1st

Fannie Mae Capital Rules Relaxed; $6 Billion Share Sale Planned

Fannie Mae Capital Rules Relaxed; Share Sale Planned (Update2) - Bloomberg.com

Wall Street rallying on the news.

Nothing like loosening the reins on a an insanely leveraged business that's hemmorhaging cash.

Another bottom caller.

OH!

Well. Good!

Thank God that's over.

"The Housing Crisis is Over"
That sounds like good news, we can't have that. If we start having good news stocks will dive.

Cyril's motivation:

Mr. Moulle-Berteaux is managing partner of Traxis Partners LP, a hedge fund firm based in New York.

Barton one day....the worker bee's the next.

Ciao
MS

Here comes the Le français de service, the French passer-by.

Letting anyone argue such a silly proposition, even a Frenchman in the current stream of US Francophobia, is preposterous at least.

Thank you for the joke. The subject does require any though

conventional mortgage rates are not that far off where they have been for the past 4 years. The differential is the esoteric products and that along with lax credit distorted affordability as so well detailed on this sight. The payment argument is what got us here. Why is it at similiar interest rates back in the early 70s the home price to income ratio was 2x. Now with like rates that multiple is 5-6x? Wall Street alchemy periood

ya...I think this year I will vote for a hedge fund. Getting tired of the Dems and Reps.

This should become the latest in the series of failed bottom callings that came a few years too early.

Much like the collection of these from the 1990s RE downturn that are amusing to read.

tj & the bear wrote, "When I looked at buying our house, what I cared about is how much the monthly payment was going to be." So, you didn't give a damn about the total price as long as the payments fit into your budget? I'd love to sell -- or better yet lease -- you your next car (and I'm not even a car salesman).

Well, I give a damn, but my wife doesn't. (Only half-joking, unfortunately.)

I can't see how interest rates won't have some impact. If rates are low and someone knows they're not going to move (and hence have no future need to sell), then really the monthly payment is all that counts.

Yes, yes, I know, one cannot know that one won't need to move (or sell for some other reason). The question, however, is what do typical buyers think? They're the ones that shape the demand curve.

My own hunch is that tighter markets, particularly where land is scarce, will be ones that are more interest rate driven.

Sebastian wrote, That is absolutely not the same situation for the millions of people who locked-in a low 30-year fixed-rate when they had the chance...or now, come to mention it.

I don't necessarily disagree with you (see post above), but there really is an issue here, ultimately an empirical one about housing demand and home purchasers' view of interest rate risk.

loan type does not matter if value is not there when the time comes to re-finance....and that time is coming.

makes no difference what loan you have.

Nice try Seb....

Ciao
MS

Ciao
MS

Elvis- According to US census projections household formation is projected to be 1.1 million new households per year. Obviously a recesion can retard that demand as people delay leaving home or take on extra roommates, but that's the long term trend.

The price of rice has risen substantially lately because:

1. Rice farmers have switched to growing corn for ethanol;
2. Rice farmers thought the price was going to drop so they cut back on production;
3. Worldwide, everybody now enjoys fried rice alot more;
4. Demand in Texas for sushi has exploded; OR
5. The Federal Reserve has done more of "injecting liquidity when needed" ?

Sure, affordability (and thus prices) have moved inversely to rates. Following through on that, higher rates will mean lower prices, and you'd really much rather have a lower mortgage at a higher rate.

When people are saying "rates are at historic lows" they're also saying "prices are at historic highs". Not the place to be buying.

30YearFixed wrote, My point was that the maximum amount we could afford was determined partially by the interest rate.

It makes sense in another way: land value.

The value of a piece of land is the net present value of future rent payments (after taxes).

The higher the discount rate, the lower the current value.

Bernie better plan on massive inflation (which he clearly is) because when rates go up anyone trying to unload a house is going to have a higher rate enviroment to deal with which will affect affordability for the buyers. It isnt like 30 yr fixed rates will be going down.

tj & the bear wrote, When people are saying "rates are at historic lows" they're also saying "prices are at historic highs". Not the place to be buying.

That's true. But how it affects prices depends on the typical buyer.

The long-term secular trend in nominal interest rates has definitely downwards since sometime in the 1980s.

I myself think rates will go back up, by at least 200 bp. I don't know when. The reason I think rates will go up is because the Chinese and others aren't going to continue to lend us money to buy their goods forever.

However, it's very difficult to time such macroeconomic turning points.

Last night I heard Bernanke speak of abnormal mortgage markets. He's got a skewed view of what "normal" is.

The reality is that 28% DTI, 20% downpayment & fully verified income ARE the norm.

Heck, even FNM & FRE are now way outside the historical norms.

When I looked at buying our house, what I cared about is how much the monthly payment was going to be.

I think, outside of some of the posters on this blog, that is the way most people think about it. The total amount of the loan is, sort of, irrelevant because we all refinance to take advantage of lower rates when it makes sense, sell and buy another house, and pay off the notes early. So the total amount isn't really important, but how much the payment is per month is. Unlke a car, in fact, where the loan is short-term and unlikely to change over the life. So a car or other short-term note is a bad example. As 30year says, it's the way we all figure how much house we can afford, and then go from there.

This article, however, is just an example of what the WSJ is becoming. It just doesn't make any logical sense from the numbers or the argument. But I would have to disagree and say that income does, indeed, factor the most in people's decisions on how much to spend on a house.

Two weeks ago my husband and I closed on a condo in Orlando, Fl. We were priced out of the market in 2004 and refused to rely on both of our incomes to purchase. FYI, we are in the 50K to 75K earning per year category. As this article talks about the first time homebuyer being priced out of the market being the catalyst to the bursting of the housing bubble, I felt it was appropriate to give our opinion here. I have continued to watch and research the real estate market for the past 4 years, watching our dream of home ownership slip further and further away. Just as we were talking about leaving Florida to move to a more affordable location I started to see a light at the end of the tunnel in 2007. We located a place that had been on the market for over a year. This is a 2/2 condo on a large ski lake with complete water views and access. We made an offer of 70% of the maximum price of units that had sold during the height of the boom in 2005. We know we can comfortably make our mortgage payment in case of a further downturn. If the prices continue to fall another 10 to 15% it is not a big deal to us. We got to a point that we could afford to buy and we took the leap. This downturn gave us the chance to cherry pick for the best location and the best house for us. And it was on clearance sale. How often does a chance like that happen? Just like you can't call the bottom of stock prices, you can't call the exact bottom of housing either. All you can do is get to a point where it is undervalued and affordable to you. In my opinion, this year will mark the beginning of a slow, slow return to midline.

Moulle-Berteaux is right on and the bottom is in and the stock market is pricing in the recovery with a huge premium, because with all the write offs and disclosed liabilities, earnings are going to look like jet fuel on a runway, and the sky is the limit! Burn baby, burn!

Is Tanta up yet?

Vacant Homes- Thanks, I came up with my own estimate. I took the difference between housing starts and household formation via the census bureau. There were 10 million housing starts since 2001, compared to 8 million net new housholds formed. Giving an overhang of 2 million units. I'll check and see if my est matches the vacancy.

There was also an increase of 1.6% in home ownership or about 1.75 million.

Elvis- I think you misunderstand my question, I am not looking at demand to buy housing, just to occupy it. Related, but slightly different things.

Shan Fields wrote, Just like you can't call the bottom of stock prices, you can't call the exact bottom of housing either.

Right, you can't call tops and bottoms.

However,
(1) You can make predictions based on fundamentals. There's nothing in fundamentals AFAICT that say prices are going to go up anytime soon.
(2) You can look at the time pattern of historical, similar financial events. AFAICT---I haven't looked into this deeply enough---it usually takes a long time for real estate bubbles to deflate. That is, history would say that while prices might not go down much more (though I think they will), they certainly won't be going up anytime soon.

Shan, you should have waited another 18-24 months...your equity in an Orlando condo is vaporized...riightttt. Now.

The question to be asking right now, is who has lost the most and how cheap are they today as a result. When you identify the bloodiest contender, you know you have future cash flow ahead!

I think, outside of some of the posters on this blog, that is the way most people think about it.

Oh, absolutely. But that thinking assumed a fairly stable housing and mortgage market, neither of which apply now. The game has changed.

cd-

you are reading that wrong....

It accepted about $25b with your amount as the total amount actually bid for (they like creating the perception of need-just like the NYMEX with oil futures)

They are always oversubbed regardless of the actual reason for existence.

Really it makes no difference since that money is very obviously not going where it should be.

As long as the "banks" return that money with the 2% premium they are free to do with it what they want.....and that is not lending it out to anyone.

and there are supposedly several rules that prevents this from happening however we are suffering from a lapse in enforcement (like for the last 8 years!!!) and not a need for more regulation.

Must be nice to be allowed to "fix" all those "mistakes" with 2% treasury money backed by you and me.

Ciao
MS

OT

Seperately, Frank said that he “was disappointed” in recent economic stimulus legislation that raised conforming and FHA lending limits temporarily in key local markets. So-called jumbo conforming loans have yet to begin flowing into the secondary market, while the FHA has begun pushing some of the higher balance product out to investors.

Frank said his Committee will hold a hearing on May 21 to figure out “why we haven’t gotten more bang for our buck” with the boosted conforming and FHA lending limits.

“We need to try to unstick that market,” he said. “There is a chain of people blaming each other, and we’re going to call everybody in there into the hearing and find out why.”

maybe there is little demand for expensive housing?

Whenever I want to read all negative news and opinions all the time I turn to this site. Suddenly, someone has a positive thought and they stir a hornets nest of negativity.
This is great. You will all probably be like Alan Abelson in Barrons. I've read him for over 20 years and he's been consistently negative on markets and the economy.
Well, it's ok if negativity makes you happy. Go ahead WALLOW.

texalope,

I agree, as no one wants the market to go up, and up and up, they all want a recession or depression and after reading this blog, it would be nice if many of these posters would cancel internet service and save themselves from using electricity!

Jim A. has it exactly right. The problem with Moulle-Berteaux's argument is that he is still thinking in a 100% financing mindset. 100% financing was available for long enough during the bubble that a lot of people forgot why downpayments were ever required in the first place. With no down payment, the total price really becomes insignificant compared to the monthly payment, and joe sixpack becomes harry how-much-a-month. It's a lot easier to convince yourself that you can swing X thousand dollars a month to "buy" a 500K home, even if you really can't, if you can move in next week and worry about paying later. All of those mortgage payments will come in some distant foreign land called "the future".

Only when down payments are reintroduced does the total price become relevant again, because the down payment is set as a fixed percentage of the price. It's a lot harder to overstretch yourself to get into a house when you need to come up with 10%, or 20% of the purchase price just to get into the game.

One can wildly overestimate how much money they can afford per month to pay for a mortgage, but it is a lot harder to wildly overestimate a downpayment that you don't have into existence.

Now that down payments are coming back into fashion, as they rightfully should, monthly payments are still obviously a strong factor, but subordinate to one's ability to come up with a down-payment, and a lender willing to loan the rest of the price.

Re: "Where's manny and Jack?"

Where is doc and scotty is a better question.

I'm a retired CEO of a really big org and I know what I know and I know we are going to be growing EPS in the S&P500 and I know we are going to have growth from inflation and I know that growth in stocks will translate into growth for the housing market, because baby boomers will be spending incomes from stocks and living The Dream! The rest doesn't matter, this is a very, very focused and narrow recovery underway, which will result in boomers doing very well, just as large corporations will do very well, and the rest of America will be frozen in stagflation for years, if not from here on out!

Unsympathetic-Great find...DD duly noted!

Seb-If you were a cheerleader you would be team captain! Keep it coming..Everytime I read your optimistic quotes I think of the Double Tree sweet dreams pillow! The only problem is I only get to use it for 5 hours or so..

What you all fail yo understand is that homes, i.e, the average American home, doesn't matter anymore. The only reason we are talking real estate is because we have affluent people with lots of cash that will either buy rentals or bigger luxury homes. The housing bubble is over, make no mistake about that, but the economy of the upper classes is getting better and if you don't tap into that stream of liquidity, you may as well live in Mexico and learn how to use a vacuum or broom!

If you look back, The great Depression was a great buying opportunity.

Moe Showers,

5/5/8 @ 12:45 p.m

Sebastian,
Take out a 5.75% mortgage on your home and buy all the stocks you can with the proceeds. based on your conviction it sounds like a no-brainer. You could probably do it on 50% margin too. You may want to dabble in options as well because if you dont believe in a recession or even a prolonged slowdown, and think we'll see a strong rebound in the 2nd half and in 2009 then stocks are probably a great bargain right now.
Not that you need it, but i think you'd earn a lot of respect from all the naysayers by putting your money where your mouth is.
Good luck.

Yeah bad news is really good news and good news is even better. Everything is just great. Couldn't be better.

Fannie sees a bridge to profit growth - May. 6, 2008

Oh, wait, but then there was that thingy with Bear Stearns. Oh well, that was just a teeny weeny blip on the pollyanna landscape of the US economy. Everything else is coming up roses. Right?

And a stock market that shrugs-off hundreds of billions in earnings losses, gets the ball back and steadily marches it back towards the goal-line.>>

You forgot to add:

Out and out fraud regarding anything related to it's balance sheet-that Merrill's L3 "assets" are larger than it's TOTAL MARKET CAP is just ridiculous-and that is but ONE example

over a trillion in "auctions" (love how they still call it that)that allow those "losses" to never really actually have to occur

FASB creating a neat little depository for all those paper profits (pretty good for an industry that saw none of it coming )and let's not mention the personal bankruptcy laws that were again changed by people who saw none of it coming.

a backstopped bailout of an investment bank to the tune of $30 billion with tax payer money. Tip of the 'berg as it gave the green light to fuck up and get bailed out like the clowns they were/are

Publishing doctored numbers that seek to discount the actualities of the commodities bubble it has helped blow

Lowering rates to improve spreads for it's member banks

Lowering rates to "help" out consumers

Allowing Treasury to dictate policy the destroys the very currency it is supposedly chartered to protect

paying lip service to anything resembling sound monetary policy by flag waving.

When your "analysis" takes some of these realities into account it might be worth reading but until then...

STFU

Ciao
MS

The main problem with this blog is that you cannot use "edit--find" on the comments to go to your last post to see if anyone responded. You have to scroll down the whole long list of comments, or stay glued to the comments all the time.

A home is not a car, anytime a consumer is getting into a car deal while buying a home is dead meat.

how about a 4 square mortgage loan. It would be a great snl skit..

Sir, u have 20K down, you want a payment of 1800P&I, your trade in is an amc rambler which will give you 1K for but we have a problem with your 675 score. Let me go talk to my manager on this.

He comes back with we do have this home in the back of the lot we've been sitting on for a little while (18months) and we could make it happen if u can go to a payment of 1980. Let's go take a look at it..
http://www.mrlinley.com/images/1523%20Howard.JPG

Interesting Times: Well maybe 15-20% of the comments are instructive; most are not very, including mine. I think having to scroll such a long list is a drag, so to say.

csco just layed an egg...

chris-Control F

Whenever I want to read all negative news and opinions all the time I turn to this site. Suddenly, someone has a positive thought and they stir a hornets nest of negativity.
This is great. You will all probably be like Alan Abelson in Barrons. I've read him for over 20 years and he's been consistently negative on markets and the economy.
Well, it's ok if negativity makes you happy. Go ahead WALLOW.

Texalope, I'd be a lot more positive about the economy if home prices were 2x or 3x median family income in my city, rather than the 11x they currently are at. Can you really not understand why people such as myself are happy that this housing bubble ponzi scheme is finally starting to go bust? Do you want your children and grandchildren to be debt slaves?

Sebastian wrote, "Unprecedented" crisis, "not seen since the Great Depression", yet the U.S. economy can't even get one quarter of negative real GDP.

IIRC per capita GDP growth is negative.

Can you really not understand why people such as myself are happy that this housing bubble ponzi scheme is finally starting to go bust? Do you want your children and grandchildren to be debt slaves?

Harsh I have to tell you something. I wouldn't want my kids denying themselves everything based completely on a financial decision. I want them to be happy. I think what the poster was getting at was the fundamental unhappiness in these posts.

Everyone acts like a decision on a house is complex for most people. It isn't. Do you really want a house of your own and can you afford the payment and are you happy with it? Then buy it. All the arguments here on price, bottoms, interest rates, etc are nice in an academic setting. But in reality this isn't how it works.

Calculated Risk wrote, Gerard MacDonell, I will write soon on how interest rates impact housing prices - it's actually very interesting. Interest rates matter because they impact demand (the buy vs. rent decision is easier with lower interest rates) - but this author's view that interest rates are "the most important factor" in price is simply wrong.

But the interesting question is "how much do they matter?"

The idea that people are just going to limit themselves to some modest multiplier of income, regardless of how low rates are, seems wrong. (Whether they should so limit themselves, based on various commenters' take on interest rate risk stemming from a future forced sale in a possible environment of rising rates, is a different matter.)

I read somewhere some study that claimed interest rates don't have much of an impact. While I can believe that in some markets, I also strongly doubt it's true in many markets. Certainly not the one I might buy in soon.

The Housing Crisis will be over when people can afford to buy the median house in a given area on the median household income, while putting down a reasonable down payment and without taking out toxic loans or using other tricks (Option Arms, "liar loans," and so on) to "afford" the house.

Here in Maryland, it is typical to see housing start at 4X median household income for a given area (and that is for junker houses and cruddy condos) and rapidly rise to hit 10x median household income. Other areas start at 5x to 6x median household income. These absurdly ovepriced houses are build in huge tracts based on the surreal assumption that everyone could just keep flipping houses to each other while getting rich and never, ever having to be able to truly afford the house.

Until this madness ends, the system clears, and the crooks stop trying to keep housing unaffordable, the Crisis will not end. It could take a few years, or it could take well over a decade. Sadly, the choice is not up to us, but each step of the way there will be a horde of idiot bottom callers announcing that each month is the bottom. Eventually, they'll be right - by dumb chance - and will be hailed as geniuses by the mainstream media for their "insight."

No Sebastian I am saying your constant cheerleading factors none of that. NOt the result of the market.....Big difference

What the market does has nothing to do with your optimistic slant w/o any supporting analysis.

But continue to make it about what the market does as opposed to what your opinion is.

The world has enough Cramer's....it does not need another one.

Ciao
MS

The Housing Crisis will be over when people can afford to buy the median house in a given area on the median household income, while putting down a reasonable down payment

That's exactly true, and my opinion (probably supported by fact) is that most people start with trying to figure out what price range they should be looking at. So they go through the "pre-approval" process which includes their earnings, down payment, debt load, credit score, etc. They then get a range to work with. So the interest rate and all the rest are folded into the process.

I think most interest rate reactions are just anecdotal. Most people don't really know what it should be, but only that it sounds high or low based on whatever they recently heard or read. They react to what it says about how much they can afford. The total amount of the loan they don't care about either, because it's so far out in the future, and they know it's a long-term loan...not like a car. And they know they can refinance in the future too.

So what will happen is the market will return to what the average percentages were before all this started in terms of ownership, new loans, and first time buyers as soon as most people feel some price stabilization is near. And a lot of people have been waiting to buy since this started...so that will help stabilize prices as soon as they start coming into the market.

I was out most of the day so have not read all of the posts. The referenced article is so off base as to be laughable. Who is this guy and why is he trying to con the country?

30YearFixed,

You don't know what a good price is? Just look at rents, make some assumptions about price increases or decreases over the say the next 5 years. Then do a discounted cash flow analysis.

What you will find is that with Price to rent ratios still so high, the only way you come out ahead (over say a 5-7 year period) is if prices go higher. But the reason it is the only way you come out ahead vs renting, is that prices are so high vs rents.

See the problem? Do the math and you will see that we are a LONG ways from buying being any kind of a good deal.

Right now, in my area, houses like the one I am now renting ($1850/mo) are listing for $600K+....lets say selling for $550K.

How optimistic about prices do you need to be to make the numbers work over a 5 year holding period?

Year 1 - +/-0%
Year 2 - +/-0%
Year 3 +2%
Year 4 +5%
Year 5 +5%

Even with this VERY optimistic price increase assumption, it is STILL a money loser to rent....by about $2K per year.

What happens if you look at a more realistic scenario:

Year 1 - (-)10%
Year 2 - (-)5%
Year 3 +0%
Year 4 +2%
Year 5 +5%

Few here will discount that this price trend is unrealistic for a bubbled up area of CA.

If prices follow this sort of path you will lose over $100K vs renting over 5 years! In other words, with the likely price changes over the next 5 years, buying will cost more than 2x renting!!

I took it all into account:
Principal Payment
Interest
Interest deduction
Typ prop tax
Typ HOA
Typ Maint
Gain/Loss in value
Opportunity cost of 20% Down Payment.

I see 2-3 x income for affordable housing being
thrown around. Shouldn't it be even lower for those
in the lower income brackets ? They now have to pay higher costs for gas, food, medical insurance,
and taxes. They will also have to fund more of their
retirement out of an ever decreasing wage thanks
to global competition. I see 1x income in the future
for those making less than 75k a year in the near future.

"Calculated Risk wrote, Gerard MacDonell, I will write soon on how interest rates impact housing prices - it's actually very interesting. Interest rates matter because they impact demand (the buy vs. rent decision is easier with lower interest rates) - but this author's view that interest rates are "the most important factor" in price is simply wrong."

One way of re-phrasing the question would be examine the NAR's Housing Affordability Index, or some similar measure. I seem to recall building my own proxy of the index (I was probably drunk at the time).

If interest rates were the major driver of house prices the affordability index should be pretty steady around some level. (The index is the ratio of actual house prices versus the price that could be financed with a 80% mortgage on 30% of the average income (numbers from memory)).

From what I recall, it would give a pretty wide error bar if you used an interest rate scenario to predict house prices.

30YearFixed writes:
Forgive me for being stupid .... but I'm not completely sure I disagree with Moulle-Berteaux's concept of "affordability", but I would like to be educated.

However, only paying interest and comparing that to rent is right as long as the interest rate is locked/hedged (you could hedge it with an investment equal to the amount of the mortgage invested in a bond)

Sorry, have no time to read all the preceding comments, but interested people should be sure to read the (relatively few) comments to Salmon's piece to see the substantial homebuilder and investment bank holdings of the author's hedge fund. So he was doing nothing more than 'talking his book', which the disgraceful WSJ allowed him to do without an editorial note to readers.

To say that home prices should vary inversely with mortgage interest rates is to say that homes should trade like Treasury bonds.

Well, I wasn't THINKING that, exactly. But looking back I was realizing I wasn't communicating it well.

Interest rates changing affect the amount of money that I can spend on a house. So turning that around, if interest rates are higher, that shrinks the available pool of houses that I (or anyone else) can buy. And that probably puts downward pressure on home prices, but I suspect it's not very strong downward pressure.