Real Estate Blog

Good grief, I am in slow motion this month.

The Federal Open Market Committee kept the rate at 2% for the second straight meeting yesterday. The WSJ breaks out the announcment FOMC statement in a regular feature called Parsing The Fed.

Hint: Falling Oil Prices AND Falling Housing Prices

Two meetings ago, I suggested the Fed would hold for a while. I’ll stick to that with the slight modification that I would think they will raise rates after the November election. It’s a tough call because inflation concerns, while real, are…well, inflated.

Mortgage rates are not doing much and banks are being forced to enjoy the spread between what they can borrow from the Fed (federal funds rate) and what they can lend (mortgage rates). The large losses are likely being released by financial institutions piecemeal: so as to not scare their stockholders combined with the lack of mortgage rate reduction suggests a lot more losses that are going to be announced over the next few quarters.

On top of it, a bleeding Freddie Mac will need to capitalize too.

Forget drinking milk, here’s how to win at rock, paper, scissors.

Excerpted from:
[FOMC 2%] Milking The Pause

The Federal Reserve announced changes to its emergency lending window for financial institutions today.  The changes extend the repayment period for the loans and the duration of the program among others.  The lending window allows banks to borrow from the Fed for short periods of time while putting up securities (such as mortgage backed securities, etc.) as collateral for the loan.  Banks have used this lending window to alleviate the strain on capital exacerbated by the credit crunch.

From Market Watch:

Advertise Here

The Federal Reserve, continuing to combat the enormous stresses that have engulfed financial markets, announced Wednesday several steps designed to enhance its emergency lending program for banks and primary dealers.

For banks, the Fed said it would lengthen some of the credit it extends to 84 days. At the moment, the loans have been for 28 days.

For broker dealers that serve as primary dealers of Treasury debt, the Fed said it would introduce auctions of options on $50 billion of loans. The options could be exercised if needed in periods of elevated stress in months to come, such as the end of financial quarters.

The Fed also said it’s officially extending its primary-dealer loan program to the end of January from mid-September. This step had been previously telegraphed by Fed Chairman Ben Bernanke.

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Fed extends emergency lending window

Fannie Mae and Freddie Mac are government sponsored enterprises (GSE). Yet they have shareholders and are profit driven. They play a critical role in the stability of the US mortgage market (and housing) by promoting liquidity, helping mortgage rates and availability consistent throughout the country.

One of the things that made them have a competitive advantage over others was their inferred backing by the federal government.

In the New Yorker this week, James Surowiecki writes in his column Sponsoring Recklessness

The two companies have long been required to tell investors that their securities are not guaranteed by the federal government. But in the financial markets everyone has always assumed that this demurral was just window-dressing, and everyone, it turns out, was right. Last week, when fears of a possible collapse of the two companies threatened to spark a major financial crisis, the Treasury Department and the Federal Reserve quickly came up with a rescue package. What had been an implicit guarantee became an explicit one

Fannie was privatized in 1968 so president Johnson could move the debt off the federal books to help sell the Vietnam War budget, not to help the mortgage market.

Help to the consumer in terms of their impact on keeping low mortgage rates may be exagerated.

A paper by the economist Wayne Passmore, of the Federal Reserve, suggests that in fact Fannie and Freddie have only a small effect on the interest rates that homeowners pay, saving them less than one-tenth of a percentage point.

The GSE self-preservation mechanism has been aggressive lobbying using former high placed government officials, very effective in enabling them to grow to $5 trillion in mortgage debt. A blip on the radar could cause more damage than Congress is able to burden the taxpayers with.

More than $10 billion in losses in the past two quarters, the GSEs (and FHA) are looking for more money to capitalize to help bailout the housing market at Congress’ urging.

Holden Lewis over at Bankrate wrote a great post on this last week called The GSEs and moral hazard.

Daniel Gross, my friend over at Slate and Newsweek, makes a better argument for the help GSEs provide to the taxpayer/homeowner suggesting that a bailout of the GSEs would actually be a bargain.

I guess I have a hard time accepting that anything the federal government would do would be a bargain and the long term concept of nationalization of the GSEs would be cost effective, but hey, I don’t have to refinance my mortgage.

View original here:
[GSE Reminder] Hey, There Are No Guarantees

The Federal Reserve finished crafting their subprime mortgage rules regarding Truth in Lending called Regulation Z. I am doubtful that this rule would have been updated if we weren’t experiencing the current mortgage market turmoil.

Because this is such an important issue, it will take effect on October 1, 2009 (more than a year from now.)

“The proposed final rules are intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership,” said Federal Reserve Chairman Ben S. Bernanke. “Importantly, the new rules will apply to all mortgage lenders, not just those supervised and examined by the Federal Reserve. Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers,” the Chairman said.

Ask anyone whether they thought these types of rules would already be on the books (for high priced mortgages - 1.5% above the “average prime offer rate”) - here are some excerpts:

• Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.
• Require creditors to verify the income and assets they rely upon to determine repayment ability.
• Ban any prepayment penalty if the payment can change in the initial four years.
• Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans.

And here are rules for all loans, not just high priced:

• Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home’s value.
• Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees.
• Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling, such as a home improvement loan or a loan to refinance an existing loan.

Is it just me or do these rules seem crazy obvious? Why aren’t they on the books already? Why on earth do these rules only apply to subprime mortgages? Not Alt-A or Prime?

Speaking of scapegoating subprime, and something about the squeaky wheel getting the grease, lets talk oil and the evils of the dreaded speculation.

And the tale of two economies…

Highlights of Regulation Z [Federal Reserve]

The rest is here:
[Subprime Truth In Lending] From A To Regulation Z

Ben Bernanke reported to Congress that he expects turmoil in the housing and mortgage markets to continue through 2009 and has asked Congress for increased Federal Reserve powers to help address the market problems.

They’re still overly optimistic.  The plain fact is that Option ARM resets are going to start crashing on the shores of the housing market with grave effect.  Unless the government decides to offer wholesale debt forgiveness and cheap refinancing options to these note holders were going to be in for a lot of pain through 2012.

From the New York Times:

Ben S. Bernanke, the chairman of the Federal Reserve, publicly indicated on Tuesday that he believes the problems will persist into next year when he outlined a series of steps the Fed is considering in the coming months.

One such step would extend low-interest lending programs to Wall Street’s largest investment banks into next year. The programs, one of which was set to expire in September, can continue only if the Fed issues a finding that there are “unusual and exigent circumstances” that justify them.

Mr. Bernanke also recommended that Congress grant the Fed broader authority to monitor and supervise the financial markets to assure greater stability in the future. But with time running out on this session, lawmakers are unlikely to adopt such legislation before next year.

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Fed: Housing Trouble through 2009

Real estate -> territorial -> turf -> self-preservation -> wide knobby bike tires

Ok, so the timeline doesn’t work, but hear me out. I used to fix my own flat tires, now I rely on the bike shop so I don’t have to get dirty.

As I have mentioned on more than one occasion, government on a federal level seems unable to ease the credit/housing market pain. Congress can’t seem to move forward with housing relief in any meaningful way. The Federal Reserve missed the signs of growing housing stress and took action too little too late. The GSEs seemed to be part of the problem as enablers of poor lending practices (made painfully apparent with its agreement with NY AG Cuomo).

GSEs Fannie Mae, Freddie Mac, plus FHA were designated as the housing saviors for Congress to rely on in the stimulous package. They’ve lost more than $15B in the past 6 months by my calculations and everyone is rooting for them.

On a monday, a comment by a Federal Reserve official and a Lehman analyst sent GSE stocks plummeting, an illustrating just how nervous investors are about the effectiveness of the GSEs role in all of this is.

Aside from letting time pass, I am fresh out of ideas, and I have resorted to incessant whining so watch out.

The problem is more complex than Congress can wrangle an effective compromise out of, and the OTS is still angry about the Cuomo deal with the GSEs.

It seems like a government solution’s time has passed.

On the bright side, the Tour de France, my all time favorite sporting event after March Madness, might have a prayer of being drug free this year or close to it. Of course, like housing, there is a turf war between the Tour de France and the International Cycling Union over their more stringent testing policy. Coincidentally, none of the usual cycling stars are in the race.

Perhaps an unknown, generic solution to housing may appear at some point. The current situation is over the heads (and handlebars (sorry)) of the usual government participants until they can get together.

Here is the original post:
[GSE Flat] Reality Sets In For Those Wide Knobby Tires

The Federal Open Market Committee was widely expected to raise rates a few weeks ago amid growing concerns over inflation. However, that concern eased in recent weeks as it became apparent that the overall economy was still weak and the rate was left unchanged.

Repeat of last month’s hint: Housing AND inflation

I would doubt there will be a change in the federal funds rate until after the election - a coincidence I am sure [wink].

Here’s a great discussion on Fedspeak and the Feds’s political connections by Holden Lewis over at Bankrate.

But assuming not much fixing happens until after the election, can the next President actually do anything about the state of the economy?

Here are the minutes from the last meeting:

Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

Of course, as Congress struggles to pass legislation to ease some of the homeowner pain (which, as a body of government, I feel the issue is far too complex for them to arrive at an effective solution because excessive compromise is the result), mortgage debt is snowballing.

Hurry up.

Although 71% of Americans describe the federal government’s economic policies as bad, a recent Harris Poll found that More Now Believe Their Household’s Financial Condition Will Improve in Next Six Months.

Huh?

I think it’s not just the Fed that’s unsure about the economy at the moment.

View original here:
[Deflating Expectations] FOMC Shifts To Neutrally Unsure

…and those expectations are continued weakness.

The focus on oil and fuel efficiency of cars seems to be taking over the BBQ conversation from housing these days.

the relationship between consumption and m.p.g. is curvilinear, and there is a greater savings at lower m.p.g.’s. Over 10,000 miles, the 28 m.p.g. car uses 198 fewer gallons than the 18 m.p.g., more than double the savings of the 50 m.p.g. car compared with the 34 m.p.g. one.

With this new measure, the researchers suggest, consumers would more easily see the value of swapping an inefficient car for one that is even just modestly more efficient.

Speaking of curvilinear relationships, check out this recent ad in Craigslist. A friend of mine is having great difficultly finding an apartment. Apparently this landlord has the answer.

Today is just full of fun announcements…

Isn’t it summer Being outside, enjoying the sunshine? Optimism? Consumer Confidence plunged to a 16-year low in May.

As expected, the S&P/Case Shiller Index showed continued decline in April, the beginning of the “spring market” when sales activity is most robust. In fact, it showed a record decline for its 20 year history. I think there was hope brewing that the housing market is approaching bottom. It’s hard to see that with a 15.3% annualized decline and a 17.8% decline from peak.

Of course, OFHEO released their numbers today as well and guess what? OFHEO shows the housing market is declining 4.5% annually (over the same period that Case Shiller measures). That’s because CSI includes the entire price spectrum and OFHEO excludes non-conforming mortgage sales. It is interesting how much the data gets skewed by the high end market. Based on the difference between these two indexes, the high end is tanking (no pun intended).

Tomorrow, the FOMC announcement is on tap. The futures markets are betting on no change in rates. I would think further rate cuts will hurt the economy by empowering inflation. Rate cuts in the past year have not helped housing in any measurable, even curvilinear way.

At least not enough to get pumped up about (sorry).

Continued here:
Curvilinear MPG With Benefits, While Confidence, CSI and OFHEO Meet Expectations

Source: NYT

Click here for full sized graphic.

In this week’s Off The Charts column, Floyd Norris talks about how inflation has now become the key point of credibility for the Fed. Conventional wisdom says the Fed won’t raise rates in an election year so you could see an aggressive stance in the late fall.

It still seems unlikely that the Fed will actually raise rates in an election year when the economy is probably in recession. But the surprisingly strong increases in producer prices for May, reported by the government this week, increased the pressure on the Fed at least to sound tough about inflation.

In other words, the economy is weak and the Fed can’t raise rates or it will hurt the economy so they need to talk a tough line. A real rock and a hard place.

Unable to raise rates because of a fragile economy, policy makers have to resort to jawboning.

It’s not that they’re insincere about resisting “an erosion of longer-term inflation expectations,” as Federal Reserve Chairman Ben Bernankesaid last week. It’s just that they would prefer not to have to do it now, especially when they expect inflation to recede as demand weakens.

After a brief expectation of an increase, the Fed is likely to keep rates the same this week at the FOMC meeting.

And those expectations, if proven wrong, will eventually converge with reality.

And reality is that the Fed can only assure the credit markets by projecting an image of control. So, despite the severe problems with credit on a global scale, tackling the inflation risk has taken usurped credit risk as the productive course of action.

Still, questions remain about being inflation hawks.

Indeed, if growth slows, people are not likely to eat less rice or corn. And if they have less money to buy new fuel-efficient cars, they will be more reliant on gas-guzzling clunkers.

Why can’t central bankers distinguish structural problems from general overheating? If your only tool is a hammer, everything looks like a nail. But a deliberately engineered recession will only increase economic suffering.

I love the hammer/nail analogy, in fact I picked up the hammer and saw (sorry).

And finally, there is a difference between managing risk and managing volatility.

RISK management, then, should be a process of dealing with the consequences of being wrong. Sometimes, these consequences are minimal — encountering rain after leaving home without an umbrella, for example. But betting the ranch on the assumption that home prices can only go up should tell you the consequences would be much more than minimal if home prices started to fall.

We’ve known that the Fed would have to deal with inflation (The Rock) after it dealt with the credit crisis (Hard Place). Unfortunately, the aggressive rate reductions have not resulted in lower mortgage rates to help easy the housing market pain being felt in many markets.

Improvement in the credit environment will have to wait. Anyone up for Rock, Paper, Scissors?

Just add water: applying water to a rock and a hard place results in tubular commuting (hat tip to Dave Barry).

Go here to read the rest:
Jawboning The Inflation Rock And A Hard Place

One of the remarkable things about the Fed’s recent monetary policy was that they opted to deal with the housing market first, and then inflation. Prior to the credit crunch summer of 2007, the fed was concerned about the economy overheating. And then it realized too late that the housing market was likely to be the proverbial straw that broke the economy’s back.

Fix housing by lowering rates hoping mortgage rates would follow. Deal with inflation later.

The end result? The sharp drop in the federal funds rate since last summer has done nothing for the housing market. It’s all about credit or lack thereof.

Now the concern going forward is inflation, which is sure to occupy the conversation for the next several years.

Inflation is a rise in general level of prices of goods and services over time. Although “inflation” is sometimes used to refer to a rise in the prices of a specific set of goods or services, a rise in prices of one set (such as food) without a rise in others (such as wages) is not included in the original meaning of the word. Inflation can be thought of as a decrease in the value of the unit of currency.

Today’s “Producer Price Index numbers show a sharp increase overall, but mild increase on core (excluding food and energy - which is a mystery to me in its relevance beyond academia since consumers eat and buy gas.)

The Producer Price Index advanced 1.4 percent in May, its fastest pace in six months and another troubling sign that inflation is worsening, the government said Tuesday.

Many economists, however, prefer to measure price increases in products other than energy and food. While this gauge, called the “core” index, does not measure the full effect of inflation on Americans, it does offer a guide to how long inflation might linger. For May, core producer prices rose at a tepid pace, 0.2 percent, in line with economists’ expectations.

What does an inflation threat mean to housing? It likely means higher mortgage rates (they are rising now) which will slow down the recovery.

Here’s a few inflation articles burning a hole in my pocket…

The Fed Chairman ascribes to “inflation targeting” which basically says that if inflation rises above a set level, the rate is raised, no matter what the source. Here’s an interesting paper on why inflation targeting doesn’t work, called, oddly enough: The Failure of Inflation Targeting. Quite often the source of inflation, such as food or oil, is imported and beyond the control of a country’s government.

Elizabeth Spiers of Fortune Magazine wrote an interesting piece called The great inflation cover-up which examines the disconnect between reality and CPI. Many of us are seeing rising prices first hand (I paid $4.99/gal at the pump last weekend) and yet the CPI stats reported seem very mundane. This theme seems to go along with many “national” housing stats like housing starts (released today) and existing home sales. There is a real disconnect between how information is reported and what the consumers “on the ground” experience is. Possible explanations:

Paranoia - absolutely real and I am guilty as charged. Bring on the “red light” theory. You only remember how many red lights you hit while driving your car.

Reliance on core inflation - eliminates short time volatile components like food and energy. Inflation is inflation in my book. When we say core inflation is tame and I am paying $4.99 for gas, its simply a misleading indicator for consumers.

CPI simply isn’t accurate - There are some schools of thought that CPI overstates inflation. ergo the 1996 Boskin Commission and some feel its significantly understated (saves the Feds on social security increases and the conversion to “rental equivalent” for housing in 1983 makes me, well, paranoid.)

Pollyanna Creep Economy
And while we are talking about accuracy, inflation could very well be much higher. Here’s an interesting Harper’s article from last month’s issue called Numbers racket: Why the economy is worse than we know (Free version). The article pokes holes in the alphabet soup of indicators such as CPI, GDP, unemployment, etc. and references a web site called ShadowStats.com

So what’s the point to all this (besides using up my collection of inflation articles I was saving for a rainy day and it’s sunny out right now)?

If we are trying to restore investor confidence in the credit markets, it is tough not to be disillusioned by the growing awareness of the lack of statistical accuracy available to consumers (and the assumption that these figures are also relied on by fiscal policy makers). I relate this first hand to my appraisal profession where I am struck by the fact that banks actually read the appraisals that are submitted to them now versus a few years ago, when nobody cared about the reliability of valuation.

Paranoia strikes deep (for what it’s worth)…

Speaking of paranoia, we now know that using IM is more efficient than email.

More:
[Inflation] Be Paranoid, Or Deal With It

This report is provided by Jeffrey Otteau of the Otteau Appraisal Group who also authors a series of widely followed quarterly market reports on the New Jersey real estate market. This information is collected from various sources including Boards of Realtors and Multiple Listing Systems in New Jersey.

I have known Jeff for many years and consider him one of the leaders in the real estate appraisal profession. He has taught me a lot about quantitative real estate market analysis.
…Jonathan Miller

HOUSING MARKET SHOWS EARLY SIGNS OF STABILIZATION

April home sales increased from the March pace for the first time since 2005 in what may be a sign that market stabilization has begun. In April, New Jersey contract-sales activity increased for the 4th consecutive month and recorded a 9.3% increase above the March level. By comparison, sales activity declined during April in both 2006 and 2007.

Also significant is that number of homes for sale rose modestly as Unsold Inventory increased by only 4.5%, less than normal for the month of April. As a result of these trends the Projected Absorption of homes offered for sale now stands at it’s lowest level of the year reflecting a 10.0 month supply. By comparison, absorption stood at 12.7 months in January, 11.0 in February and 10.5 in March.

Any determination as to whether these trends actually signal the beginning of a market recovery hinges on the momentum carrying through for the remainder of the 2008. There are ,however, a growing list of positive factors for the housing market which include increased housing affordability due to lower home prices, favorably low mortgage interest rates and massive pent-up demand due to reduced purchase activity.

To keep things in the proper perspective however, it is clear that the housing market remains in the grip of a dramatic correction and will not see rising prices until Unsold Inventory levels have been reduced significantly. Until then home prices will likely drift slightly lower, although at a slower pace than the past 2 years. But a bottom to the housing downturn may be forming which would be a first step towards recovery. Potential home buyers who have been delaying their purchase in an attempt to ‘time the market’ should consider whether that time has now come. This is because the greater risk in delaying is the likelihood of higher mortgage rates in the future due to the inflationary pressures of high oil and food prices which will erase any potential savings from future price declines. Supporting this view is recent remarks by Federal Reserve Chairman Ben Bernanke indicating that future interest rate cuts are not likely due to a need to guard against inflation. Our analysis of the cost-benefit relationship of delaying a home purchase indicates that the added monthly cost attributable to rising interest rates is likely to be greater than the savings generated by any further price declines. Thus, the next 6 months will present a rare combination of low interest rates, low home pricing and a wide selection of homes being offered by motivated sellers. We’re all likely to look back five years from now and conclude that 2008 was a time when Smart Buyers took advantage of this unique opportunity by locking in both low prices and low interest rates. I’m reminded of the axiom that the right time to sell is when everyone else is buying, and the right time to buy is when everyone else is selling.

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State Of New Jersey: Otteau April 2008 Contracts

McLEAN, VA — Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey (PMMS) in which the 30-year fixed-rate mortgage (FRM) averaged 6.08 percent with an average 0.6 point for the week ending May 29, 2008, up from last week when it averaged 5.98 percent. Last year at this time, the 30-year FRM averaged 6.42 percent.

See original here:
Mortgage Rates Rise to 11-Week High on Inflation Jitters

Periodically, I like to round-up some of my favorite recent blog posts or articles that are housing market/credit/economy related. It’s journalism heaven: housing provides an endless supply of stuff to write about and this week was no exception.

Credit:
[Housing On Fire] Blogoshere Hose-Down, Heaven Can Wait Edition

Despite all the grim news about gas prices and recession, there are more than a few encouraging signs popping up in the national economy that aren’t getting a lot of attention.

Read the rest here:
Real Estate Outlook: Encouraging News

The Economist magazine appropriately named Map of misery article on US Housing showcases a map of OFHEO data that chronicles the change in housing prices by County/State.

The pain of America’s housing bust varies enormously by region. Hardest hit have been the “bubble states”—California, Nevada and Florida, and parts of the industrial Midwest. The biggest uncertainty hanging over the economy is how red will things get.

Yesterday I joked about Bernanke using heat maps and The Economist saw the humor in it as well.

Sounding more like a cartographer than a central banker, Ben Bernanke this week showed off the Federal Reserve’s latest gizmo for tracking America’s property bust: maps that colour-code price declines, foreclosures and other gauges of housing distress for every county. His goal was to show that falling prices meant more foreclosures, and to urge lenders to write down the principal on troubled loans where the house is worth less than the value of the mortgage. His maps—where hotter colours imply more trouble—also make a starker point. The pain of America’s housing bust varies enormously by region. Hardest hit have been the “bubble states”—California, Nevada and Florida, and parts of the industrial Midwest. The biggest uncertainty hanging over the economy is how red will things get.

But can a “bottom” be projected?

One of the most favored ways to measure a housing market by The Economist magazine is to track the ratio of rental prices to sales prices. From 1960 to 1995, rent/price was 5% to 5.5%. When prices soared over the last decade, the ratio is 3.5%. In order to get the ratio back up to 5%, prices have to drop 10% to 15% assuming rents are flat. It’s lookin’ like at least 2010 before this happens.

In terms of projecting when we will see an end to the weak housing market, try correlating it with handgun accuracy. NYC police officers hit their targets roughly 34 percent of the time. Of course, when they fire at dogs, roughly 55 percent of shots hit home.

Go here to see the original:
[Mapping Misery] Only 10-15% To Go!