are as follows:

• We believe the Fed is unlikely to raise rates this year due to uncertainty around Europe and lower inflation data.
• We are lowering our 10-year yield forecast from 4.25-4.75% to 3.5-4.0%.
• As inflation has surprised to the downside, we are lowering our core CPI range to 0.75-1.25% from 1.0-1.5% and our headline CPI range to 1.5-2.0% from 1.75-2.25%.
• We maintain our central case target of 1150-1225 on the S&P 500

In 2011:

• We expect GDP to grow 2.75-3.25%. Investment will likely recover from its low levels; consumption should continue to grow at a moderate pace.
• The Fed is unlikely to raise rates until some time in the second half of 2011 unless employment growth and/or inflation surprise to the upside.
• Our central case target for the S&P 500 is 1225-1300

download report [GS Investment Strategy Group]

I have been coming across what I believe to be somewhat weird rear view looks at the credit/housing bubble we just went through from some well respected voices. I’m thinking there is perhaps an academia disconnect from the front lines.

[click to open article]

Casey B. Mulligan is an economics professor at the University of Chicago writes “Was it really a bubble?“

According to the bubble theory, for a while the market was overcome with exuberance, meaning that people were paying much more for housing than changes in incomes, demographics, technology and other basic factors would suggest.

But why would the blue line need to be where it is? Housing prices are stickier on the downside and the slope should not form a bell curve as the drawing suggests. It should be a lesser slope and drawn out over several years, shouldn’t it? And wasn’t that the whole point of the stimulus plan in reference to the first time home buyers’ and existing homeowner’s tax credit? It stimulated sales activity and as a result, artificially pushed sales price levels sideways.

Take a look at my colleague at Westwood Capital, Dan Alpert’s chart showing the exuberance of housing prices. You can slice it and dice anyway you want but THAT’s a bubble.

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And one of my favorite economist/writers Edward Glaeser writes “What Caused the Great Housing Maelstrom?“

If the easy credit hypothesis is correct, then we can take comfort in the thought that we understand the great housing convulsion, and we can start pointing fingers at those institutions, like the Federal Reserve System, that play a role in determining interest rates.

He and his colleagues through their research seem to be saying that low interest rates and high lending approval rates don’t explain enough of the rise in housing prices.

In all due respect, I don’t know exactly how they proved their points empirically but this research seems to be a bit disconnected to what most of us observed on the ground during the boom itself.

For example, a five percent increase in loan-to-value ratios is associated with a 2.5 percent increase in prices, and loan-to-value ratios rose by less than five percent during the boom.

That seems like a very low ratio to me. As appraisers we could clearly see the pressure we were under to hit the number for the mortgage approval and that most people were placing 5%-10% down. I contend that credit was easier than anytime in modern history and that combined with interest rates kept on the floor from late 2001 to mid 2004 caused a frenzy of demand or as Professor Robert Shiller characterizes it as “Irrational Exuberance.”

This was a credit bubble and that housing was merely a way to keep score. Perhaps I am not following their logic but having lived through it and saw the lending environment first hand, its hard to imagine this whirlwind of the past 7 years was not a bubble of some kind.

(courtesy: CS Monitor)

Admittedly I am getting annoyed about the lack of closure on this credit crunch thing. Can’t we simply point fingers, have someone apologize but indirectly deny responsibility and then we can then get back to buying stuff and building extensions on our houses?

Make no mistake, the credit crunch is one big mistake. It’s called a systemic breakdown because so many in the economy played a role in our economic demise. Moral hazard, government backstops, bailouts, stimulus, bonuses, trillions, synthetic CDOs have been placed in the forefront of our thinking.

But no clear financial reform path is being taken – in fact it took an investment bank using swear words in an email to get Washington’s attention and break the political maneuvering. Each party is planning to oversteer the solution to their agenda which was part of the problem that lead to this crisis. While we all worry about “free markets” we have forgotten how important it is to create a level playing field. Without rules, free markets degrade to chaos and lack of investor participation. We are seeing this now within the secondary mortgage market, especially jumbos.

We can never remove the human factor from the problem since regulators were clearly asleep at the switch (since Clinton) compensation had perverse incentives favoring short term profits over long term viability, regulators were neutered by the prior administration (think prior SEC under Bush) so its dumb to have some sort of czar. It’s never one factor – it a combination of people, events, institutions and politics that light the fuse.

I am looking forward to some sort of meaningful financial reform. If neutrality isn’t baked into the system, then this is all a big waste of time. Regulators need authority and can not be influenced and investment banks can’t pick the regulator they want. Rating agencies should not be paid directly by the investment banks whose products they rate. Appraisers can not be fearful of their livelihood because they don;t hit the number, etc.

Here’s what it all boils down to now: blame and being sorry.

Blame
Another Jonathon Miller (no relation, but awesome name) and his wife are suing a large builder for not preventing flipping in their housing development which brought in “irreverent transients” who party loudly, park erratically and install unauthorized satellite dishes.

I’m not doubting those conditions exist and it appears to be a creative way to get your money back.

When the housing market collapsed, some contracted buyers abandoned deals. From the outset, the project exhibited “ghost-town-like” qualities, the suit says.

Looking back, the Millers say the developer should have worked harder to prevent so-called flippers from buying units. Buyers were supposed to stick around for at least 18 months.

Saying I’m Sorry
In particularly interesting Reuters Summit Notebook piece, People make mistakes, take Alan Greenspan and Captain of Titanic

Phil Angelides, Financial Crisis Inquiry Commission chairman, says he’d rather see some taking of responsibility than hear another “I’m sorry.”

“Personally I don’t see my role as … to obtain apologies. What I don’t hear is a sense of responsibility and self-assessment about what occurred. There seems to be a disconnect between the practices that people undertook and the financial collapse,” he said at the Reuters Global Financial Regulation Summit.

“I’m struck by the extent to which all fingers point away generally from the person testifying,” Angelides said.

When it gets to this point, its too late. Let’s try to be proactive with some sort of meaningful financial reform. Not more regulation, not fewer protections for neutral parties.

If we can’t do this as a country, well, don’t blame me.