Housing & economy doing great…shut down this site!

[stansd]

When I was in Business School 4 years ago, one of my professors would often talk about the accounting mess, lax controls, lack of risk management, and huge risk of fannie and freddie…I thought it was odd at the time, now I see how prescient the guy was.

Stan

[stansd]

When I was in Business School 4 years ago, one of my professors would often talk about the accounting mess, lax controls, lack of risk management, and huge risk of fannie and freddie…I thought it was odd at the time, now I see how prescient the guy was.

Stan

[one_muggle]

I find it ironic that some are arguing over the real estate market for the 1 or 2 percent of the population with the idea that these are the super rich. If one looks at the Wells Fargo Opportunity Index (tracks the percent whom can afford the median), it averages around 30-40 percent for San Deigo, and dropped as low as 18 percent in the early 90’s. In LA it dropped into the low teens over the same period, but averages just a bit higher. Right now SD is around 5 percent, while LA has dropped to a touch over 2 percent!
So to the bottom 95-98 percenters, unless you already have a pile of cash, a generous relative or some real estate already in your pocket, you cannot afford the median.

Add in the Global Insights analysis, which takes into account historical prices (and hence the sunshine tax), population, jobs, and salaries, it is very hard to take any claims of RE ascendancy with any seriousness.
BTW: That report puts the area at nearly 50 percent over valued–and the same report actually had the area undervalued as late as 2001!

It has been said before, but this sounds more like the tech bubble than a prior RE bubble. Of course it will take longer to play out. RE is opaque, while stocks are transparent and it still took a couple of years for the tech bubble to renormalize.
Nobody ever knows for certain what will happen in any free market, but the mathematical expected value of RE is decidedly negative.

-one muggle

[one_muggle]

I find it ironic that some are arguing over the real estate market for the 1 or 2 percent of the population with the idea that these are the super rich. If one looks at the Wells Fargo Opportunity Index (tracks the percent whom can afford the median), it averages around 30-40 percent for San Deigo, and dropped as low as 18 percent in the early 90’s. In LA it dropped into the low teens over the same period, but averages just a bit higher. Right now SD is around 5 percent, while LA has dropped to a touch over 2 percent!
So to the bottom 95-98 percenters, unless you already have a pile of cash, a generous relative or some real estate already in your pocket, you cannot afford the median.

Add in the Global Insights analysis, which takes into account historical prices (and hence the sunshine tax), population, jobs, and salaries, it is very hard to take any claims of RE ascendancy with any seriousness.
BTW: That report puts the area at nearly 50 percent over valued–and the same report actually had the area undervalued as late as 2001!

It has been said before, but this sounds more like the tech bubble than a prior RE bubble. Of course it will take longer to play out. RE is opaque, while stocks are transparent and it still took a couple of years for the tech bubble to renormalize.
Nobody ever knows for certain what will happen in any free market, but the mathematical expected value of RE is decidedly negative.

-one muggle

[Allan from Fallbrook]

Stan,

When you think about how big a chunk of the $4 trillion mortgage market that Fannie and Freddie control, I think your B school professor was indeed prescient as regards the level of risk they represent.

I talked to a former colleague of mine who has eliminated all of his positions in the stock market and has backed away from bonds as well. When I asked him if it had anything to do with how overpriced the NYSE is (from a P/E ratio vantage), he said no. Rather, it was the potential risk posed by the same lack of accounting controls you mentioned above. He felt, and I agree, that the nonsense surrounding the Arthur Andersen/Enron debacle, and Tyco, Global Crossings, etc, was not eliminated by Sarbanes-Oxley, nor even contained, but still out there and as bad as ever.

I think about the NASDAQ/dotcom bust, and how little we seemed to have learned following. The same mistakes and the same warning signs are all there, and we are ignoring them just the same.

I guess Polybius did have it right: “Those who fail to learn from the lessons of History are doomed to repeat them”.

Speaking of prescient, right?

[Allan from Fallbrook]

Stan,

When you think about how big a chunk of the $4 trillion mortgage market that Fannie and Freddie control, I think your B school professor was indeed prescient as regards the level of risk they represent.

I talked to a former colleague of mine who has eliminated all of his positions in the stock market and has backed away from bonds as well. When I asked him if it had anything to do with how overpriced the NYSE is (from a P/E ratio vantage), he said no. Rather, it was the potential risk posed by the same lack of accounting controls you mentioned above. He felt, and I agree, that the nonsense surrounding the Arthur Andersen/Enron debacle, and Tyco, Global Crossings, etc, was not eliminated by Sarbanes-Oxley, nor even contained, but still out there and as bad as ever.

I think about the NASDAQ/dotcom bust, and how little we seemed to have learned following. The same mistakes and the same warning signs are all there, and we are ignoring them just the same.

I guess Polybius did have it right: “Those who fail to learn from the lessons of History are doomed to repeat them”.

Speaking of prescient, right?

[patientrenter]

Learning from history is great, and I love the historical perspective. Based on historical ratios of home prices to income, San Diego and LA and many other places seem overvalued. (I think the prices are ridiculous, myself.)

However, housing history isn’t restricted to California or even this country. My impression is that home prices in the UK, for example, are an even higher multiple of incomes than here the US. And the financial sector and economy there has adapted to this. Perhaps someone more knowledgeable than I can fill in the facts (price/income).

Here’s another challenge for someone who knows where to get data or credible studies: Did the ratio of US home prices to income permanently increase after the advent of government guarantees for mortgages (Fannie, Freddie, FHA…)? Will all the looseness in home loan underwriting of the last few years simply disappear completely, or is some of that also a permanent change?

Where is the Chinese central bank going to invest next month’s trade surplus dollars? Wherever that is, it will continue to depress all asset returns for the many yield-hungry US pension funds and other institutions who have to invest their next month’s cash flows also. Much ingenuity will be expended on creating reformed ‘solutions’ that cause home loans to still look like they yield more than Treasuries. And those funds still need those higher yields.

So the pressures on credit and therefore home prices are there and having some impact, but we still don’t have other factors kicking in, like a recession, or liquidity drying up, or a sharp collapse in the dollar, or high CPI numbers, or the Fed being tight, or a nuclear terrorist attack, or… If one or more of these happen, then the probability of a really major dip in home prices, back to historical averages, becomes high. Until then, we’re all just hoping and speculating (which is fun) while watching the emerging facts on the ground.

Patient renter in OC

[patientrenter]

Learning from history is great, and I love the historical perspective. Based on historical ratios of home prices to income, San Diego and LA and many other places seem overvalued. (I think the prices are ridiculous, myself.)

However, housing history isn’t restricted to California or even this country. My impression is that home prices in the UK, for example, are an even higher multiple of incomes than here the US. And the financial sector and economy there has adapted to this. Perhaps someone more knowledgeable than I can fill in the facts (price/income).

Here’s another challenge for someone who knows where to get data or credible studies: Did the ratio of US home prices to income permanently increase after the advent of government guarantees for mortgages (Fannie, Freddie, FHA…)? Will all the looseness in home loan underwriting of the last few years simply disappear completely, or is some of that also a permanent change?

Where is the Chinese central bank going to invest next month’s trade surplus dollars? Wherever that is, it will continue to depress all asset returns for the many yield-hungry US pension funds and other institutions who have to invest their next month’s cash flows also. Much ingenuity will be expended on creating reformed ‘solutions’ that cause home loans to still look like they yield more than Treasuries. And those funds still need those higher yields.

So the pressures on credit and therefore home prices are there and having some impact, but we still don’t have other factors kicking in, like a recession, or liquidity drying up, or a sharp collapse in the dollar, or high CPI numbers, or the Fed being tight, or a nuclear terrorist attack, or… If one or more of these happen, then the probability of a really major dip in home prices, back to historical averages, becomes high. Until then, we’re all just hoping and speculating (which is fun) while watching the emerging facts on the ground.

Patient renter in OC

[Allan from Fallbrook]

One Muggle: All the same hype that accompanied the dotcom era are present here as well.

Remember, “it’s the New Economy, stupid”? All of the old business metrics were to be swept away by the new internet model. Profits didn’t matter, revenue didn’t matter; these would be replaced by a whole new set of meaningful benchmarks.

And so we had market capitalizations of internet startups exceeding a billion dollars, but the companies themselves had no revenue and no profit and no means of acquiring/achieving either. Remember pets.com? Kozmo.com? eToys? At some point during the run-up, these companies had stock prices in the hundreds of dollars per share and astronomical P/E ratios with no serious financial underpinnings.

Stop me if any of this sounds familiar. We now have skyrocketing home prices juxtaposed with stagnant or falling wages, overwhelming household debt loads and cheap, easy cash.

You’re right about the NASDAQ bubble in that it took over two and a half years for it to fully bottom out and then begin the painful journey back up. I don’t think we’ll see bottom on the RE market for at least another 18 months. And I think the fallout in the mortgage banking industry will take years to correct. You better bet that underwriting standards are going to get a lot more rigorous.

[Allan from Fallbrook]

One Muggle: All the same hype that accompanied the dotcom era are present here as well.

Remember, “it’s the New Economy, stupid”? All of the old business metrics were to be swept away by the new internet model. Profits didn’t matter, revenue didn’t matter; these would be replaced by a whole new set of meaningful benchmarks.

And so we had market capitalizations of internet startups exceeding a billion dollars, but the companies themselves had no revenue and no profit and no means of acquiring/achieving either. Remember pets.com? Kozmo.com? eToys? At some point during the run-up, these companies had stock prices in the hundreds of dollars per share and astronomical P/E ratios with no serious financial underpinnings.

Stop me if any of this sounds familiar. We now have skyrocketing home prices juxtaposed with stagnant or falling wages, overwhelming household debt loads and cheap, easy cash.

You’re right about the NASDAQ bubble in that it took over two and a half years for it to fully bottom out and then begin the painful journey back up. I don’t think we’ll see bottom on the RE market for at least another 18 months. And I think the fallout in the mortgage banking industry will take years to correct. You better bet that underwriting standards are going to get a lot more rigorous.

[Allan from Fallbrook]

Patient Renter: If I had to guess, I would bet on a major credit contraction being the culprit that kicks the legs out from under the table.

The Fed is doing their level best to ignore core inflation and pricing pressure, because they know full well that if they increase interest rates it will have a very negative impact on the economy.

I also think the loose underwriting standards are already on the way out. There has been much reporting in the MSM about the elimination of zero doc loans in certain sectors, and how credit is tightening up. Given that the MSM has long been a mouthpiece for the NAR and RE propaganda machines, this represents a major change of pace. There is still much of the Pollyanna reportage featuring “Baghdad Bob”-type pronouncements by Lereah, Yun and Co (“the market has hit bottom; sales will come back up, etc”), but a more sanguine level of realism is now present as well.

You’re right about the speculation, of course, but it’s fun to try and parse the data and divine the ultimate outcome of this mess.

[Allan from Fallbrook]

Patient Renter: If I had to guess, I would bet on a major credit contraction being the culprit that kicks the legs out from under the table.

The Fed is doing their level best to ignore core inflation and pricing pressure, because they know full well that if they increase interest rates it will have a very negative impact on the economy.

I also think the loose underwriting standards are already on the way out. There has been much reporting in the MSM about the elimination of zero doc loans in certain sectors, and how credit is tightening up. Given that the MSM has long been a mouthpiece for the NAR and RE propaganda machines, this represents a major change of pace. There is still much of the Pollyanna reportage featuring “Baghdad Bob”-type pronouncements by Lereah, Yun and Co (“the market has hit bottom; sales will come back up, etc”), but a more sanguine level of realism is now present as well.

You’re right about the speculation, of course, but it’s fun to try and parse the data and divine the ultimate outcome of this mess.

[patientrenter]

Allan,

In my line of work, I have to think about possible future credit spreads. I’ve nudged us to benefit from a widening of credit spreads, so I am putting some money down on what you’re saying (about a more general credit contraction). But I have to admit it’s a gut instinct. What’s your thinking behind a spreading of credit tightening from mortgages to other loans? How do you see that playing out?

I agree also with your description of what the Fed is doing and why. But does that mean you think the Fed’s likely actions will help house prices?

Patient renter in OC

[patientrenter]

Allan,

In my line of work, I have to think about possible future credit spreads. I’ve nudged us to benefit from a widening of credit spreads, so I am putting some money down on what you’re saying (about a more general credit contraction). But I have to admit it’s a gut instinct. What’s your thinking behind a spreading of credit tightening from mortgages to other loans? How do you see that playing out?

I agree also with your description of what the Fed is doing and why. But does that mean you think the Fed’s likely actions will help house prices?

Patient renter in OC

[4plexowner]

patientrenter – I have read that homes became LESS affordable after FHA (HUD) came on the scenes in 1934 (Fannie and Freddie are just more of the same)

the intent of these programs is twofold:
1. to reduce risk to the lender in case of a buyer’s default
2. to help the potential buyer obtain affordable financing for a house

number 1 makes the lender more willing to lend on residential real estate

number 2 greatly increases the pool of potential house buyers

demand for houses increased significantly because more people were able to purchase them (prior to FHA, 50% down was required with balance paid over no more than 5 years)

the banks were happy to loan the money because FHA guaranteed 78% of the value of the loan – a buyer puts 20% down and FHA covers 78% of the 1st mortgage – that leaves the bank holding 2% of the risk which is protected by the buyer’s 20% down payment – not a bad position to be in when you can collect interest on these mortgages for 30 years

there are at least two ways to look at the effects of FHA:

1. this artificial stimulus (a govt guarantee to the banks) of the housing market caused free-market control mechanisms (which keep supply and demand in balance) to become irrelevant – the long-term effect was to cause housing to become less affordable rather than more [some people would argue that this is what happens EVERY time the govt gets involved in free markets but we won’t go there today]

2. starting the FHA was a humanitarian thing to do because so few people could afford decent housing – now almost 70% of the nation have become homeowners

back to your idea, patientrenter – the article I read indicated that house prices became less affordable as a result of the FHA guaranteeing home loans – I don’t remember any charts – I’ll post a link if I come across the article

~

history of FHA from (http://www.hud.gov/offices/hsg/fhahistory.cfm):

When the FHA was created, the housing industry was flat on its back:

* Two million construction workers had lost their jobs.

* Terms were difficult to meet for homebuyers seeking mortgages.

* Mortgage loan terms were limited to 50 percent of the property’s market value, with a repayment schedule spread over three to five years and ending with a balloon payment.

* America was primarily a nation of renters. Only four in 10 households owned homes.

[Author]

Posts