It wouldn’t be a proper Christmas without a little holiday cheer from
legendary housing bubble analyst Ramsey Su. So pour yourself a
couple buckets of egg nog and read on…
REAL
ESTATE OUTLOOK – 2010
by Ramsey Su
ESTATE OUTLOOK – 2010
by Ramsey Su
These are not predictions. This is a list that deserves full
attention in 2010. Not intending to write a book, I am not
including references and links.
Short Sales
In my opinion, short sales are the most equitable solution for all
parties to share the blame while stimulating the market in a
sustainable manner. The timing is perfect for short sales.
For the lender, it minimizes loss severity.
For the borrower, it provides a fast route to recovery by limiting
damage to credit scores while repairing household balance sheets with
the elimination of the debt and debt service.
For the industry, real estate brokers, mortgage brokers, escrow, title
etc., would all benefit from a growing number of transactions.
For the real estate market, it will stabilize prices, determined by
supply and demand.
Neighborhoods benefit from not having to be flooded by unsightly
unoccupied REOs.
One of the biggest obstacles, the second lien, is being phased out with
time. Very few loans originated during 2007 and beyond utilized
second liens.
Public policy remains an obstacle, such as the recently introduced HAFA
by the Treasury, 43 pages of bureaucratic red tape.
If they want to do something constructive, policy makers should, at no
cost to taxpayers, create some safe harbor rules for deficiency
judgment resulting from short sales.
Also at no cost to taxpayers, policy makers should assist credit
bureaus in setting a standard of the treatment of short sales so that
defaulting borrowers can be recycled back to the buyers’ pool as soon
as possible.
If short sales increase with a corresponding decrease of completed
foreclosures, I think that could be the most bullish signal for 2010.
Modifications
Similar to short sales, government should stop HAMPering
recovery. Give the free market a chance.
HAMP does not work because, more often than not, it is not a good deal
for the borrower. A loan modification is basically a lease with
option to buy. The break even point is the fair market
rent. In other words, if the resulting total housing expense
(principal, interest, tax, HOA dues, etc) is equal to the fair market
rent, then the modification is a wash for the borrower. For
example:
A
house with a current value of $300,000 is for rent at $2,000 per
month. If the landlord offers the potential tenant an option to
purchase the property at $500,000 in exchange for raising the rent to
$3,000 per month, is that a good and fair deal? That is exactly the
terms of many modifications. The shysters would promote that as
helping poor borrowers stay in their homes but are in fact charging
them an extra $1000 for the privilege of having their name on a deed
instead of a rental agreement.
On the other hand, if the rent
(modified payment amount) remains at $2,000 per month or less, then the
tenant (borrower) has nothing to lose by taking the option even though
it may take many years for the option to be in the money.
house with a current value of $300,000 is for rent at $2,000 per
month. If the landlord offers the potential tenant an option to
purchase the property at $500,000 in exchange for raising the rent to
$3,000 per month, is that a good and fair deal? That is exactly the
terms of many modifications. The shysters would promote that as
helping poor borrowers stay in their homes but are in fact charging
them an extra $1000 for the privilege of having their name on a deed
instead of a rental agreement.
On the other hand, if the rent
(modified payment amount) remains at $2,000 per month or less, then the
tenant (borrower) has nothing to lose by taking the option even though
it may take many years for the option to be in the money.
Borrowers are beginning to understand “prevent foreclosure” actually
means “prevent foreclosure so lenders can minimize loss severity at the
expense of the borrowers”. They are starting to realize they have
a much better option – walk.
HAMP qualifying cut off date is for loans originated before Jan 1,
2009. Ironically, the loans originated after that date are easier
to modify, since the majority are agency loans with no junior
liens. Freddie, Fannie and FHA are free to offer anything they
wish without having to deal with private investors and junior liens.
Regardless, modifications should remain a non issue in 2010. It
will be a lot of noise with not much impact one way or another.
Interest Rate
Bernanke claimed that he is easing out of the agency MBS
purchases. He had been buying exactly $16 billion per week for
the last five weeks. In just over 2 months, we should know if
there are agency MBS buyers to replace Bernanke in this all important
secondary market and, more importantly, at what rate.
FHFA and FHA should be analyzing the recent loans to determine what
percentage of the applications would have been denied if mortgage rates
are higher, by each increment.
It is difficult for mortgage rates to remain at current levels when the
Feds exit the MBS market. With the bulk of the activity at the
low end, any increase in rates would impact affordability sufficient
enough to shut off any signs of recovery, forcing the Feds to take
further action.
With so much competition from the Treasuries, the probability of
mortgage rates increasing is high. We should be able to see where
rates are heading no later than February. If mortgage rates rise
above 6%, the rate before Fed intervention, 2010 would be a very
difficult year.
Fixing Freddie and Fannie (and FHA)
Freddie, Fannie and FHA kept the real estate market alive in 2009 by
providing subsidized financing with the help of the Feds and the
Treasury. This is not sustainable.
When the GSEs were placed under conservatorship over a year ago, they
were given $100 billion of play money, and then raised to $200 billion
and there are rumors that it may be increased to $300 billion – each.
The GSEs had not been profitable, are not profitable and have no plan
to become profitable in the foreseeable future. Their losses are
equivalent to a subsidy for the housing market. How long can this
subsidy continue and what are the ramifications when they are removed?
In 2010, the GSEs are supposed to reduce their combined portfolio to
$1.7 trillion. If there are no buyers for agency MBS after the
Feds exit the market, the GSEs may be forced to increase their
portfolio in direct violation of the terms of the
conservatorship. The other alternative would be to raise the
mortgage rates until buyers for the agency securities can be found.
In 2010, funding for the GSEs can no longer be by the Treasury alone
and will require congressional approval.
2010 cannot be business as usual for the GSEs. Are we going to
see a good bank/bad bank proposal? Are the GSEs going to be
nationalized indefinitely, along with ownership of Citi, GM and
AIG? Is there some secret committee working on an exit plan?
I opine that the probability of disruption is very high. The GSEs
will not fail, that is a given. However, it is a certainty that
the agencies are going to cost the taxpayers a lot of money; the only
question is how much.
Foreclosure Outlook
There are two types of defaults, those resulting from the housing
bubble and those resulting from economic conditions such as job
loss. They are not mutually exclusive.
Housing bubble defaults have been worked over with multiple rounds of
modification attempts and moratoriums. With all the fruitless
attempts out of the way, foreclosures should resume in 2010. The
defaults caused by economic conditions are starting. With no
employment, these loans are very difficult to work out.
In 2009, there were approximately 900k REOs vs about 5.1 million
existing home sales (unadjusted). There are 4 to 5 million loans
that are 60 days delinquent and beyond. Various estimates for
negative equity range from 20% to 30% of mortgages. The sooner
the hopelessly under water loans are flushed out, the sooner
sustainable recovery can begin.
If there are no new government intervention schemes, REO volume could
easily double to over 2 million, which is only a 40% roll rate for the
current pool of delinquent loans. The roll rate should be high
because most of these delinquencies have exhausted all options.
Home Prices
With so much supply over hang, especially in the “must sell” category,
it is hard to imagine that there could be any upward price
pressure. There should be some job creation in 2010 but caulkers
and census takers are not good home buyers.
Interest rate is at historical lows. Bernanke (if he is still Fed
Chairman next year) would have a tough time keeping the rates at this
level, not to mention driving it down if further stimulus is needed.
Low end buyers bidding on properties with multiple offers should have a
much easier time next year when the REOs hit the market. Higher
end properties depend on move-up buyers who are all stuck with an
existing home that they cannot or are unwilling to sell.
The best the market can hope for is support for the low end properties
due to affordability. As long as the higher end property owners
can afford to hang in there, that sector of the market can be frozen
indefinitely, allowing time to absorb the price corrections.
In summary, the real estate
market faces major hurdles in 2010, starting early in the year with the
bench mark 30 fixed rate as the Feds continue to exit the agency MBS
market. Foreclosures are temporarily postponed till after the
holidays but flood gates should open immediately after the New
Year. The massive amounts of government intervention have very
little to show for but the policy makers are convinced that the
disaster have already been averted while Bernanke is busying himself to
accept the Time Magazine award. Not only is there no Plan B,
there is no one in charge of coming up with a Plan B. It will be
management by panic, similar to Lehman and Bear Stearns if conditions
deteriorate.
I will make one prediction for the 2010 government intervention – principal reduction.
Gee louis, rationally I know
Gee louis, rationally I know it’s going to be better to wait….but my wife and my mom finally decided for me and I will have to follow their wish, tag along…..I am buying a house finally and it’s kind of by accident (from my point of view). It’s not bad, just that I myself could have waited but my family can’t.
Ben Bernake won the waiting game.
Just when the flood gate about to open, I jump in for a swim.
So sorry to hear about your
So sorry to hear about your situation, KIBU. I think you’re in good company. A lot of people have given up on waiting because they can see that the govt is hell-bent on keeping prices artificially inflated.
Hope you find something that has seen some serious declines, and that your risk is somewhat mitigated.
Best of luck!
Nice analysis, Mr Su. Thanks.
Nice analysis, Mr Su. Thanks. Employment looks to be the problem with no solution. Should it presist.
I like Ramsey, it’s near
I like Ramsey, it’s near impossible to find flaw in his reasoning. Where I do have concern is that the situation is very regional right now, town to town, county to county and state to state have experienced very different dynamics in their R/E markets thus far. Some of the boomiest markets have reached/passed overcorrection fundamentals, some never boomed (entire states never boomed) and different market segments (low end/high end) have had different experiences. While Ramsey did not say these were predictions, only areas to look at, as a reader I was left with the sinking feeling that we are headed for trouble. But it’s Christmas morning, there is a lull right now before the last family member awakes and the festivities begin, this is a time of reflection. In that reflection, I realize that every year there is something to be concerned about for the coming year and there always will be. Housing prices are a moving target, there are hundreds of those targets and thousands of reasons each of those targets move. It makes it difficult to be a marksman. Just learn what your target did in the past decade, in the past three years and the past year, try and predict what it will do in the future and then aim at that target and only that target. Trying to figure out what all the targets will do will drive you insane. Trying to compare high end Phoenix to low end Miami to mid level Texas has little benefit, looking at each question in a vaccuum is probably the best option.
Kibu, we don’t know the specifics of your purchase so we cannot pass judgment. The one important question still remains in any housing purchase that you plan to live in, “can I comfortably afford this and does it suit my long term needs?” If you answer “yes,” ignore the advice, even from those you respect. I ignored a lot of advice when I didn’t rebuy in 2006 and that turned out well, I ignored advice when I bought my house a year ago and that went well, however I followed advice and did not sink my income tax refund last year into Ford stock when it was a dollar a share, continued to follow that advice when it hit $4 because I had missed the boat and yesterday it broke $10, that didn’t go so well. In my bad stock decision of the last 12 months I chose to look at the big picture and ignore the specifics, in my housing purchase I ignored the big picture and focused on the specifics, there is a lesson there for 2010, at least for me.
I do respect Ramsey, but his article was probably not meant for everyone, everywhere who is contemplating purchasing a home. It’s a macro piece, take from it what was intended, something to think about.
Merry Christmas Piggs.
It’s amazing that the
It’s amazing that the excellent analysis Ramsey wrote here is already out of date in one respect – the support for FNM/FRE will have no limits for a full 3 years.
Given that there is a high-level bipartisan commitment to keeping home prices high at all costs (see the Dec 21 Newsweek interview with Geithner, for just one example), I think we will see other govt price supports increased further, as deemed necessary to achieve home price targets. Examples are:
1. Principal reductions (as Ramsey says).
These ensure that people who paid too much get a complete free do-over at a lower price and better loan terms all round. No home buyer loses. And the resulting restriction in supply will help to push prices up (or less down, for the mathematically challenged). It will also encourage more demand, as buyers realize they will be bailed out if the market goes down instead of up after they buy.
2. Interest rate limits.
Mortgage interest rates will be held low, regardless of market forces. This may cause some further depreciation of the dollar.
3. FHA and FNM/FRE (almost) no-money-down loans will be extended to higher priced homes. Barney Frank has already promised to increase the limits by $100K, taking the limit in coastal SoCal to $829K.
4. If the other measures don’t achieve the price goals, then loan underwriting requirements will be eased, to allow lower FICO scores and higher DTI, for example, or less documentation. Probably not on a broad published basis, more of an “enhanced flexibility approach” to underwriting.
patientrenter wrote:It’s
[quote=patientrenter]It’s amazing that the excellent analysis Ramsey wrote here is already out of date in one respect – the support for FNM/FRE will have no limits for a full 3 years.
Given that there is a high-level bipartisan commitment to keeping home prices high at all costs (see the Dec 21 Newsweek interview with Geithner, for just one example), I think we will see other govt price supports increased further, as deemed necessary to achieve home price targets. Examples are:
1. Principal reductions (as Ramsey says).
These ensure that people who paid too much get a complete free do-over at a lower price and better loan terms all round. No home buyer loses. And the resulting restriction in supply will help to push prices up (or less down, for the mathematically challenged). It will also encourage more demand, as buyers realize they will be bailed out if the market goes down instead of up after they buy.
2. Interest rate limits.
Mortgage interest rates will be held low, regardless of market forces. This may cause some further depreciation of the dollar.
3. FHA and FNM/FRE (almost) no-money-down loans will be extended to higher priced homes. Barney Frank has already promised to increase the limits by $100K, taking the limit in coastal SoCal to $829K.
4. If the other measures don’t achieve the price goals, then loan underwriting requirements will be eased, to allow lower FICO scores and higher DTI, for example, or less documentation. Probably not on a broad published basis, more of an “enhanced flexibility approach” to underwriting.[/quote]
And we’ll end up right back where we started on this nightmarish merry-go-round.
“Recovery” means that prices drop to a level where people can afford to buy, and will not be overly burdened if they should lose a job or suffer some other common hardship. It means that we won’t have to see the dollar fall as the PTB manipulate interest rates so the debt serfs can “afford” to overpay for housing. Maybe prices can come down enough so that Americans can actually **save** money instead of continuously getting deeper and deeper in debt.
patientrenter wrote:It’s
[quote=patientrenter]It’s amazing that the excellent analysis Ramsey wrote here is already out of date in one respect – the support for FNM/FRE will have no limits for a full 3 years.
Given that there is a high-level bipartisan commitment to keeping home prices high at all costs (see the Dec 21 Newsweek interview with Geithner, for just one example), I think we will see other govt price supports increased further, as deemed necessary to achieve home price targets. Examples are:
.[/quote]
Those are old tricks. Been there, done that and blew up in faces already. No major job growth and this is all just adding very, very debilitating debt. It’s that simple.
The next steps are:
1: Data mining for qualified buyers and sending Geithner to their door, begging OR forced purchases
2: Declaring RE deflation illegal
3: Holding back more and more inventory
4: Home purchase requirement for government jobs programs
Watching the desperate end of a ponzi-scheme comes to mind.
2010 is going to be the year of uncomfortable realizations.
[quote]Not only is there no Plan B, there is no one in charge of coming up with a Plan B. It will be management by panic, similar to Lehman and Bear Stearns if conditions deteriorate.[/quote]
This is one of them….
I went and see the house
I went and see the house again today. It’s amazing how the emotion pendulum swings when you buy a home….Yes I love it today but last night I was going through all the doubts, yet the day before I liked it. The main problem was that this wasn’t at all the floor plan that I have been waiting for a very very long time so it took me quite some time to adjust to the new reality which went so fast….put in the offer, then got accepted in 1 day.
Yes, right now, I am very happy with the decision made and I have to say that of all the helpful and smart advices from the piggs here which I will forever appreciate, I own it most to Temecula Guy (it made a difference!!), SDR, sdrealtor, and Rich. The advices they gave me are extremely practical. There are other experts which I learned so much and I am also thankful for the nonexpert crowd who endured my naive questions and sentiments .
Thanks CA renter, as you can
Thanks CA renter, as you can see, I am going thru buyer anxiety phase, next will be rationalization….
However, seriously, I think I am happy with the decision now. :))
KIBU wrote:Thanks CA renter,
[quote=KIBU]Thanks CA renter, as you can see, I am going thru buyer anxiety phase, next will be rationalization….
However, seriously, I think I am happy with the decision now. :))[/quote]
Congratulations on your new house, KIBU. You’ve waited patiently and probably understand the market better than most buyers out there.
Enjoy your home! 🙂
My only quibble is with this
My only quibble is with this bit:
“The GSEs will not fail, that is a given. However, it is a certainty that the agencies are going to cost the taxpayers a lot of money; the only question is how much.”
I agree that the GSEs will cost taxpayers a lot of money in the SHORT term. But in the long term, we will get our money back in nominal terms. Again, that whole spread lending thing. One thing to keep in mind is that although hundreds of billions in losses is a (very) large number, a portfolio of over $2 trillion is a large number as well. And something like 80%+ of these mortgages are paying as agreed. That’s a whole lotta spread income that isn’t going anywhere.
I’m not concerned about getting taxpayer money back from the banks or the GSEs. My concern is with AIG and the auto companies… because there’s no portfolio teet to suck off of for years on end until we get our money back.
davelj wrote:My only quibble
[quote=davelj]My only quibble is with this bit:
“The GSEs will not fail, that is a given. However, it is a certainty that the agencies are going to cost the taxpayers a lot of money; the only question is how much.”
I agree that the GSEs will cost taxpayers a lot of money in the SHORT term. But in the long term, we will get our money back in nominal terms. Again, that whole spread lending thing. One thing to keep in mind is that although hundreds of billions in losses is a (very) large number, a portfolio of over $2 trillion is a large number as well. And something like 80%+ of these mortgages are paying as agreed. That’s a whole lotta spread income that isn’t going anywhere.
I’m not concerned about getting taxpayer money back from the banks or the GSEs. My concern is with AIG and the auto companies… because there’s no portfolio teet to suck off of for years on end until we get our money back.[/quote]
Why should we believe that the 80% will continue to pay as agreed? Only the most foolish of borrowers would continue to do so at this point.
We have 800+ FICO scores, no revolving debt of any sort, and decent reserves and income. Even I would feel inclined to force my lender to reduce the principal balance and/or lower the rates on my loan if every idiot and gambler out there is getting their loans modified. Why should the responsible people have to pay more than those who willingly took on debt they could not afford?
CA renter wrote:
Why should
[quote=CA renter]
Why should we believe that the 80% will continue to pay as agreed? Only the most foolish of borrowers would continue to do so at this point.
We have 800+ FICO scores, no revolving debt of any sort, and decent reserves and income. Even I would feel inclined to force my lender to reduce the principal balance and/or lower the rates on my loan if every idiot and gambler out there is getting their loans modified. Why should the responsible people have to pay more than those who willingly took on debt they could not afford?[/quote]
Pick a number. We still get paid back. It just takes longer when more folks default. At the end of the day, it’s just math. You choose the assumptions and I’ll tell you roughly how long it’s going to be before we get our money back.
Related… my understanding is that roughly 25%-30% of GSE borrowers have negative equity. Why is someone with positive equity going to default (unless they lose their job)? Are they all being “foolish”?
davelj wrote:…Why is
[quote=davelj]…Why is someone with positive equity going to default (unless they lose their job)? Are they all being “foolish”?[/quote]
I think you are being a little too literal, dave. Loan mods granted to people with negative equity do come at a cost. Spread income is being created for banks, but is coming from other people/ economic entities, so it too is a cost.
When a bank loans $800,000 to a landscaper to buy a home for $800,000, there is a loss. We are busily trying to make the losses a little less obvious, along with the flows of value being funneled into the entities that were responsible for taking the losses. Those flows include forced high spreads, taxpayer guarantees or other subsidies, and maybe future quiet saver taxes imposed via inflation.
The current legerdemain may fool the simple-minded, but most piggs can see that the losses are huge, and the parties theoretically responsible for them are getting bailed out by picking other people’s pockets.
patientrenter wrote:davelj
[quote=patientrenter][quote=davelj]…Why is someone with positive equity going to default (unless they lose their job)? Are they all being “foolish”?[/quote]
I think you are being a little too literal, dave. Loan mods granted to people with negative equity do come at a cost. Spread income is being created for banks, but is coming from other people/ economic entities, so it too is a cost.
When a bank loans $800,000 to a landscaper to buy a home for $800,000, there is a loss. We are busily trying to make the losses a little less obvious, along with the flows of value being funneled into the entities that were responsible for taking the losses. Those flows include forced high spreads, taxpayer guarantees or other subsidies, and maybe future quiet saver taxes imposed via inflation.
The current legerdemain may fool the simple-minded, but most piggs can see that the losses are huge, and the parties theoretically responsible for them are getting bailed out by picking other people’s pockets.[/quote]
I was literal in my response because Ramsey’s point was literal. I was simply addressing a specific issue from his post. You’re addressing a separate issue.
Having said that, I will agree that there are additional “costs” to the current bailout that are not obvious or measurable in today’s dollars and cents. But we won’t know for at least a decade what those costs were (and even then it will be very approximate). Conversely, the money taxpayers put directly into the GSEs is measurable and thus easily accounted for… which is the issue that Ramsey brought up and which I addressed.
davelj wrote:…But we won’t
[quote=davelj]…But we won’t know for at least a decade what those costs were (and even then it will be very approximate)….[/quote]
I am reacting because part of what is being orchestrated right now is a burying of the very obvious real losses under a mountain of complexity and postponement. As I said, when a landscaper bought a shack for $800,000 by borrowing $800,000, there was a real loss. If the house would really fetch only $300,000 on the open market with no govt supports, then the loss is $500,000.
Who pays that loss, and when, are the only questions. Tracing the incidence of that $500,000 loss is incredibly complicated, mainly because of all the govt interventions distorting prices, interest rates, and the real value of money. We are being made to believe that the losses won’t be that bad, or cannot be estimated properly, or will take years to be well known. Sure there is some uncertainty, and we can use more time to better estimate the exact losses, but in truth, most of the time and uncertainty will be deliberate, to make it less obvious who is paying for the very large aggregate losses that can be seen as plain as day.
patientrenter wrote: Sure
[quote=patientrenter] Sure there is some uncertainty, and we can use more time to better estimate the exact losses, but in truth, most of the time and uncertainty will be deliberate, to make it less obvious who is paying for the very large aggregate losses that can be seen as plain as day.[/quote]
Sure… but isn’t everyone who’s not living in a cave aware of that at this point?
davelj wrote:….Sure… but
[quote=davelj]….Sure… but isn’t everyone who’s not living in a cave aware of that at this point?[/quote]
Amazingly, no. If you only read and heard our public officials from the Treasury and Federal Reserve and so on, you’d think that hardly any money was being lost, and certainly very little money belonging to taxpayers or savers or other people who didn’t stand to profit from the bubble.
So when I see something that seems like what these political hacks are saying, underplaying the losses, and misleading people about who will pay for them, I over-react.
patientrenter wrote:davelj
[quote=patientrenter][quote=davelj]….Sure… but isn’t everyone who’s not living in a cave aware of that at this point?[/quote]
Amazingly, no. If you only read and heard our public officials from the Treasury and Federal Reserve and so on…[/quote]
Yeah, but who believes any of that baloney? The blogs, even the MSM is on top of this issue…
I think most folks know that the losses are being spread out (although the exact degree to which this is happening is debatable and only knowable in hindsight) and that taxpayers are financing the effort, in one aspect or another.
Do people really believe what Obama, the Treasury, the Fed, etc. say? I think we’ve been beyond that for some time now.
Yeah we moved beyond that
Yeah we moved beyond that when Cater tried to reign in inflation and energy consumption and Reagan smashed him in the 80 election.
No wait, it was Nixon closing the glod window.
Oh wait, it must have started when LBJ wanted guns AND butter.
Perhaps it was the establishment of the Fed?
Nah, humans are stupid, most of them anyway. Most of them weren’t paying attention during the halcyon days of the 90’s either. The only difference is at that point truthiness didn’t seem as important.
As to me, I believe. I do truly believe! Not our elected leaders of course, but I do believe. I believe my ox is being gored, but then we’ve covered that many times already…
Josh
PR (principal reduction)is a
PR (principal reduction)is a PR (public relations) excercise like fake unemployment numbers and the governments “efforts” to create jobs.
It makes people feel better if they think the big mean banks are being forced to gift people $100ks at a time.
Lets get real here, the losses are going to be recognized, we can do it while preserving the chains that cement the banks control over us (sanctity of contracts) or we can have an unprecedented event where the Gov. all of a sudden decides to give us common folks gifts gallore as if we were bankers. The resulting PR and canceling of contracts would set in motion an unending chain of lawsuits to get out of any uncomfortable contract in existance.
Car losing too much value? Enter crafty lawyer using precedent of PR reduced mortgage contracts.
Lease squeezing the bottom line too much? How can you be unfairly singled out as the only chump to be expected to honor your contract?
Yeah right…Banks and the Gov. they control are going to voluntarily choose to destroy their profit chanel and control over us. Good luck with all that.