Homeowners Lobby for Foreclosure Registry
I am sharing a couple of links to an interview I did yesterday on National Public Radio with Alex Cohen, host of “All Things Considered.” The topic of discussion was the proposed foreclosure registry in San Diego, aimed at reducing blight across bank-owned single family homes. This is a general article about the proposal, and this is the actual podcast. My radio interview starts at 1:07:20 on the MP3 file.
Inside the Fed in 2006: Missing the Coming Crisis
Minutes recently released from the 2006 meetings of Federal Open Market Committee (FOMC) offer some disturbing insights into the failure of Fed officials to understand how deeply intertwined the housing sector and financial markets are. This New York Times piece goes into much detail regarding this and other less-than-flattering aspects of these meetings. While residential investment represents a tiny four percent (4%) of Gross Domestic Product (GDP), it has far reaching backward- and forward-linkages into many other components of GDP, such as construction, construction materials, durable goods, home furnishings, brokerage and financial services. For this reason, it is often said that when it comes to the strong effect residential investment has on the economy, that housing is the “tail that wags the dog.”
Home Price-to-Rent Ratios Show Signs of a Bottom
When evaluating where we are in the housing cycle, it is often useful to evaluate fundamental valuation metrics and compare current trends versus historical averages. Below is a graph (click to enlarge) depicting the national price-to-rent ratio, which depicts how homes are trading relative to their rental values. This metric is similar to the P/E (price/earnings) ratio typically used in analyzing the stock market.
This graph uses the Case-Shiller Composite 20 and CoreLogic House Price Index, and sets the baseline period at January 1998, which is assigned a value of 1.0. The current ratio (as of October 2011) on both indices is at 2000 levels, indicating that we are very close to long-run historic average metrics. While foreclosures/short sales (lagging economic indicators) still account for a significant share of existing home sales, the good news is that delinquency rates (leading economic indicators) are gradually diminishing. As such, we can expect home prices to bounce around gently for several months, then gradually start to recover based on improving fundamentals.
“Foreclosure-Gate” Impacting Home Sales
This New York Times piece, written by Andrew Martin and David Streitfeld, highlights the latest “foreclosure-gate” debacle — that is, the shoddy preparation of mortgage documents which has stalled foreclosures in 23 judicial foreclosure states — and the effect it has on home sales. While the article focuses on sales declines, it altogether ignores the issue of price stability. With fewer homes released into the market, supply is constrained, creating a bit of temporary price stability that otherwise may not have existed. Either way, like most efforts under the current administration, this series of events will simply slow the decline to where the housing market will end up anyway. Here’s a link to the article:
http://www.nytimes.com/2010/10/08/business/08frozen.html?partner=rss&emc=rss
California Delinquencies Recede
I am quoted in today’s Los Angeles Times, on a piece by E. Scott Reckard related to a slight decrease in California homeowner delinquencies. In a separate report, the Mortgage Bankers Association announced in its Q1 report that delinquencies nationwide were slightly lower while foreclosures were slightly higher, indicating that we are gradually working through the logjam of excess shadown housing inventory. All good news. Link below:
http://www.latimes.com/business/la-fi-0520-late-loans-20100520,0,7557172.story
The “Toxic Twins” – Reforming Fannie and Freddie
If you only read one article out of each day’s Wall Street Journal, select something from Review & Outlook at the back of Section A. I particularly enjoyed yesterday’s editorial on the need for reform of the GSEs, addressing a recent proposal by GOP Senators McCain, Shelby and Gregg. The essence of the argument is that no financial reform is adequate so long as it exempts Fannie Mae and Freddie Mac, two of the biggest culprits in the housing meltdown. In an attempt to wind down government support for these entities, the McCain proposal seeks to shrink the size of their portfolios, increase capital requirements, and repeal the infamous affordable housing mandates which dramatically increased subprime exposure.
The GSEs have had a host of problems, the most significant issue of which is the asymmetric privatization of gains and socialization of losses – that is, “crony capitalism.” Further, losses to these GSEs are effectively off-balance-sheet, and thus their expected $380 billion budgetary impact is hidden from the government’s books. If we are to see meaningful financial reform, we must address the GSEs role in the housing bubble and create a structure where these entities are left to stand on their own two feet. Link below:
http://online.wsj.com/article/SB10001424052748703961104575226192386797952.html
The Crisis of Credit – A Short, Humorous Video
I had stumbled upon this great little video a while back, and have been sharing it with many of my students, particularly those new to real estate and the secondary markets. It provides a very entertaining, yet fairly factual account of the events that led to the collapse of the financial markets toward the end of 2008. It was created by Jonathan Jarvis, a design student out of Pasadena, as part of his graduate thesis. Perhaps a tad simplistic, but still conveys many key points. I particularly get a kick out of the “subprime family” caricatures. I hope you’ll enjoy it as much as I do.
HAMP = FAIL: 32% Success Rate is Good Only in Baseball
Today the Treasury released the February 2010 Making Home Affordable (aka HAMP) Servicer Performance Report, which depicts very informative statistics on the success of the program to date. I decided to do a little digging, since the academic quarter at UCLA ended today and I had a bit of free time…
If you look at page 4 of the report, you will see that we have reached a cumulative total of 1,094,064 trial modifications through the end of February 2010. The success of this program, however, is dependent largely on the percentage of trial modifications which are converted to permanent modifications, a step which requires 90 days of solid borrower performance under the new modified terms. Thus, we need to evaluate those trial modifications which are at least 90 days old, taking us back to November 2009. At that time, there were 822,075 trial modifications. Of those, 32% have achieved permanent status. I did a little math to get the breakdown: 168,708 (20.5%) are “permanent modifications” and 91,843 (11.2%) are “pending permanent modifications.”
That’s great, so what about the remaining 68%? I bet it’s safe to say that this is the redefault rate. A bit of fishing may help out. Hmmm…on page 6, they tell us that a WHOPPING 54% of modifications were made due to loss of borrower income! So what difference does it make whether the interest rate is 7% or 2%? Out of work borrowers still can’t make the payments, and this is the fundamental drag on today’s housing market. No window dressing can ever hide the fact that incomes are the only real cure for an ailing housing market. Link below:
http://www.makinghomeaffordable.gov/docs/Feb%20Report%20031210.pdf
Median Home Price Falls Two Months in a Row
David Haldane’s piece in this week’s Los Angeles Business Journal discusses the continuing decline in local median home prices. Haldane quotes me fairly liberally, and then in the end, pits my views against my good friend and colleague Chris Thornberg. And all along I thought I was the pessimist. Link below:
http://www.labusinessjournal.com/article.asp?aID=145424
Kato Kaelin Was Ahead of His Time – Live at Home Without Making Payments
Alana Semuels of the Los Angeles Times wrote yesterday about an emerging trend in distressed residential communities: banks allowing defaulting borrowers to stay put in their homes while making no payments.
The logic is that allowing borrowers to stay put reduces the likelihood of vandalism and protects the value of the bank’s investment, essentially allowing borrowers to act as caretakers of the property. At the same time, banks can explore various avenues in an effort to comply with government pressure to modify loans and keep people in their homes. Finally, with a glut of distressed inventory, banks are loath to dump too many homes into the market for fear of further depressing prices. According to the article, in the Inland Empire, over 100,000 delinquent borrowers are living rent-free. Link below:
http://www.latimes.com/business/la-fi-squatters27-2010feb27,0,3096300.story