I agree that $320 million is just a slap on the wrist, but as I read the Mortgage Daily comment, the $152 billion referred to TOTAL online ad spend for ALL industries, not just the mortgage industry. Hard to believe that ad spend for just one industry could exceed 1% of GDP.
All these government agencies have the FEMA mentality; wake up out of their slumber after the sh** has hit the fan. Do these people understand the concept of preventive medicine?
That was my take as well, 152 billion is bogus in relation to the mortgage market. Just a rough calc - what the size of mortgage issuances? Say 3 trillion for a year, 152 billion is over 5% of that. Impossible, last time I checked there weren't 10 points built in to the average mortgage
Thanks for your always very insightful comments on the mortgage industry. I have a question for you as I am from a different country with somewhat different RE/mortgage habits. Maybe you can see an issue in my conclusion.
In Germany, MBS productas have been the backbone of the mortgage market for more than 100 years. They have always been extremely widespread and in a deep and liquid secondary market. Banks in Germany traditionally issues MBS in the same way it happened in the US in the last 5-10 years already for generations. At the same time, RE prices have alwys been considerably higher in Germany relative to income than here in the US.
My conclusion is now that as the US adopted a new way of financing homes via the secondary market (MBS), house prices will be permanently higher here as well as it has been the custom in Germany for generations. - I'm not talking about the excesses like 100% financing, option ARMs etc. which are causing the current correction in house prices. I don't say either house prices will not fall somewhat from current levels. I do conclude, though, that the change from the regime of restricting mortage loans by the bank loan officer of the bank holding the note itself to the mortgage broker offering to the secondary market provides more liquidity and thus raising home values. I also conclude that home prices will not fall meaningfully below 2004/5 levels.
O-Joe - we have had agencies like FNMA for a very long time. Only large institutions can afford to have substantial portfolios of 30 year notes because of cash-flow issues. In no sense has the US market suddenly shifted from an portfolio model to an MBS model.
The change in the 2000s was that "innovation" took a lot of pooled business away from the GSEs (Fannie, Freddie). The, ah, innovation crowd took risks that the GSEs wouldn't, and they took a big chunk of market share. The high annual price increases for US homes were almost entirely generated by loosening underwriting and appraisal standards, aided in the earlier years by very low rates provided to stimulate the economy out of a prolonged slump.
If you don't understand this, believe me, you don't understand anything about the US housing market. That's not meant to be a criticism, but helpful information. I know very well that it is hard for a foreigner to get clear information from newspaper articles, which is one of the reasons why Tanta is so critical of the misinformation in them, and tries so hard to explain how the business really works. Our journalists often write nonsense with great sincerity and certainty. I have, btw, noticed very confused descriptions of the problem in recent foreign papers so I totally understand why you might believe what you wrote.
"At the same time, RE prices have alwys been considerably higher in Germany relative to income than here in the US."
This can be deceptive though.
income structure is different in the two countries. For example, healthcare is free in Germany, not in the US
childcare options may be better in Germany than here. as are vacations, sick leave, maternity leave, paternity leave, etc. (not sure about this)
also, demographics are different in terms of rural vs urban. Do Germans live in concentrated cities? If so, this differs from America where many live in sprawling areas.
do Germans get good social services after retirement? because that may be different as well. In America, you better have saved some money or you are in trouble.
that said, taxes may be higher in Germany compared to here.
I can't speak too much for Germany, but in France
-you get "familial allocations" for having children
-you have good maternity/paternity leave
-you get good practically free healthcare
-there is good healthcare/retirement benefits for the elderly
-people have less "things" in France than America, thus have less overhead costs there.
thus, you often have more income available for housing in France compared to America, due to the social network.
Optimistic Joe said: "...My conclusion is now that as the US adopted a new way of financing homes via the secondary market (MBS), house prices will be permanently higher here as well as it has been the custom in Germany for generations...."
Wow, best post of the month! An original, provocative point of view that would take both bulls and bears by surprise.
The "genie is out of the bottle" because mortgages have been introduced to a whole new level of liquidity, huh? Great contribution, nicely done.
O-Joe, I'm sure you know more about Pfandbriefe than I do--it wouldn't be hard to know more about them than I do. My understanding is that they, unlike the modern U.S. securitization, remain on-balance sheet.
U.S. lenders have done "participations" on loans for at least 100 years. This is a way for other insitutitions to "participate" in a loan without removing it from the originating lender's books. It is actually much more legitimately described as "chopping up loans" than tranched securitization is, but our reporters like to use that "chopped up" phrase for the latter.
It is generally held that the first pass-through MBS in the U.S. was issued by Freddie Mac in 1971. The first private issue PT was by BoA in 1977. The first CMO (tranched mortgage backed) was issued by Freddie in 1983. The first REMICs were issued in 1986.
The issues of the last 5-10 years bear little resemblance to traditional MBS in this country. I'm surprised to hear that the German bank model is what we have been doing lately.
My eyes are just full of tears weeping with a full heart that our government agencies -- sons of shrub -- are so concerned about our poor humble welfare! Sigh, weep, weep, sigh! And to think they showed up on their swift white horse in their shinning amor only, oh, 10 - 15 years behind the times! Gosh, I'll bet they will jumping right on those "Lose 10 lbs in 1 week with All-Natural VitaTrim Pills" and "Makes you BIGGER, guaranteed, or your money back" ads I saw all over cable just this weekend. Way to mighty FTC, your guys are my knights in shinning armor heros!
Joe,
There are no new ways to finance things.
There are new cocktails of the same ways businesses have been financing since the Roman Empire (when Jesus wore short pants). There are also technological efficiencies.
Each and every one of your points was used, with substituted nouns, to explain why the NASDAQ's valuation in early 2000.
Honestly, you guys are so good you should be in regular circulation in the business section of major newspapers. You should talk to that Zell guy, he seems to be a step ahead of the pack. We need more expert opinion and less boilerplate if this country is going to get any financial education.
I think Sam Zell would be a welcome edition to Calulated Risk but only in a junior position as he needs more experience. It is really up to CR and Tanta if they want to contact him. Here is his email [posting someone's email address in a blog comment means that person will get spammed to death. Don't do it. --Tanta]
Long time lurker here with no background in economics. But for most of the last twenty years I have lived in Germany. My husband and I have gone through the house buying process twice here and each time we applied for the mortgage to our bank. They then held the mortgage and we made payments to them. It was pretty straightforward and simple. My only experience with the US market was when I had to sell my mom's house last year. A nightmare!
The credit industry, with interest rates, was known to exist, from written records, in Ur and Sumeria, some 3,000 - 4,000 years ago. Also records exist for a credit industry in ancient Egypt. The trading, buying, and selling of "loans" also is known to have existed at this time, and many forms of credit may have existed before written records. It was common by the time of the Greeks and Romans.
Only the details are different, nothing new in the actuals.
Come on, we simply HAVE to make sure the horses are out of the closed-door barn HERE before we can find the ponies over THERE in The Iraq. I mean, our fearless leaders have asserted that "Globally, national current [Equidae] account deficits and surpluses must balance out". Sheesh. It's like no one understands equine gradients or anything. If John Abimbola shoves a Naira into his piggy bank, it pops out of mine like a whole-wheat muffin out of a jet-powered toaster and then I simply have to struggle to my feet and go somewhere to spend it. I mean, I am so tired of that back and forth to the mall grind, back and forth, back and forth....
With the creation of methods to calculate interest and record transactions, along came debt.
Debt was a powerful motivator in early times. It was used to make people work harder and be more efficient. Crop yields of farmers in debt were significantly higher than those without debt. If farmers could not pay back their loans, they would lose their farm through foreclosure or be forced to sell themselves into slavery. That kind of consequence would really get you moving, wouldn't it?
While this system of lending may have been great for the people of Uruk and the rest of the Mesopotamian economy, it is difficult to escape the conclusion that it made life miserable for the working man and woman. Even at the dawn of the first recorded writings, people of the region were lamenting their financial situations:
How lowly is the poor man!
A mill (for him) (is) the edge of the oven;
His ripped garment will not be mended;
What he has lost will not be sought for!
The poor man --- by (his) debts is he brought low!
What is snatched out of his mouth must repay (his) debts.
Of course, it's all different now -- we have Wall Street Innovations! Debt is Go(o)d, Greed is Go(o)d, Wall Street Innovations are Go(o)d!
As accounting/bookkeeping is entirely what most early written languages were about, I'm not sure I'd put it past them. Maybe something along the lines of an abstracted pregnant ewe??
Yearning-
"I am not sure about Berlin, but I have NEVER seen people in Paris spend as much on housing as they do in California."
Sigh. Our apartment in Berlin was in the hippest part of town and beautiful. Only ran us E750 per month. This would get me a closet in the South Bronx - or maybe not.
Of course, having 20,000 vacant flats in Berlin (or that's what it was five years ago) helped keep down prices - as did the widespread idea that only an idiot would ever buy real estate.
At the same time, RE prices have alwys been considerably higher in Germany relative to income than here in the US
OMG. I can't believe such argument could have been presented here. German prices are among lowest in Western Europe. Average price of condo is only 1673 EUR/sq m. Average house (which are traditionally bought by more afluent) is 191,000 EUR. Berlin is very, very cheap, even cheaper than the German average. It is more than in Podunk but definitely less than in densely populated areas in the USA. Even the most expensive German city, Munich, is quite cheap with prices hovering around 3000 EUR/sq. m. And the prices are falling for years.
Germany used to be expensive in the 1970s. Prices were higher than in France. Now it is the opposite. Nothing is permanent.
BTW, in Germany more that 50% of the households rent, mostly because tenants have basically more rights than landlords.
NEW YORK, Sept 11 (Reuters) - Some 57 percent of mortgage broker customers with adjustable-rate loans were unable to refinance into a new loan to avoid higher monthly payments in August, a national survey reported on Tuesday.
The poll of 1,744 brokers in the last week of August found that subprime borrowers had trouble refinancing mortgages because loan programs were no longer available, according to a statement from Campbell Communications, the Washington-based research firm that conducted the survey. Prime borrowers were impeded by appraisals and high loan-to-value ratios, it said.
My conclusion is now that as the US adopted a new way of financing homes via the secondary market (MBS), house prices will be permanently higher here as well as it has been the custom in Germany for generations.
O Joe, RE Bear beat me to it...
Germany - 234 people /sq km.
US - 33 people / sq km.
The other 'reasons' are superfluous. Drive across Nebraska & you'll get it.
Interesting to bring up Berlin; one reason they are quite out of sync in Germany in general and Berlin in particular was that, back in the DM day while the US was busy recessing, the Bundesbank was blowing it's own bubble to finance the unification project. A lot of money was borrowed/printed to ensure that all participants understood that it wasn't a takeover in the bad old historical sense, but rather a reunion party rather like a US high school celebration, without the catty remarks about the ex-cheerleaders. Much of that money found itself funneled into (wait for it....yep) real estate, especially in the new capital. More than necessary , really, and I know several people with Berlin condos and houses which are just breaking even 15 years later. Specialized circumstances, to be sure, but the bubble-collapse cycle played out just the same.
"Drive across Nebraska and you'll get it"
it = bored ??
LOL. Budda would struggle with that drive. Starring at a wall is nothing compared to that drive.
But until you've done it (or the drive on I 90 or I 94 across the Dakota's and Montana... or south across Texas, or Oklahoma, or Kansas... pick your own personal hell march) you don't grasp what open space means. When you have open space like that - the cost of RE will always be close to the production cost. No other way it can happen.
O-Joe, "I also conclude that home prices will not fall meaningfully below 2004/5 levels"
LOL! That was the price peak during the lending pull-out-all-the-stops craze. Prices are ALREADY below those levels in many bubble areas.
Glad you're not managing my money. Sebasrian has some stock tips for you. I'm sure the 2 of you can put together a winner portfolio. Good time to buy investment property too!
That's true that Germany had a reunification boom and the prices inflated while in other countries deflated. But on average the price increases were nevertheless mild. Look at the Graph 1 of this paper. But Berlin was definitely overbulit and the economy of Berlin is weaker than in Germany as a whole.
Thanks for your reply. It just sticks in my mind that in times past in the US you had to put on your best suit&tie, go to the local bank's loan offices and beg for a mortgage. The loan officer essentially rationed credit, because he was personally liable for the credit quality and the future solvency of his bank. Now, he would just look at the conditions in the secondary market and rather fight to originate the loan as he is only motivated by the origination and service fees, while an investor carries the credit risk. I believe this creates more liquity for housing and higher prices. Of course, the invention and expansion of FannieMae and other GSE plays an important role as well.
All,
Relative to available income RE prices are more expensive in Germany, believe me. You have to factor in several differences like way lower take-home pay due to higher taxes and the usual higher-income-areas-have-higher-RE-prices.
BTW if you think health care is "free" in Germany, please go back to economy 101. As long as no unlimited HC supply falls from the Heavens, you'll have to pay for it. In Germany you pay big time in health care taxes deducted from your income and coverage has been dropping year by year - so you had higher deductibles as well. I'm not saying it's any better here, but socialist solutions rarely work either. Additonally, as you have to pay for health care anyway thru mandatory taxes, why not make use of it and go see as many doctors as your spare time allows? Often, this is the main hobby of retired people.
-This is a whole different topic and not worth discussing here.
Regarding the markets I said I would not buy RE now as I do expect shallow declines for some time. When our daughter goes to kindergarden next year, we'll buy regardless. As for the stock market I do believe we put in an intermediate bottom and are on track for a less volatile ascent like in the March-June time frame, taking out the ATHs soon.
Tanta said: "O-Joe may not know that securitization of mortgages is 36 years old in this country, but you ought to."
Dear, I also know that the concept of mutual funds is hundreds of years old but the explosion of their popularity and the truly titanic amounts of money funneled into them is far more recent.
The concept that O-Joe introduced is a "disruptive" one, in the sense that if there's been a leap in mortgage and mortgage-related securitization it could have the same impact on stock and bond trading/investing/liquidity as IRA's and other retirement accounts subsequent to their introduction.
On a blog that is deeply rutted, endlessly going back and forth over very old ground, IMO a big, new idea is a breath of fresh air. Even if it's not entirely valid it could still be big enough to be a game-changer and worthy of some consideration.
while an investor carries the credit risk. I believe this creates more liquity for housing and higher prices.
Periodically I go through bouts of trying to explain that the secondary market in mortgages is not just about credit risk. But it's a losing battle sometimes.
You are confusing the "liquidity" of mortgages with the liquidity of houses. You are also assuming that more liquidity = higher price, or at least "price support."
One can have highly liquid mortgages on infrequently traded homes. One can even believe that the relative illiquidity of the home increases the value, and hence liquidity, of the mortgage loan. (I can sell mortgages to an investor because the investor believes that the mortgages won't all prepay in six months. People don't trade houses like that.)
In any case I know of no economic theory that says prices will rise in a liquid market but fall in an illiquid market.
I should note that I use the term "liquidity" in the old fashioned sense of the efficiency with which an asset can be reduced to cash.
1673 EUR /sq m = $214/sq ft
3000 EUR /sq m = $384/sq ft
Sound high to me, but maybe we're spoiled. I live in Plano, Texas, which is reported to have the highest median income of any US city above 250,000 people (mid $70k). Nice homes available in good locations for $100/sq ft. Can build high end for $200/sq ft.
I can sell mortgages to an investor because the investor believes that the mortgages won't all prepay in six months. People don't trade houses like that.
Subprime ABS investor: "Actually i was kind of hoping they would."
Not to gang up (and it looks like you may have made a correction - sorta, maybe) but I'm essentially 100% sure the $152 billion advertising figure can't be correct.
Maybe Mortgagedaily is the source of the error.
I track advertising expenditures on a macro, aggregate basis and $152 billion is approximately the total US ad spend annually under certain methodologies (Coen).
For comparison, the Big 4 TV networks only have about $3 to $4 billion in annual ad revenues each.
The reason prices here in the US cannot be "permanently higher" after the introduction of all the fancy new products is because people CANNOT make their mortgage payments are the full rate. That's it. That's all there is too it. You can have option ARMS, negative amortization loans, CDO's, QZPs, and so on, and it doesn't matter if the buyer cannot pay off the loan.
All the new products in the past 5 to 7 years have managed to create the illusion of a "new way of doing business" but it was nothing but a pyramid scam. In the end, if people cannot make the PITI payments each month, they can't afford the house. Salaries are not going up, so housing prices will come down.
cas127, that was just one of those brain-to-finger things. I was looking at a mortgage source. I was thinking about mortgages. Even though I actually read that sentence, I retyped it (paraphrasing) instead of copying it, and that word "mortgage" intruded itself.
I actually asked whether anyone knows what the mortgage industry's ad budget is because I don't, and I haven't found an estimate for it.
I do, however, believe that ~3.2 million a year in fines probably doesn't make a prohibitive dent in revenues from those ads.
if there's been a leap in mortgage and mortgage-related securitization it could have the same impact on stock and bond trading/investing/liquidity as IRA's and other retirement accounts subsequent to their introduction.
OK, do tell. I'll take care of the "if" there has been a "leap" in securitization, if you tell me how, say, freeing up a bank's balance sheet by taking mortgage loans off of it channels cash into equities. The banks I know of on this planet have really nasty capital and reserve requirements for holding stocks, so they tend to take that liquified balance sheet and make more loans with it. But I'm sure you can tell me different.
In 1995, total MBS outstandings (all the MBS ever issued that hadn't retired yet) amounted to $1.9 trillion, 90% being GSE and 10% being private-issue.
In 2000, total MBS outstandings (all the MBS ever issued that hadn't retired yet) amounted to $3 trillion, 87% being GSE and 13% being private-issue.
In 2006, total MBS outstandings were $5.8 trillion, 67% being GSE and 33% being private issue.
In 1995, total mortgages outstanding were $3.4 trillion (55% were securitized outstanding).
In 2000, total mortgages outstanding were $5.1 trillion (59% were securitized outstanding).
In 2006, total mortgages outstanding were $10.2 trillion (57% were securitized outstanding).
In fact, the peak for securitization (measured in outstandings) seems to be 2002, when 60% of all mortgages outstanding were securitized.
Everyone gets confused about it because you are used to seeing data on gross issuance:
1995: $315 billion in gross issuance
2000: $614 billion in gross issuance
2006: $2 trillion in gross issuance
Remember that not every mortgage loan is purchase-money. Gross issuance includes refinances of loans that used to be in an old security or in a lender portfolio. It also includes purchase-money loans for existing homes, and for nearly every one of those you get an existing mortgage paid off. You have to have an increase in first-time homebuyers, purchases of new (never occupied) homes, and/or general increase in home prices, occuring at a faster rate than mortgage payoffs in cash, to get an increase in mortgages outstanding. We apparently had all of that. It is not entirely clear what contribution securitization, in and of itself, had to those phenomena.
(Source: UBS, who gets it from Fed Flow of Funds and Loan Performance.)
Subprime ABS investor: "Actually i was kind of hoping they would."
I get the joke, but then again, no, that's the problem here.
Subprime investor wishes these folks would refi every six months. That's not the same thing as selling the house and buying a new one every six months.
This is average (so it is more than median) and Germany is densely populated. It is comparable in density to coastal America. These prices does not look expensitv compare to big coastal cities.
Subprime investor wishes these folks would refi every six months. That's not the same thing as selling the house and buying a new one every six months.
yeah, i meant the subprime investor just wanted prepays...you yuppies always ruin a good joke.
Oh Seb, thank you, the mere sight of you in the form of a charging knight valiantly supporting the value of a new thought in a deeply rutted dialogue .... I'll cherish it forever.
I can sell mortgages to an investor because the investor believes that the mortgages won't all prepay in six months. People don't trade houses like that.
see, you said this, which also doesn't distinguish the investor's preference for type of prepay...so you shouldn't have ruined my joke:(
I thought the non-GSE MBS market was having a seizure at the moment. We're going to see a permanently high RE valuations based on a debt market that is in free-fall?
Opt Joe,
I usually don't tell people what to do unless they're paying me, but:
If you don't have to sell a house, you're in the catbird's seat. I'd lowball every offer.
Apologies if this is an impatient post and someone mentioned before me, but seems to me the really interesting part of this story is that the FTC did not release a list of mortgage advertisers it has warned. Why not?
Thanks for the advice. We'll definitively try to bargain very hard next year.
My biggest concern currently is that IR will raise. I'm afraid we're just putting in a meaningful bottom in LT rates. I have very little experience with futures trading, but that seems to be the only way to secure interest rates by selling futures. Gulp.
My original response to your post was actually to show that it is difficult to compare relative housing prices across countries, since there are many variables, including density of living, services given (such as childcare/healthcare, etc), and so on.
I will only tell you that US housing cannot keep it's RE prices "permanently high" simply because Americans cannot afford the payments.
the part you neglect about the American Securitization process was the LYING.
Too many of the securitized mortgages contain toxic waste of people who OVERSTATED their income, who LIED on their application as example.
Securitization doesn't help if the original asset is garbage.
now everyone realizes that securitization was hiding toxic garbage, so nobody wants it.
Here is how it works: first you wait until a problem surfaces - it has to be generally known but still on the rise before its publicity crest. Then you issue some statements to establish plausible concern. You are working to protect the innocent but hapless public. Then you reveal that the problem is so big that you cannot guarantee public safety without a big increase in your investigative and regulatory powers. This means more lawyers, desks and money, of course. And so it goes. If you can't get the hang of it, you aren't bureaucrat material.
Seriously, I just received one of the most deceptive soliciations in history. I plan on reporting it to the FTC. If you have a way for me to upload for all your readers to appreciate just let me know.
Always after the fact everyone has to look like they are trying to do something. Ass covering is popping up everywhere these days.
I agree that $320 million is just a slap on the wrist, but as I read the Mortgage Daily comment, the $152 billion referred to TOTAL online ad spend for ALL industries, not just the mortgage industry. Hard to believe that ad spend for just one industry could exceed 1% of GDP.
All these government agencies have the FEMA mentality; wake up out of their slumber after the sh** has hit the fan. Do these people understand the concept of preventive medicine?
...preventative...medicine - Doh!!
That was my take as well, 152 billion is bogus in relation to the mortgage market. Just a rough calc - what the size of mortgage issuances? Say 3 trillion for a year, 152 billion is over 5% of that. Impossible, last time I checked there weren't 10 points built in to the average mortgage
FTC = Go'vt workers.
'Nuff said.
Tanta,
Thanks for your always very insightful comments on the mortgage industry. I have a question for you as I am from a different country with somewhat different RE/mortgage habits. Maybe you can see an issue in my conclusion.
In Germany, MBS productas have been the backbone of the mortgage market for more than 100 years. They have always been extremely widespread and in a deep and liquid secondary market. Banks in Germany traditionally issues MBS in the same way it happened in the US in the last 5-10 years already for generations. At the same time, RE prices have alwys been considerably higher in Germany relative to income than here in the US.
My conclusion is now that as the US adopted a new way of financing homes via the secondary market (MBS), house prices will be permanently higher here as well as it has been the custom in Germany for generations. - I'm not talking about the excesses like 100% financing, option ARMs etc. which are causing the current correction in house prices. I don't say either house prices will not fall somewhat from current levels. I do conclude, though, that the change from the regime of restricting mortage loans by the bank loan officer of the bank holding the note itself to the mortgage broker offering to the secondary market provides more liquidity and thus raising home values. I also conclude that home prices will not fall meaningfully below 2004/5 levels.
Thank you.
O-Joe
maybe the first thing we should do is stop referring to homeownership as the great American dream...time for a new dream...
O-Joe - we have had agencies like FNMA for a very long time. Only large institutions can afford to have substantial portfolios of 30 year notes because of cash-flow issues. In no sense has the US market suddenly shifted from an portfolio model to an MBS model.
The change in the 2000s was that "innovation" took a lot of pooled business away from the GSEs (Fannie, Freddie). The, ah, innovation crowd took risks that the GSEs wouldn't, and they took a big chunk of market share. The high annual price increases for US homes were almost entirely generated by loosening underwriting and appraisal standards, aided in the earlier years by very low rates provided to stimulate the economy out of a prolonged slump.
If you don't understand this, believe me, you don't understand anything about the US housing market. That's not meant to be a criticism, but helpful information. I know very well that it is hard for a foreigner to get clear information from newspaper articles, which is one of the reasons why Tanta is so critical of the misinformation in them, and tries so hard to explain how the business really works. Our journalists often write nonsense with great sincerity and certainty. I have, btw, noticed very confused descriptions of the problem in recent foreign papers so I totally understand why you might believe what you wrote.
"At the same time, RE prices have alwys been considerably higher in Germany relative to income than here in the US."
This can be deceptive though.
I can't speak too much for Germany, but in France
-you get "familial allocations" for having children
-you have good maternity/paternity leave
-you get good practically free healthcare
-there is good healthcare/retirement benefits for the elderly
-people have less "things" in France than America, thus have less overhead costs there.
thus, you often have more income available for housing in France compared to America, due to the social network.
Optimistic Joe said: "...My conclusion is now that as the US adopted a new way of financing homes via the secondary market (MBS), house prices will be permanently higher here as well as it has been the custom in Germany for generations...."
Wow, best post of the month! An original, provocative point of view that would take both bulls and bears by surprise.
The "genie is out of the bottle" because mortgages have been introduced to a whole new level of liquidity, huh? Great contribution, nicely done.
Sebastia
And going with MaxedOutMama's idea:
I am not sure about Berlin, but I have NEVER seen people in Paris spend as much on housing as they do in California.
I have countless associates and friends who spent 10x (or more) their income on condos (flats).
I never saw that in Paris.
(my most recent friend bought a $475,000 condo, he makes $34,000 per year)
In the end, despite securitization, eventually the payments on these types of mortgages can sometimes be MORE than the borrower's take home pay!
O-Joe, I'm sure you know more about Pfandbriefe than I do--it wouldn't be hard to know more about them than I do. My understanding is that they, unlike the modern U.S. securitization, remain on-balance sheet.
U.S. lenders have done "participations" on loans for at least 100 years. This is a way for other insitutitions to "participate" in a loan without removing it from the originating lender's books. It is actually much more legitimately described as "chopping up loans" than tranched securitization is, but our reporters like to use that "chopped up" phrase for the latter.
It is generally held that the first pass-through MBS in the U.S. was issued by Freddie Mac in 1971. The first private issue PT was by BoA in 1977. The first CMO (tranched mortgage backed) was issued by Freddie in 1983. The first REMICs were issued in 1986.
The issues of the last 5-10 years bear little resemblance to traditional MBS in this country. I'm surprised to hear that the German bank model is what we have been doing lately.
Wow, best post of the month! An original, provocative point of view that would take both bulls and bears by surprise.
Sebastian, you are never less than a full measure of entertainment.
O-Joe may not know that securitzation of mortgages is 36 years old in this country, but you ought to.
Tanta should charge for a service to review reporters stories before they go to press. Could be some lucrative extra income.
Tanta should charge for a service to review reporters stories before they go to press.
Except on those days I need reporters to review my stories before I hit "publish" . . .
My eyes are just full of tears weeping with a full heart that our government agencies -- sons of shrub -- are so concerned about our poor humble welfare! Sigh, weep, weep, sigh! And to think they showed up on their swift white horse in their shinning amor only, oh, 10 - 15 years behind the times! Gosh, I'll bet they will jumping right on those "Lose 10 lbs in 1 week with All-Natural VitaTrim Pills" and "Makes you BIGGER, guaranteed, or your money back" ads I saw all over cable just this weekend. Way to mighty FTC, your guys are my knights in shinning armor heros!
Now where did I put that spare hanky.....
Joe,
There are no new ways to finance things.
There are new cocktails of the same ways businesses have been financing since the Roman Empire (when Jesus wore short pants). There are also technological efficiencies.
Each and every one of your points was used, with substituted nouns, to explain why the NASDAQ's valuation in early 2000.
...in early 2000, now at a permanently higher level.
Germany - 234 people /sq km.
US - 33 people / sq km.
apples and oranges? or apples and elephants????
Honestly, you guys are so good you should be in regular circulation in the business section of major newspapers. You should talk to that Zell guy, he seems to be a step ahead of the pack. We need more expert opinion and less boilerplate if this country is going to get any financial education.
I think Sam Zell would be a welcome edition to Calulated Risk but only in a junior position as he needs more experience. It is really up to CR and Tanta if they want to contact him. Here is his email [posting someone's email address in a blog comment means that person will get spammed to death. Don't do it. --Tanta]
Edited By Siteowner
Long time lurker here with no background in economics. But for most of the last twenty years I have lived in Germany. My husband and I have gone through the house buying process twice here and each time we applied for the mortgage to our bank. They then held the mortgage and we made payments to them. It was pretty straightforward and simple. My only experience with the US market was when I had to sell my mom's house last year. A nightmare!
O-Joe --
The credit industry, with interest rates, was known to exist, from written records, in Ur and Sumeria, some 3,000 - 4,000 years ago. Also records exist for a credit industry in ancient Egypt. The trading, buying, and selling of "loans" also is known to have existed at this time, and many forms of credit may have existed before written records. It was common by the time of the Greeks and Romans.
Only the details are different, nothing new in the actuals.
Come on, we simply HAVE to make sure the horses are out of the closed-door barn HERE before we can find the ponies over THERE in The Iraq. I mean, our fearless leaders have asserted that "Globally, national current [Equidae] account deficits and surpluses must balance out". Sheesh. It's like no one understands equine gradients or anything. If John Abimbola shoves a Naira into his piggy bank, it pops out of mine like a whole-wheat muffin out of a jet-powered toaster and then I simply have to struggle to my feet and go somewhere to spend it. I mean, I am so tired of that back and forth to the mall grind, back and forth, back and forth....
Only the details are different, nothing new in the actuals.
So how do you write "credit default swaps on asset backed securities" in cuneiform?
From "The History of Credit & Debt":
With the creation of methods to calculate interest and record transactions, along came debt.
Debt was a powerful motivator in early times. It was used to make people work harder and be more efficient. Crop yields of farmers in debt were significantly higher than those without debt. If farmers could not pay back their loans, they would lose their farm through foreclosure or be forced to sell themselves into slavery. That kind of consequence would really get you moving, wouldn't it?
While this system of lending may have been great for the people of Uruk and the rest of the Mesopotamian economy, it is difficult to escape the conclusion that it made life miserable for the working man and woman. Even at the dawn of the first recorded writings, people of the region were lamenting their financial situations:
Of course, it's all different now -- we have Wall Street Innovations! Debt is Go(o)d, Greed is Go(o)d, Wall Street Innovations are Go(o)d!
gng:
Hang on, channeling my Sumerian forebears now....
As accounting/bookkeeping is entirely what most early written languages were about, I'm not sure I'd put it past them. Maybe something along the lines of an abstracted pregnant ewe??
Yearning-
"I am not sure about Berlin, but I have NEVER seen people in Paris spend as much on housing as they do in California."
Sigh. Our apartment in Berlin was in the hippest part of town and beautiful. Only ran us E750 per month. This would get me a closet in the South Bronx - or maybe not.
Of course, having 20,000 vacant flats in Berlin (or that's what it was five years ago) helped keep down prices - as did the widespread idea that only an idiot would ever buy real estate.
At the same time, RE prices have alwys been considerably higher in Germany relative to income than here in the US
OMG. I can't believe such argument could have been presented here. German prices are among lowest in Western Europe. Average price of condo is only 1673 EUR/sq m. Average house (which are traditionally bought by more afluent) is 191,000 EUR. Berlin is very, very cheap, even cheaper than the German average. It is more than in Podunk but definitely less than in densely populated areas in the USA. Even the most expensive German city, Munich, is quite cheap with prices hovering around 3000 EUR/sq. m. And the prices are falling for years.
Germany used to be expensive in the 1970s. Prices were higher than in France. Now it is the opposite. Nothing is permanent.
BTW, in Germany more that 50% of the households rent, mostly because tenants have basically more rights than landlords.
Tanta, just for the record. I made up that address and it bounces.
1673 EUR /sq m = $214/sq ft
3000 EUR /sq m = $384/sq ft
For my fellow people who only think in US units....
NEW YORK, Sept 11 (Reuters) - Some 57 percent of mortgage broker customers with adjustable-rate loans were unable to refinance into a new loan to avoid higher monthly payments in August, a national survey reported on Tuesday.
The poll of 1,744 brokers in the last week of August found that subprime borrowers had trouble refinancing mortgages because loan programs were no longer available, according to a statement from Campbell Communications, the Washington-based research firm that conducted the survey. Prime borrowers were impeded by appraisals and high loan-to-value ratios, it said.
© Reuters 2007. All Rights Reserved.
My conclusion is now that as the US adopted a new way of financing homes via the secondary market (MBS), house prices will be permanently higher here as well as it has been the custom in Germany for generations.
O Joe, RE Bear beat me to it...
Germany - 234 people /sq km.
US - 33 people / sq km.
The other 'reasons' are superfluous. Drive across Nebraska & you'll get it.
"Drive across Nebraska and you'll get it"
it = bored ??
Interesting to bring up Berlin; one reason they are quite out of sync in Germany in general and Berlin in particular was that, back in the DM day while the US was busy recessing, the Bundesbank was blowing it's own bubble to finance the unification project. A lot of money was borrowed/printed to ensure that all participants understood that it wasn't a takeover in the bad old historical sense, but rather a reunion party rather like a US high school celebration, without the catty remarks about the ex-cheerleaders. Much of that money found itself funneled into (wait for it....yep) real estate, especially in the new capital. More than necessary , really, and I know several people with Berlin condos and houses which are just breaking even 15 years later. Specialized circumstances, to be sure, but the bubble-collapse cycle played out just the same.
"Drive across Nebraska and you'll get it"
it = bored ??
LOL. Budda would struggle with that drive. Starring at a wall is nothing compared to that drive.
But until you've done it (or the drive on I 90 or I 94 across the Dakota's and Montana... or south across Texas, or Oklahoma, or Kansas... pick your own personal hell march) you don't grasp what open space means. When you have open space like that - the cost of RE will always be close to the production cost. No other way it can happen.
O-Joe, "I also conclude that home prices will not fall meaningfully below 2004/5 levels"
LOL! That was the price peak during the lending pull-out-all-the-stops craze. Prices are ALREADY below those levels in many bubble areas.
Glad you're not managing my money. Sebasrian has some stock tips for you. I'm sure the 2 of you can put together a winner portfolio. Good time to buy investment property too!
ratefink,
That's true that Germany had a reunification boom and the prices inflated while in other countries deflated. But on average the price increases were nevertheless mild. Look at the Graph 1 of this paper. But Berlin was definitely overbulit and the economy of Berlin is weaker than in Germany as a whole.
Tanta,
Thanks for your reply. It just sticks in my mind that in times past in the US you had to put on your best suit&tie, go to the local bank's loan offices and beg for a mortgage. The loan officer essentially rationed credit, because he was personally liable for the credit quality and the future solvency of his bank. Now, he would just look at the conditions in the secondary market and rather fight to originate the loan as he is only motivated by the origination and service fees, while an investor carries the credit risk. I believe this creates more liquity for housing and higher prices. Of course, the invention and expansion of FannieMae and other GSE plays an important role as well.
All,
Relative to available income RE prices are more expensive in Germany, believe me. You have to factor in several differences like way lower take-home pay due to higher taxes and the usual higher-income-areas-have-higher-RE-prices.
BTW if you think health care is "free" in Germany, please go back to economy 101. As long as no unlimited HC supply falls from the Heavens, you'll have to pay for it. In Germany you pay big time in health care taxes deducted from your income and coverage has been dropping year by year - so you had higher deductibles as well. I'm not saying it's any better here, but socialist solutions rarely work either. Additonally, as you have to pay for health care anyway thru mandatory taxes, why not make use of it and go see as many doctors as your spare time allows? Often, this is the main hobby of retired people.
-This is a whole different topic and not worth discussing here.
Regarding the markets I said I would not buy RE now as I do expect shallow declines for some time. When our daughter goes to kindergarden next year, we'll buy regardless. As for the stock market I do believe we put in an intermediate bottom and are on track for a less volatile ascent like in the March-June time frame, taking out the ATHs soon.
O-Joe
Tanta said: "O-Joe may not know that securitization of mortgages is 36 years old in this country, but you ought to."
Dear, I also know that the concept of mutual funds is hundreds of years old but the explosion of their popularity and the truly titanic amounts of money funneled into them is far more recent.
The concept that O-Joe introduced is a "disruptive" one, in the sense that if there's been a leap in mortgage and mortgage-related securitization it could have the same impact on stock and bond trading/investing/liquidity as IRA's and other retirement accounts subsequent to their introduction.
On a blog that is deeply rutted, endlessly going back and forth over very old ground, IMO a big, new idea is a breath of fresh air. Even if it's not entirely valid it could still be big enough to be a game-changer and worthy of some consideration.
JMO.
Sebastian
while an investor carries the credit risk. I believe this creates more liquity for housing and higher prices.
Periodically I go through bouts of trying to explain that the secondary market in mortgages is not just about credit risk. But it's a losing battle sometimes.
You are confusing the "liquidity" of mortgages with the liquidity of houses. You are also assuming that more liquidity = higher price, or at least "price support."
One can have highly liquid mortgages on infrequently traded homes. One can even believe that the relative illiquidity of the home increases the value, and hence liquidity, of the mortgage loan. (I can sell mortgages to an investor because the investor believes that the mortgages won't all prepay in six months. People don't trade houses like that.)
In any case I know of no economic theory that says prices will rise in a liquid market but fall in an illiquid market.
I should note that I use the term "liquidity" in the old fashioned sense of the efficiency with which an asset can be reduced to cash.
1673 EUR /sq m = $214/sq ft
3000 EUR /sq m = $384/sq ft
Sound high to me, but maybe we're spoiled. I live in Plano, Texas, which is reported to have the highest median income of any US city above 250,000 people (mid $70k). Nice homes available in good locations for $100/sq ft. Can build high end for $200/sq ft.
I can sell mortgages to an investor because the investor believes that the mortgages won't all prepay in six months. People don't trade houses like that.
Subprime ABS investor: "Actually i was kind of hoping they would."
Tanta,
Not to gang up (and it looks like you may have made a correction - sorta, maybe) but I'm essentially 100% sure the $152 billion advertising figure can't be correct.
Maybe Mortgagedaily is the source of the error.
I track advertising expenditures on a macro, aggregate basis and $152 billion is approximately the total US ad spend annually under certain methodologies (Coen).
For comparison, the Big 4 TV networks only have about $3 to $4 billion in annual ad revenues each.
The reason prices here in the US cannot be "permanently higher" after the introduction of all the fancy new products is because people CANNOT make their mortgage payments are the full rate. That's it. That's all there is too it. You can have option ARMS, negative amortization loans, CDO's, QZPs, and so on, and it doesn't matter if the buyer cannot pay off the loan.
All the new products in the past 5 to 7 years have managed to create the illusion of a "new way of doing business" but it was nothing but a pyramid scam. In the end, if people cannot make the PITI payments each month, they can't afford the house. Salaries are not going up, so housing prices will come down.
cas127, that was just one of those brain-to-finger things. I was looking at a mortgage source. I was thinking about mortgages. Even though I actually read that sentence, I retyped it (paraphrasing) instead of copying it, and that word "mortgage" intruded itself.
I actually asked whether anyone knows what the mortgage industry's ad budget is because I don't, and I haven't found an estimate for it.
I do, however, believe that ~3.2 million a year in fines probably doesn't make a prohibitive dent in revenues from those ads.
if there's been a leap in mortgage and mortgage-related securitization it could have the same impact on stock and bond trading/investing/liquidity as IRA's and other retirement accounts subsequent to their introduction.
OK, do tell. I'll take care of the "if" there has been a "leap" in securitization, if you tell me how, say, freeing up a bank's balance sheet by taking mortgage loans off of it channels cash into equities. The banks I know of on this planet have really nasty capital and reserve requirements for holding stocks, so they tend to take that liquified balance sheet and make more loans with it. But I'm sure you can tell me different.
In 1995, total MBS outstandings (all the MBS ever issued that hadn't retired yet) amounted to $1.9 trillion, 90% being GSE and 10% being private-issue.
In 2000, total MBS outstandings (all the MBS ever issued that hadn't retired yet) amounted to $3 trillion, 87% being GSE and 13% being private-issue.
In 2006, total MBS outstandings were $5.8 trillion, 67% being GSE and 33% being private issue.
In 1995, total mortgages outstanding were $3.4 trillion (55% were securitized outstanding).
In 2000, total mortgages outstanding were $5.1 trillion (59% were securitized outstanding).
In 2006, total mortgages outstanding were $10.2 trillion (57% were securitized outstanding).
In fact, the peak for securitization (measured in outstandings) seems to be 2002, when 60% of all mortgages outstanding were securitized.
Everyone gets confused about it because you are used to seeing data on gross issuance:
1995: $315 billion in gross issuance
2000: $614 billion in gross issuance
2006: $2 trillion in gross issuance
Remember that not every mortgage loan is purchase-money. Gross issuance includes refinances of loans that used to be in an old security or in a lender portfolio. It also includes purchase-money loans for existing homes, and for nearly every one of those you get an existing mortgage paid off. You have to have an increase in first-time homebuyers, purchases of new (never occupied) homes, and/or general increase in home prices, occuring at a faster rate than mortgage payoffs in cash, to get an increase in mortgages outstanding. We apparently had all of that. It is not entirely clear what contribution securitization, in and of itself, had to those phenomena.
(Source: UBS, who gets it from Fed Flow of Funds and Loan Performance.)
Subprime ABS investor: "Actually i was kind of hoping they would."
I get the joke, but then again, no, that's the problem here.
Subprime investor wishes these folks would refi every six months. That's not the same thing as selling the house and buying a new one every six months.
Texirish,
This is average (so it is more than median) and Germany is densely populated. It is comparable in density to coastal America. These prices does not look expensitv compare to big coastal cities.
Subprime investor wishes these folks would refi every six months. That's not the same thing as selling the house and buying a new one every six months.
yeah, i meant the subprime investor just wanted prepays...you yuppies always ruin a good joke.
Oh Seb, thank you, the mere sight of you in the form of a charging knight valiantly supporting the value of a new thought in a deeply rutted dialogue .... I'll cherish it forever.
I can sell mortgages to an investor because the investor believes that the mortgages won't all prepay in six months. People don't trade houses like that.
see, you said this, which also doesn't distinguish the investor's preference for type of prepay...so you shouldn't have ruined my joke:(
I thought the non-GSE MBS market was having a seizure at the moment. We're going to see a permanently high RE valuations based on a debt market that is in free-fall?
Opt Joe,
I usually don't tell people what to do unless they're paying me, but:
If you don't have to sell a house, you're in the catbird's seat. I'd lowball every offer.
Apologies if this is an impatient post and someone mentioned before me, but seems to me the really interesting part of this story is that the FTC did not release a list of mortgage advertisers it has warned. Why not?
lama,
Thanks for the advice. We'll definitively try to bargain very hard next year.
My biggest concern currently is that IR will raise. I'm afraid we're just putting in a meaningful bottom in LT rates. I have very little experience with futures trading, but that seems to be the only way to secure interest rates by selling futures. Gulp.
O-Joe
O Joe:
My original response to your post was actually to show that it is difficult to compare relative housing prices across countries, since there are many variables, including density of living, services given (such as childcare/healthcare, etc), and so on.
I will only tell you that US housing cannot keep it's RE prices "permanently high" simply because Americans cannot afford the payments.
the part you neglect about the American Securitization process was the LYING.
Too many of the securitized mortgages contain toxic waste of people who OVERSTATED their income, who LIED on their application as example.
Securitization doesn't help if the original asset is garbage.
now everyone realizes that securitization was hiding toxic garbage, so nobody wants it.
Here is how it works: first you wait until a problem surfaces - it has to be generally known but still on the rise before its publicity crest. Then you issue some statements to establish plausible concern. You are working to protect the innocent but hapless public. Then you reveal that the problem is so big that you cannot guarantee public safety without a big increase in your investigative and regulatory powers. This means more lawyers, desks and money, of course. And so it goes. If you can't get the hang of it, you aren't bureaucrat material.
I know of a fundamentalist US Christian group who sends missionaries to Germany to build houses for the poor folks there.
Tanta,
Seriously, I just received one of the most deceptive soliciations in history. I plan on reporting it to the FTC. If you have a way for me to upload for all your readers to appreciate just let me know.