More CRA Idiocy
Howard Husock has an exercise in cognitive dissonance in today's NYT Op-Ed pages titled Housing Goals We Can’t Afford, and it begins:
"The national wave of home foreclosures, many concentrated in lower-income and minority neighborhoods, has created a strong temptation to find the villains responsible."
What can you say about an Op-Ed whose very first sentence is a giant pile of steaming bullshit? That statement is demonstrably false. As the prior post on foreclosures shows, the concentration is mostly middle class and upper middle class white suburban neighborhoods.
California leads the nation in foreclosures. The state’s foreclosure activity was up 51% from a year ago. These are not CRA communities, they are what were hoped to be surburban bedroom communities east of the major cities (San Diego and L.A.)
Case-Shiller Index falls 17.4%
The September S&P/Case-Shiller Home Price Index of 20 US cities fell 17.4% year over year -- that is the most on record and is now down 21.7% from its high in July '06. On a month over month and year over year basis, all 20 cities saw declines.
Existing Home Sales Record Price Drop
Sales of existing homes dropped 3.1% from the prior month in October, and slipped 1.6% from the previous year. Total housing inventory fell 0.9%. percent to 4.23 million existing homes available for sale, which represents a 10.2-month supply at the current sales pace, up from a 10.0-month supply in September. Single-family home sales declined 3.3 percent to a seasonally adjusted annual rate of 4.43 million
Prices fell by the most on record: Median price fell 11.3% ($183,300) from a year earlier. This is the largest year-over-year existing home price decrease since records began in 1968.
Valuing Homes ex-Foreclosures
Here's a little bit of pushback on the indices showing how terribly elevated home prices are, and why they likely have more to fall.
The WSJ Numbers Guy column, written by Carl Bialik, looks at various indices -- Case Shiller,
OFHEO FHFA, etc. As the charts at bottom reveal, they all show a boom, elevated prices and a rollover.
"The one point of widespread agreement in the real-estate industry is that there is no single accurate index of home prices. They are all over the map, cover different sets of homes and may exclude parts of the country or be unduly influenced by the mix of homes sold in a given month.
See this here
Underwater Homes in Bay Area
No, not flooding -- underwater in terms of owing more than the home is worth:
"Twenty percent of Bay Area homeowners owe more on their mortgages than their homes are worth, according to a study being released today. This dubious distinction has entered the American lexicon as an all-too-familiar term - being underwater.
As home values continue to plunge, the real estate valuation service Zillow.com said that 20.76 percent of all homes in the nine-county Bay Area are underwater. The rate is much higher than the national average of 1 in 7 homes, or 14.3 percent. That's because the Bay Area - like most of California - was a classic bubble market, where buyers in recent years paid overinflated prices for homes that now are rapidly losing value in the market downturn."
Mark-to-Modified Market (the Home Game Version)
Housing prices remain elevated, inventory overhang is huge, cancellations are still rampant, credit is tight, and foreclosures are still rising. It is in this environment that several new plans to modify loans are starting to be enacted:
Fannie Mae and Freddie Mac are expected to announce plans Today to speed up the modification of hundreds of thousands of loans held by the housing finance giants. The GSEs will reduce principal or interest rates on some loans and extend the terms of others. The program is an extension of the Hope Now alliance.
The effort will target certain loans that are past due and will aim to bring the ratio of household debt to income for these borrowers down to 38%
Citigroup is contacting 500,000 homeowners with $20 billion in mortgages during the next six months. About 130,000 mortgage customers are expected to qualify.
JPMorgan Chase (and their Washington Mutual acquisition) announced plans last week to cut monthly payments by lowering interest rates and temporarily reducing loan balances for as many as 400,000 homeowners.
The Thundering Herd . . . "Were Pigs"
“The mortgage business at Merrill Lynch was an afterthought — they didn’t really have a strategy. They had found this huge profit potential, and everybody wanted a piece of it. But they were pigs about it.”
-- William Dallas, founder of Ownit Mortgage Solutions, a lending business in which Merrill bought a stake a few years ago.
There is a monster Gretchen Morgenson piece in the Sunday Times, titled, How the Thundering Herd Faltered and Fell. Its about the rise and ignomius fall of Mother Merrill.
How did it happen? Bad mortgages.
TYPICAL of those who dealt in Wall Street’s dizzying and opaque financial arrangements, Merrill ended up getting burned, former executives say, by inadequately assessing the risks it took with newfangled financial products — an error compounded when it held on to the products far too long.
The fire that Merrill was playing with was an arcane instrument known as a synthetic collateralized debt obligation. The product was an amalgam of collateralized debt obligations (the pools of loans that it bundled for investors) and credit-default swaps (which essentially are insurance that bondholders buy to protect themselves against possible defaults).
Synthetic C.D.O.’s, in other words, are exemplars of a type of modern financial engineering known as derivatives. Essentially, derivatives are financial instruments that can be used to limit risk; their value is “derived” from underlying assets like mortgages, stocks, bonds or commodities. Stock futures, for example, are a common and relatively simple derivative.
Among the more complex derivatives, however, are the mortgage-related variety. They involve a cornucopia of exotic, jumbo-size contracts ultimately linked to real-world loans and debts. So as the housing market went sour, and borrowers defaulted on their mortgages, these contracts collapsed, too, amplifying the meltdown.
The synthetic C.D.O. grew out of a structure that an elite team of J. P. Morgan bankers invented in 1997. Their goal was to reduce the risk that Morgan would lose money when it made loans to top-tier corporate borrowers like I.B.M., General Electric and Procter & Gamble.
Regular C.D.O.’s contain hundreds or thousands of actual loans or bonds. Synthetics, on the other hand, replace those physical bonds with a computer-generated group of credit-default swaps. Synthetics could be slapped together faster, and they generated fatter fees than regular C.D.O.’s, making them especially attractive to Wall Street.
Michael A. J. Farrell is chief executive of Annaly Capital Management, a real estate investment trust that manages mortgage assets. A unit of his company has liquidated billions of dollars in collateralized debt obligations for clients, and he believes that derivatives have magnified the pain of the financial collapse.
“We have auctioned billions in credit-default swap positions in our C.D.O. liquidation business,” Mr. Farrell said, “and what we have learned is that the carnage we are witnessing now would have been much more contained, to use that overworked word, without credit-default swaps.”
The whole piece is worth a read . . .
How the Thundering Herd Faltered and Fell
NYT, November 8, 2008
The Housing Crisis Is Over
Mr. Moulle-Berteaux, along with Barton Biggs, is a partner of Traxis Partners, a hedge fund firm based in New York.
They have had a series of disasterous calls recently: Shorting Oil three years ago at $50, and a mere 6 months ago, this horrific call in the WSJ, declaring the end of problems in residential real estate: The Housing Crisis Is Over.
There is an important lesson here for investors. Read this, and them join me at the other end:
The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.
How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.
Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982. Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.
The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.
Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.
Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in . . .
In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.
I recall reading it at the time, and saying to myself: "Wow, that is simply awful analysis." Hence, the diary for 6 months later and the current look back.
The logic errors within are myriad: Comparing different time periods and expecting identical parallel results, the failure to recognize how significant the credit crunch was, the extrapolation from past lows to present using insufficient variables, the failure to use traditional metrics of affordability, such as median home price to median income or price of rent versus own ratios, and lastly, the unsupported assumption that a 15% drop over 3 years, after a 100% increase was sufficient to make homes affordable.
If I was grading this, it would get a D minus.
The lesson you should take away when you read dumb things from smart guys running big piles of cash: They are talking their books, and having drank the Kool-aid, have little or no objectivity.
This is a classic example of that.
The Housing Crisis Is Over
May 6, 2008; Page A23
Pending Home Sales Index: Not Bad . . .
Here's something that almost never happens: An NAR release came out, and I think its better than the NAR does!
The Pending Home Sales Index -- based on contracts signed in September -- declined 4.6% to 89.2 from the upwardly revised 93.5 in August. That is pretty awful, but is 1.6% higher than September 2007 (87.8). And as we have so painstakingly detailed, its the year over year data that is significant.
Year over year, the number has improved. As the table below shows, its doing so for one reason: Huge price decreases in the West have led to giant increases in sales.
We noted Monday, sales in California have gone up as prices have fallen.
Pending Home Sales Index (PHSI)
Propping Up Home Prices, Stopping Foreclosures (November 2008)
Pending Home Sales Down on Tight Credit and Economic Slowdown
NATIONAL ASSOCIATION of REALTORS, November 07, 2008