Archive for bubble

« Older Entries

What the Economy Needs Now is More/Faster Foreclosures

Posted in Just the Facts, Stories with tags , , , , , , , , , , , on April 15, 2010 by marcitz

Recently I read the following quote about how to “save” the housing market and the overall economy:

Indeed, Casey Mulligan, an economics professor at the University of Chicago, argued that both the Bush and Obama administrations had focused too much on making house payments affordable, based on income levels, and not enough on reducing debt.

Here’s a great way to reduce debt, GET OUT OF IT. 

For some reason all those people who are walking away for their houses (or are threatening to do so) seem to understand that much better than the government who keeps trying to keep people in debt.  Further proof that people understand this is shown by the high rate (>50%) of re-defaults by people who were already helped once. (high recidivism rate). 

Given that the public is embracing this approach to solving their own problems maybe the solution should be making it EASIER for people to actually walk away.

Here is why this is a potentially great (and new-fangled) solution.  At the heart of the current logjam is that different people are upset about approaches to saving the economy for different reasons.  Here are the most prevalent of those arguments:

  • Bailouts help the evil banks by having the government make their bad (or worse yet fraudulent) investments almost whole.
  • Bailouts reward individuals who were irresponsible.
  • Not propping up housing prices will keep unemployment high because any economic recovery will be hampered.
  • Taxpayer money shouldn’t be used to help those (individuals OR banks) who took egregious risk with no downside.

So if we look at making it easier for people to walk away everyone gets a sense of satisfaction (but also has to contribute to the pain). Specifically:

  • Banks will have more foreclosures on their hands (pain) but they won’t have the overhead of formal foreclosure proceedings because the owner willing ceded the property (benefit).  Also they won’t face increasing pressure from the government to abrogate contracts (and deal with the lawsuits that will inevitably follow) with their investors.
  • Homeowners who walk away give up the asset they treasured (pain) but get to move on to a life where they don’t have day-to-day financial worries of this magnitude (benefit).  Also they can quickly make amends for that one-time lapse in judgement like a hangover cure or the morning-after pill.
  • Unemployed homeowners get the added benefit of being able to go where the jobs are and NOT be stuck in a house they can’t afford in an area where they can’t work.   Their pain and their benefit is having to relocate.
  • Taxpayers – In the short-term home prices will drop (pain) but will quickly recover as a new wave of buyers can finally jump in and this won’t cost them a single nickel (benefit).

How can this be accomplished?  The government needs to create a “credit amnesty” program where people have a fixed time  (6 – 12 Month period) to walk away from their houses without any penalty on their credit reports and no taxes on forgiven debt.  Just write it off and start over.  They also need to find a way to faciliate faster foreclosures.  Finally (and there would be some additional taxpayer pain in this) the government could offer tax credits for moving expenses.  This has two benefits.  One it facilitates the move for both sellers (underwater homeowners) and buyers (to pick up those homes that are now available but in a different area), not to mention it funds jobs for movers.

The added bonus to this plan, like King Solomon dividing the baby,  is that the truly committed long-term homeowner will surface.  They are the ones that will, of their own accord, make whatever sacrifice is needed to keep their home.  Those that aren’t committed will simply take the opportunity to walk away and start anew, also a laudable goal.

Granted I’m not the biggest fan of this idea but in the spirit of shared sacrifice its the best I’ve seen so far and much better than any artificially cramming down of interest rates and principle balances.  So I vote for this.

(Follow Me on Twitter at watchingmarcitz) 

(Having problems with your Toyota.  Learn how to get more for your troubles)

13 Comments »

Economic Racism is Alive and Well at the New York Times

Posted in Just the Facts, Stories with tags , , , , , , , , , , , , , , on April 3, 2010 by marcitz

My love-hate relationship with the New York Times continues.  Recently an article deal entitled Help Paying Mortgages Elicits Anger (by Tara Siegel Bernard who can be emailed at tsbernard@nytimes.com)  tried to make the point that fairness isn’t important what needs to be done should just be about the greater good over the long term.  Unfortunately, because of the prevailing and irrational home ownership bias in this country all assumptions were based on just that, preserving home ownership even if its bad for the owners themselves.   In pulling apart the arguments in the piece I found a new way to look at this homeownership bias.  It is actually a form of “economic racism” that, in a post Civil Rights world, fills the racism void.

For me the AHA! moment was when I read this quote that was designed to defend government bailouts of homeowners –   “It (the fall in house prices) shouldn’t be something people should be punished for,” said Robert Shilller.

AHA! Having some one leave a house they couldn’t afford and instead live in some other, presumably more affordable rental property is PUNISHMENT!  There it is – that subtle nasty  undercurrent (“economic racism”) that “renting is bad” that fuels even Robert “Da Man” Shiller’s argument.  Ms Bernard even says  ”a government should consider the greater good over the long-term” in which she is implying that home ownership is the “greater good”.  Categorically it is NOT true as per these sources:

Don’t get me wrong.  I think home ownership is a fine tool for many people (those with enough means to support all the ancillary costs of home ownership in both money and time, those for whom mobility is not an issue) but renting is a fine tool for many others (those with less means, who need mobility, don’t have time/money for all the home ownership maintenance issues).  Neither one is categorically better all the time and their mix of appropriateness changes as prices in both markets ebb and flow.

Recently (in the New York Times) there was a great piece (the “love” in my “love/hate” relationship) that pointed out that Tea Party arguments against health care reform are really about racism and having to embrace a new world of Blacks, Latinos and Women .  I would like to argue that Ms. Bernard’s (and Dr. Shiller’s and most other “pro-housing”  arguments) are about fear of embracing a world of renting as opposed to owning.  Like white majority, homeownership has been the goal and desire of those in power over the past 80 – 100 years at least.   It may be time for a change that no one wants to embrace.   Not surprising it was our current President who was the first one  to try and  find a way to phase out the mortgage income tax deduction.

Unfortunately the “greater good over the long-term” is that everyone gets over their social security blanket (or economic racism)  that home-ownership is the only valid and right way of living (it’s the “white makes right” equivalent of modern US economics).  Unfortunately the only way to do that is to encourage people to try other forms of living to see that in many (but not all) cases those other ways are actually better but that is not what is happening.  If you have easy access to a mortgage hammer then everything becomes a home ownership nail and we’ll never know.  I HAVE A (different view of the American) DREAM!!!…

(Follow Me on Twitter at watchingmarcitz) 

(Having problems with your Toyota.  Learn how to get more for your troubles)

11 Comments »

Why Higher Prices are a Bad Sign

Posted in Just the Facts with tags , , , , , on October 11, 2009 by marcitz

In the San Francisco Chronicle this week there was an article that tried to find a positive sign of a housing recovery from the fact that house listing prices had started to rise.  The article did point out that this was strange given that all other stats (selling price, # of sales, and price per square foot) had been falling at the same time.  Still the general consensus was that a good thing was happening and I quote “this optimism is a trend for the area…”  Try again…

What is really going on here is quite a bad sign and represents the last ditch efforts of sellers to deal with increasing buyer negotiating power (and proof that they finally accept the switch to a “buyers market”).   Specifically sellers now know they will be forced to negotiate A LOT more than they thought up until now.  In fact they all have in their heads a percentage (much larger than before they adopted this strategy) of how much they will have to lower the price of their house to get the deal done and they believe that is an absolute.  As a result the only way to combat that is to raise the price so when the required and large discount happens you still can capture some upside.

Here is an example from the recession of 1980.  My father sold window coverings to bring in some money above his teaching salary.  Typically they are priced with 50% margin (so window blinds he lists for $100 cost him $50).  He carried sheets that had these list prices on them and his customers all knew what the margin was (most people assume 50% for most products regardless of the truth).  Then one day his distributor, during the economic downturn of the early 80s,  offered him some “60% markup sheets”.  Simply put these were the same list price sheets but they had a 60% margin built in.  So now the same blinds had a list price of $125.

The result?  Well without saying anything (because of the common market belief in a 50% margin) he could offer his customers 50% off (in theory offering the blinds “at cost”) making them extremely happy and more willing to buy even during that recession.  In reality he still got to pocket 10% ($12.50) margin and no one argued.  Afterall you can’t get something below cost can you?  This was also very believable to the customer because it was a recession so my father should just be happy to sell at cost just to keep his business around, if not profitable.

So that is what is going on here.  Sellers are increasing the implicit markup knowing they have to sell “at cost”.  In this case the “cost” is the minimum price at which the seller is willing to offload the house.  The “markup” is actually the percentage that they know they will have to reduce the price to move the sale given current market conditions.  Like the story above they just pad the “markup” so when that percentage comes off they get to preserve some margin.  Assuming this works.

Don’t get me wrong, when the market does truly recover of course listing prices will rise, justifiably.  The difference  here, however, is that none of the “true” stats (those that represent actual buyer behavior as opposed to seller aspirations and packaging) show this upward momentum.   Remember listing prices don’t actually mean anything.  In the world of economics (as opposed to the world of real estate fantasy) the true “market clearing price” of an object is what the buyer is willing to pay (and actually close the transaction) NOT at what price the seller is initially willing to sell.

So in the end this strategy is a form of seller capitulation and not market improvement.  Sellers now know they must discount heavily (not just a token amount) and are trying to preserve some minimal upside.  Strap in because this ride is a lot longer than most wish to believe.  To the 5 year old real estate optimists in the back seat “no honey, we’re not there yet, why don’t you nap some more.”

8 Comments »

Why Case-Shiller Is A Bit Fucked

Posted in Just the Facts with tags , , , , , , , on October 4, 2009 by marcitz

As the old Real Estate aphorism goes “Only 3 things matter – location, location, location”.  So the issue with relying on Case-Shiller (which has been “growing” for three months – yippity f-ing doodah!)  is that the “city” used for valuation is usually a multi-county location with each location being at a different stage in the price cycle.  The “San Francisco” area ranges from Pacific Heights to the Brentwood suburbs over 55 miles away.  Brentwood may have bottomed but it will take some time for the Silicon Valley and the “City by the Bay” to follow it into the abyss.  Oh and by-the-way Silicon Valley, typically considered Santa Clara county, is not actually in the index.

The recovery that Case-Shiller has been talking about is allowing the far out suburbs to mask further falls in the inner-core. The net result is, as Case-Shiller recovers, people closer to the namesake city buy too soon under the false pretense that their little pocket of the world has improved with the broader index.  Ironically those in the exurbs will now do better than those closer to the city named in the index.

How will prices in the inner core eventually fall into the abyss?  Simple migration.  The cheapest areas will draw from their neighbors (Brentwood from Dublin) lowering the prices for the neighbors as well (as Brentwood represents a “substitute” in classic economic parlance).  Those now lower price neighbors will then draw from their neighbors one step closer to the inner core (Dublin from Castro Valley) drawing down the prices there.  This will then continue  as such – Castro Valley from Fremont, Fremont from Mountain View and finally Mountain View from Palo Alto.  In the end nature abhors a pricing vacuum and one currently exits in the exurbs.  It will take some time before it really sucks here in Palo Alto.  But it will suck!

The net-net is the worst place to buy right now is anywhere near the city named in the index.   Oh and if your not actually in the index then purchase at your own risk.  You say you live in the “San Francisco” area but remember that it is a spiritual and not a statistical distinction according to Messrs. Case and Shiller.

To add to the scary (and highly varied picture) take a look at this chart which shows how wildly different the valuation story is WITHIN  the “San Francisco” area:

http://www.housingbubblebust.com/OFHEO/Major/NorCal.html

Also look at this analysis as why Palo Alto is in for a fall (albeit 2 years later) like Brentwood: http://invisiblerenters.com/2009/06/23/why-palo-alto-housing-will-fall-30-or-more/

1 Comment »

A New Measurement for House Price Declines

Posted in Just the Facts with tags , , , , on August 3, 2009 by marcitz

Given the severity of house price declines it only seems like it merits its own measurement as neither the English system (inches, feet, pounds, etc…) nor the Metric system (meters, kilometers, grams, etc…) can properly convey the magnitude of the fall.  For this I propose a new measurement called the Greenspan which measures the distance between the value of your house at the peak of the market and what it will measure at the bottom of the market (whenever that occurs).

Why call it the Greenspan?  Here are three very sound reasons:

  • “Green” is, of course, the symbol (in the US) of money and wealth.  For example “after the latest economic collapse I have a lot LESS green.”
  • “Span” measures distances and often LARGE ones (like bridges and the distance from one side of the Grand Canyon to the other).
  • “Greenspan” as in Alan Greenspan the person who is significantly responsible for this mess.  It it is time he is honored for his role in this.

As a baseline, a single Greenspan is a 25% fall in value from peak.  Given that the average US market will probably fall by as much as 2 Greenspans in total.  Certain markets (like Vallejo, California) could see a drop of 3 Greenspans.

Remember real estate is local so your Greenspans may vary. 

See how Palo Alto, California is due for AT LEAST a 1.2 Greenspan drop.

1 Comment »

Why Palo Alto Housing Will Fall 30% or More

Posted in Just the Facts with tags , , , , , , , , , , , , , on June 23, 2009 by marcitz

Green shoots, the recovery is here, houses are bottoming!

Not so fast!  Yes many areas may be reaching a bottom but that does not mean that all places have hit bottom.

For example it is believed that housing bubble ground zero locations like Vallejo, California have come close to a bottom.  Therefore, hot areas like Palo Alto, must also be similarly close to that bottom eventhough prices there have not fallen (on a percentage basis) nearly as much.

The typical explanation for the differential treatment is that Palo Alto is desireable and therefore immune to a large price decline. I would like to suggest that its not about “absolute” price but “relative” value.

Yes, a house in Palo Alto will ALWAYS be worth more than a house in Vallejo but I argue that the RATIO of house prices should remain close to constant. If Vallejo rises in value then Palo Alto will rise in value but if you divide the value of a house in Palo Alto by the value of a house in Vallejo the resulting number should, over the long term, be relatively the same. So that is what I did.

Using data from Zillow I took the sales price per square foot of houses in Palo Alto over the past 10 years (2000-present) and divided it by the same metric from Vallejo to plot the ratio. For extra credit I also calculated the ratio of Palo Alto to both Hayward and Mountain View.

Why Hayward and Mountain View? Simply put Hayward is a little closer in and a more rational commute (not many people would think you were NUTS to commute to the Silicon Valley/San Francisco job centers from there). I chose Mountain View because that is the, only slighly less desireable, southern neighbor to Palo Alto.

So here is a picture of what I found:

Price Per Sq Ft Ratios

What does this all mean?  Well let me state one other assumption and that is let’s assume the year 2000 was a ratonal year and that that ratio represents a normal premium of Palo Alto over the other cities.  (older data was not available from Zillow)

Lets divide the chart into 3 segments:

  • 2000-2001 – The “normal” period in which the ratios represent the typical balance.
  • 2002-2006 – The “bubble” in which all hell broke loose.
  • 2007-2009 – The “deflation” of the bubble. (NOTE most people agree that the bubble started deflating in 2006-2007 across the US.)

So in the “normal” period we see the ratios between Palo Alto and its neighbors staying relatively confined (maybe a 5-10% swing at most).  This is what you would expect.

Now if we look at the “bubble” period we see a relatively dramatic drop in the ratio which means that Vallejo and Hayward were gaining on Palo Alto.  Did they actually become more desirable?  Well traffic would go up (more people were moving there driving up those prices) so I would say “no”.  What it really means is that the bubble valuations hit Vallejo first.

Now if we look at the “deflation” period we see the ratio turning DRAMATICALLY in the other direction and well above the historical norm.  This means that either (or both) that deflation hit Vallejo first and the bubble hit Palo Alto second.

One might argue that this means Palo Alto is safe EXCEPT for the fact that the ratio has so dramatically outpaced where it was in the “normal” period in 2000-2001.   If it had returned to the levels of the normal period in 2000 then there would be nothing noteworthy here.  In fact Vallejo returned to almost the exact same price per square foot in 2009 that it was in 2000 where as Palo Alto was still almost double where it was in 2000 as shown here.

price comparison

So what would it take for this ratio to fall back into line (and deflation to hit Palo Alto second)?  Simply put, compared to Vallejo, Palo Alto prices would have to fall 39%.  Compared to Hayward they would have to fall 26%.  This of course assumes that Vallejo and Hayward have truly bottomed out which is probably not the case.  Assuming they have even the most conservative estimate pegs Palo Alto at a 26% fall.

Heck even compared to it’s neighbor Mountain View it would have to fall 11% to come into line with the historical ratio.

In short Palo Alto has some falling to do.  It just was late to both parties.

Got a really fucked computer?  Get it repaired online at support.com

50 Comments »

Killing the Myths of Homeownership

Posted in Just the Facts with tags , , , , , , , , , , , , , , , , , , , , , on April 16, 2009 by marcitz

Recently I read an article in The Economist that had many incorrect assumptions that shows just how far the myth of homeownership has permeated society.  Here are some of the common myths and corrections along with actual articles from other sources to back up the key points.

Myth #1  - Home ownership encourages “forced savings” because home owners have to pay off their mortgage.

ABSOLUTELY NOT! That is exactly what home equity lines and continuous refinancings were all about. Spending your savings as opposed to accumulating it and making yourself a “renter with an option to eventually own”.  A person very close to me has just refinanced a 30 year mortgage after 21 years effectively turning it into a 51 year mortgage and unless the almighty intervenes they won’t be paying it off in this life.

Myth #2 – The mortgage income tax deduction is good for homeowners.

ABSOLUTELEY NOT!  It just encourages people to raise the price of the house to eventually eliminate the advantage of the benefit (NOTE: Any increase in income chasing a, somewhat constrained, good means that prices get bid up and income tax deductions raise effective income). Its a zero sum game that only raises your interest payments in the end (because the principal needed is more due to larger home prices) which means the bank actually makes more money (remember they are the bad guys nowadays).

Eliminate the deduction and new home buyers (current homeowners would, truthfully, be screwed) would see lower prices commensurate with the decline in the kickback from the government. That means lower interest costs and more money, net, in their pocket (again current homeowners would see their housing values fall)

Myth #3 – Homeowners benefit from many social advantages.

Sorry but  there are NONE and actually some social disadvantages, including worse sex.  Study after study done as recently as last January show that there is practically NO social benefit of homeowning vs. renting.  In fact home-owners had been those leading the charge AGAINST racial integration in their neighborhoods. Turns our renters are actually more relaxed, less racist, more social and, yup, have better sex. Additionally these housing bailouts are a tad racist/classist and are bad for current homeowners in the long run. Don’t believe me check out these links:

Recently published study by Wharton  (Its a long academic study but just read the first paragraph)

The American McDream from the San Francisco Chronicle (renters have better sex, too)

Understanding how Obama’s Plan Hurts 100 MILLION US Citizens from watchingmarcitz.com (this shows how home bailout programs have a dark underbelly)

How the Crash Will Reshape America from The Atlantic (why renting is actually the answer to the problem we now face)

The Advantages of Renting from National Public Radio

Myth #4 – The market is finally finding a bottom

Take a lesson from the movie Titanic. The ship has just temporarily stabilized before its violent rush to the bottom as shown here.

Myth #5 – Once you pay off your mortgage your house is free (rent goes on forever)

Not exactly:

  • Property tax is forever so you pay that every year even after the mortgage is done. It may also be variable depending on the property tax laws where you live. So it behaves like rent (including changing from time-to-time)
  • Maintenance. That also goes on forever and that is variable (roof = $15,000) and unpredictable. So it also behaves like rent but much more violent in its swings. Sure renters implicitly pay maintenance but it is more smoothed out through the rent and periodic rent increases.
  • Your mortgage may go up depending on how you financed it. A very large percentage of mortgages done in the past 8 years were adjustable-rate. That could swing way above rent or way below depending on the interest rate environment.

See more myths in this follow-up post.

Got a really fucked computer?  Get it repaired online at support.com

27 Comments »

Homeownership – So Many Chores, So Little Time

Posted in Stories with tags , , , , , , , , , , , , on April 15, 2009 by marcitz

See one of the problems with homelownership is that not only do you have to cover the mortgage but you also have to clean the roof, flush the pipes, paint the walls and, of course, you have to “Mow the Lawn”

Well at least that last part isn’t so bad…

Leave A Comment »

Obama Administration Says NO to Bankruptcy Loan Modifications

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , on March 15, 2009 by marcitz

So Congress has been trying to push a law that will allow bankruptcy judges to modify the terms of mortgages including reducing interest rates and “cramming-down” loan principal.  Many have opposed this because it violates contract law.  The highly justified fear is that if the government can just violate any contract at will then contracts of any kind (past, present or future) will no longer have any value.   Up until this morning the Obama administration has signaled that it supports these in-bankruptcy modifications.  That all changed on the Sunday morning talk show circuit when Larry Summers, head of President Obama’s National Economic Council, came out in strong defense of contract law.

According the the New York Times:

Mr. Summers, who also appeared on CBS’s “Face the Nation” suggested, however, that the government’s ability to require…scaled back was restricted by preexisting contracts, even though he did not specify what those restrictions may be.

“We are a country of law,” said Mr. Summers, one of several economic officials to hit the Sunday-morning talk show circuit. “There are contracts. The government cannot just abrogate contracts.”

Ok, now for a little truth telling.  Dr. Summers was actually talking about the bonuses being given to AIG employees but isn’t the sentiment the same?  After all, last time I checked a mortgage is a contract and by Dr. Summers own admission the government cannot “abrogate” them yet that is what congress wants to do. 

As an invisible renter I am sure you are thrilled because you want your shot to buy a house at a fair price and by NOT allowing in-bankruptcy loan modifications you will get your chance.  So please don’t forget to call and email Dr. Summers to thank him for his support of contract law (I just talked with his office) and for signaling that the Obama administration will now veto any in-bankruptcy loan modification legislation that Congress may propose.

Dr. Lawrence Summers  

Or is that not what he meant to say…

P.S.  See how the New York Times also seems to have come out against housing bailouts in this analysis of an article by Joe Nocera.

11 Comments »

Is Wells Fargo Playing Games? – Tell Us Your Scam Story…

Posted in Stories with tags , , , , , , , , , , on March 11, 2009 by marcitz

So talking to a friend the other day who is one of the lucky ones thanks, potentially, to some good old-fashioned game playing on the part of his mortgage appraiser.  Seems that he bought a house 3 years ago and was ready to refinance it so he called in Wells Fargo.  This is where it gets strange.

Apparently the only house that they could find to comp against his house for the appraisal was HIS house based on its purchase price from 3 years before.  What’s cool is that his house, even given all the stuff going on in the macro economy, hadn’t lost any value in the past three years based on that comp (neat trick!). 

Of course given the increase in houses on the market how is this possible that his house was the only comp they could use?  Afterall, not to far away there were many houses for sale (and many foreclosures) that were used as comps when he first bought his house (of course they weren’t in foreclosure then).  Turns out that Wells decided to “tighten-up” the radius from when he had bought his house 3 years before so, one might guess, the foreclosures wouldn’t be included in the appraisal and then they couldn’t give him the loan. (another neat trick!)

But why would they want to give him a loan that exceeded the true value of the house?  Well because (just like over the past few years) they weren’t going to keep it and if they didn’t get the appraisal they wouldn’t get the loan origination business.  Sure enough he said that they weren’t and that it was immediately going to Fannie Mae because he had a conforming loan. VOILA!

Well its nice to know in these crazy times that some things never change. 

So have you heard a recent story of financial “magic” (spelled “s-c-a-m”)?  If so please share it here because you, as a taxpayer, just bought my friends house.  He’s a responsible and talented guy and will make good on his loan but there are many out there that probably got the same treatment and may not be so responsible.

ARE YOU A RENTER - STOP  THEY NEW YORK TIMES FROM HURTING YOU

6 Comments »

« Older Entries
Follow

Get every new post delivered to your Inbox.