Steve, I think the answer is yes for existing home inventory - and that is what I graphed. I expect the normal seasonal increase in inventory, plus, as more homeowners get in trouble, they will try to sell their homes.
Steve wrote, "Since building has slowed down, should we expect inventory to increase at the same rate as last year?"
In theory, since some of the new home sales of the previous few hot years will end up in the existing home market this year, existing-home inventory will grow at a larger rate for the next few years.
Theory isn't always correct, though!!!
The reset bulges are going to push more homes on the market. Also a lot of inventory is out there in the form of short rentals which sooner or later will come back on the market after resets.
The housing bust and the banking problems are making front page news lately. Is this the crest? Is the story ready to fade way now?
Not on your life. There are only a few things you can state in economics, that ALWAYS happen. Transaction prices ALWAYS revert to their means.
The size of this bubble will also run roughshod of some of the long held chestnuts of real estate investing.
Real etstae is local? Then why were urban condos built all over the map, in far flung small towns like Pocatello Idaho and Iowa City? Come on! Bubble money oozed everywhere as investors sought out the next market that "everyone will be moving to".
We'll get tired of popcorn as this unfolds. Also keep some peanuts and Chex Mix handy! >:-}
One surefire way to reduce inventory is to have a "fire sale". That means sellers finally throw in the towel and start cutting prices drastically. That hasn't happened yet but this spring/summer sure could get interesting. Especially if a selling panic occurs, i.e. my neighbor just cut the price 10% so I'm gonna cut 15%.
Not sure it will happen everywhere, but just for giggles let's imagine the effect of a cruddy spring sales season in Florida followed by a cat 4 hurricane or two landfalling near Miami. Might just do the trick.
and lest we forget, the months supply is measured at the current sales rate, so the bump in existing home sales this past month alters that calculation.
Once credit tightening pares back demand, and inventory rises further from the re-lists, foreclosures, investor retreats, etc, that months supply number will balloon.
The real test is if we get significant economic stress on top of it, which would be the proverbial straw. Clearly some is headed our way - the many multihomeowning soon to be unemployed mortgage related workers will be one source) and construction workers, also likely to be caught up in the racket, will be another) Automaker layoff pai
n is already making itself felt. If a downward spiral begins with overall final demand cooling and cutting back on business capital spending, well, then you will see just how ugly the housing market can get, and how fast prices can adjust.
Still a bit early to tell, but not looking good. Im glad all the bulls are enjoying their moment in the sun. Seriously, enjoy it while it lasts. And please do come back here on the next meaningless piece of good news to taunt people who are trying to be realistic about how a really depressing period of US economic history could be getting underway. Fortunately, all of your businesses will keep expanding in the next downturn, so you'll look like a genius for HELOC your house for business credit. Remember, it's different where you are. Bleh bleh...
I have a question on the 'eight month rule'... that once turnover hits eight months pricing starts to crumble more rapidly...
Are there empirical studies that back that up?
Or is there a rationality behind this? Being from an ice locked part of the world where the lakes remain frozen long after temperatures reach into the 60s (as was the case today)... I can see how folks around here who absolutely must sell might panic if the average time to sell grows longer than the period of time the lakes remain unfrozen. If you put the home on the market now, and don't sell in eight months... it'll be snowing again before eight months. Not much sells after the snow flies.
Or is the eight months rule just an old realtor's tale?
dryfly, I remember seeing some discussion on these blogs that it is statistically valid that a market with 10 months of inventory simply sags under it's own mass. Price declines just happen.
"However when existing home supply reaches a certain point, prices start to fall in the existing home markets too. Also, when lenders start taking short sales, and banks are selling REOs (bank Real Estate Owned), this puts additional pressure on prices."
When do you see this happening? I've read Tanta explaining different REO scenarios, but is there anything to suggest how large a REO presence must be before declines accelerate?
Just found this bit on Impac Mortgage and am sharing accordingly - pls skip if you've heard it all before:
NEW YORK, March 21 (newratings.com) -In a research note published yesterday, analysts at UBS reiterate their "reduce" rating on IMPAC Mortgage Inc (IMH.NYS). The target price has been reduced from $6 to $3.50.
Suppose 20% of the market are REOs, and the absorbtion rate is 20% of inventory over a year.
Certainly some of that 20% will want a clean, fresh retail sale. But a lot of them will be deal hunters.
Suppose half of the sales are to REO buyers. 1 in 2 REOs found a buyer, and there will still be REOs to sell next year, even if no more foreclosures take place.
Meanwhile, 1 in 8 owner occupant homes found a buyer.
This sticky price phenomenon in the existing home market is actually good for new home sales.
I think maybe this sticky price phenomenon stimulates overbuilding. If the homebuilders are aware of it, it provides the incentive to drain "profits" from the existing home market by producing excess housing and aggresively pricing it (e.g. undercutting the sticky pricing with loose pricing in the short-term).
dryfly, I've heard this number (8 months) for years - but unfortunately the NAR is not very open with their statistical data, so I can't present an analysis. Think of it as a guideline. It is really for each local area as opposed to the national numbers I'm using.
AG, the REO numbers are building. A friend send me the number for San Diego, and they have been steadily increasing. Short sales also have an impact - and I've read several stories of short sales recently. So my answer is it's already started and will just get worse over the course of the year.
No one tracks or estimates the number of borrowers who avoid foreclosure with a short sale, according to Duncan and David Berson, chief economist of Washington-based Fannie Mae, the largest buyer of mortgages. Theres ample evidence that the number is increasing, they said.
The short sales may mitigate the impact of the housing slump as the properties avoid being tallied as foreclosures. At the same time, they will help push the U.S. median house price to a third consecutive quarterly decline in 2007s first three months, Berson said.
The way the banks see it, its better than if the house goes into foreclosure, stands empty, and sees its value spiral downward before its auctioned on the courthouse steps, Duncan said. It helps to clear the market.
I suspect we are going to see a real bifurcation in the market. The lower end stuff may well get drilled as sellers become desparate but the upper end folks can afford to be pretty patient. One big question is what will construction do from here.
The SFH resale inventory levels has been focused in areas that are the less desirable or in areas that have low appreciation and challeging job growth. Not counted in this inventory is the REO stock that also is building within the less desirable areas. In checking the CFC REO Calif list I find little or no homes in the most desirable locations though this might change with the coming resets.
This resale SFH inventory overhang is not spread out evenly among the different zip codes which will produce some interesting buying decisions this spring and summer. My guess is that these areas will continue to build both resale and REO inventory while the most desirable areas have very sticky prices.
I tried to refi my house, but the appraiser told the lender the condition of the property was poor. the underwriter told me they wouldn't take poor condition property as collateral.
A while back Bush was asked about the housing market and he said builders were making large margins and so it would take some time before they got into any trouble. In other words, builders could drop prices a lot before they lost profitability. They can continue building and selling homes for lower and lower prices as demand falls until finally their profit margins are negative. Only then do they stop building. On the other hand, a guy who is foolish enough to buy a new home in a declining market while builders still have positive margins, will of course find that he can't sell and break even like the builders can and his situation just gets worse and worse until the builders stop building. What prolongs the agony for homeowners is the fact that as housing demand drops off builders can source materials and land at lower and lower prices so they get help on the way down, while the poor existing homeowner gets pinched more and more.
dryfly, I've heard this number (8 months) for years
Ya me too. Just wondering if there was science behind it or just folklore.
This tangential thought came to me as I went to get my youngest at track practice today... the snow has mostly melted and the ground has thawed & 'For Sales' signs are sprouting like crazy. I started counting...
April, May, June, July, August, September, October, November...
Ice will be on the lakes again & ground freezing before eight months are up. Actually last snow is usually in mid-April... first snow again in mid-October. Nothing much sells during those months in between. Folks here don't have eight months if they want to sell between thaw & freeze up.
If the turnover starts to exceed eight months then for many the fear is it could become a 'year and eight months'... or more. There is your motivation to cut price & then some no later than Labor Day. Either that or plan on waiting until NEXT spring.
good list; maybe this time really is different. I'd add:
7) greater amount of speculation/investment homes.
This may strongly influence how fast prices drop, as investors don't have the luxury of thinking "oh well, it's good shelter until the storm passes". Does anyone know where to find data on the trends for second home ownership?
We'll get tired of popcorn as this unfolds. Also keep some peanuts and Chex Mix handy! >:-}
I deliver pizzas, hoagies, calzones, lasagna, salads, soft drinks, and desserts. If anyone needs the phone number, I'll be happy to provide it. Most of you are out of our delivery area, though, so expect steep delivery charges.
Ice will be on the lakes again & ground freezing before eight months are up. Actually last snow is usually in mid-April... first snow again in mid-October.
This is obviously the post of an old timer. This year, we had two months of winter.
This is obviously the post of an old timer. This year, we had two months of winter.
Overall it was a warm winter here too - just not much snow.
But we had a helluva a cold couple months after the Holidays. As a result people's septic systems froze solid in January & February in much of central Minnesota because there wasn't a snow blanket to insulate the ground... That has to make life interesting.
But as late as last week I saw large SUVs driving around on the lakes so it must have gotten cold enough at some point to freeze solid.
If there is a problem on the north central plains its that there hasn't been enough moisture... we might not have lakes left to freeze.
Oh look at that will ya, a transmission mechanism...
Banks are imposing terms on real-estate firms similar to those for defaulted loans,'' said David Malpica, who helps manage $5.6 billion of real-estate and distressed debt assets in Europe and the U.S. for CarVal Investor in London.It reflects the high volatility of real-estate assets.'' Vacation Homes Boom in Spain May Bust as Banks Recoil (Update1) - Bloomberg.com
CCI (Cost of Credit Intermidation) is rising. How how high will it go, kids?!
My wife is a Realtor in suburban NY so i get to sneak a look at the Lower Hudson Valley MLS system. I agree with this post that "By mid-summer, months of supply will likely be a significant problem."
It was clear to see this past winter that many listing were allowed to expire after six months on MLS. I believe those sellers will be back en masse starting about now and through next month hoping to sell their homes by this summer and will overwhelm the market in the county's just north of NYC and no doubt in many locations where folks pulled their listings during the cold winter months thinking the market would pick up in the Spring.
The tighter lending standards and the glut of inventory will strike a blow to prices over time. Here in my county the median price is still about $400k and I think across the river in Westchester it's still around $600k. Tighter standards on Jumbos and Alt-A to finance these expensive homes will eliminate many potential buyers.
TOday's data is also very counter productive to agents trying to get people to be reasonable about listing prices. The sellers hear the news and think all is ducky and still insist on listing at near peak 2005 prices. DUMB. That was dumb last summer and some houses still sit on the market listed last summer at 2005 prices, but still people want to do that in 2007. I haven't heard what David Lereah at NAR said today, or the other cheerleaders but the false message spread that subprime is contained and the rest of real estate is fine and dandy will cause many sellers to make the huge error of over pricing their homes when they put them on the market this Spring. Those sellers will be stuck as the market takes another leg down this summer.
I did some contract work in Ohio recently (briefly). If you haven't had the experience of driving to work while hearing about how a nearby school district had to shut down it's public school buses and send 9-year-olds walking through drug-infested neighborhoods every day (I kid you not) due to plunging property tax revenues, then you have no understanding of the consequenses of spending wealth you don't really have (IMO).
Ohio is now guilty of pillaging other peoples' future just as they're paying the price of pillaging their own.
The only thing that keeps me from being a perma-bull is the conviction that people never learn...
Normally homeowners and builders compete for buyers. Now, with all the foreclosures, banks are also competing with builders for buyers. When that happens you can bet your bottom dollar that banks will make it harder for builders to get financing.
You are welcome guys. Janszen at itulip has in the past drawn parallels with 1937 -- a time when there was high inflation in a deflationary period. I wonder if we will see a reacceleration in inflation towards the end of the year. The JOC-ECRI appears to hint at that. For some reason, updates seem to have stopped this month.
Not to be picky, though, but I believe I implicitly covered speculation in #1 (High owner occupation). Can't understate the impact of that non-owner occupied property, especially when you just know that "investments" were almost always financed IO / NegAm to minimize carrying costs.
That's like the NCAA announcing they're going to bail out the NFL because they just got the backing of the local junior high school. - ac
From the link...
Proceeds of the bond issue by the Ohio Housing Finance Agency will provide financing for about 1,000 loans with a fixed rate of about 6.75 percent, said Robert Connell, the agency's director of debt management.
1000 loans. That won't cover the eastern half of Cuyahoga county... what'll Youngstown do?
REOs of homes bought at 2005 prices with 100% LTV option arms loaded up to 115% competing with builders who've discounted 15% off 2005 prices - HA! Must be east coast math.
Why not adjust the price to balance supply and demand?
Supply has a slope because fewer units (widgets) can be made/produced at lower prices in theory.
Reality - construction costs might be lower than 2005/6 in some areas, but impace fees and permits (the #2 line item after land) is still increasing. Just looked at Folsom, CA and picked up a 33% increase over June 2006, from $45K to almost %60K per home.
why is 20 percent the magic number? i want some background on this. magic numbers!
what would the property markets look like without banks? without mortgage lenders? what would borrowers substitute for FICO scores?
maybe we need a new urban homestead act that erases mortgage debt after say five years of ownership. most of american history has been about frontiers, and we're definitely on the new finance frontier, where if u are not invested in hedge funds, u are losing out!
frontiers used to be about westward expansion, cheap land, and loyalty to the union. oh, how things have changed. maybe new frontiers are in the middle east!
maybe, just maybe, the finance frontiers have become dominated by greed, fraud, corruption. but hey, as long as 65% of the populace own 100% of the real estate market, who gives a damn about short term profits. asset inflation, global savings glut, global asset shortage, cheap liquidity, whatever the term of your preference, get on board or be left behind. otherwise if you are a high FICO score renter, be happy chase bank, citicorp, and discover offer u 'free' money credit cards for 15 months to make u feel better. dont worry about wage stagnation!
There is a more pressing reason why adjusting price isn't smart.
It kills demand.
Most home-buying is financed by a home sale. Something that is difficult if your upside down. It can very fast lead to situations where people can afford the higher mortgage payments but can't find the loans as they are >100%LTV
It is not only banks that have skin in realestate. Local government is another player in the game as it makes most of its money out of house prices. Try getting the required paperwork out of them when they don't want to.
ps. For those of you who believe that the corrupted, i mean elected officials listen to the voters. Yey that to.
In Fla, the developers are taking buyer to court to force them to close.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you didn't read the newspapers, you'd think the condo boom was still in full swing in much of coastal Florida, where frantic construction activity is still very much in evidence on the skylines of major downtowns and in quieter suburbs. These condominiums on the western edge of Boca Raton are one of hundreds of condo and condo-conversion projects that saw pre-construction demand and prices soar, only to drop sharply over the past year and a half. Some speculators, like Marie Guillaume, a Haitian immigrant, saw the value of their units drop 20 percent or more even before construction was finished. So Guillaume, and some other buyers here decided to walk away from their purchase contracts and forfeit their deposits. Now in another time, it wouldn't have been a big deal. The developer could have turned around and sold those units to someone else. But buyers are so scarce these days, the developer instead chose to sue Guillaume and force her in court to close on her condo purchase. Marvin Moss is Marie Guillaume's attorney.
MARVIN MOSS, ATTORNEY: It is very unusual. As a matter of fact, if you talk to most lawyers they have never come across these cases at all before. The only lawsuits for specific performance as previously stated are the ones that are filed by the buyer against the seller in order to get title to the property.
I wonder how in the world any loan will be approved, or if the builder is going to finance it, then it is going to be impossible to sell the loan. In any case, most contracts have a stipulation that financing will be approved. Sooo is the builder going to sue a bank to make it approve the loan.
also
Builders sue lax home buyers McFarland said many banks are opting out of loans with buyers, which leaves builders developing a house that can't be funded. That has been happening when houses don't appraise for the loan amount.
They can continue building and selling homes for lower and lower prices as demand falls until finally their profit margins are negative.
Actually the builders will keep going as long as cash flow is positive. The builder may have a large inventory of land purchased at a high price - this is a sunk cost which cannot be recovered. So the builder may be selling at a loss for accounting and tax purposes while still getting a + cash flow. And the loss can be written off against profitable years.
So at market bottom you may see houses selling for the cost of building them alone, or perhaps even less if the builders overshoot.
"why is 20 percent the magic number? i want some background on this. magic numbers!"
well if you look on iran they have 100% down and until you save enough you have to rent. since interest is evil acording to them
anyway i personaly think there is some really big truth in this. i mean, if everyone would buy his house for cash the prices would have never gone up so much because not many people would simply have the money to buy a house.
some will say its unfair, but rent or own is really just a psychological myth created by parties which profit from mortgages.
if i own the house my mobility gets limited if the job market in my area crumbles. the times have changed, you dont have a job for 20-40 years, not even in a big company
in the end i would just ask what happened with the common sense that i can spend only so much, how much i have?
but since we live in the west and we are known for "Inovation" one way to get easy housing would be a yen mortgage, as someone few threads ago mentioned. for example since currency of east european countries are strengthning against the euro an euro mortgage are widely available to peaople in these countries, altough the ratse are no 1-2% like in yen
but i really think that loans encourage irresponsible behaviour in people.
hmm, little on sidenotes i red few weeks ago that japan has banned loan services of consumer loan companies which operate on more than 20% rate a years. and since than few big companies have left japan including some of the american companies
What I love about these comments is their utter blindness.
If someone so much as mentions the idea that the government might step in and bail out ______ (fill in the blank as you see fit: greedy bankers, illegal immigrants), there is an enormous hue and cry against the evil government.
Okay. I suppose that the reason the housing market is falling into the gutter is "the invisible hand".
Get your peckers out of your invisible hands and start to ask yourselves why all this is happening. And with all due respect to Tanta, if the answer is, "Well everyone thought real estate would always go up," I won't need Ipecac to vomit.
It's a flood of cheap money. Where did it come from? Who profited?
-The media and most of Wall Street continue to ignore the seasonality of inventory. The implication of near-peak inventory levels in Feb. was largely lost on them. Couple that with foreclosures and re-listings of 4q de-lists, and the inventory level for the summer is almost pre-ordained.
-But for this site and Ivy Zelman (Credit Suisse hb analyst and uber-bear), one would think that an 2h07 rebound for housing is still in the cards. Lowes is the prime example: the company had -4% same-store-sales in 1q, but it forecasts flat comps for the year -- meaning significant positive comparisons in the second half. Now look at where the stock price is: the analysts buy it! You can derive a similar "shallow/brief cycle" from many other stocks and also credit spreads.
I post the above not to highlight a particular investment oppty, but to show how dangerously complacent our financial markets are in response to the housing downturn. The chacarter of this type of complacency is that it is based on denial of the visible. As such, it can turn on a dime. Kind of like when you can't see the summit from where you stand on the mountain, but you walk up a few steps and there it is, in all its glory. You go from "I can't see it," to "I see it!" in seconds.
This is something the Feds and the regulators of our financial markets don't understand. They (and people like "Banker") repeatedly highlight tight credit spreads as an indication that all is well, and that high leverage is in order.
Great post, another layer of strata in the issue. Particular point, sorry if someone already covered this.
A further problem on the demand side is the the lax underwriting standards in place the last few years has had the effect of 'poaching' potential first time buyers from the future market, i.e. qualifing people who would have become buyers in a few years, but weren't really ready yet. There's going to be some significant pain in this group in the coming years.
Well here I am, late to the party again. Who ate all the Chex Mix?
dryfly, as a former resident of the Arctic Steppes, I will also add that the whole brewing additional ugliness that is the banks' custom-build construction loan pipelines--even the FDIC has commented on that recently-- is an interesting geographical problem. If you're in a year-round construction market, you tend to forget that there are places in the country where--in a normal winter, at any rate--you can't dig a foundation until spring. My parents built a home once and got caught up in expensive delays due to seasonal weight restrictions on the country roads: you can't send a concrete mixer down County Road 1500 until the thaw is over and the odds of the road buckling under the truck have improved in favor of the truck. So I hear from some up-north lenders that two problems, drop off in new custom loans and failure to complete current loans, have been "explained" to everyone involved by appeal to weather conditions. I eagerly await April, the cruelest month, to come and make all those problems go away.
There is another reason that "20% down" is a magic number.
Back in the old days, when most foreclosures were conforming first mortgages, odds were pretty good that the balance owed would be 75% to 80%. The borrowers had paid some of it, so adding in the recently unpaid portion and court fees raised the outstanding amount back up to around 80%.
Courthouse "vultures" will step in and buy properties around 80% of fair market value and rent them out. Fewer of them end up on the banks books.
This can still work today on an 80/20 if the first mortgage forecloses ahead of the second mortgage. The second gets removed from title and all the foreclosure buyer needs to do, is to pay off the first.
But on heavily financed property, forget it. After repairing and carrying an empty house for several months, it's so cash flow negative that an investor would just be trading places with the hapless borrower, for a cash-negative situation.
If you were going to buy a golf club, you wouldn't walk into a store and buy the first one you see, would you? Of course not; especially if you want to improve your golf game! You'll want to hold the club, take some practice swings, hit some balls if the store has a practice spot, and look at the price, of course. If you are considering buying running shoes, you need to go through a similar process and take the time to find the perfect shoe.
Moza Moz seems to be implicitly assuming that the loss at time of foreclosure is somehow independent of the balance at origination. If someone makes a 20% down payment and prices fall 15%, the borrower with a problem sells for a 15% loss and takes the hit, and there isn't a foreclosure. If prices fall 25%, they end up a foreclosure and the holder of the credit risk takes a hit for 5% plus disposition costs.
If that person had instead made a 10% down payment, when they got into trouble they'd end up a foreclosure, and the holder of the credit risk would take a hit for 5% plus disposition costs.
The amount lost at time of foreclosure is only weakly related to the down payment. With big down payments, there are few foreclosures, and most of them entail losses of around 10% to 20%. With small down payments, there are a lot of foreclosures, and most of them entail losses of around 10% to 20%, with a few going out to 30 and 40 and 50. Small down payments have a fatter tail for the loss distribution, but the center of the distribution is pretty much the same for both cases.
A good interview in Barrons today with a Sy Jacobs who called the housing and subprime crash in July 05. His comments on the subprime implosion:
"The events of the past two weeks would tell you that the train wreck is accelerating and is turning into a contagion. Subprime will bring down mortgage lending, housing and, in turn, the economy and the market.
Q: Some insist the problems in the subprime market are manageable.
A: The problems in subprime are not self-contained. It is a pinprick to a larger problem, and it needs to be looked at that way. The notion that subprime home-equity lending is somehow ring-fenced because it is only 12% of total mortgage loans outstanding and won't affect the rest of the mortgage and housing market is absurd. First of all, subprime lending was over 20% of 2006's volume. That tells you it was growing rapidly as a percentage of the mortgage business when it hit the wall.
It also tells you that the subprime borrower was increasingly the marginal buyer of housing and tilted the supply and demand of housing that resulted in such big increases in home prices until late last year."
Not to be picky, though, but I believe I implicitly covered speculation in #1 (High owner occupation).
tj & the bear
Yes, you did, but I think its worth considering speculation separately since (anecdotally) it seems much more prevalent than say, 6 years ago, and I think speculators will be much quicker to drop their price than, for example, owners of vacation homes. Of course these things overlap some, so its hard to get a handle on this.
OT, can anyone tell me how to italicize in haloscan?
Isn't Mozo Maz just suggesting that the higher the LTV, the more likely the lender/insurer is to win the auction? That's just a way of saying that 20% is a "magic" number for a certain class of RE investors.
When the current balance of the loan is 80%, however it got there, the lender will bid 80% at the FC sale. A third party can bid 81% and win, so the property never becomes REO.
When the current balance is 95%, the lender bids 95%, nobody else bids 96%, and so the property becomes REO.
It is not necessarily the case that a lender who takes the REO loses more than the lender who sees it go to a third party. But it does mean that the vultures have what we might call "opportunity cost."
"Cui bono?" is one of my favorite questions (after "Is there any coffee left?").
Just don't include those spaces. I had to include them so that Halo would display them instead of turning them into italic tags. Because I just got up and can't remember how to write rem code.
Hmmmm, another blogger with the same tag, but capitalised. Greetings brother or sister!!
Anyhow, Geoff has raised the point about the rise in sales affecting the inventory measured in sales months, but IMHO he has missed the more salient point that the NAR compares Seasonally Adjusted sales with Actual inventory.
Based on actual sales (just under 400K), the 3.75M February inventory is over 9 months of sales.
My parents built a home once and got caught up in expensive delays due to seasonal weight restrictions on the country roads: you can't send a concrete mixer down County Road 1500 until the thaw is over and the odds of the road buckling under the truck have improved in favor of the truck.A
We're in 'thaw' now & the DOT has severe weight restrictions all over the state (except not on major state highways and interstates which are built with sufficient bases to handle the daily thaw-refreeze cycles).
There is one new additional exception - the governor allowed sewage trucks to run 'over-weight' because of all the damaged septic systems I mentioned above (many froze & broke up due to cold temps & no snow cover). The septic pumping companies have never been so busy as a result - they can't keep up.
And while excavation companies might not be digging and pouring a lot of new foundations & basements this spring & summer, due to the housing slow down, it looks like they'll be busy for a while replacing septic systems & drain fields... at least in some parts of the state.
Tanta - I'm not sure if I'm agreeing or disagreeing with your interpretation of Mozo Maz' comment, becuase I'm not sure if you mean 80% of the current value of the collateral, or 80% at origination. If you mean 80% of current value, I'd agree with you but would point out that that has little to do with LTV at origination. If you mean to imply that the sharks who show up at auction routinely bid 80% of what the house sold for to the poor devil getting tossed by the sheriff, I'd disagree and figure that the sharks are smarter than that. In neighborhoods that have been flat that might be true, but in neighborhoods that have really tanked they'd bid a lot less than that.
It's true I made some assumptions, chief among them that the market is just "slow" - not a price crash. In a crash, even 70% of value property can get no bids at the courthouse. The vultures are waiting for those fantastic 50% off situations, like estate sales.
Some banks have pretty sharp loss mitigation depatments, too. They may bid under the balance owed, in the hope an investor does show up.
But usually, they bid the balance. It gives a hard number to take back to the PMI company, to prove there really were no buyers at that price.
mort_fin, I meant current LTV. As an underwriter--trying to predict loss frequency--I care about original LTV. As a servicer, it's all water under the bridge, and current LTV is my only concern. No?
I didn't, actually, mean to predict or generalize about what the sharks do in any given environment, only to point out that they have more opportunity to win the bid to the extent that the lender's bid is a lower percent of current value. The lender is never motivated to bid more than the loan amount, unless it has just decided to go into the RE investment business.
My understanding is that in a judicial foreclosure the lender is not allowed to bid less than the loan amount. Is that so? Can you save me the trouble of having to look it up?
A realtor post at Realty Times reports last week's activity in a Chicago suburb as:
27 asking price reductions
51 new listings
20 sales contracts written
............................................................. Avg Days
..............................Listings .. Avg price .. on Market
3 bedroom houses:...... 178 ... $410,675 ... 135
4+ bedroom houses:.... 221 ... $701,798 ... 168
Condo's/Townhomes:... 322 ... $249,832 ... 149
(Original includes samples back to 9/06.)
While Sun-Times sales data shows only 51 homes sold at >= $700k in 2006, the MLS lists 98 homes at >= $700k (and 94 at >= $735k -- allowing for sales at 5% below asking).
Verrrry interesting -- nearly two years' worth of inventory at $700k+.
Even more interesting: examining the individual listings one finds that 71 of these homes are vacant, and another 5 (all million dollar homes) are oddly furnished (house-sitters?). (Almost all are new spec homes built on lots cleared by teardowns in this mature community -- not new subdivisions.)
It is not necessarily the case that a lender who takes the REO loses more than the lender who sees it go to a third party. But it does mean that the vultures have what we might call "opportunity cost."
Good point.
My barber shop logic why 80-20 probably worked so well for so long was that market fluctuations were typically smaller than than 20%... so folks rarely went underwater in a down market if they start at 80%LTV... water might get up pretty high around the chin from time to time but rarely would folks be swimming.
And since in bygone eras RE markets & banks were both more local, a banker knew if the packing plant laid off he'd see a decline in business from local merchants, a drop in deposits held by local workers and the LAST thing he needed was to see a bunch of REO fall in his lap. A nasty trifecta.
Problems tended to compound in those bad old days before anyone thought of national & international banking and 'disintermediation'.
So while the local banker can't force the packing plant to hire... and it can't stop depositors from withdrawing... it CAN require 20% down on loans it lets out.
And since there wasn't a lot of 'Ditech' adds running during 'I Love Lucy'... bankers didn't feel compelled by the market to change.
Exit 'I Love Lucy' and enter 'Ditech' and now we have 125%LTV.
The last reason why 80-20 was common over say 81-19 or is 79-21 is that it is easy to remember.
90-10 and 70-30 are easy to remember too but local markets can easily fluctuate 10%... might as well go 100%LTV in that case... and 70-30 is plenty safe but you'd never have loan customers if they had to wait to get to 30% (at least not many in packing plant towns on packing plant wages).
80-20 was a marriage of safety and convenience and became a convenient rule of thumb that worked for a long time. That's my guess.
There simply won't be a lower end of the retail SFR market until the entire inventory of lower and middle tier REOs are cleared out at prices the retail owners at the low end can afford. The same effect happens in microcsm in tracts where both builders and resellers overlap their sales efforts. The resellers simply cannot compete effectively with the wholesale builders for the same customers.
The last reason why 80-20 was common over say 81-19 or is 79-21 is that it is easy to remember.
Actually, it's because before the days of business casual, you couldn't take your shoes off at work. So since you only had ten fingers to count with, toes being off limits . . .
In neighborhoods that have been flat that might be true, but in neighborhoods that have really tanked they'd bid a lot less than that.
Exactly.
I know folks who do this - bid on defaults. Try more like 50 cents on the dollar not 80 cents on the dollar. If they don't win the bid, so be it - there are worse things than losing a bid. And besides, there are always more where those came from.
In fact I've seen them win bids and be shocked... asking "I wonder how much I left on the table?"
I know that is counter to the 'boom' philosophy but most of the folks I know were doing this long before the boom. They'll be doing it long after the boom too.
I think Mozo Maz has it right on the 'enrichment' part. I don't think it's literally the case that the lender is prohibited from bidding less, but it's effectively the case because the lender can't make any more money by bidding less.
If tanta is talking about servicer behavior based on a price several years after origination, then I'd reiterate that this doesn't tell my much about why originators would adopt a particular rule relating to price at timem of origination.
Seems like we usually end up with the same conclusions around here.
80/20 worked pretty well at the local level. 95/5 worked well too, with appraisers independently selected by a panel, full-documentation, and sold into the secondary market WITH recourse.
The 100% LTV, pick-your-own-appraiser, variable rate, no recourse, cash-back, why-bother-documenting methods mixed all the worst approaches together, in a toxic brew. One that that was pumped out for 3 or 4 years.
It went on so long, that people forgot what the "normal" times were even like.
12000 MARKET ST #448
RESTON, VA 20190
List Price: $324,900
Prior Sale: $530,628 11/07/2006 BANK OF NEW YORK
Prior Sale: $634,900 04/18/2005
-49%
Could be anomalous or a sign of things to come. REO Realty (I know this through the grapevine) is a local N. VA firm that geared up a few years ago to handle all the foreclosures they saw coming. They aren't shy about hacking prices to sell.
The 100% LTV, pick-your-own-appraiser, variable rate, no recourse, cash-back, why-bother-documenting methods mixed all the worst approaches together, in a toxic brew. One that that was pumped out for 3 or 4 years.
And that has put a frothy head on a lot of RE markets like cheap beer from a keg that's rolled around in the back of the trunk too long. Its gonna take time to settle down.
Note that the rise is average, so not all regions rose. In fact, some new [mini-]bubble exists: Commercial and residential land prices rose as much as 46 percent near Tokyo's new Omotesando Hills retail and residential development, the ministry [Ministry of Land, Infrastructure and Transport] said.
I have a request for a topic -- Subprime credit problem containment.
I believe viewing subprime as some entirely isolated phenom as totally absurd, ignoring everything about linkages across the RE and credit spectrum. How can BB and the bulls etc make such a claim. What do they use to base their "analysis", or is it very myopic observations...
I am merely entertained that the voices calling for 20% down payments, at least on this blog, are not, interestingly enough, yours or mine.
There's more of your 'ciao bono'...
If you are living in a bubble zone & uncomfortable with the price levels and have savings to make an 80-20 and are sick of OTHER people taking out 100%LTV exotic loans to bid prices even higher... on stuff you might have bought if 'sanely' priced... why not cry out for 20% down across the board?
On a side note... is bono coming or going? Anyone know?
I am merely entertained that the voices calling for 20% down payments, at least on this blog, are not, interestingly enough, yours or mine.
Nor mine. In 1998 we had the option to buy one house in Seattle with 20% down or a house in Seattle with 10% down and two in Colorado Springs with 10% down. We opted for the one plus two rentals and, even though it was very tough for a while, have not regretted the decision.
If you are living in a bubble zone & uncomfortable with the price levels and have savings to make an 80-20 and are sick of OTHER people taking out 100%LTV exotic loans to bid prices even higher... on stuff you might have bought if 'sanely' priced... why not cry out for 20% down across the board?
Of course. Especially if you're a first-time homebuyer.
If you're a move-up borrower, and your 20% down is coming from the FTB's purchase money loan . . .
Banker - can you comment on the "subprime containment". I actually value your somewhat bullish posts. No good to only see the bearish side. I just don't get it. Maybe you have some insight that I am missing entirely.
Spurred by a Fed policy shift to neutral and strong housing data, US stock markets rose by 3.5% this week, their best performance in four years.
That's right, four years.
The February stock correction based on trembling obsessive fears that sub-prime mortgage failures would spread like a virus through capital markets, major financial institutions and the economy has now given way to a renewal of the bull market built on the knowledge that the sub-prime sickness will be contained and the housing drag on the economy is gradually dissipating.
Earlier this week new housing starts surprised the perma-bears with a 9% gain reported for February. Today, existing home sales scored a 3.9% February blow-out rise that caught the narrowly focused housing bears completely off-guard. The home resale gain was the biggest monthly rise in three years and the third consecutive monthly gain. With small home price declines and rising job-related incomes, the housing affordability index has quietly reached a two year high.
Besides the housing releases, the Fed's index of industrial production increased 1% just for February alone, and corporate payrolls gained nearly 150,000 jobs including prior month revisions. All this during a month of terrible winter weather that was so bad that over 500,000 people couldn't get to work, and two Congressional hearings on global warming were cancelled due to unusually frigid and snowy climate change.
There are still some sub-prime glitches that will work their way through the economy. But the low-tax, deregulated, resilient and diverse American business system will certainly escape the perma-bear recession forecast. Over the past year the US stock market has gained over 10%, a sign of future boom rather than bust. At current interest rates, stocks look to be at least 20% undervalued at a minimum.
Betting on the âtapped outâ consumer and against the muscular and innovative US economy has rarely been more of a sucker bet than it is today.
"Housing oversupply and rising interest rates sank the market in Weld County, where mile after mile of pastel-hued suburban homes with neatly mowed lawns have sprung up in this longtime agricultural and meatpacking center, also the site of the University of Northern Colorado."
"We were seeing 3% in new housing stock from 1997 until 2002; then it went up to 4%," said Becky Safarik, Greeley's community development director. "Anything over 4% is difficult to handle. We had too much growth for too long."
There is a general belief that the current oversupply of new homes will at some point be absorded by demand either by price reductions or increase in population or a combination of both. This is probably true for developments within a reasonable driving distance to major employment centers but HB have developed the largest supply in areas with the lowest price land these areas in the West would be Central Valley Ca, Inland Empire Ca, LV, AZ just to name a few.
So we find the bulk of the builders oversupply is concentrated in areas that are far from employment centers, have little or no job possibilities , no significant infrastructure such as schools, shopping centers , police and fire.
The HB inventory oversupply is skewed towards locations that will require significant price reductions.
The other issue to consider regarding inventory is that significant new inventory may be coming into the market via the spring selling season in much more desirable areas which would absord the bulk of the demand leaving areas with current high inventory no relief.
You call people who buy at 80% vultures? You can bid at 70% on FHA Repos! And if you wait long enough (FHA drops the prices 10% every 45 days) you can buy these properties for peanuts. Even better with VA repos.(except the ones with VA financing). When it comes to residential I would never go for more than 80 GRM.
80 GRM makes sense in a flat market with no apprciation. It's hard to make single family rentals cash flow.
Up to 120 GRM can work if you buy at a modest discount, and it's in the "good side of town" that appreciates. Some landlords would rather have better class tenants and fewer calls, than high profit.
People buying the last two years at 200 GRM or 3% cap rates were off their rockers with the kool-aid!
I suspect we are going to see a real bifurcation in the market. The lower end stuff may well get drilled as sellers become desparate but the upper end folks can afford to be pretty patient. One big question is what will construction do from here.
Banker: we may also see this bifurcation on the demand side. With tighter lending standards a smaller affluent pool of buyers who will be more location driven then just price only.
As the market was knee-capped by the subprime hysteria-mongers and then the LibDems over the Gonzales US Attorney-sacking, the smart money saw it for what it was: A reason for a pullback that the market had been BEGGING for to provide a buying opportunity for mountains of sidelined cash. Some of highest Royalty on Wall Street also recognized a once-in-lifetime opportunity to squeeze their "clients" warehouse lines and steal a major segment of the lending industry for pennies on the dollar, creating yet more profit opportunities for the far-sighted invstor.
This rally sets up a nice launching pad going into the April IRA-funding season.
Mazo, at least in Florida, you can get easily between 12-16% on Tax Lien Certificates.(it goes to 18% max) So now you see why I wouldnt go higher than 80 GRM. Not to mentioned "no headaches". Maybe I am too cheap, I dont know.
ron writes, "but the upper end folks can afford to be pretty patient."
But much of the upper end is not owned by "upper end folks" -- see my post above about how 70+% of the high end in a fairly typical Chicago suburb is vacant (and mostly new spec construction), and how there's more than a year of inventory there. Just how patient can a spec McMansion builder be?
Nor mine. In 1998 we had the option to buy one house in Seattle with 20% down or a house in Seattle with 10% down and two in Colorado Springs with 10% down. We opted for the one plus two rentals and, even though it was very tough for a while, have not regretted the decision.
Robert: best of luck on those rentals, seems the Colorado Springs market may be in for a rough time with a 25% gain in inventory.
According to the Colorado Springs Gazette, sales of single-family homes fell nearly 11 percent in February compared with the same month a year ago.
As sales slid, the supply of homes on the market surged by a whopping 25 percent in February from 12 months ago, the Pikes Peak Association of Realtors reports.
Despite a larger supply and reduced demand, homes that did sell around the area fetched higher prices, reflecting that Colorado Springs mortgage demand hasnt entirely fallen off the radar in the region; the median price for homes sold in February rose 4.9 percent to $214,950.
The numbers reflect home sales and listings handled by Realtors Association members mostly in El Paso and Teller counties and dont include homes being marketed for sale by owner.
The Colorado Springs housing market enjoyed record sales in 2004 and 2005, but took a step backward in 2006 when sales declined and inventories rose.
Real estate industry members and economists have said the current market is a victim of past success. Low Colorado mortgage costs lured many people to buy homes in 2004 and 2005, but strong sales in those years have drained the pool of buyers in 2006 and so far into 2007.
All of which has led to a softer housing market.
Another problem last year: Speculative homes those built before buyers actually purchase and occupy them were constructed by area home builders and competed with the resale market right as demand waned.
But home builders have slowed construction of speculative homes, which should help cut inventories and make resales more attractive to buyers, said Wynne Palermo, owner of Wynne Realty Ltd. in Colorado Springs.
It bodes well for the resale market, she said.
Combine low mortgage rates with an ample supply, and the intelligent buyers will have plenty of choices for quality homes, which should help boost area sales as the year goes on, said Ben Day, branch manager of ERA Shields Real Estates InterQuest office in Colorado Springs.
One projects 2007 sales which are 1 million units less than the current pace, the other formatted to mask the flatness of inventory for the last nine months.
Extrapolated projections based on wishful thinking.
20% DP would mean a fast death for FHA and a slow death for Fannie and Freddie. We wouldn`t want to throw away 70+ years of regulations, would we? That would be depressing for a lot of people.
I can comment on subprime containment, but I'm guessing as much as anyone else. Here is my take. The world moves so fast now that the impact of higher defaults etc. is now reflected in stock prices, new lending standards etc. already. I think a major moment happened last week when an investor bought $150 million in a convert (or maybe sub debt with warrants) in a subprime provider (I'm blanking on the name). What usually happens in the markets for this stuff is that is it gets oversold by panicked "sheep" and cleaned up (in both senses) by the smart and independent thinkers. That's what I think is happening here.
perfectly traces my professional career/experience as well as my expectations for the sub-prime world.
As for "containment," I simply don't think there is a bunch of overlap that needs to be "contained." Borrowing spreads will have widened for more traditional mortgage companies and banks for a while, slowing them down a little bit, but only a bit. They still need to do business and are earnings driven not "save the farm" driven at this point, while the sub-prime guys are "save the farm" driven. I simply don't see much evidence in either the Alt-A world or the mainstream mortgage market that defaults are running to scary levels. I think the Cragen (?) report CR cited a week or so ago makes for informative reading.
Bullish? I said months ago that I think housing will offer negative real returns over the next several years, that's only bullish compared to the "sky is falling" "economic disaster" film at 11 crowd.
I simply do not think what is happening in the housing world will be enough to cause a general recession and that we have far bigger economic problems than housing, like out of control entitlement spending that currently shows a present value of something like negative $70 trillion.
Robert: best of luck on those rentals, seems the Colorado Springs market may be in for a rough time with a 25% gain in inventory.
We just refinanced them into a lower interest rate 20 year loan on Friday. We plan to hold them another 12 years until they are fully depreciated then 1031(9?) them into another real estate investment. While now is not a good time to have to sell and maybe one should wait to buy, but long term holders of real estate investments can just hold.
Oh ya. I was listening to them on late night alternative college radio out of Iowa City while working third shift as a process engineer at the wet mill. We are talking '82 & '83. I was right out of school.
Plus I had friends who had just come back from hitchhiking around Europe for a couple years... they had spent time at Trinity & reported back that this was a band to watch for.
So even though I was a complete rube... I was a somewhat enlightened rube. At least back then.
Of course everyone else thought I was freaking nuts. Everyone has an opinion.
I simply do not think what is happening in the housing world will be enough to cause a general recession and that we have far bigger economic problems than housing, like out of control entitlement spending that currently shows a present value of something like negative $70 trillion.
An entitlement outlay spread out over half a century. Get off that soap box or be ready to catch the spoiled fruit & veggies - we toss 'em you know.
BTW - work your way back through CR's postings... you'll find he addresses that issue nicely. 'Entitlements' fall in order of importance behind the Bush deficits and medical cost explosion (of which Medicare is a part, significant part, but only a part).
Importance by the way is a factor of BOTH size & immediacy... in which case current gov't debt trumps in both cases.
And while you are at it compare actual debt growth vs reported debt growth. Enron wasn't the only organization creating off balance sheet entities.
So entitlements are an issue but a small one compared to other bigger & more immediate ones. That is unless you smoke the really good stuff - then you ponder & worry about things that might happen 20-30 years from now while the couch catches on fire next to you. Dream on.
Unemployment...no jobs...recession...soup kitchens...where are the jobs? ...my income isn't growing...poverty...depression... Buddy, can you spare a dime?...The Grapes of Wrath...Tobacco Road...outsourcing...globalization...its not fair...Bangladesh...redistribute...where's my BMW?...where's mine...you owe me....I'm not accountable...you are responsible...it takes a village!
I love the smell of retreating fear merchants in the morning.
We enter the new quarter with considerable economic MOJO. The "one-trick-pony" alarmists are no longer relevant, and will need to find their own parallel universe in which to communicate with one another about the tapped out consumer and the housing led recession.
Ah, yes. I can smell the roses--and DJIA 15000.
The BODACIOUS profitfest debauchery rolls along.
KAAACHING!!
I am farting through silk, baby, farting through silk!
"I still see new homes being constructed by Pulte & Toll in Sunnyvale, CA. What is up with that?"
There's still demand around the South Bay, at the right price. There's just not enough land, and some people don't want to commute 90 minutes each way to cheaper housing. And there's still a lot of money around there; high income area, and high-tech has shown no sign of decline -- yet.
A developer of my acquaintance is about 1/3 of the way through a townhome development nearby, in Santa Cruz; one full block of high-density housing, and he's just put in the foundation and basement garage.
Last year I asked him about his market expectations, and he said they were covered either way: if prices fell too much to make selling profitable, his company could get by by renting out the units until the market improved. (Rents around here are pretty high.)
This outfit (privately owned) is primarily about commercial buildings, and retains and manages about 2/3 of its projects. So, some developers know how to work with an uncertain market. Probably the vast majority don't, though.
Should any of this RE fallout be a surprise? This boom/bust cycle is a direct result of the supply side conjob foisted on the public. Have no doubt in your mind people.
Think present value and understand that Medicare is an entitlement. Then we are speaking the same language. This isn't a 30-40 year problem, it is a 5-10 year issue.
"Bullish? I said months ago that I think housing will offer negative real returns over the next several years"
This is where we may differ perhaps substantially in opinion, and I am betting quite heavily on it. I think we agree the RE market is a one-way train for the next several years heading south.
My feeling is there are several "traditional" lenders (regional banks) that will experience a great deal of financial pain. I also suspect the HBs will either contract severely or consolidate. There is over-capacity in the HB space just as there was (is) in the lending space.
I am quite certain I see more downside than you or the federal reserve. Basically the opposite of the last 7 year run squeezed into a shorter timeframe which will almost certainly be driven home by a recession Q3-Q4. All that MEW provided a lot of stimulus to the economy. That largely vanishes replaced by foreclosures and grief on the 6P news. We'll see how it turns out.
Our disagreement is what makes markets. One of the reasons I think I'm more liklety correct is the massive worlwide liquidty at this point. The savings available in Japan alone are stupendous (as one example) and that money must be put to work somewhere. Here's another reason. Jamie Dimon (among others)in particualr is salivating over the prospect of regional bank problems. He buys them with stock, their balance sheet is instantly recpapitalized, Jamie does his usual marvelour job at cutting costs and voila, no more troubled regional bank.
Look, I could be wrong, but in my experience, pessimists don't often make money over time. Hell, even Roubini is 100% in equities.
Think present value and understand that Medicare is an entitlement. Then we are speaking the same language. This isn't a 30-40 year problem, it is a 5-10 year issue.
Medicare is indeed a very acute & immediate issue. But the current debate is a canard. If you abolish Medicare tomorrow the expenses for SOCIETY in AGGREGATE only go down if we stop treating a lot of people.
You for that? You want to try & sell that to the electorate? To the elderly? To their families?
You think they go for that? Wait until they get their first bill.
BTW - I'm self-employed & have experience with this. My guess is you probably have 'company paid' insurance. Oh boy do you have a surprise coming.
If you don't like Medicare, you're going to love single payer. That's what will replace it when conservatives 'kill' Medicare. Bank on it.
Of course conservatives don't know that yet. They'll learn. They have so much to learn.
You should really stop making assumptions about me. You are wrong yet again. I too am self-employed. The rest of your post has a similar degree of insight.
I was afraid this would happen. I find a good blog with excellent info in the comment section, then it becomes popular, and all the 'Kudlow for President' trolls and other agitators come out of the woodwork. They're really not contributing anything, but just parroting talking points from the bull camp. Tonight it appears that Joe Kernan or Neil Cavuto are posting comments here.
What's with that one post with nothing but links of headlines from Bloomberg? Hell, I can find those everyday....if you invest just by what the headlines say, good luck with that. I probably sold you my shares of NEW, TOLL and MOT a couple of months ago!
You should really stop making assumptions about me. You are wrong yet again. I too am self-employed.
Okay - my apology. I'm a bit sensitive to this since so few of the 'privatization' party actually have skin in the game like we do. Most I meet have company paid.
Personally we've gone years without coverage because insurers wouldn't cover an existing condition my wife had at any price - we lucked out that her condition didn't reoccur until quite a bit later when she had company paid (she quit working with me and took a 'job' at a large firm just to have access to insurance). Then it reoccurred & surgery was successful, thank God.
But it doesn't alter the story - how does eliminating Medicare change the overall cost structure?
It doesn't change anything fundamentally unless services & treatment are denied under the no-medicare scenario... then costs would decline.
If the same procedures are performed as would be performed under Medicare... then the cost is basically the same... plus or minus a small amount. Its just devolves into an argument about who pays.
Medicare is only one small part of a much larger problem - the explosion of medical cost in general. The more we privatize pieces of the system the closer we get to eventual single payer.
The tipping point is when the majority of the voting public realize they no longer have company paid and can't afford private insurance sufficient to really cover their risk. If we get a real recession (lay offs & benefit cuts) then that day comes a lot sooner.
Sorry about your wife. I hope everything works out ok. The problem now is that the insured by a company or by the gov't overuse the medical system because someone else is paying for it. It is a version of the "tragedy of the commons." We need to link utilization and the payer. They are currently decoupled. What kind of car would you buy if I were paying for it? So everyone gets Ferrari style treatment now. It makes no sense. Sprain a Knee? Rather than ice it, asprirn, wrap it and watch it for a week, we run to the emergency room, get an x-ray, then an MRI, see a doctor, get some superibuprofin and go home and wrap it and ice it. The cost of the former? $50 bucks. The latter? Gotta be a thousand. Think if someone were paying direclty they might watch it for a week? But in most cases what is the ultimate outcome medically? Zero.
The other issue we are going to have to deal with is not spending a gazillion dollars on the last 30 days of someone's life. All that spending (and it is huuuuge) is obviously unproductive and a huge drain on the next generation. Cold perhaps. But undeniable I think.
We need to link utilization and the payer. They are currently decoupled.
Agreed. Except a lot of people (like maybe half) won't be able to pay for catastrophic risk. I'm sure you understand the details of this (demographics & income distribution issues - they don't overlap).
Couple that with the fact health care is not just another good. If you are rich & I am poor - I might resent that you drive a nicer car but it doesn't kill me. Not getting prompt treatment of a melanoma because I can't pay the insurance might.
That is another place where the tactics need to dovetail the strategy & I've not seen a good answer from liberal or conservative alike.
::::
The other issue we are going to have to deal with is not spending a gazillion dollars on the last 30 days of someone's life.
You have no idea how well I know that story. I had two parents both dead now. One we avoided the last 30 day torture, the other (although we tried) we didn't... he got the full ugly expensive treatment.
What is worse - he suffered way more than my Mom & got 'supposedly' some of the best & most expensive treatment on earth. Everyone thought he would recover - until all of a sudden (after too many procedures already) it was clear that he would not. At that point we fought like crazy & spent a lot of our own money just to get him home to die.
His problem was he was mid80s & became ill and it just spiraled out of control over a period of about a month. Heart related. Should have we pulled the plug sooner considering his age and not done the procedures?
Just a month before he and I had cut about ten cords of firewood. Seriously. This included DROPPING the trees, cutting them up, splitting and stacking. Back breaking work.
Plus he had been going to Mayo for years and his heart seemed fine.
Who would have ever known he had just 60 days left in this world back then? Thirty of those days were spent in hospital ER & ICU.
After our experience I can see how families fall into the 30 day trap.
Its not the theory most of us are all arguing about but rather how to implement reason in a humane way. The older I get the more I realize that is the root of wisdom - not creating or ex-pounding on theory. I love CRs blog for exactly that reason. Please keep coming back even if we differ.
Is this your discussion based on anecdotes or have either of you seen data that backs your viewpoints? AFAIK, the '30 day problem' is not real. I've seen a public policy paper that looked into this issue in a number of First World countries and found these costs to be a few percent of annual medical outlays. I don't recall any mention of moral hazard introducing stilted results in the US versus Sweden, Japan etc.
Banker, you seem to think that people jump to use insurance based services at the drop of a hat. From decades of involvement with several aspects of the medical field, my experience is very different than yours. The couple of thousand in out-of-pocket expenses that most PPO plans inflict makes most people think twice before going to the doctor etc. HMO fees are lower but the HMO itself regulates the issue you speak of.
I don't deny that the actual problem you identify exists - but in a different form. It is the doctors themselves who order procedures, workups, labs etc of all kinds, dramatically increasing the cost of care. The reason clearly has to do with litigation and the fact that insurance pays, as you say. In countries where the cost of service is lower, but individuals pay it (and malpractice cases are rare) doctors spend much more time on analysis. US-based doctors are notoriously poor diagnosticians because their time is so expensive that it is imperative that they keep the assembly line of patients flowing.
Thanks much. On the latter point, I will bow your experience as to what is driving "Ferrari" levels of treatment. On the 30 day point, I'll see if I can find something to back me up, but yes, my anecdotal experience (Grandparents in my case) matches Dryfly's. Here's some interesting data. http://www.pubmedcentral.nih.gov/articlerender.fcgi?artid=1464043
Scroll down and there is this (among lots of other interesting stuff)
Principal Findings
From 1992 to 1996, mean annual medical expenditures (1996 dollars) for persons aged 65 and older were $37,581 during the last year of life versus $7,365 for nonterminal years. Mean total last-year-of-life expenditures did not differ greatly by age at death. However, non-Medicare last-year-of-life expenditures were higher and Medicare last-year-of-life expenditures were lower for those dying at older ages. Last-year-of-life expenses constituted 22 percent of all medical, 26 percent of Medicare, 18 percent of all non-Medicare expenditures, and 25 percent of Medicaid expenditures.
Not as much as I had thought, but ugly nonetheless. I'll keep hunting.
Its not the theory most of us are all arguing about but rather how to implement reason in a humane way. The older I get the more I realize that is the root of wisdom - not creating or ex-pounding on theory. I love CRs blog for exactly that reason. Please keep coming back even if we differ.
I think some smart guy talked about action being the root of wisdom 2500 years ago. We still haven't learned it. As for hanging around, you guys teach me things from time to time. I find that invaluable. I think I annoy some people with my different outlook though. I'll stay unitl CR asks me to leave or until I get enough hints tha I'm making the place unenjoyable for too many. Thanks for the sentiment.
Banker,
I come here to get the other point of view. I see your side of things everyday on CNBC, Bloomberg, Marketwatch, and of course research by the Wall Street banks.
If you're looking at the highs in the stock market and see that as a guide to the economy, well, that explains a lot.
I'm curious about this graph - it's a graph that professor Doakes would draw on the board in advanced micro at 9:30 on tuesday morning.
But, based upon my bad memory and general annoyance with micro - I'm not sure about the slopes. Wouldn't the slope of the curves be at least as instructive as their interaction? Would we assume that the slope of both the S&D curves were relatively inelastic whereby a large change in P would produce only a small change in Q? And if this is the case, wouldn't this impact the intensity of a housing led recession?
Maybe you can pick this up on another thread.
Thanks!
Great post, CR. It does a really good job explaining why there are more problems ahead.
CR,
Great analysis. Meanwhile, the Kasriel-leading-indicator issues a recession warning.
http://tinyurl.com/2p2ftr
OMG - its the supply demand chart again! Haven't seen that in YEARS. I suppose next it will be the the Spanish Inquisition...
Seriously. I concur with Steve, great post CR. Thanx.
I do have a question, though.
Since building has slowed down, should we expect inventory to increase at the same rate as last year?
Thanks, CR
Steve, I think the answer is yes for existing home inventory - and that is what I graphed. I expect the normal seasonal increase in inventory, plus, as more homeowners get in trouble, they will try to sell their homes.
Best Wishes.
Steve wrote, "Since building has slowed down, should we expect inventory to increase at the same rate as last year?"
In theory, since some of the new home sales of the previous few hot years will end up in the existing home market this year, existing-home inventory will grow at a larger rate for the next few years.
Theory isn't always correct, though!!!
The reset bulges are going to push more homes on the market. Also a lot of inventory is out there in the form of short rentals which sooner or later will come back on the market after resets.
Tanta,
I can't get Italian speakers to agree on the translation of Cui Bono.
I think "Who benefits?"
Please help. You know Italians, we can't stop arguing about it.
Thanks
Ciao for now
Tom - it's Latin. "Who benefits" is a decent translation, a literal translation is more like "To whom the good?"
Charts! Charts! Charts!1!1!
OK, settle down now...
The housing bust and the banking problems are making front page news lately. Is this the crest? Is the story ready to fade way now?
Not on your life. There are only a few things you can state in economics, that ALWAYS happen. Transaction prices ALWAYS revert to their means.
The size of this bubble will also run roughshod of some of the long held chestnuts of real estate investing.
Real etstae is local? Then why were urban condos built all over the map, in far flung small towns like Pocatello Idaho and Iowa City? Come on! Bubble money oozed everywhere as investors sought out the next market that "everyone will be moving to".
We'll get tired of popcorn as this unfolds. Also keep some peanuts and Chex Mix handy! >:-}
One surefire way to reduce inventory is to have a "fire sale". That means sellers finally throw in the towel and start cutting prices drastically. That hasn't happened yet but this spring/summer sure could get interesting. Especially if a selling panic occurs, i.e. my neighbor just cut the price 10% so I'm gonna cut 15%.
Not sure it will happen everywhere, but just for giggles let's imagine the effect of a cruddy spring sales season in Florida followed by a cat 4 hurricane or two landfalling near Miami. Might just do the trick.
and lest we forget, the months supply is measured at the current sales rate, so the bump in existing home sales this past month alters that calculation.
Once credit tightening pares back demand, and inventory rises further from the re-lists, foreclosures, investor retreats, etc, that months supply number will balloon.
The real test is if we get significant economic stress on top of it, which would be the proverbial straw. Clearly some is headed our way - the many multihomeowning soon to be unemployed mortgage related workers will be one source) and construction workers, also likely to be caught up in the racket, will be another) Automaker layoff pai
n is already making itself felt. If a downward spiral begins with overall final demand cooling and cutting back on business capital spending, well, then you will see just how ugly the housing market can get, and how fast prices can adjust.
Still a bit early to tell, but not looking good. Im glad all the bulls are enjoying their moment in the sun. Seriously, enjoy it while it lasts. And please do come back here on the next meaningless piece of good news to taunt people who are trying to be realistic about how a really depressing period of US economic history could be getting underway. Fortunately, all of your businesses will keep expanding in the next downturn, so you'll look like a genius for HELOC your house for business credit. Remember, it's different where you are. Bleh bleh...
I have a question on the 'eight month rule'... that once turnover hits eight months pricing starts to crumble more rapidly...
Are there empirical studies that back that up?
Or is there a rationality behind this? Being from an ice locked part of the world where the lakes remain frozen long after temperatures reach into the 60s (as was the case today)... I can see how folks around here who absolutely must sell might panic if the average time to sell grows longer than the period of time the lakes remain unfrozen. If you put the home on the market now, and don't sell in eight months... it'll be snowing again before eight months. Not much sells after the snow flies.
Or is the eight months rule just an old realtor's tale?
Anyone know?
dryfly, I remember seeing some discussion on these blogs that it is statistically valid that a market with 10 months of inventory simply sags under it's own mass. Price declines just happen.
Tanta or CR,
"However when existing home supply reaches a certain point, prices start to fall in the existing home markets too. Also, when lenders start taking short sales, and banks are selling REOs (bank Real Estate Owned), this puts additional pressure on prices."
When do you see this happening? I've read Tanta explaining different REO scenarios, but is there anything to suggest how large a REO presence must be before declines accelerate?
Thanks and Great Work!
Just found this bit on Impac Mortgage and am sharing accordingly - pls skip if you've heard it all before:
NEW YORK, March 21 (newratings.com) -In a research note published yesterday, analysts at UBS reiterate their "reduce" rating on IMPAC Mortgage Inc (IMH.NYS). The target price has been reduced from $6 to $3.50.
IMPAC Mortgage "reduce," target price reduced - newratings.com
Think of it this way.
Suppose 20% of the market are REOs, and the absorbtion rate is 20% of inventory over a year.
Certainly some of that 20% will want a clean, fresh retail sale. But a lot of them will be deal hunters.
Suppose half of the sales are to REO buyers. 1 in 2 REOs found a buyer, and there will still be REOs to sell next year, even if no more foreclosures take place.
Meanwhile, 1 in 8 owner occupant homes found a buyer.
Is it any wonder that prices fall?
This sticky price phenomenon in the existing home market is actually good for new home sales.
I think maybe this sticky price phenomenon stimulates overbuilding. If the homebuilders are aware of it, it provides the incentive to drain "profits" from the existing home market by producing excess housing and aggresively pricing it (e.g. undercutting the sticky pricing with loose pricing in the short-term).
Thanks for that link to Kasriel, BR.
For all of the folks bleating that NYC is so very different...Apparently the mayor is not so sure:
Bloomberg Budget Shocker: Are the Good Times Stopping Their Roll? -- Daily Intel
The "sticky" part also owes itself to numerous historical factors no longer applicable:
1) High owner occupation.
2) Substantial equity.
3) Standard DTI ratio.
4) High level of fixed rate loans.
5) (Need I say) Better borrowers!
And last but not least...
6) Limited availability of pricing information and/or awareness.
dryfly, I've heard this number (8 months) for years - but unfortunately the NAR is not very open with their statistical data, so I can't present an analysis. Think of it as a guideline. It is really for each local area as opposed to the national numbers I'm using.
AG, the REO numbers are building. A friend send me the number for San Diego, and they have been steadily increasing. Short sales also have an impact - and I've read several stories of short sales recently. So my answer is it's already started and will just get worse over the course of the year.
There are many articles like this from Bloomberg: Lender works with R.I. couple to avoid foreclosure
No one tracks or estimates the number of borrowers who avoid foreclosure with a short sale, according to Duncan and David Berson, chief economist of Washington-based Fannie Mae, the largest buyer of mortgages. Theres ample evidence that the number is increasing, they said.
The short sales may mitigate the impact of the housing slump as the properties avoid being tallied as foreclosures. At the same time, they will help push the U.S. median house price to a third consecutive quarterly decline in 2007s first three months, Berson said.
The way the banks see it, its better than if the house goes into foreclosure, stands empty, and sees its value spiral downward before its auctioned on the courthouse steps, Duncan said. It helps to clear the market.
Best to all.
That was a whale of a post CR. Excellent stuff.
I suspect we are going to see a real bifurcation in the market. The lower end stuff may well get drilled as sellers become desparate but the upper end folks can afford to be pretty patient. One big question is what will construction do from here.
The other interesting element is the elections. We're already seeing congressional comittees talking about the problems, talk of bailouts, etc.
And we're only in the third inning... maybe top of the 4th... to this saga.
The SFH resale inventory levels has been focused in areas that are the less desirable or in areas that have low appreciation and challeging job growth. Not counted in this inventory is the REO stock that also is building within the less desirable areas. In checking the CFC REO Calif list I find little or no homes in the most desirable locations though this might change with the coming resets.
This resale SFH inventory overhang is not spread out evenly among the different zip codes which will produce some interesting buying decisions this spring and summer. My guess is that these areas will continue to build both resale and REO inventory while the most desirable areas have very sticky prices.
Short sales seem to be a bit like buying on the dips. If prices continue to drop, then the short sales buyers will dump also.
Why was the inventory growth in 2004 so different?
Would inventory top 4 million if you average the last few years, rather than using the 2006 growth rates?
And, as a side note, I'd love an explanation of the consequences to borrowers and lenders of the 2005 bankruptcy law.
I tried to refi my house, but the appraiser told the lender the condition of the property was poor. the underwriter told me they wouldn't take poor condition property as collateral.
so the loan didnt go through.
Great analysis. Meanwhile, the Kasriel-leading-indicator issues a recession warning.
Pfft... I stopped reading Kasriel's stuff when he revealed himself as an "in-the-closet" deflationist.
Bah.
A while back Bush was asked about the housing market and he said builders were making large margins and so it would take some time before they got into any trouble. In other words, builders could drop prices a lot before they lost profitability. They can continue building and selling homes for lower and lower prices as demand falls until finally their profit margins are negative. Only then do they stop building. On the other hand, a guy who is foolish enough to buy a new home in a declining market while builders still have positive margins, will of course find that he can't sell and break even like the builders can and his situation just gets worse and worse until the builders stop building. What prolongs the agony for homeowners is the fact that as housing demand drops off builders can source materials and land at lower and lower prices so they get help on the way down, while the poor existing homeowner gets pinched more and more.
OT
Someone pointing out that James Hamilton has a new post up entitled "Bubble, bubble, toil, and trouble".
Is anyone else having trouble posting to it?
I have a suspicion I'm being blocked from challenging the good professor, but maybe it's just a technical problem (perhaps mine).
The curves are steeper in FL, AZ, and CA.
dryfly, I've heard this number (8 months) for years
Ya me too. Just wondering if there was science behind it or just folklore.
This tangential thought came to me as I went to get my youngest at track practice today... the snow has mostly melted and the ground has thawed & 'For Sales' signs are sprouting like crazy. I started counting...
April, May, June, July, August, September, October, November...
Ice will be on the lakes again & ground freezing before eight months are up. Actually last snow is usually in mid-April... first snow again in mid-October. Nothing much sells during those months in between. Folks here don't have eight months if they want to sell between thaw & freeze up.
If the turnover starts to exceed eight months then for many the fear is it could become a 'year and eight months'... or more. There is your motivation to cut price & then some no later than Labor Day. Either that or plan on waiting until NEXT spring.
Great post CR.
tj & the bear,
good list; maybe this time really is different. I'd add:
7) greater amount of speculation/investment homes.
This may strongly influence how fast prices drop, as investors don't have the luxury of thinking "oh well, it's good shelter until the storm passes". Does anyone know where to find data on the trends for second home ownership?
We'll get tired of popcorn as this unfolds. Also keep some peanuts and Chex Mix handy! >:-}
I deliver pizzas, hoagies, calzones, lasagna, salads, soft drinks, and desserts. If anyone needs the phone number, I'll be happy to provide it. Most of you are out of our delivery area, though, so expect steep delivery charges.
Ice will be on the lakes again & ground freezing before eight months are up. Actually last snow is usually in mid-April... first snow again in mid-October.
This is obviously the post of an old timer. This year, we had two months of winter.
CR, another terrific analysis.
BR, my thanks also for the Kasriel article.
This is obviously the post of an old timer. This year, we had two months of winter.
Overall it was a warm winter here too - just not much snow.
But we had a helluva a cold couple months after the Holidays. As a result people's septic systems froze solid in January & February in much of central Minnesota because there wasn't a snow blanket to insulate the ground... That has to make life interesting.
But as late as last week I saw large SUVs driving around on the lakes so it must have gotten cold enough at some point to freeze solid.
If there is a problem on the north central plains its that there hasn't been enough moisture... we might not have lakes left to freeze.
Oh look at that will ya, a transmission mechanism...
Banks are imposing terms on real-estate firms similar to those for defaulted loans,'' said David Malpica, who helps manage $5.6 billion of real-estate and distressed debt assets in Europe and the U.S. for CarVal Investor in London.It reflects the high volatility of real-estate assets.''
Vacation Homes Boom in Spain May Bust as Banks Recoil (Update1) - Bloomberg.com
CCI (Cost of Credit Intermidation) is rising. How how high will it go, kids?!
(via Ben Jones)
Tanta, CR, care to comment on Ohio's plans to bail out their subprime borrowes? It just hit the Bloomberg headlines.
My wife is a Realtor in suburban NY so i get to sneak a look at the Lower Hudson Valley MLS system. I agree with this post that "By mid-summer, months of supply will likely be a significant problem."
It was clear to see this past winter that many listing were allowed to expire after six months on MLS. I believe those sellers will be back en masse starting about now and through next month hoping to sell their homes by this summer and will overwhelm the market in the county's just north of NYC and no doubt in many locations where folks pulled their listings during the cold winter months thinking the market would pick up in the Spring.
The tighter lending standards and the glut of inventory will strike a blow to prices over time. Here in my county the median price is still about $400k and I think across the river in Westchester it's still around $600k. Tighter standards on Jumbos and Alt-A to finance these expensive homes will eliminate many potential buyers.
TOday's data is also very counter productive to agents trying to get people to be reasonable about listing prices. The sellers hear the news and think all is ducky and still insist on listing at near peak 2005 prices. DUMB. That was dumb last summer and some houses still sit on the market listed last summer at 2005 prices, but still people want to do that in 2007. I haven't heard what David Lereah at NAR said today, or the other cheerleaders but the false message spread that subprime is contained and the rest of real estate is fine and dandy will cause many sellers to make the huge error of over pricing their homes when they put them on the market this Spring. Those sellers will be stuck as the market takes another leg down this summer.
Tanta, CR, care to comment on Ohio's plans to bail out their subprime borrowes? It just hit the Bloomberg headlines.
Ohio Plans Bonds to Bail Out Homeowners Strapped
I did some contract work in Ohio recently (briefly). If you haven't had the experience of driving to work while hearing about how a nearby school district had to shut down it's public school buses and send 9-year-olds walking through drug-infested neighborhoods every day (I kid you not) due to plunging property tax revenues, then you have no understanding of the consequenses of spending wealth you don't really have (IMO).
Ohio is now guilty of pillaging other peoples' future just as they're paying the price of pillaging their own.
The only thing that keeps me from being a perma-bull is the conviction that people never learn...
Irony. Hypocrisy. Etc.
Have a great weekend.
Normally homeowners and builders compete for buyers. Now, with all the foreclosures, banks are also competing with builders for buyers. When that happens you can bet your bottom dollar that banks will make it harder for builders to get financing.
You are welcome guys. Janszen at itulip has in the past drawn parallels with 1937 -- a time when there was high inflation in a deflationary period. I wonder if we will see a reacceleration in inflation towards the end of the year. The JOC-ECRI appears to hint at that. For some reason, updates seem to have stopped this month.
Ohio's plans to bail out their subprime borrowes?
More OPM, plenty more where that came from.
AJH,
Thanks.
Not to be picky, though, but I believe I implicitly covered speculation in #1 (High owner occupation). Can't understate the impact of that non-owner occupied property, especially when you just know that "investments" were almost always financed IO / NegAm to minimize carrying costs.
Ohio's plans to bail out their subprime borrowes?
More OPM, plenty more where that came from.
That's like the NCAA announcing they're going to bail out the NFL because they just got the backing of the local junior high school.
That's like the NCAA announcing they're going to bail out the NFL because they just got the backing of the local junior high school. - ac
From the link...
Proceeds of the bond issue by the Ohio Housing Finance Agency will provide financing for about 1,000 loans with a fixed rate of about 6.75 percent, said Robert Connell, the agency's director of debt management.
1000 loans. That won't cover the eastern half of Cuyahoga county... what'll Youngstown do?
1000 loans. That won't cover the eastern half of Cuyahoga county... what'll Youngstown do?
I told people every day that I commuted from "Up North" to "Acorn Ohio". And every day I was gently reminded that it was "Akron not Acorn".
In the end I think we came to the conclusion that "I just didn't get it."
I think they're right - I'll always miss Acorn. Sometimes I think they miss me too.
REOs of homes bought at 2005 prices with 100% LTV option arms loaded up to 115% competing with builders who've discounted 15% off 2005 prices - HA! Must be east coast math.
Why not adjust the price to balance supply and demand?
Supply has a slope because fewer units (widgets) can be made/produced at lower prices in theory.
Reality - construction costs might be lower than 2005/6 in some areas, but impace fees and permits (the #2 line item after land) is still increasing. Just looked at Folsom, CA and picked up a 33% increase over June 2006, from $45K to almost %60K per home.
Countrywide Foreclosures (REO) Blog
CFC REO up 5% in.....3 days !!!! (after being up only 6% from previous week and 8% from previous month)
The best way to adjust pricves is to requitre 20% down payment.
People will have to save and they will care about the price they pay.
Now, with 100%LTV (trenamed to 95% LTV) they don't care about the price but about the monthly payment.
When they only care about the monthly payment and the exotic loans give them low starting rate they don't understand the concept of pricing.
Assume some would be sellingt you stocks on 100%margin and pumps all day "stocks never go down" - would you care at what price you buy ?
CR,
I still see new homes being constructed by Pulte & Toll in Sunnyvale, CA. What is up with that?
why is 20 percent the magic number? i want some background on this. magic numbers!
what would the property markets look like without banks? without mortgage lenders? what would borrowers substitute for FICO scores?
maybe we need a new urban homestead act that erases mortgage debt after say five years of ownership. most of american history has been about frontiers, and we're definitely on the new finance frontier, where if u are not invested in hedge funds, u are losing out!
frontiers used to be about westward expansion, cheap land, and loyalty to the union. oh, how things have changed. maybe new frontiers are in the middle east!
maybe, just maybe, the finance frontiers have become dominated by greed, fraud, corruption. but hey, as long as 65% of the populace own 100% of the real estate market, who gives a damn about short term profits. asset inflation, global savings glut, global asset shortage, cheap liquidity, whatever the term of your preference, get on board or be left behind. otherwise if you are a high FICO score renter, be happy chase bank, citicorp, and discover offer u 'free' money credit cards for 15 months to make u feel better. dont worry about wage stagnation!
There is a more pressing reason why adjusting price isn't smart.
It kills demand.
Most home-buying is financed by a home sale. Something that is difficult if your upside down. It can very fast lead to situations where people can afford the higher mortgage payments but can't find the loans as they are >100%LTV
It is not only banks that have skin in realestate. Local government is another player in the game as it makes most of its money out of house prices. Try getting the required paperwork out of them when they don't want to.
ps. For those of you who believe that the corrupted, i mean elected officials listen to the voters. Yey that to.
In Fla, the developers are taking buyer to court to force them to close.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you didn't read the newspapers, you'd think the condo boom was still in full swing in much of coastal Florida, where frantic construction activity is still very much in evidence on the skylines of major downtowns and in quieter suburbs. These condominiums on the western edge of Boca Raton are one of hundreds of condo and condo-conversion projects that saw pre-construction demand and prices soar, only to drop sharply over the past year and a half. Some speculators, like Marie Guillaume, a Haitian immigrant, saw the value of their units drop 20 percent or more even before construction was finished. So Guillaume, and some other buyers here decided to walk away from their purchase contracts and forfeit their deposits. Now in another time, it wouldn't have been a big deal. The developer could have turned around and sold those units to someone else. But buyers are so scarce these days, the developer instead chose to sue Guillaume and force her in court to close on her condo purchase. Marvin Moss is Marie Guillaume's attorney.
MARVIN MOSS, ATTORNEY: It is very unusual. As a matter of fact, if you talk to most lawyers they have never come across these cases at all before. The only lawsuits for specific performance as previously stated are the ones that are filed by the buyer against the seller in order to get title to the property.
PBS
I wonder how in the world any loan will be approved, or if the builder is going to finance it, then it is going to be impossible to sell the loan. In any case, most contracts have a stipulation that financing will be approved. Sooo is the builder going to sue a bank to make it approve the loan.
also
Builders sue lax home buyers
McFarland said many banks are opting out of loans with buyers, which leaves builders developing a house that can't be funded. That has been happening when houses don't appraise for the loan amount.
Most excellent post, Dude!
Good points and great graphs. As usual.
They can continue building and selling homes for lower and lower prices as demand falls until finally their profit margins are negative.
Actually the builders will keep going as long as cash flow is positive. The builder may have a large inventory of land purchased at a high price - this is a sunk cost which cannot be recovered. So the builder may be selling at a loss for accounting and tax purposes while still getting a + cash flow. And the loss can be written off against profitable years.
So at market bottom you may see houses selling for the cost of building them alone, or perhaps even less if the builders overshoot.
"why is 20 percent the magic number? i want some background on this. magic numbers!"
well if you look on iran they have 100% down
and until you save enough you have to rent. since interest is evil acording to them 
anyway i personaly think there is some really big truth in this. i mean, if everyone would buy his house for cash the prices would have never gone up so much because not many people would simply have the money to buy a house.
some will say its unfair, but rent or own is really just a psychological myth created by parties which profit from mortgages.
if i own the house my mobility gets limited if the job market in my area crumbles. the times have changed, you dont have a job for 20-40 years, not even in a big company
in the end i would just ask what happened with the common sense that i can spend only so much, how much i have?
btw. i am 26
but since we live in the west and we are known for "Inovation" one way to get easy housing would be a yen mortgage, as someone few threads ago mentioned. for example since currency of east european countries are strengthning against the euro an euro mortgage are widely available to peaople in these countries, altough the ratse are no 1-2% like in yen
but i really think that loans encourage irresponsible behaviour in people.
hmm, little on sidenotes i red few weeks ago that japan has banned loan services of consumer loan companies which operate on more than 20% rate a years. and since than few big companies have left japan including some of the american companies
time for a new thread!
What I love about these comments is their utter blindness.
If someone so much as mentions the idea that the government might step in and bail out ______ (fill in the blank as you see fit: greedy bankers, illegal immigrants), there is an enormous hue and cry against the evil government.
Okay. I suppose that the reason the housing market is falling into the gutter is "the invisible hand".
Get your peckers out of your invisible hands and start to ask yourselves why all this is happening. And with all due respect to Tanta, if the answer is, "Well everyone thought real estate would always go up," I won't need Ipecac to vomit.
It's a flood of cheap money. Where did it come from? Who profited?
Science is asking why, not saying, "We see this."
CR: Once again, thanks a lot for be willing to share your wisdom. I extend this commentary to Tanta.
CR,
One of your best! Thanks!
Two things to add:
-The media and most of Wall Street continue to ignore the seasonality of inventory. The implication of near-peak inventory levels in Feb. was largely lost on them. Couple that with foreclosures and re-listings of 4q de-lists, and the inventory level for the summer is almost pre-ordained.
-But for this site and Ivy Zelman (Credit Suisse hb analyst and uber-bear), one would think that an 2h07 rebound for housing is still in the cards. Lowes is the prime example: the company had -4% same-store-sales in 1q, but it forecasts flat comps for the year -- meaning significant positive comparisons in the second half. Now look at where the stock price is: the analysts buy it! You can derive a similar "shallow/brief cycle" from many other stocks and also credit spreads.
I post the above not to highlight a particular investment oppty, but to show how dangerously complacent our financial markets are in response to the housing downturn. The chacarter of this type of complacency is that it is based on denial of the visible. As such, it can turn on a dime. Kind of like when you can't see the summit from where you stand on the mountain, but you walk up a few steps and there it is, in all its glory. You go from "I can't see it," to "I see it!" in seconds.
This is something the Feds and the regulators of our financial markets don't understand. They (and people like "Banker") repeatedly highlight tight credit spreads as an indication that all is well, and that high leverage is in order.
Great post, another layer of strata in the issue. Particular point, sorry if someone already covered this.
A further problem on the demand side is the the lax underwriting standards in place the last few years has had the effect of 'poaching' potential first time buyers from the future market, i.e. qualifing people who would have become buyers in a few years, but weren't really ready yet. There's going to be some significant pain in this group in the coming years.
Well here I am, late to the party again. Who ate all the Chex Mix?
dryfly, as a former resident of the Arctic Steppes, I will also add that the whole brewing additional ugliness that is the banks' custom-build construction loan pipelines--even the FDIC has commented on that recently-- is an interesting geographical problem. If you're in a year-round construction market, you tend to forget that there are places in the country where--in a normal winter, at any rate--you can't dig a foundation until spring. My parents built a home once and got caught up in expensive delays due to seasonal weight restrictions on the country roads: you can't send a concrete mixer down County Road 1500 until the thaw is over and the odds of the road buckling under the truck have improved in favor of the truck. So I hear from some up-north lenders that two problems, drop off in new custom loans and failure to complete current loans, have been "explained" to everyone involved by appeal to weather conditions. I eagerly await April, the cruelest month, to come and make all those problems go away.
Uffda!
Great post, CR.
There is another reason that "20% down" is a magic number.
Back in the old days, when most foreclosures were conforming first mortgages, odds were pretty good that the balance owed would be 75% to 80%. The borrowers had paid some of it, so adding in the recently unpaid portion and court fees raised the outstanding amount back up to around 80%.
Courthouse "vultures" will step in and buy properties around 80% of fair market value and rent them out. Fewer of them end up on the banks books.
This can still work today on an 80/20 if the first mortgage forecloses ahead of the second mortgage. The second gets removed from title and all the foreclosure buyer needs to do, is to pay off the first.
But on heavily financed property, forget it. After repairing and carrying an empty house for several months, it's so cash flow negative that an investor would just be trading places with the hapless borrower, for a cash-negative situation.
If you were going to buy a golf club, you wouldn't walk into a store and buy the first one you see, would you? Of course not; especially if you want to improve your golf game! You'll want to hold the club, take some practice swings, hit some balls if the store has a practice spot, and look at the price, of course. If you are considering buying running shoes, you need to go through a similar process and take the time to find the perfect shoe.
Moza Moz seems to be implicitly assuming that the loss at time of foreclosure is somehow independent of the balance at origination. If someone makes a 20% down payment and prices fall 15%, the borrower with a problem sells for a 15% loss and takes the hit, and there isn't a foreclosure. If prices fall 25%, they end up a foreclosure and the holder of the credit risk takes a hit for 5% plus disposition costs.
If that person had instead made a 10% down payment, when they got into trouble they'd end up a foreclosure, and the holder of the credit risk would take a hit for 5% plus disposition costs.
The amount lost at time of foreclosure is only weakly related to the down payment. With big down payments, there are few foreclosures, and most of them entail losses of around 10% to 20%. With small down payments, there are a lot of foreclosures, and most of them entail losses of around 10% to 20%, with a few going out to 30 and 40 and 50. Small down payments have a fatter tail for the loss distribution, but the center of the distribution is pretty much the same for both cases.
A good interview in Barrons today with a Sy Jacobs who called the housing and subprime crash in July 05. His comments on the subprime implosion:
"The events of the past two weeks would tell you that the train wreck is accelerating and is turning into a contagion. Subprime will bring down mortgage lending, housing and, in turn, the economy and the market.
Q: Some insist the problems in the subprime market are manageable.
A: The problems in subprime are not self-contained. It is a pinprick to a larger problem, and it needs to be looked at that way. The notion that subprime home-equity lending is somehow ring-fenced because it is only 12% of total mortgage loans outstanding and won't affect the rest of the mortgage and housing market is absurd. First of all, subprime lending was over 20% of 2006's volume. That tells you it was growing rapidly as a percentage of the mortgage business when it hit the wall.
It also tells you that the subprime borrower was increasingly the marginal buyer of housing and tilted the supply and demand of housing that resulted in such big increases in home prices until late last year."
He sees more downside in NFI, FMT and NEW.
Here's the link, but you need to be a subscriber:
Slow-Motion Train Wreck Picks Up Speed - Barrons.com
Not to be picky, though, but I believe I implicitly covered speculation in #1 (High owner occupation).
tj & the bear
Yes, you did, but I think its worth considering speculation separately since (anecdotally) it seems much more prevalent than say, 6 years ago, and I think speculators will be much quicker to drop their price than, for example, owners of vacation homes. Of course these things overlap some, so its hard to get a handle on this.
OT, can anyone tell me how to italicize in haloscan?
Thanks,
Isn't Mozo Maz just suggesting that the higher the LTV, the more likely the lender/insurer is to win the auction? That's just a way of saying that 20% is a "magic" number for a certain class of RE investors.
When the current balance of the loan is 80%, however it got there, the lender will bid 80% at the FC sale. A third party can bid 81% and win, so the property never becomes REO.
When the current balance is 95%, the lender bids 95%, nobody else bids 96%, and so the property becomes REO.
It is not necessarily the case that a lender who takes the REO loses more than the lender who sees it go to a third party. But it does mean that the vultures have what we might call "opportunity cost."
"Cui bono?" is one of my favorite questions (after "Is there any coffee left?").
AJH:
< i > opens italic
< / i > closes italic
Just don't include those spaces. I had to include them so that Halo would display them instead of turning them into italic tags. Because I just got up and can't remember how to write rem code.
Hmmmm, another blogger with the same tag, but capitalised. Greetings brother or sister!!
Anyhow, Geoff has raised the point about the rise in sales affecting the inventory measured in sales months, but IMHO he has missed the more salient point that the NAR compares Seasonally Adjusted sales with Actual inventory.
Based on actual sales (just under 400K), the 3.75M February inventory is over 9 months of sales.
My parents built a home once and got caught up in expensive delays due to seasonal weight restrictions on the country roads: you can't send a concrete mixer down County Road 1500 until the thaw is over and the odds of the road buckling under the truck have improved in favor of the truck.A
We're in 'thaw' now & the DOT has severe weight restrictions all over the state (except not on major state highways and interstates which are built with sufficient bases to handle the daily thaw-refreeze cycles).
There is one new additional exception - the governor allowed sewage trucks to run 'over-weight' because of all the damaged septic systems I mentioned above (many froze & broke up due to cold temps & no snow cover). The septic pumping companies have never been so busy as a result - they can't keep up.
And while excavation companies might not be digging and pouring a lot of new foundations & basements this spring & summer, due to the housing slow down, it looks like they'll be busy for a while replacing septic systems & drain fields... at least in some parts of the state.
Tanta - I'm not sure if I'm agreeing or disagreeing with your interpretation of Mozo Maz' comment, becuase I'm not sure if you mean 80% of the current value of the collateral, or 80% at origination. If you mean 80% of current value, I'd agree with you but would point out that that has little to do with LTV at origination. If you mean to imply that the sharks who show up at auction routinely bid 80% of what the house sold for to the poor devil getting tossed by the sheriff, I'd disagree and figure that the sharks are smarter than that. In neighborhoods that have been flat that might be true, but in neighborhoods that have really tanked they'd bid a lot less than that.
Tanta cought that one.
It's true I made some assumptions, chief among them that the market is just "slow" - not a price crash. In a crash, even 70% of value property can get no bids at the courthouse. The vultures are waiting for those fantastic 50% off situations, like estate sales.
Some banks have pretty sharp loss mitigation depatments, too. They may bid under the balance owed, in the hope an investor does show up.
But usually, they bid the balance. It gives a hard number to take back to the PMI company, to prove there really were no buyers at that price.
mort_fin, I meant current LTV. As an underwriter--trying to predict loss frequency--I care about original LTV. As a servicer, it's all water under the bridge, and current LTV is my only concern. No?
I didn't, actually, mean to predict or generalize about what the sharks do in any given environment, only to point out that they have more opportunity to win the bid to the extent that the lender's bid is a lower percent of current value. The lender is never motivated to bid more than the loan amount, unless it has just decided to go into the RE investment business.
My understanding is that in a judicial foreclosure the lender is not allowed to bid less than the loan amount. Is that so? Can you save me the trouble of having to look it up?
A realtor post at Realty Times reports last week's activity in a Chicago suburb as:
27 asking price reductions
51 new listings
20 sales contracts written
............................................................. Avg Days
..............................Listings .. Avg price .. on Market
3 bedroom houses:...... 178 ... $410,675 ... 135
4+ bedroom houses:.... 221 ... $701,798 ... 168
Condo's/Townhomes:... 322 ... $249,832 ... 149
(Original includes samples back to 9/06.)
While Sun-Times sales data shows only 51 homes sold at >= $700k in 2006, the MLS lists 98 homes at >= $700k (and 94 at >= $735k -- allowing for sales at 5% below asking).
Verrrry interesting -- nearly two years' worth of inventory at $700k+.
Even more interesting: examining the individual listings one finds that 71 of these homes are vacant, and another 5 (all million dollar homes) are oddly furnished (house-sitters?). (Almost all are new spec homes built on lots cleared by teardowns in this mature community -- not new subdivisions.)
Tanta, that is also true in many nonjudicial states. Lenders connot be "unjustly" enriched by foreclosure.
It is not necessarily the case that a lender who takes the REO loses more than the lender who sees it go to a third party. But it does mean that the vultures have what we might call "opportunity cost."
Good point.
My barber shop logic why 80-20 probably worked so well for so long was that market fluctuations were typically smaller than than 20%... so folks rarely went underwater in a down market if they start at 80%LTV... water might get up pretty high around the chin from time to time but rarely would folks be swimming.
And since in bygone eras RE markets & banks were both more local, a banker knew if the packing plant laid off he'd see a decline in business from local merchants, a drop in deposits held by local workers and the LAST thing he needed was to see a bunch of REO fall in his lap. A nasty trifecta.
Problems tended to compound in those bad old days before anyone thought of national & international banking and 'disintermediation'.
So while the local banker can't force the packing plant to hire... and it can't stop depositors from withdrawing... it CAN require 20% down on loans it lets out.
And since there wasn't a lot of 'Ditech' adds running during 'I Love Lucy'... bankers didn't feel compelled by the market to change.
Exit 'I Love Lucy' and enter 'Ditech' and now we have 125%LTV.
The last reason why 80-20 was common over say 81-19 or is 79-21 is that it is easy to remember.
90-10 and 70-30 are easy to remember too but local markets can easily fluctuate 10%... might as well go 100%LTV in that case... and 70-30 is plenty safe but you'd never have loan customers if they had to wait to get to 30% (at least not many in packing plant towns on packing plant wages).
80-20 was a marriage of safety and convenience and became a convenient rule of thumb that worked for a long time. That's my guess.
But times change.
There simply won't be a lower end of the retail SFR market until the entire inventory of lower and middle tier REOs are cleared out at prices the retail owners at the low end can afford. The same effect happens in microcsm in tracts where both builders and resellers overlap their sales efforts. The resellers simply cannot compete effectively with the wholesale builders for the same customers.
The last reason why 80-20 was common over say 81-19 or is 79-21 is that it is easy to remember.
Actually, it's because before the days of business casual, you couldn't take your shoes off at work. So since you only had ten fingers to count with, toes being off limits . . .
In neighborhoods that have been flat that might be true, but in neighborhoods that have really tanked they'd bid a lot less than that.
Exactly.
I know folks who do this - bid on defaults. Try more like 50 cents on the dollar not 80 cents on the dollar. If they don't win the bid, so be it - there are worse things than losing a bid. And besides, there are always more where those came from.
In fact I've seen them win bids and be shocked... asking "I wonder how much I left on the table?"
I know that is counter to the 'boom' philosophy but most of the folks I know were doing this long before the boom. They'll be doing it long after the boom too.
I think Mozo Maz has it right on the 'enrichment' part. I don't think it's literally the case that the lender is prohibited from bidding less, but it's effectively the case because the lender can't make any more money by bidding less.
If tanta is talking about servicer behavior based on a price several years after origination, then I'd reiterate that this doesn't tell my much about why originators would adopt a particular rule relating to price at timem of origination.
Seems like we usually end up with the same conclusions around here.
80/20 worked pretty well at the local level. 95/5 worked well too, with appraisers independently selected by a panel, full-documentation, and sold into the secondary market WITH recourse.
The 100% LTV, pick-your-own-appraiser, variable rate, no recourse, cash-back, why-bother-documenting methods mixed all the worst approaches together, in a toxic brew. One that that was pumped out for 3 or 4 years.
It went on so long, that people forgot what the "normal" times were even like.
50% off sale - Top-floor 2/2 condo
12000 MARKET ST #448
RESTON, VA 20190
List Price: $324,900
Prior Sale: $530,628 11/07/2006 BANK OF NEW YORK
Prior Sale: $634,900 04/18/2005
-49%
Could be anomalous or a sign of things to come. REO Realty (I know this through the grapevine) is a local N. VA firm that geared up a few years ago to handle all the foreclosures they saw coming. They aren't shy about hacking prices to sell.
The 100% LTV, pick-your-own-appraiser, variable rate, no recourse, cash-back, why-bother-documenting methods mixed all the worst approaches together, in a toxic brew. One that that was pumped out for 3 or 4 years.
And that has put a frothy head on a lot of RE markets like cheap beer from a keg that's rolled around in the back of the trunk too long. Its gonna take time to settle down.
I'd reiterate that this doesn't tell my much about why originators would adopt a particular rule relating to price at timem of origination.
Absolutely.
I am merely entertained that the voices calling for 20% down payments, at least on this blog, are not, interestingly enough, yours or mine.
OT: Japanese land prices go up for the first time in 16 years:
Japan's Rising Land Prices Show Recovery, Not Bubble (Update3) - Bloomberg.com
Note that the rise is average, so not all regions rose. In fact, some new [mini-]bubble exists: Commercial and residential land prices rose as much as 46 percent near Tokyo's new Omotesando Hills retail and residential development, the ministry [Ministry of Land, Infrastructure and Transport] said.
CR - Great post.
I have a request for a topic -- Subprime credit problem containment.
I believe viewing subprime as some entirely isolated phenom as totally absurd, ignoring everything about linkages across the RE and credit spectrum. How can BB and the bulls etc make such a claim. What do they use to base their "analysis", or is it very myopic observations...
I am merely entertained that the voices calling for 20% down payments, at least on this blog, are not, interestingly enough, yours or mine.
There's more of your 'ciao bono'...
If you are living in a bubble zone & uncomfortable with the price levels and have savings to make an 80-20 and are sick of OTHER people taking out 100%LTV exotic loans to bid prices even higher... on stuff you might have bought if 'sanely' priced... why not cry out for 20% down across the board?
On a side note... is bono coming or going? Anyone know?
I am merely entertained that the voices calling for 20% down payments, at least on this blog, are not, interestingly enough, yours or mine.
Nor mine. In 1998 we had the option to buy one house in Seattle with 20% down or a house in Seattle with 10% down and two in Colorado Springs with 10% down. We opted for the one plus two rentals and, even though it was very tough for a while, have not regretted the decision.
That graph looks downright moderate, even bullish, until you get to '07 - the MADE UP PART.
LOL!
That graph looks downright moderate, even bullish, until you get to '07 - the MADE UP PART.
It looks even more bullish if you're high.
David Pearson
They (and people like "Banker") repeatedly highlight tight credit spreads as an indication that all is well, and that high leverage is in order.
Please cite where I said that or retract. Thank you.
Builders can only use the "burn the furniture to heat the house" +ve cash flow strategy of selling land and canceling land options for so long.
That was the 2006 trick they took out of their bag of tricks. Now what?
If you are living in a bubble zone & uncomfortable with the price levels and have savings to make an 80-20 and are sick of OTHER people taking out 100%LTV exotic loans to bid prices even higher... on stuff you might have bought if 'sanely' priced... why not cry out for 20% down across the board?
Of course. Especially if you're a first-time homebuyer.
If you're a move-up borrower, and your 20% down is coming from the FTB's purchase money loan . . .
Banker - can you comment on the "subprime containment". I actually value your somewhat bullish posts. No good to only see the bearish side. I just don't get it. Maybe you have some insight that I am missing entirely.
dryfly On a side note... is bono coming or going? Anyone know?
I'm a bono fan. U2?
What a week for the US economy, eh?
Spurred by a Fed policy shift to neutral and strong housing data, US stock markets rose by 3.5% this week, their best performance in four years.
That's right, four years.
The February stock correction based on trembling obsessive fears that sub-prime mortgage failures would spread like a virus through capital markets, major financial institutions and the economy has now given way to a renewal of the bull market built on the knowledge that the sub-prime sickness will be contained and the housing drag on the economy is gradually dissipating.
Earlier this week new housing starts surprised the perma-bears with a 9% gain reported for February. Today, existing home sales scored a 3.9% February blow-out rise that caught the narrowly focused housing bears completely off-guard. The home resale gain was the biggest monthly rise in three years and the third consecutive monthly gain. With small home price declines and rising job-related incomes, the housing affordability index has quietly reached a two year high.
Besides the housing releases, the Fed's index of industrial production increased 1% just for February alone, and corporate payrolls gained nearly 150,000 jobs including prior month revisions. All this during a month of terrible winter weather that was so bad that over 500,000 people couldn't get to work, and two Congressional hearings on global warming were cancelled due to unusually frigid and snowy climate change.
There are still some sub-prime glitches that will work their way through the economy. But the low-tax, deregulated, resilient and diverse American business system will certainly escape the perma-bear recession forecast. Over the past year the US stock market has gained over 10%, a sign of future boom rather than bust. At current interest rates, stocks look to be at least 20% undervalued at a minimum.
Betting on the âtapped outâ consumer and against the muscular and innovative US economy has rarely been more of a sucker bet than it is today.
KAAAAAAAAAAACHING!!
Iâm fartinâ through silk, baby!
"Housing oversupply and rising interest rates sank the market in Weld County, where mile after mile of pastel-hued suburban homes with neatly mowed lawns have sprung up in this longtime agricultural and meatpacking center, also the site of the University of Northern Colorado."
"We were seeing 3% in new housing stock from 1997 until 2002; then it went up to 4%," said Becky Safarik, Greeley's community development director. "Anything over 4% is difficult to handle. We had too much growth for too long."
There is a general belief that the current oversupply of new homes will at some point be absorded by demand either by price reductions or increase in population or a combination of both. This is probably true for developments within a reasonable driving distance to major employment centers but HB have developed the largest supply in areas with the lowest price land these areas in the West would be Central Valley Ca, Inland Empire Ca, LV, AZ just to name a few.
So we find the bulk of the builders oversupply is concentrated in areas that are far from employment centers, have little or no job possibilities , no significant infrastructure such as schools, shopping centers , police and fire.
The HB inventory oversupply is skewed towards locations that will require significant price reductions.
The other issue to consider regarding inventory is that significant new inventory may be coming into the market via the spring selling season in much more desirable areas which would absord the bulk of the demand leaving areas with current high inventory no relief.
I don't think anyone here was forecasting that the subprime problems would create an immediate meltdown in the markets.
If asked, I would have said last week it's "odds-on" that we have a short term buying opportunity in place.
But that would leave us bears with less time to hug our bonds, cash, and gold. >;-)
You call people who buy at 80% vultures? You can bid at 70% on FHA Repos! And if you wait long enough (FHA drops the prices 10% every 45 days) you can buy these properties for peanuts. Even better with VA repos.(except the ones with VA financing). When it comes to residential I would never go for more than 80 GRM.
Feds Geithner Says Subprime Lending Disruptions Are Unlikely To Spread:
Fed's Geithner Says Subprime Woes Unlikely to Spread (Update1) - Bloomberg.com
Worst Of Subprime Rout Absorbed By Inverstors As Stock, Bond Market Rally:
Investors Absorb Worst of Subprime Rout, Markets Show (Update4) - Bloomberg.com
Sales Of Prviously Owned Homes Rose 3.9%, Fastest Pace In Three Years:
U.S. Economy: Existing Home Sales Surge in February (Update3) - Bloomberg.com
Feds Plosser Say Future Inflation Expectations Are Likely To Be Lower
Plosser Sees Lower Inflation Expectations in Future (Update1) - Bloomberg.com
Continuing the Bloomberg link-fest:
Subprime Loan Saga Might Hold Surprise at the End: Chet Currier - Bloomberg.com
80 GRM makes sense in a flat market with no apprciation. It's hard to make single family rentals cash flow.
Up to 120 GRM can work if you buy at a modest discount, and it's in the "good side of town" that appreciates. Some landlords would rather have better class tenants and fewer calls, than high profit.
People buying the last two years at 200 GRM or 3% cap rates were off their rockers with the kool-aid!
I suspect we are going to see a real bifurcation in the market. The lower end stuff may well get drilled as sellers become desparate but the upper end folks can afford to be pretty patient. One big question is what will construction do from here.
Banker: we may also see this bifurcation on the demand side. With tighter lending standards a smaller affluent pool of buyers who will be more location driven then just price only.
As the market was knee-capped by the subprime hysteria-mongers and then the LibDems over the Gonzales US Attorney-sacking, the smart money saw it for what it was: A reason for a pullback that the market had been BEGGING for to provide a buying opportunity for mountains of sidelined cash. Some of highest Royalty on Wall Street also recognized a once-in-lifetime opportunity to squeeze their "clients" warehouse lines and steal a major segment of the lending industry for pennies on the dollar, creating yet more profit opportunities for the far-sighted invstor.
This rally sets up a nice launching pad going into the April IRA-funding season.
Mazo, at least in Florida, you can get easily between 12-16% on Tax Lien Certificates.(it goes to 18% max) So now you see why I wouldnt go higher than 80 GRM. Not to mentioned "no headaches". Maybe I am too cheap, I dont know.
ron writes, "but the upper end folks can afford to be pretty patient."
But much of the upper end is not owned by "upper end folks" -- see my post above about how 70+% of the high end in a fairly typical Chicago suburb is vacant (and mostly new spec construction), and how there's more than a year of inventory there. Just how patient can a spec McMansion builder be?
Nor mine. In 1998 we had the option to buy one house in Seattle with 20% down or a house in Seattle with 10% down and two in Colorado Springs with 10% down. We opted for the one plus two rentals and, even though it was very tough for a while, have not regretted the decision.
Robert: best of luck on those rentals, seems the Colorado Springs market may be in for a rough time with a 25% gain in inventory.
According to the Colorado Springs Gazette, sales of single-family homes fell nearly 11 percent in February compared with the same month a year ago.
As sales slid, the supply of homes on the market surged by a whopping 25 percent in February from 12 months ago, the Pikes Peak Association of Realtors reports.
Despite a larger supply and reduced demand, homes that did sell around the area fetched higher prices, reflecting that Colorado Springs mortgage demand hasnt entirely fallen off the radar in the region; the median price for homes sold in February rose 4.9 percent to $214,950.
The numbers reflect home sales and listings handled by Realtors Association members mostly in El Paso and Teller counties and dont include homes being marketed for sale by owner.
The Colorado Springs housing market enjoyed record sales in 2004 and 2005, but took a step backward in 2006 when sales declined and inventories rose.
Real estate industry members and economists have said the current market is a victim of past success. Low Colorado mortgage costs lured many people to buy homes in 2004 and 2005, but strong sales in those years have drained the pool of buyers in 2006 and so far into 2007.
All of which has led to a softer housing market.
Another problem last year: Speculative homes those built before buyers actually purchase and occupy them were constructed by area home builders and competed with the resale market right as demand waned.
But home builders have slowed construction of speculative homes, which should help cut inventories and make resales more attractive to buyers, said Wynne Palermo, owner of Wynne Realty Ltd. in Colorado Springs.
It bodes well for the resale market, she said.
Combine low mortgage rates with an ample supply, and the intelligent buyers will have plenty of choices for quality homes, which should help boost area sales as the year goes on, said Ben Day, branch manager of ERA Shields Real Estates InterQuest office in Colorado Springs.
SOURCE: Colorado Springs Gazette
Love the graphs.
One projects 2007 sales which are 1 million units less than the current pace, the other formatted to mask the flatness of inventory for the last nine months.
Extrapolated projections based on wishful thinking.
Funny stuff!
jm:
I was quoting from a poost by Banker, sorry if I did not make that clear.
20% DP would mean a fast death for FHA and a slow death for Fannie and Freddie. We wouldn`t want to throw away 70+ years of regulations, would we? That would be depressing for a lot of people.
Barely,
I can comment on subprime containment, but I'm guessing as much as anyone else. Here is my take. The world moves so fast now that the impact of higher defaults etc. is now reflected in stock prices, new lending standards etc. already. I think a major moment happened last week when an investor bought $150 million in a convert (or maybe sub debt with warrants) in a subprime provider (I'm blanking on the name). What usually happens in the markets for this stuff is that is it gets oversold by panicked "sheep" and cleaned up (in both senses) by the smart and independent thinkers. That's what I think is happening here.
This article Subprime woes akin to junk bond saga
perfectly traces my professional career/experience as well as my expectations for the sub-prime world.
As for "containment," I simply don't think there is a bunch of overlap that needs to be "contained." Borrowing spreads will have widened for more traditional mortgage companies and banks for a while, slowing them down a little bit, but only a bit. They still need to do business and are earnings driven not "save the farm" driven at this point, while the sub-prime guys are "save the farm" driven. I simply don't see much evidence in either the Alt-A world or the mainstream mortgage market that defaults are running to scary levels. I think the Cragen (?) report CR cited a week or so ago makes for informative reading.
Bullish? I said months ago that I think housing will offer negative real returns over the next several years, that's only bullish compared to the "sky is falling" "economic disaster" film at 11 crowd.
I simply do not think what is happening in the housing world will be enough to cause a general recession and that we have far bigger economic problems than housing, like out of control entitlement spending that currently shows a present value of something like negative $70 trillion.
Boy, that was long. Sorry.
Robert: best of luck on those rentals, seems the Colorado Springs market may be in for a rough time with a 25% gain in inventory.
We just refinanced them into a lower interest rate 20 year loan on Friday. We plan to hold them another 12 years until they are fully depreciated then 1031(9?) them into another real estate investment. While now is not a good time to have to sell and maybe one should wait to buy, but long term holders of real estate investments can just hold.
I'm a bono fan. U2?
Oh ya. I was listening to them on late night alternative college radio out of Iowa City while working third shift as a process engineer at the wet mill. We are talking '82 & '83. I was right out of school.
Plus I had friends who had just come back from hitchhiking around Europe for a couple years... they had spent time at Trinity & reported back that this was a band to watch for.
So even though I was a complete rube... I was a somewhat enlightened rube. At least back then.
Of course everyone else thought I was freaking nuts. Everyone has an opinion.
Iâm fartinâ through silk, baby!
Bong water will do that... leaves nasty stains.
I simply do not think what is happening in the housing world will be enough to cause a general recession and that we have far bigger economic problems than housing, like out of control entitlement spending that currently shows a present value of something like negative $70 trillion.
An entitlement outlay spread out over half a century. Get off that soap box or be ready to catch the spoiled fruit & veggies - we toss 'em you know.
BTW - work your way back through CR's postings... you'll find he addresses that issue nicely. 'Entitlements' fall in order of importance behind the Bush deficits and medical cost explosion (of which Medicare is a part, significant part, but only a part).
Importance by the way is a factor of BOTH size & immediacy... in which case current gov't debt trumps in both cases.
And while you are at it compare actual debt growth vs reported debt growth. Enron wasn't the only organization creating off balance sheet entities.
So entitlements are an issue but a small one compared to other bigger & more immediate ones. That is unless you smoke the really good stuff - then you ponder & worry about things that might happen 20-30 years from now while the couch catches on fire next to you. Dream on.
So this is the roaring economy the WhiteHouse CrimeSyndicate gave us?
Unemployment...no jobs...recession...soup kitchens...where are the jobs? ...my income isn't growing...poverty...depression... Buddy, can you spare a dime?...The Grapes of Wrath...Tobacco Road...outsourcing...globalization...its not fair...Bangladesh...redistribute...where's my BMW?...where's mine...you owe me....I'm not accountable...you are responsible...it takes a village!
I love the smell of retreating fear merchants in the morning.
We enter the new quarter with considerable economic MOJO. The "one-trick-pony" alarmists are no longer relevant, and will need to find their own parallel universe in which to communicate with one another about the tapped out consumer and the housing led recession.
Ah, yes. I can smell the roses--and DJIA 15000.
The BODACIOUS profitfest debauchery rolls along.
KAAACHING!!
I am farting through silk, baby, farting through silk!
"I still see new homes being constructed by Pulte & Toll in Sunnyvale, CA. What is up with that?"
There's still demand around the South Bay, at the right price. There's just not enough land, and some people don't want to commute 90 minutes each way to cheaper housing. And there's still a lot of money around there; high income area, and high-tech has shown no sign of decline -- yet.
A developer of my acquaintance is about 1/3 of the way through a townhome development nearby, in Santa Cruz; one full block of high-density housing, and he's just put in the foundation and basement garage.
Last year I asked him about his market expectations, and he said they were covered either way: if prices fell too much to make selling profitable, his company could get by by renting out the units until the market improved. (Rents around here are pretty high.)
This outfit (privately owned) is primarily about commercial buildings, and retains and manages about 2/3 of its projects. So, some developers know how to work with an uncertain market. Probably the vast majority don't, though.
Should any of this RE fallout be a surprise? This boom/bust cycle is a direct result of the supply side conjob foisted on the public. Have no doubt in your mind people.
Dryfly,
Think present value and understand that Medicare is an entitlement. Then we are speaking the same language. This isn't a 30-40 year problem, it is a 5-10 year issue.
Banker, Thanks for the reply.
"Bullish? I said months ago that I think housing will offer negative real returns over the next several years"
This is where we may differ perhaps substantially in opinion, and I am betting quite heavily on it. I think we agree the RE market is a one-way train for the next several years heading south.
My feeling is there are several "traditional" lenders (regional banks) that will experience a great deal of financial pain. I also suspect the HBs will either contract severely or consolidate. There is over-capacity in the HB space just as there was (is) in the lending space.
I am quite certain I see more downside than you or the federal reserve. Basically the opposite of the last 7 year run squeezed into a shorter timeframe which will almost certainly be driven home by a recession Q3-Q4. All that MEW provided a lot of stimulus to the economy. That largely vanishes replaced by foreclosures and grief on the 6P news. We'll see how it turns out.
Barely,
Our disagreement is what makes markets. One of the reasons I think I'm more liklety correct is the massive worlwide liquidty at this point. The savings available in Japan alone are stupendous (as one example) and that money must be put to work somewhere. Here's another reason. Jamie Dimon (among others)in particualr is salivating over the prospect of regional bank problems. He buys them with stock, their balance sheet is instantly recpapitalized, Jamie does his usual marvelour job at cutting costs and voila, no more troubled regional bank.
Look, I could be wrong, but in my experience, pessimists don't often make money over time. Hell, even Roubini is 100% in equities.
Think present value and understand that Medicare is an entitlement. Then we are speaking the same language. This isn't a 30-40 year problem, it is a 5-10 year issue.
Medicare is indeed a very acute & immediate issue. But the current debate is a canard. If you abolish Medicare tomorrow the expenses for SOCIETY in AGGREGATE only go down if we stop treating a lot of people.
You for that? You want to try & sell that to the electorate? To the elderly? To their families?
You think they go for that? Wait until they get their first bill.
BTW - I'm self-employed & have experience with this. My guess is you probably have 'company paid' insurance. Oh boy do you have a surprise coming.
If you don't like Medicare, you're going to love single payer. That's what will replace it when conservatives 'kill' Medicare. Bank on it.
Of course conservatives don't know that yet. They'll learn. They have so much to learn.
Dryfly,
You should really stop making assumptions about me. You are wrong yet again. I too am self-employed. The rest of your post has a similar degree of insight.
I was afraid this would happen. I find a good blog with excellent info in the comment section, then it becomes popular, and all the 'Kudlow for President' trolls and other agitators come out of the woodwork. They're really not contributing anything, but just parroting talking points from the bull camp. Tonight it appears that Joe Kernan or Neil Cavuto are posting comments here.
What's with that one post with nothing but links of headlines from Bloomberg? Hell, I can find those everyday....if you invest just by what the headlines say, good luck with that. I probably sold you my shares of NEW, TOLL and MOT a couple of months ago!
Hayduke,
Yup, listen to one side, that's the ticket. Really. You'll learn a great deal that way. Good luck with that.
You should really stop making assumptions about me. You are wrong yet again. I too am self-employed.
Okay - my apology. I'm a bit sensitive to this since so few of the 'privatization' party actually have skin in the game like we do. Most I meet have company paid.
Personally we've gone years without coverage because insurers wouldn't cover an existing condition my wife had at any price - we lucked out that her condition didn't reoccur until quite a bit later when she had company paid (she quit working with me and took a 'job' at a large firm just to have access to insurance). Then it reoccurred & surgery was successful, thank God.
But it doesn't alter the story - how does eliminating Medicare change the overall cost structure?
It doesn't change anything fundamentally unless services & treatment are denied under the no-medicare scenario... then costs would decline.
If the same procedures are performed as would be performed under Medicare... then the cost is basically the same... plus or minus a small amount. Its just devolves into an argument about who pays.
Medicare is only one small part of a much larger problem - the explosion of medical cost in general. The more we privatize pieces of the system the closer we get to eventual single payer.
The tipping point is when the majority of the voting public realize they no longer have company paid and can't afford private insurance sufficient to really cover their risk. If we get a real recession (lay offs & benefit cuts) then that day comes a lot sooner.
Dryfly,
Sorry about your wife. I hope everything works out ok. The problem now is that the insured by a company or by the gov't overuse the medical system because someone else is paying for it. It is a version of the "tragedy of the commons." We need to link utilization and the payer. They are currently decoupled. What kind of car would you buy if I were paying for it? So everyone gets Ferrari style treatment now. It makes no sense. Sprain a Knee? Rather than ice it, asprirn, wrap it and watch it for a week, we run to the emergency room, get an x-ray, then an MRI, see a doctor, get some superibuprofin and go home and wrap it and ice it. The cost of the former? $50 bucks. The latter? Gotta be a thousand. Think if someone were paying direclty they might watch it for a week? But in most cases what is the ultimate outcome medically? Zero.
The other issue we are going to have to deal with is not spending a gazillion dollars on the last 30 days of someone's life. All that spending (and it is huuuuge) is obviously unproductive and a huge drain on the next generation. Cold perhaps. But undeniable I think.
We need to link utilization and the payer. They are currently decoupled.
Agreed. Except a lot of people (like maybe half) won't be able to pay for catastrophic risk. I'm sure you understand the details of this (demographics & income distribution issues - they don't overlap).
Couple that with the fact health care is not just another good. If you are rich & I am poor - I might resent that you drive a nicer car but it doesn't kill me. Not getting prompt treatment of a melanoma because I can't pay the insurance might.
That is another place where the tactics need to dovetail the strategy & I've not seen a good answer from liberal or conservative alike.
::::
The other issue we are going to have to deal with is not spending a gazillion dollars on the last 30 days of someone's life.
You have no idea how well I know that story. I had two parents both dead now. One we avoided the last 30 day torture, the other (although we tried) we didn't... he got the full ugly expensive treatment.
What is worse - he suffered way more than my Mom & got 'supposedly' some of the best & most expensive treatment on earth. Everyone thought he would recover - until all of a sudden (after too many procedures already) it was clear that he would not. At that point we fought like crazy & spent a lot of our own money just to get him home to die.
His problem was he was mid80s & became ill and it just spiraled out of control over a period of about a month. Heart related. Should have we pulled the plug sooner considering his age and not done the procedures?
Just a month before he and I had cut about ten cords of firewood. Seriously. This included DROPPING the trees, cutting them up, splitting and stacking. Back breaking work.
Plus he had been going to Mayo for years and his heart seemed fine.
Who would have ever known he had just 60 days left in this world back then? Thirty of those days were spent in hospital ER & ICU.
After our experience I can see how families fall into the 30 day trap.
Its not the theory most of us are all arguing about but rather how to implement reason in a humane way. The older I get the more I realize that is the root of wisdom - not creating or ex-pounding on theory. I love CRs blog for exactly that reason. Please keep coming back even if we differ.
Banker and dryfly,
Is this your discussion based on anecdotes or have either of you seen data that backs your viewpoints? AFAIK, the '30 day problem' is not real. I've seen a public policy paper that looked into this issue in a number of First World countries and found these costs to be a few percent of annual medical outlays. I don't recall any mention of moral hazard introducing stilted results in the US versus Sweden, Japan etc.
Banker, you seem to think that people jump to use insurance based services at the drop of a hat. From decades of involvement with several aspects of the medical field, my experience is very different than yours. The couple of thousand in out-of-pocket expenses that most PPO plans inflict makes most people think twice before going to the doctor etc. HMO fees are lower but the HMO itself regulates the issue you speak of.
I don't deny that the actual problem you identify exists - but in a different form. It is the doctors themselves who order procedures, workups, labs etc of all kinds, dramatically increasing the cost of care. The reason clearly has to do with litigation and the fact that insurance pays, as you say. In countries where the cost of service is lower, but individuals pay it (and malpractice cases are rare) doctors spend much more time on analysis. US-based doctors are notoriously poor diagnosticians because their time is so expensive that it is imperative that they keep the assembly line of patients flowing.
Name,
Thanks much. On the latter point, I will bow your experience as to what is driving "Ferrari" levels of treatment. On the 30 day point, I'll see if I can find something to back me up, but yes, my anecdotal experience (Grandparents in my case) matches Dryfly's. Here's some interesting data. http://www.pubmedcentral.nih.gov/articlerender.fcgi?artid=1464043
Scroll down and there is this (among lots of other interesting stuff)
Principal Findings
From 1992 to 1996, mean annual medical expenditures (1996 dollars) for persons aged 65 and older were $37,581 during the last year of life versus $7,365 for nonterminal years. Mean total last-year-of-life expenditures did not differ greatly by age at death. However, non-Medicare last-year-of-life expenditures were higher and Medicare last-year-of-life expenditures were lower for those dying at older ages. Last-year-of-life expenses constituted 22 percent of all medical, 26 percent of Medicare, 18 percent of all non-Medicare expenditures, and 25 percent of Medicaid expenditures.
Not as much as I had thought, but ugly nonetheless. I'll keep hunting.
Dryfly,
Its not the theory most of us are all arguing about but rather how to implement reason in a humane way. The older I get the more I realize that is the root of wisdom - not creating or ex-pounding on theory. I love CRs blog for exactly that reason. Please keep coming back even if we differ.
I think some smart guy talked about action being the root of wisdom 2500 years ago. We still haven't learned it. As for hanging around, you guys teach me things from time to time. I find that invaluable. I think I annoy some people with my different outlook though. I'll stay unitl CR asks me to leave or until I get enough hints tha I'm making the place unenjoyable for too many. Thanks for the sentiment.
Banker,
I come here to get the other point of view. I see your side of things everyday on CNBC, Bloomberg, Marketwatch, and of course research by the Wall Street banks.
If you're looking at the highs in the stock market and see that as a guide to the economy, well, that explains a lot.
I have noticed few references in comments or articles to the global rise in the price of housing (bubble?).
I noticed some global context on
House price news, information and discussion - HousePriceCrash.co.uk
AND
The See Also section of
Real estate bubble - Wikipedia, the free encyclopedia
I'm curious about this graph - it's a graph that professor Doakes would draw on the board in advanced micro at 9:30 on tuesday morning.
But, based upon my bad memory and general annoyance with micro - I'm not sure about the slopes. Wouldn't the slope of the curves be at least as instructive as their interaction? Would we assume that the slope of both the S&D curves were relatively inelastic whereby a large change in P would produce only a small change in Q? And if this is the case, wouldn't this impact the intensity of a housing led recession?
Maybe you can pick this up on another thread.
Thanks!