Posted by Jonathan J. Miller -Wednesday, August 20, 2008, 11:24 AM
I am struck by the extreme range and contrast of housing development beyond traditional on-site construction. From mobile homes on the low end to art-like pre-fab homes on the high end.
Single-wide, double-wide, wide-load
The mobile home market, which often represents the lower end of the housing demographic, is seeing particular hardship right now in the availability of financing. It is sort of a a hybrid of real estate and chattel (personal property).
In the development of mobile home parks it is not unusual for the home owner to be situated on leased land, something not generally done in traditional home building. Pre-fab homes (the kind you see being hauled in two halves on semi-tricks) are generally lumped into the same category. A few years ago there was a meltdown in the manufactured home mortgage market so now the new housing law directs Fannie Mae and Freddie Mac to come up with new loan products and flexible underwriting standards for manufactured homes. Don’t count on it.
Tubes on stilts
On the other end of the spectrum, pre-fab housing is seen as making a statement, an artistic interpretation of housing. The exception would be the type where the art/brand transcends the house, like the Frank Lloyd Wright utilitarian homes scattered throughout the midwest and Levittown. Long since bastardized to match today’s living standards. Worthy of the Museum of Modern Art, the emphasis is placed on design over functionality and practicality.
And of course, The Haute Couture of Suburbia
Little pink houses for you and me. And while we are thinking rock n roll, here’s proof that the wheels really coming off the wagon.
Posted by Jonathan J. Miller -Wednesday, June 4, 2008, 3:39 PM
In the recent edition of PMI’s Housing and Mortgage Market Review (which is now a better read since chief economist David Berson came over from FNMA), focus was on affordability this month. Mortgage lending has gotten back to basics since last summer. Thats a positive long term view and will hopefully promote better overall financial stability of the banking system. It will be interesting to see how long this new found religion lasts after lenders post substandard profit performance over the next several years.
Underwriting standards remain tight, but there is a general feeling that affordability is better now that mortgage rates are relatively stable and prices have fallen in many markets.
NAR publishes a housing affordability index which the PMI analyzes. Affordability has jumped substantially over the past 6 months. The index bases its index on three factors:
- Mortgage rates (modest gains)
- House prices (NAR existing home sale stats are skewed by mix)
- Family income (slower growth)
Prices are the real wild card here since the other two factors aren’t improving affordability. The PMI report spends a lot of time analyzing the OFHEO and S&P indexes which use the repeat sales methodology.
However, the problem with the NAR Affordability Index is not which price index is selected. The problem is that it does not consider availability of credit. Underwriting standards are the highest they have been in years. Its not an apples to apples index because the formula doesn’t consider this major variable (it wasn’t necessary to consider this 10 years ago because underwriting standards were relatively stable) to affordability. Availability of credit is now the key driver of affordability.
To say affordability is “way up”, while technically true, has no real world application. The word “affordability” in this application is simply the name of a metric, not a correct word to describe whether borrowers are more able to purchase a home.
If affordability is “way up”, why are home sales declining and foreclosures rising?
Logic says that if affordability is up significantly, we would have seen a surge of home purchases since the beginning of the year. That hasn’t happened. Why? Because many who would have qualified for a mortgage in 2005, doesn’t qualify today even if there was no change in their financial condition.
Reality. Can’t live with it, can’t live without it.
Posted by Jonathan J. Miller -Tuesday, May 20, 2008, 11:05 AM
It seems a bit early to start reflecting on the lessons learned from the housing/mortgage problems we face, since, well, we still face them.
Don’t get me wrong.
It is always good to look back over your efforts and evaluate whether anything different could have been done to yield a different result. It is just that this infers closure and it is too early to summarize.
OFHEO – James Lockhart, the director spoke last week at the 44th Annual Conference on Bank Structure and Competition in Chicago (think Auto show, only less metallic paint) on the “Lessons Learned from the Mortgage Market Turmoil.”
He arrived on the scene after the party already begun and despite the criticisms levied towards both him and his agency, I actually think he did well with what powers he has to employ.
Plus, he likes charts “To set my remarks in context, I often like to start with a chart that gives some perspective…” Start with a chart and I am on your side.
Key lessons learned
- what goes up too far goes down too far. In other words, bubbles burst.
- mortgage securities are risky and that there is a long list of financial firms that have had
problems with those securities, including problems related to model, market, credit, and
operational risks. A key lesson from the savings and loan crisis that was ignored was not
to lend long and borrow short, as structured investment vehicles (SIVs) did.
- Another lesson ignored is that in bull markets investors and financial institutions tend to misprice risk, which can result in inadequate capital when markets turn.
- A new lesson that should be learned is that
putting subprime mortgages, which almost by definition need to be worked, into a â€œbrain
deadâ€ trust makes no sense.
- Another lesson is that overreliance on sophisticated, quantitative models promotes a
hubris that has frequently caused serious problems at many financial institutions
Lessons learned specific to the GSEs
- The first is about pro-cyclical behavior during the credit cycle. An important issue for supervisory agencies is how to create incentives for institutions to
behave in a less pro-cyclical manner without interfering with their ability to earn
reasonable returns on capital.
- A second lesson from recent experience is the importance of capital. Capital at
individual institutions not only reduces their risk of experiencing solvency and funding
problems and of contributing to financial market illiquidity, but also helps them avoid the
need to retrench in bad times and miss what may be very attractive opportunities in weak
- Those two lessons provide compelling arguments for a third: legislation needs to be
enacted soon that would reform supervision of Fannie Mae and Freddie Mac and,
specifically, give a new agency authority to set capital requirements comparable to the
authority the bank regulatory agencies possess.
These are important points because the GSEs dwarf other debt and the GSEs have been losing money as of late. Here’s a few charts that may be of interest from his speech:
FDIC – Sheila Bair, FDIC CHairman was speaking in Washington, DC at the Brookings Institution Forum, The Great Credit Squeeze: How it Happened, How to Prevent Another http://www.fdic.gov/news/news/speeches/chairman/spmay1608.html on the same day Lockhart was speaking in Chicago. A full court press of self-reflection. Like Lockhart, Bair has been very outspoken and I believe lucid in her depiction of the problems at hand. To her credit, she has clearly articulated the problem with the mortgage system.
Her salient points are:
- …things may get worse before they get better. As regulators, we continue to see a lot of distress out there.
- Data show there could be a second wave of the more traditional credit stress you see in an economic slowdown.
- Delinquencies are rising for other types of credit, most notably for construction and development lending, but also for commercial loans and consumer debt.
- The slowdown we’ve seen in the U.S. economy since late last year appears to be directly linked to the housing crisis and the self-reinforcing cycle of defaults and foreclosures, putting more downward pressure on the housing market and leading to yet more defaults and foreclosures.
- Reform is not happening fast enough
- She explains HOP loans are NOT a bailout
- The housing crisis is now a national problem that requires a national solution. It’s no longer confined to states that once had go-go real estate markets.
- The FDIC has dealt with this kind of crisis before.
Both OFHEO and FDIC seem to be saying we need to take action now and they were powerless to do anything before this situation evolved into its current form?
It makes me wonder whether any regulatory proposals will do much good. Regulators did not take action or propose safeguards while the problem was building. How can they suddenly have wisdom now? While these recommendations and insight seem prudent but isn’t it kind of late for that?
Speaking of monoliths, here’s Steve Ballmer getting egged in Hungary.
Posted by Jonathan J. Miller -Wednesday, May 14, 2008, 12:04 AM
In the past week, I took out my sea kayak (SS. Miller Samuel) and boat (dubbed “Mom Said”) for the first time this season and have started wondering if it has influenced my perception of the credit crunch. Are we already underwater? Zillow and Shiller thinks so.
Last week, the WSJ ran a fun story on page 1 by Michael Corkery called For Mortgages Underwater, Help Swims In.
While lawmakers in Washington struggle to solve the nation’s foreclosure crisis, officials here are using a small fish to clean up some of the mess.
The Gambusia affinis is commonly known as the “mosquito fish” because of its healthy appetite for the larvae of the irritating and disease-spreading insects. Lately, the fish is being pressed into service in California, Arizona, Florida and other areas struggling with a soaring number of foreclosures.
The mosquito fish is well suited for a prolonged housing slump. Hardy creatures with big appetites, they can survive in oxygen-depleted swimming pools for many months, eating up to 500 larvae a day and giving birth to 60 fry a month. That can save environmental crews from having to repeatedly spray pesticides in the pools while the houses grind through the foreclosure process.
Of course, Fannie Mae wants to keep those houses occupied so fish don’t factor into the credit crunch. In James Hagerty’s article Fannie to Aid Underwater Loans:
Fannie Mae is preparing to introduce by midyear a program of refinancing mortgages for people who owe more than the current value of their homes, a situation known as being “underwater.”
The plan is the latest twist in efforts to contain the surge in foreclosures on homes in much of the U.S. It differs from a bill approved by the House on Thursday that would authorize the Federal Housing Administration to insure loans for distressed borrowers only after the lender has written down the principal — something many lenders are reluctant to do. Fannie’s refinance plan would result in new loans of equivalent size, leaving the borrower underwater but giving him or her a lower monthly payment or at least a fixed rate.
Of course, there can’t be a discussion about liquidity without the mention of beer and wine.
Judy Weil, editor at Seeking Alpha, posts a funny: Maybe Beer Will Help Stimulate House Sales.
A group of real estate agents is hosting a free condominium and beer-tasting tour.
I can only imagine the liabilities the Oregon agents were subject to without thinking. Of course, wine generates the same result. It also makes me wonder about Baltimore.
To help you steer through this complicated morass, the following video will show you others that lost their cool.
Posted by Jonathan J. Miller -Thursday, May 8, 2008, 12:57 AM
Ok, let me get this straight. Fannie Mae:
Actually Fannie Mae’s stock dropped 5.7% yesterday so maybe it’s not love afterall.
Ok, what am I missing here? It seems to me that the GSEs can not be the housing market’s sole saviours and we risk serious damage to our financial system if housing drops sharply this year and Fannie & Freddie get taken over by the government and assume the liabilities…
But some financial experts worry that the companies are dangerously close to the edge, especially if home prices go through another steep decline. Their combined cushion of $83 billion â€” the capital that their regulator requires them to hold â€” underpins a colossal $5 trillion in debt and other financial commitments.
The companies, which were created by Congress but are owned by investors, suffered more than $9 billion in mortgage-related losses last year, and analysts expect those losses to grow this year.
More regulation is need to protect the GSEs from faltering. OFHEO lowered their capital requirements in exchange for making Fannie Mae go out and borrower $6B to help protect against further housing market declines.
â€œRegulators need all the tools they can get to make sure these companies donâ€™t fail, especially since weâ€™re talking about entities that have over $5 trillion in financial commitments and debt,â€ said Senator Richard C. Shelby of Alabama, the senior Republican on the Senate Banking Committee. â€œSix billion dollars looks like a pretty paltry sum, and if we get into a further housing downturn, that capital can go pretty fast.â€
The dilemma (although its not really a dilemma because there few other options) is whether to entrust the GSE to get the nation out of the mortgage problem that is keeping housing from stabilizing.
Increased roles for Fannie and Freddie could be just what the doctor ordered to maintain confidence and liquidity in the mortgage markets at a crucial time and stave off a far greater crisis. However, if the crisis continues to deepen, these companies could go under and possibly push the worldwide financial system into turmoil.
William Poole, a former Federal Reserve Bank president, said that Fannie and Freddie are “at the top of my list of sources of potentially serious trouble.” And according to Senator Mel Martinez, a former secretary of housing and urban development, the companies “could cause an economywide meltdown if they got into real trouble and leave the public on the hook for billions.”
It seems to me like this is one small solution of many others that are needed. It’s going to be a long time to ride out this downturn and common sense says that the GSEs can’t weather it alone. FHA lost money last year too. I am starting to think we are making things worse by trying to fix the problem.
Here’s a great piece by Randall Forsyth of Barrons called Show Me the Monet where he says more than half of all homeowners who bought in ‘06 are underwater and that’s the tipping point for foreclosures. He wonders how the worst of the credit crisis can be behind us.
Posted by Jonathan J. Miller -Thursday, May 1, 2008, 9:22 AM
For every action, there is an equal and opposite reaction. In other words, for housing to reach a bottom, something has to happen to cause it to change direction.
Something has to change or improve. In other words, something has to get better before housing does.
Caroline Baum at Bloomberg, one of my favorite columnists, pens a witty take on the very notion that something needs to improve, in order for housing to improve called Snoozing in Econ 101 Is Hazardous to Your Health. She provides the hopeful statements made by many these days and applies good old Econ 101 logic to them – I embellish each point a bit as well:
Misleading logic is plentiful these days
Home sales won’t pick up until housing prices stop falling. What could possibly make people start buying again? According to the confused thinking above, prices will levitate spontaneously, encouraging buyers back into the market. Sales activity leads prices. Cart before the horse can’t move a market. You need activity.
Housing affordability has turned up, which is a harbinger of stronger sales ahead. Affordability is only up in the formulaic sense. Underwriting requirements are at a far higher level now than before so it is not apples and oranges. In other words, the buying power has been weakened by elevation of standards. This becomes a self-fulfilling prophecy because housing markets (think of it as collateral for mortgages) gets rattled by more conservative lending practices after it was built up by a sustained period without real underwriting standards.
Governments continue to interfere with the law of supply and demand; that’s to be expected. What’s surprising is that so many practitioners of the dismal science [Economics] can’t seem to get it right either.
Prices continue to slide
If we can all hang in there, the US population will have 700 million more people in 2100 and a good portion of the South Florida real estate market can finally be absorbed by then (call me optimistic).
Acronym of the week: YAWN: Young and Wealthy but Normal Better yet – my modification… PAWN: Poor and Worried but Normal
Posted by Jonathan J. Miller -Saturday, April 5, 2008, 10:35 PM
I recently got a copy of The Effects of Inclusionary Zoning on Local Housing Markets: Lessons from the San Francisco, Washington DC and Suburban Boston Areas researched by Jenny Schuetz, Rachel Meltzer, and Vicki Been of the Furman Center for Real Estate and Urban Policy at New York University. I have had the pleasure of knowing Vicki Been and the good work of the Furman Center. Last summer I had honor of having a paper I co-authored with the Furman Center back in 2003 published in the Journal of Legal Studies.
I’ve always been intrigued by the influence of zoning on housing: why a town or neighborhood has a consistent housing stock, higher end type of property, limited multi-unit dwellings, limited of commercial space, (let alone the lack of chain-link fences, a key source of suburban blight).
Zoning tends to be exclusion based to keep affordable housing out of specific areas and has a lot to due with whether a housing market is higher priced in certain markets and not in others.
Inclusionary zoning, also known as inclusionary housing, refers to municipal and county planning ordinances that require that a given share of new construction be affordable to people with low to moderate incomes.
the average annual number of single-family permits issued during the 1980s, 1990s and since
2000. As shown in the first two groups, the changes in annual permits since 1980 are quite
similar when comparing all jurisdictions that had not adopted IZ by 2006 and all those that had
adopted IZ at some point. However, this comparison obscures considerable variation among
jurisdictions with IZ, as shown in the last four groups of columns. In particular, those
jurisdictions that adopted IZ prior to 1980 or after 2000 issued substantially more permits, both
before and after adoption, than jurisdictions that adopted IZ in the 1980s and 1990s. The most
recent adopters seem to have been developing much more rapidly in the early decades and saw
dramatic drops in the number of permits, even before adopting IZ.
Although less pronounced, there is also considerable variation in changes in housing prices
among jurisdictions with IZ (Figure 7.2). Jurisdictions that adopted IZ prior to 1980 had higher
than average housing prices as early as 1980 and have seen some of the sharpest increases in
prices between 1980 and 2000. This would be consistent with either the explanation that IZ
resulted in higher prices in those locations, or that jurisdictions with strong location-specific
demand were some of the first to adopt IZ. As of 1980, jurisdictions that adopted IZ in the 1980s
and 1990s more closely resembled those that have never adopted IZ, and have seen price
increases roughly comparable to the non-IZ group since then. The most recent adopters, which
had some of the lowest housing prices at the beginning of our study period, have seen relatively
modest price increases, and in 2000 were still relatively affordable.
Such zoning can be controversial. It is often done without public funds and can promote economic and racial integration, but can restrict development of open market properties, creating higher priced housing, reducing affordability.
The report draft is a good read.
While you’re at it, take a look at The Effect of Community Gardens
on Neighboring Property by Vicki, and my co-author Ioan Voicu. Interesting stuff.
Posted by Jonathan J. Miller -Monday, March 31, 2008, 9:28 AM
There’s an old joke that goes like this:
Man1 Seems like I’ve been married for five minutes.
Man2 Really? only 5 minutes?
Man1 Yeah, 5 minutes…underwater
Judging by the booing the president got at opening day for the Nationals yesterday while throwing out the first pitch, the administration is starting to think it needs to do something about the stability of the financial markets, specifically credit/mortgages. We are starting to see some stirring (about a year too late , I suspect).
HUD has plans to specifically help borrowers whose home values are less than their outstanding mortgages.
The Department of Housing and Urban Development plan would enable homeowners who are “underwater” on their mortgages to qualify for a partial backstop through HUD’s Federal Housing Administration, these people said.
HUD Secretary Alphonso Jackson “is examining the potential for FHA to be a solution for these borrowers,” Treasury Secretary Henry Paulson said Wednesday.
The FHA is central to multiple plans to revitalize the housing market and prevent foreclosures.
Meanwhile, Democrats are trying to pass legislation that would allow the FHA to insure up to an additional $400 billion in mortgages by requiring lenders to take partial losses on loans and refinance borrowers into more affordable products. HUD’s proposal is likely to be much smaller in scale and is expected to offer partial insurance for certain borrowers, leaving lenders on the hook for some losses.
The way of Washington (40 square miles surrounded by reality): HUD Secretary Alphonso Jackson announced program on a Friday, expected resignation on Monday…
Housing and Urban Development Secretary Alphonso Jackson is expected to announce his resignation Monday, according to people familiar with the matter, a decision that will deal a blow to the Bush administration’s efforts to tackle the housing and mortgage mess.
The exact reasons for Mr. Jackson’s decision couldn’t be learned. The secretary has been beset recently by allegations of cronyism and favoritism.
That’s more like 10 minutes underwater.
Posted by Jonathan J. Miller -Friday, March 28, 2008, 1:13 AM
Comstock Partners, Inc. issued a special report that lays out the disconnect between economic fundamentals as they relate to housing quite clearly:
Median New Home Prices vs Median Household Disposable Income [open chart]
Home Price Appreciation vs CPI – Rent [open chart]
Posted by Jonathan J. Miller -Tuesday, February 19, 2008, 11:02 PM
As I sit an look at how we got here, its apparent to me that no one really has a clue about how we got here in the housing market. Its a “cover my you know what” scenario now, but its really our nature to look on the bright side while its happening and the dark side after its over.
Unbridled optimism got us here.
“The Dark Side of Optimism [Salon] via Naked Capitalism: Why looking on the bright side keeps us from thinking critically,” management consultant Susan Webber argues yes. In her view, “the financial and business communities dismissed all the warnings” about the housing meltdown/credit crunch bearing down upon them because they wilfully adhered to an always-sunny-side-up view of life.
Ok back to reality…
Foreclosed homes that sit vacant are sometimes a better option for homeless because the utilities are still running.
“Many homeless people see the foreclosure crisis as an opportunity to find low-cost housing (FREE!) with some privacy,” Brian Davis, director of the Northeast Ohio Coalition for the Homeless, said in the summary of the latest census of homeless sleeping outside in downtown Cleveland.
That’s not the optimism I was expecting.
Daniel Gross in his Moneybox Column on Slate explores the proposed restrictions on foreclosures. He argues that these actions simply delay the inevitable process of “price discovery“, a process where the market determines a price based on supply and demand.
In other words, the optimism that got the mortgage industry and borrowers in trouble has carried through to the political process, whose optimism will delay getting out of this quagmire.
The carnage in subprime loans has led to a spate of foreclosures. When banks or investors take over properties, they recoup whatever they can by placing it on the market quickly and accepting any reasonable offer.
Foreclosure also has the effect of hastening price discovery on the mortgages on those homes, and on the bonds backing them. Here, again, the impact can be devastating to those who bought the assets with a great deal of leverage. Hedge funds and other institutions sitting on the depreciating debt either had to put up more collateral to maintain their leveraged positions, or dump the assets to raise cash. Bond insurers must increase reserves to prepare for defaults of the bonds they insured. And if the bond insurers fail, the financial firms that purchased insurance from them will have to take their own write-downs.
Optimism is met with an equal and opposite reaction: Pessimism.
Banks are blacklisting condo projects to minimize their damage. Major lenders have created blacklists. This seems like a prudent decision…avoid certain projects to avoid issuing a high risk mortgage. But doesn’t this accomplish exactly opposite by poisoning a local market delaying its recovery and placing performing assets in the market at higher risk?
Warning to developers: this will make it extremely difficult for most buyers to come to close on Miamiâ€™s newest buildings.
Unbridled pessimism brings unforseen risks just like optimism does by inserting external forces that fight the natural order of supply and demand.
Of course, there is another way to deal with our natural housing optimism: take a bus and get a boxed lunch on a foreclosure tour.
« Previous Page — Next Page »