Housing & economy doing great…shut down this site!

[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.

[Allan from Fallbrook]

Patient Renter: Up front I’ll admit that I am an accountant by discipline and my knowledge of both the stock and bond market was driven by handling investment income for the insurance brokerage where I worked. I learned the hard truth about Merrill Lynch and Pru-Bache brokers (they’re salesman first and investment bankers second) and so sat down and educated myself. Being a fan of both Ben Graham and Warren Buffett, as well as an accountant, I will admit to always erring on the (very) conservative side.

That being said, I think the Fed is keenly aware of their culpability in this present housing mess, and they know full well that it stems from their desire to avoid a recession following the dot.bomb/NASDAQ bust. I think they are trying to hew to a course that is solidly in the middle and hoping that inflation simmers down of its own accord.

You mention gut instincts. Mine is telling me that the reason that the volatility indexes are so out of whack is that risk (true risk) is not being properly accounted for and the usual market mechanisms are therefore not behaving accordingly. Only recently has the bond market started to react and if you pull back and look at the complete picture, it appears as though the market(s) are finally starting to key on the dangerous combination of excess liquidity, improperly accounted for risk and the dangerous levels of risk inherent to certain sectors (i.e. CDO/CDS products).

The accountant in me says that a single serious market event, such as a blowout in the lower rated MBS sub-prime tranches will spread. Why? Because at that point scrutiny will increase, followed by a review of diligence procedures, followed by a revaluation of the portfolios (book values of CDO/CDS products are notoriously overvalued and very arbitrary). At this point, the pain will spread as a whiplash effect occurs and the various players involved scramble to protect their positions.

As I said earlier in another post, there is a Wall Street expression that goes, “Don’t panic. But if you do panic, panic first”. Merrill’s dumping of their position within the Bear Stearns MBS sub-prime unit was not a measured response from seasoned professionals; it was a fire sale. There is a recognition within the industry that there is an undue level of risk accompanying not just these (MBS sub-prime securities and instruments), but with other MBS products as well.

At some point Rational Market Theory goes out the window and the herd mentality takes over. I don’t think its any coincidence that UBS just unseated their CEO (following disclosure of the losses sustained in the sub-prime market), or that “warehouse” lending from the big investment houses has been severely curtailed, or that Bank of America is now reviewing their risk posture in the mortgage market.

Gut instinct is one thing, but you get a definite sense of the breeze starting to shift.

[Allan from Fallbrook]

Patient Renter: Up front I’ll admit that I am an accountant by discipline and my knowledge of both the stock and bond market was driven by handling investment income for the insurance brokerage where I worked. I learned the hard truth about Merrill Lynch and Pru-Bache brokers (they’re salesman first and investment bankers second) and so sat down and educated myself. Being a fan of both Ben Graham and Warren Buffett, as well as an accountant, I will admit to always erring on the (very) conservative side.

That being said, I think the Fed is keenly aware of their culpability in this present housing mess, and they know full well that it stems from their desire to avoid a recession following the dot.bomb/NASDAQ bust. I think they are trying to hew to a course that is solidly in the middle and hoping that inflation simmers down of its own accord.

You mention gut instincts. Mine is telling me that the reason that the volatility indexes are so out of whack is that risk (true risk) is not being properly accounted for and the usual market mechanisms are therefore not behaving accordingly. Only recently has the bond market started to react and if you pull back and look at the complete picture, it appears as though the market(s) are finally starting to key on the dangerous combination of excess liquidity, improperly accounted for risk and the dangerous levels of risk inherent to certain sectors (i.e. CDO/CDS products).

The accountant in me says that a single serious market event, such as a blowout in the lower rated MBS sub-prime tranches will spread. Why? Because at that point scrutiny will increase, followed by a review of diligence procedures, followed by a revaluation of the portfolios (book values of CDO/CDS products are notoriously overvalued and very arbitrary). At this point, the pain will spread as a whiplash effect occurs and the various players involved scramble to protect their positions.

As I said earlier in another post, there is a Wall Street expression that goes, “Don’t panic. But if you do panic, panic first”. Merrill’s dumping of their position within the Bear Stearns MBS sub-prime unit was not a measured response from seasoned professionals; it was a fire sale. There is a recognition within the industry that there is an undue level of risk accompanying not just these (MBS sub-prime securities and instruments), but with other MBS products as well.

At some point Rational Market Theory goes out the window and the herd mentality takes over. I don’t think its any coincidence that UBS just unseated their CEO (following disclosure of the losses sustained in the sub-prime market), or that “warehouse” lending from the big investment houses has been severely curtailed, or that Bank of America is now reviewing their risk posture in the mortgage market.

Gut instinct is one thing, but you get a definite sense of the breeze starting to shift.

[scruffydog]

Scene: Present day. Veterinarians office. Scruffydog is on the examination table being checked for distemper.

Vet: Bad Scruffydog!!!… I read you got all the other dogs in the Piggington kennel barking furiously

Scruffydog: (whimpering) It was unintentional…

Vet: I’ll bet! And what’s this I hear? The kennel administrator even had to admonish xxx!

Scruffydog: (tail between legs) I’ve learned my lesson…never question

Vet: That’s right NEVER, EVER question “The Pack” or they will bite your head off.

Scruffydog: …but they said I was delusional and…

Vet: Life. It’s all about attitude. Some peer at their water bowl and see that it’s half empty and full of dead bugs and others see that it’s half full and full of bugs.

Scruffydog: Huh?…

Vet: You know the Bush and Cheney neocons have engineered the house price runup and subprime meltdown so their rich friends can scoop up property at firesale prices?

Scruffydog: (sighing) All this negativity and conspiracy theory is making my head ache

Vet: Here…lap up this Kool-Aid the other Piggington dogs made for you. It will make you *better*.

later…

Scruffydog: (appears frightened) Thanks for the Kool-Aid…I guess. But now I feel fearful and panicky about my future.

[scruffydog]

Scene: Present day. Veterinarians office. Scruffydog is on the examination table being checked for distemper.

Vet: Bad Scruffydog!!!… I read you got all the other dogs in the Piggington kennel barking furiously

Scruffydog: (whimpering) It was unintentional…

Vet: I’ll bet! And what’s this I hear? The kennel administrator even had to admonish xxx!

Scruffydog: (tail between legs) I’ve learned my lesson…never question

Vet: That’s right NEVER, EVER question “The Pack” or they will bite your head off.

Scruffydog: …but they said I was delusional and…

Vet: Life. It’s all about attitude. Some peer at their water bowl and see that it’s half empty and full of dead bugs and others see that it’s half full and full of bugs.

Scruffydog: Huh?…

Vet: You know the Bush and Cheney neocons have engineered the house price runup and subprime meltdown so their rich friends can scoop up property at firesale prices?

Scruffydog: (sighing) All this negativity and conspiracy theory is making my head ache

Vet: Here…lap up this Kool-Aid the other Piggington dogs made for you. It will make you *better*.

later…

Scruffydog: (appears frightened) Thanks for the Kool-Aid…I guess. But now I feel fearful and panicky about my future.

[lurkor]

Scruffydog: (whimpering) It was unintentional…

What a load of bullshit. Your original post was purposefully inflammatory and insulting. Don’t try to play it off like you were the victim here.

By the way for you to use the kool aid metaphor against others is just priceless.

I still can’t tell if this all a brilliant troll or you are truly as stupid and self-righteous as it seems. If it’s a troll, congratulations because you nailed it. If it’s for real, then we are all fearful and panicky about your future too.

[lurkor]

Scruffydog: (whimpering) It was unintentional…

What a load of bullshit. Your original post was purposefully inflammatory and insulting. Don’t try to play it off like you were the victim here.

By the way for you to use the kool aid metaphor against others is just priceless.

I still can’t tell if this all a brilliant troll or you are truly as stupid and self-righteous as it seems. If it’s a troll, congratulations because you nailed it. If it’s for real, then we are all fearful and panicky about your future too.

[patientrenter]

Scruffy, Great post!

4plex, thanks for the info. My suspicion is that the govt guarantees for home loans only modestly increased home affordability. My guess is that you think it decreased home affordability. We both know it’s more complicated than that. For people like me that save 100% of the purchase price before we buy, it has probably lowered home affordability (because I’m guessing it raised all prices). For some people who don’t save as much, it has increased affordability.

But 4plex, that wasn’t the subject of my curiosity. I just wanted to know if there was widely accepted data showing that the ratio of home prices to income had been permanently increased by the advent of the govt guarantee programs. It feels right, but is is widely accepted as true, and by how much? I’ll read the sources you gave me, but can you give me a heads-up on whether that particular part of the afforability analysis is clearly separated in the sources you referred to? And is that part widely accepted by different persuasions of the economic community? (Sorry about my obvious caution in working with the info. Economics is sad, you can get any result you want if you slice the data right.)

Allan, I think we agree that the Fed wants to administer a rap on the knuckles to excessive borrowers and risk-takers. But I don’t think they want anyone to lose a finger. I’d say a majority on this blog are hoping for very big home price drops (say 40-50%). I’d enjoy it, but I can’t see the Fed or others allowing it.

My own guess about how the price of risk in general will increase is that there will be more, quite a lot more, painful losses from mortgage loans, and that will just wake investors up to the possibility of serious losses on other asset classes. That’s if regulators and others allow the losses to go fairly big, maybe $100 billion or so. It’s nothing more than a gentle reminder, after smooth sailing for years, that a risk can become a real loss. Direct effects like consumer spending slowing because of housing slowdowns caused by tighter mortgage underwriting will be pointed to, but in reality I think it’s mostly just investment advisers realizing that if other things go wrong, they can’t throw up their hands and say “Who knew?” It won’t be earth-shaking, just a small measurable increase in the price of risk.

Patient renter in OC

[patientrenter]

Scruffy, Great post!

4plex, thanks for the info. My suspicion is that the govt guarantees for home loans only modestly increased home affordability. My guess is that you think it decreased home affordability. We both know it’s more complicated than that. For people like me that save 100% of the purchase price before we buy, it has probably lowered home affordability (because I’m guessing it raised all prices). For some people who don’t save as much, it has increased affordability.

But 4plex, that wasn’t the subject of my curiosity. I just wanted to know if there was widely accepted data showing that the ratio of home prices to income had been permanently increased by the advent of the govt guarantee programs. It feels right, but is is widely accepted as true, and by how much? I’ll read the sources you gave me, but can you give me a heads-up on whether that particular part of the afforability analysis is clearly separated in the sources you referred to? And is that part widely accepted by different persuasions of the economic community? (Sorry about my obvious caution in working with the info. Economics is sad, you can get any result you want if you slice the data right.)

Allan, I think we agree that the Fed wants to administer a rap on the knuckles to excessive borrowers and risk-takers. But I don’t think they want anyone to lose a finger. I’d say a majority on this blog are hoping for very big home price drops (say 40-50%). I’d enjoy it, but I can’t see the Fed or others allowing it.

My own guess about how the price of risk in general will increase is that there will be more, quite a lot more, painful losses from mortgage loans, and that will just wake investors up to the possibility of serious losses on other asset classes. That’s if regulators and others allow the losses to go fairly big, maybe $100 billion or so. It’s nothing more than a gentle reminder, after smooth sailing for years, that a risk can become a real loss. Direct effects like consumer spending slowing because of housing slowdowns caused by tighter mortgage underwriting will be pointed to, but in reality I think it’s mostly just investment advisers realizing that if other things go wrong, they can’t throw up their hands and say “Who knew?” It won’t be earth-shaking, just a small measurable increase in the price of risk.

Patient renter in OC

[Allan from Fallbrook]

Cheney and Bush and the neocons engineered the house price runup?!? Holy Halliburton, Batman!

Scruffy, a nod for a truly humorous post. However, and as Lurkor aptly pointed out: We ain’t the ones drinking the Kool-Aid, my friend. I am curious, though. What is your profession when not penning adroit little missives like the one above? Bomb throwing Anarcho-Syndicalist? Economic advisor to the French Lysee? Poli-Sci professor at SD State? Just curious. You do seem to represent an interesting mix of Tom Hayden/Jane Fonda rhetorician (circa 1972), salted with a certain level of knowing cynicism. So, I’m guessing you’re professionally involved in the RE business?

Patient Renter: I agree with your overall read, but there is a part of me (that pesky gut instinct again) that says there is a bigger element of risk than any of us (or the Fed) recognizes.

I don’t credit the Fed with any particular ability to stave off disaster, mainly given the lack of imagination that our monetary policy has displayed over the tenure of Herr Greenspan. Given the somewhat kneejerk reaction that all Western central banks (British, German and American to the fore) have shown when it comes to inflation, I think the Fed recognizes the problem and is holding off firing the cannons (in the form of rate hikes) until it is absolutely imperative they do so. I think that the Japanese example (1990 forward), the Dollar Bust/Asian Tigers Crisis (1997) and the NASDAQ/dotcom Bust (2000) are etched deeply in the Fed’s cortex.

I don’t think we are going to see a collapse (the 40 – 50% drop you mentioned), but a correction (20 – 30%). And, no, that doesn’t represent any sort of chicken entrails auguring, in that it is already happening in certain California markets.

Course, I also think Scruffy Dog should put down his copy of “Pravda” long enough to sniff the wind and recognize that where there is smoke, there is generally fire.

[Allan from Fallbrook]

Cheney and Bush and the neocons engineered the house price runup?!? Holy Halliburton, Batman!

Scruffy, a nod for a truly humorous post. However, and as Lurkor aptly pointed out: We ain’t the ones drinking the Kool-Aid, my friend. I am curious, though. What is your profession when not penning adroit little missives like the one above? Bomb throwing Anarcho-Syndicalist? Economic advisor to the French Lysee? Poli-Sci professor at SD State? Just curious. You do seem to represent an interesting mix of Tom Hayden/Jane Fonda rhetorician (circa 1972), salted with a certain level of knowing cynicism. So, I’m guessing you’re professionally involved in the RE business?

Patient Renter: I agree with your overall read, but there is a part of me (that pesky gut instinct again) that says there is a bigger element of risk than any of us (or the Fed) recognizes.

I don’t credit the Fed with any particular ability to stave off disaster, mainly given the lack of imagination that our monetary policy has displayed over the tenure of Herr Greenspan. Given the somewhat kneejerk reaction that all Western central banks (British, German and American to the fore) have shown when it comes to inflation, I think the Fed recognizes the problem and is holding off firing the cannons (in the form of rate hikes) until it is absolutely imperative they do so. I think that the Japanese example (1990 forward), the Dollar Bust/Asian Tigers Crisis (1997) and the NASDAQ/dotcom Bust (2000) are etched deeply in the Fed’s cortex.

I don’t think we are going to see a collapse (the 40 – 50% drop you mentioned), but a correction (20 – 30%). And, no, that doesn’t represent any sort of chicken entrails auguring, in that it is already happening in certain California markets.

Course, I also think Scruffy Dog should put down his copy of “Pravda” long enough to sniff the wind and recognize that where there is smoke, there is generally fire.

[Bugs]

I play a bear right now, but that’s only because that’s where the current data and my analyses of it have led me. I was a bull in the late ’80s; went to being a bear starting in 1990 (I was slightly late); I went back to being a bull in 1995 and went bearish again in late 2002.

I fully expect to turn bullish on RE once things turn around, but I don’t expect that to happen in the next 2 years.

There’s a time to be agressive and time to be conservative – neither is more or less virtuous than the other. What is more virtuous is keeping an open mind and seeing “what is” rather than “what you want”.

[Bugs]

I play a bear right now, but that’s only because that’s where the current data and my analyses of it have led me. I was a bull in the late ’80s; went to being a bear starting in 1990 (I was slightly late); I went back to being a bull in 1995 and went bearish again in late 2002.

I fully expect to turn bullish on RE once things turn around, but I don’t expect that to happen in the next 2 years.

There’s a time to be agressive and time to be conservative – neither is more or less virtuous than the other. What is more virtuous is keeping an open mind and seeing “what is” rather than “what you want”.

[patientrenter]

Stick around, Bugs!

You seem to have gotten the timing down pretty good. I’ll be watching for your 2008 and 2009 posts on the trend.

I made the mistake in 1996 of thinking that California prices should be the higher than the rest of the country by the same % as in the 1960’s and 1970’s, so now I don’t feel completely comfortable with my judgment of the cycles without lots of conscious analysis.

Patient renter in OC

[patientrenter]

Stick around, Bugs!

You seem to have gotten the timing down pretty good. I’ll be watching for your 2008 and 2009 posts on the trend.

I made the mistake in 1996 of thinking that California prices should be the higher than the rest of the country by the same % as in the 1960’s and 1970’s, so now I don’t feel completely comfortable with my judgment of the cycles without lots of conscious analysis.

Patient renter in OC

[Author]

Posts