Keepin' It Real Estate: Treasury Tries to Re-Inflate Housing Bubble
By Andrew Jeffery Dec 04, 2008 9:30 am
Getting to the "bottom" of the housing market.
He hasn’t.
By throwing around the weight of recently nationalized mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), the Treasury Department is considering a plan to push interest rates on purchase money mortgages down to 4.5% - well below the current market rate of around 5.75%.
Artificially lowering rates so buyers can afford more house led us into this mess; it’s doubtful the same tactics will lead us out.
According to the Wall Street Journal, the plan is in the early stages of development, but officials expect the initiative to spur buying activity. The aim is to prop up home prices by enabling borrowers to afford more expensive houses. Columbia University economists believe such a program could help between 1.5 million and 2.5 million Americans buy new homes.
In order to qualify for the low rate, borrowers have to meet Fannie and Freddie’s now-stricter loan underwriting requirements. But even with more affordable monthly payments -- the lower rate amounts to savings of $150 per month on a $200,000 loan -- precious few prospective buyers are willing and able to pony up the tens of thousands dollars still required for a down payment.
Combined with the Federal Reserve’s recent $200 billion lending program for securities backed by newly originated mortgages, bureaucrats are pulling out all the stops to buoy falling property values. This is the latest in a series of botched attempts to re-inflate the housing bubble. And like the others before it, the plan fails to address the root causes of ongoing home price declines: Negative equity, over-supply and mounting job losses.
The flood of recent loan modification programs championed by FDIC Chairman Sheila Bair and rolled out by JPMorgan (JPM), Citigroup (C) and Bank of America (BAC) also miss the point. Like any distressed market, the housing market badly needs price discovery. And like any other asset class, the true price of a house is only discovered when someone buys it on the open market.
By creating unnaturally low interest rates and allowing buyers to purchase bigger homes than they could normally afford, Paulson and Bernanke are preventing home prices from falling back to where responsible, fiscally minded Americans can buy without the crutch of government subsidies.
These continued distortions of the free market end up running in contrast to their intended goals: As long as the charade continues, as long as the real estate market is prevented from finding a natural bottom, home prices will continue to fall.
The silver lining -- for those brave enough to uncover their eyes and look -- is that just as it overshot on the way up, the housing market will likewise overshoot on the way down.
A protracted period of stabilization will ensue, during which time the opportunity to purchase high-quality residential real estate below its long-term intrinsic value will be extraordinary.
Savvy investors with the ability to identify attractively priced properties will, eventually, have the buying opportunity of a lifetime.
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Reply
2008-12-04 10:02:16
One real solution
If you want to stabilize home prices, raise real middle class incomes. Anything else is a gimmick.
2008-12-04 10:28:22
One real solution
The other half of the equation is job stability. Since I have no idea whether I will have a job in six months (I work contract because there are few permanent full-time positions in my field) I can't commit to buying a home in one area when I may need to move somewhere else. And there are plenty of other people in my position. We may count as "fully employed," but we are not.
2008-12-04 10:59:06
Lies, Lies, Lies.
If we base any so called "solutions" upon bad data, how can we expect good results?
For years, our government has been lying about inflation, GDP and employment, to name just a few. Over the years, these popular economic measures have been slowly changed to the point where you can no longer compare the 70's and 80's to today.
John Williams of www.shadowstats.com has adjusted these numbers to reflect the old methods of measuring and the results are shocking.
Inflation is well over 10%, unemployment is beyond 12% and GDP went negative in late 2004. Why is it that most sensible people agree that the government understates these measures but they still accept these measures as reflective of the current condition?
If the truth is somewhere between the government version and John Williams, we're all in big trouble. Why do we continue to accept these lies from our leaders as just business as usual?
For years, our government has been lying about inflation, GDP and employment, to name just a few. Over the years, these popular economic measures have been slowly changed to the point where you can no longer compare the 70's and 80's to today.
John Williams of www.shadowstats.com has adjusted these numbers to reflect the old methods of measuring and the results are shocking.
Inflation is well over 10%, unemployment is beyond 12% and GDP went negative in late 2004. Why is it that most sensible people agree that the government understates these measures but they still accept these measures as reflective of the current condition?
If the truth is somewhere between the government version and John Williams, we're all in big trouble. Why do we continue to accept these lies from our leaders as just business as usual?
2008-12-04 11:00:58
Supply and demand...
Economics is just that simple but for some reason people refuse to understand.
I have been predicting that gas prices would go below $1/gallon some time in the not too distant future for the past year. People look at me like I'm insane. They don't understand supply and demand.
People talk about raising 'real' middle class incomes. How is this possible in a global economy when middle class incomes in the U.S. are already too high relative to the rest of the world with whom we have to compete? With new workers pouring into the cities of Japan and India etc. labor prices at least for us must come down.
If people gave any credence to supply and demand it would be obvious that with too many houses (and increasingly more coming on the market as the baby boomer phenomenon escalates) prices need to come down...dramatically! It is time for the wealth effect to work in reverse.
The other 'secret' seems to be that we as a country, and most of the developed world, got drunk on credit. Credit, like alcohol, in small doses can have an euphoric affect on the economy but just like alcohol there is a price to pay for too great an indulgence and a far greater price to pay for dependence.
If you want to know what happened to the 'American Way of Life' where every man was suppose to be a king and hard work and sacrifice were wretched concepts comdemned to history, well we got too arrogant and spent not only our past, present and future earnings but those of future generations.
Get ready for at least a generation of the new Prohibition...
the prohibition on credit.
2008-12-04 11:04:42
Stability
As long as the government continues to meddle in the economy and markets, there will be no stability. They change their minds every week on how / how much money to spend and where.
The kind of stability that is required now can best be provided by a straightjacket.
The kind of stability that is required now can best be provided by a straightjacket.
2008-12-04 11:05:08
Oooops...
When I wrote about 'new workers pouring into the cities'
that was obviously suppose to be China NOT Japan.
2008-12-04 11:41:14
To quote an oft-heard phrase from this website, "Time and Price". Time we have, or rather can't do anything about. Price is the other half, and the ONLY way to fix the housing market is to permanent lower the cost of buying or owning a home. Currently the median housing price is 4x the median household income, where it's been 3x for most of the past century. Raising real incomes by 50% would work, but doubt that that's going to be happening anytime soon.
Based on that, if the gov't really wants to wade into the housing market, it had better be sure of what it's doing, and understand that this will be a permanent option. Dropping the price of mortgages to 4.5% will stimulate the housing market, and if it includes refi's it will stimulate the economy as well. Every homeowner in the US (that qualifies) will have an extra couple hundred bucks per month to spend/save/etc. It will, in effect, lower the effective price that people are paying for a house, and start to get us closer to the historical housing prices.
BUT! This will have to be a permanent move, as it will absolutely KILL the mortgage market. Who's going to want to purchase 4.5% homeowner mortgages (aside from the US Gov't)? Yes, this would end up costing the Fed nothing, and would probably make money (sell US Treasuries at 2.6%, buy Mortgages at 4.5%, make 1.9% profit), but it would kill any type of market for these securities. And if this is a temporary measure, when rates go back up, housing sales will plummet, because the "cost to purchase/own a home" will be back where it is right now.
On a purely selfish note, I'm all for this if it means I can refinance my 6.125% mortgage into a 4.5% one. Call it greed, call it human nature, but as long as I'm getting mine, I'm willing to accept a LOT of issues with this plan...
Based on that, if the gov't really wants to wade into the housing market, it had better be sure of what it's doing, and understand that this will be a permanent option. Dropping the price of mortgages to 4.5% will stimulate the housing market, and if it includes refi's it will stimulate the economy as well. Every homeowner in the US (that qualifies) will have an extra couple hundred bucks per month to spend/save/etc. It will, in effect, lower the effective price that people are paying for a house, and start to get us closer to the historical housing prices.
BUT! This will have to be a permanent move, as it will absolutely KILL the mortgage market. Who's going to want to purchase 4.5% homeowner mortgages (aside from the US Gov't)? Yes, this would end up costing the Fed nothing, and would probably make money (sell US Treasuries at 2.6%, buy Mortgages at 4.5%, make 1.9% profit), but it would kill any type of market for these securities. And if this is a temporary measure, when rates go back up, housing sales will plummet, because the "cost to purchase/own a home" will be back where it is right now.
On a purely selfish note, I'm all for this if it means I can refinance my 6.125% mortgage into a 4.5% one. Call it greed, call it human nature, but as long as I'm getting mine, I'm willing to accept a LOT of issues with this plan...
2008-12-04 12:00:21
Off the subject but the same problem
UAW recently claims that their labor cost only amounted to 10% of the cost of the car. If you look at what the real value of a 40.000 dollar truck is by pricing it peace by peace then it would be hard to find more then 12.000.00 dollars worth of realistic part values. When you start with a frame which is just steel that has been bent and welded on an assembly line it would be hard to imagine more then 800 dollars add a bed for 800 and a empty cab for 800 and front fenders and hood 400 bumpers 200 and you have the bigger part of a basic truck for 3000.00. Put the drive train in for 6500 and a set of tires 500 and were up to about 10.000. Stereo, seats, carpets, wire harness, lights and computer 2000 Add 4000.00 in labor and then profit of 4000.00 you really only have a 20.000 dollar truck selling for 40.000.00 dollars. Ooops! New car smell .99 cents for 20.000.99.
That makes labor on the true value of this truck at about 33%. Labor on the parts before assembly is also jacked up. Is their idea of 10% labor cost just labor or does it include the added cost of all their benefits like 95% of their wage for unemployment benefits and the cost of employee buyouts if the plant shuts down.
Congress needs to do some homework before they pass out billions. If these companies are losing money its because Detroit has been living high on the hog all these years compared to the economies of the rest of middle class Americans. Tons of money was pumped into Detroit by investors only to be pack out the door by management and high priced labor. Unless everyone makes sacrifices in wage and benefits and retirement accounts then the viability of these companies as a going concern is doubtful anyway so why pump good money into a turnip that has already been juice out.
Management is focused on laying people off so that those with huge salaries can continue. Congress needs to strap on some sac and force down the excessive wages of management and labor to reflect the rest of middle class Americans. Our Government needs to do the same thing for themselves. Fewer holidays, less sick pay, less vacations and no more retiring after 20 years. Make these folks work the full 45 years like the rest of us have to. Wage freeze and across the board cuts until the economy can afford to give it back. Laying off millions is the last thing we need right now.
Cars prices need to do the same thing as housing prices to get back to affordability. Twenty years ago you could buy a brand new 1800 sq ft house on its own lot for 40.000.00. That is what it cost these days for a truck that only gets 13 MPG.
Can anyone find a stock that is not at 100% float? What does that say about confidence? The big three has totally floated its shares and has no equity stake in its stock anymore. It's the same at the banks. 100% float and split to death.
Have a good day.
JPM
That makes labor on the true value of this truck at about 33%. Labor on the parts before assembly is also jacked up. Is their idea of 10% labor cost just labor or does it include the added cost of all their benefits like 95% of their wage for unemployment benefits and the cost of employee buyouts if the plant shuts down.
Congress needs to do some homework before they pass out billions. If these companies are losing money its because Detroit has been living high on the hog all these years compared to the economies of the rest of middle class Americans. Tons of money was pumped into Detroit by investors only to be pack out the door by management and high priced labor. Unless everyone makes sacrifices in wage and benefits and retirement accounts then the viability of these companies as a going concern is doubtful anyway so why pump good money into a turnip that has already been juice out.
Management is focused on laying people off so that those with huge salaries can continue. Congress needs to strap on some sac and force down the excessive wages of management and labor to reflect the rest of middle class Americans. Our Government needs to do the same thing for themselves. Fewer holidays, less sick pay, less vacations and no more retiring after 20 years. Make these folks work the full 45 years like the rest of us have to. Wage freeze and across the board cuts until the economy can afford to give it back. Laying off millions is the last thing we need right now.
Cars prices need to do the same thing as housing prices to get back to affordability. Twenty years ago you could buy a brand new 1800 sq ft house on its own lot for 40.000.00. That is what it cost these days for a truck that only gets 13 MPG.
Can anyone find a stock that is not at 100% float? What does that say about confidence? The big three has totally floated its shares and has no equity stake in its stock anymore. It's the same at the banks. 100% float and split to death.
Have a good day.
JPM
2008-12-04 13:39:28
I will buy a house or two...
If you will loan me 130% of the purchase price at 4%. I might take a year off from working, but I promise if run out of money to pay you can have both houses back.
Or we could try increasing prices the old fashioned way, such as increasing the demand (immigration) or reducing supply (smash'em down!).
Or we could try increasing prices the old fashioned way, such as increasing the demand (immigration) or reducing supply (smash'em down!).
2008-12-04 13:53:50
I will buy a house or two...
130% of the purchase price at 4%? Hell yeah, sign me up for that program as well. Take the 30% extra and roll it over into a 7% non-FDIC-insured investment CDO, rent the house out to cover the mortgage payments, and live like there's no tomorrow! I mean, the only thing that would end that party would be if housing prices dropped, interest rates went back up, or the company servicing that AAA-rated CDO went under.
Wait a minute...
Wait a minute...
2008-12-04 13:59:34
Monetizing debt
The Feds have said they are monetizing $800 Billion in Treasury debt to pay for this. They see this as stimulatory. Looks inflationary to me.
There will be a lot more federal debt monetization. Bad, bad stuff. Who knows where this will end. Hopefully not the same thing monetization has done to Zimbabwe.
There will be a lot more federal debt monetization. Bad, bad stuff. Who knows where this will end. Hopefully not the same thing monetization has done to Zimbabwe.
2008-12-04 14:45:17
The Grim Reaper of Financial Reality Rides Again!
I feel the very cold wind of irresponsibilty blowing down the back of warm bloooded Prudence. When an unstable cold mass meets the warmer stable body, a storm ensues and someone gets hurt. Could it be that the dollar shrinks, interest rates ride the inflationary roller coaster and we all enjoy a lower standard of living? Groundhog day is back as I just lived through the Greenspan put and it's refi time again. Yeah!
2008-12-04 16:04:37
Are homeowners sacred Aztec high priests?
Why not chop up renters? This would eliminate a wage competitor for homeowners and could provide a cheap source of protein for those same homeowners on BBQ day. Using the rental units as a fuel source will further increase the homeowners spending power by increasing his own homes value and leaving him more disposable income.
Leaving aside the question of why the Govt. should be setting house prices, and why Hank Paulson is not in jail yet, and why lowering interest rates to raise home prices to make homes more affordable is seriously being considered by people thought to be sane, I, as a renter would like to offer myself as a first test subject for this (chopping up renters) plan.
Leaving aside the question of why the Govt. should be setting house prices, and why Hank Paulson is not in jail yet, and why lowering interest rates to raise home prices to make homes more affordable is seriously being considered by people thought to be sane, I, as a renter would like to offer myself as a first test subject for this (chopping up renters) plan.
2008-12-04 16:08:09
Travis,
I think you nailed it -- if this goes through we are one step closer to a nationalized mortgage market in this country. There would still exist a tiny market for non-prime loans, but rates would be very high. When looking opportunities, people still need places to live, rents should remain relatively strong (imho)
Thanks for the comments,
Andrew
I think you nailed it -- if this goes through we are one step closer to a nationalized mortgage market in this country. There would still exist a tiny market for non-prime loans, but rates would be very high. When looking opportunities, people still need places to live, rents should remain relatively strong (imho)
Thanks for the comments,
Andrew
2008-12-04 16:58:27
%%%
I remember my Dad getting a mortgage in 1956 at 4% from the private market (Prudential Ins., as I recall). At the time 30 year treasuries were probably about where they are now. I think the national debt as a percentage of GDP was still pretty high as a result of WWII. So, we return, sort of, with a government insured mortgage market.
If mortgages are 4.5% housing prices will be helped. However, as Andrew points out, housing both needs to get cheaper and the conditions for further declines in housing prices are in place, notwithstanding cheaper mortgages.
I knew a large silver dealer, now deceased, who was in the business in 1980 when the Hunt Brothers ran the price of silver up to 40-50 per oz. I said to him "you must have made a fortune when silver was going up". He said "no, but I made a fortune as it came back down". He sold a ton of it as it went from $25 to $10. It was a bargain and all the folks who hadn't bought on the way up were happy to buy on the way down. However, silver finally settled at around $4-5 an oz. It is currently under $10 an oz. Bubbles can have pretty ugly outcomes and can take a very long time to stabilize.
My instinct is that housing will continue to get cheaper and when it finally does bottom there will be plenty of opportunity to buy. It will be like any other consumable - available to anyone who chooses to buy it. The frantic need to 'own a home' will disappear. Implicit in this is a very long period of transition.
If mortgages are 4.5% housing prices will be helped. However, as Andrew points out, housing both needs to get cheaper and the conditions for further declines in housing prices are in place, notwithstanding cheaper mortgages.
I knew a large silver dealer, now deceased, who was in the business in 1980 when the Hunt Brothers ran the price of silver up to 40-50 per oz. I said to him "you must have made a fortune when silver was going up". He said "no, but I made a fortune as it came back down". He sold a ton of it as it went from $25 to $10. It was a bargain and all the folks who hadn't bought on the way up were happy to buy on the way down. However, silver finally settled at around $4-5 an oz. It is currently under $10 an oz. Bubbles can have pretty ugly outcomes and can take a very long time to stabilize.
My instinct is that housing will continue to get cheaper and when it finally does bottom there will be plenty of opportunity to buy. It will be like any other consumable - available to anyone who chooses to buy it. The frantic need to 'own a home' will disappear. Implicit in this is a very long period of transition.
2008-12-04 17:40:19
lake shore drive vs cape coral fl.
Recently (last year) cousin's son purchased a condo on Chicago's lake front at 300 dollars a square foot, has a nice view:)
Wife shows me a nightly email of 2 year old housing selling in Warm Sunny Florida at 50 dollars a square foot,
Know a carpenter who says you can't build at less than 60 dollars a square foot.
You tell me what I should do, but here is my take; I will wait in Chicago, not build in florida but as soon as I can save a downpayment I will buy is Florida.
Wife shows me a nightly email of 2 year old housing selling in Warm Sunny Florida at 50 dollars a square foot,
Know a carpenter who says you can't build at less than 60 dollars a square foot.
You tell me what I should do, but here is my take; I will wait in Chicago, not build in florida but as soon as I can save a downpayment I will buy is Florida.
2008-12-04 23:34:57
Freeze the building of
single family dwellings for 24 months (still being built out faster than demand) or destroy the 4mln housing excess inventory. USA Today stated over 18 mln vacancies. The bb (b-4-bubble) was around 10% vacancy. We currently (rental or own) are at 14% (4 million in excess) Who wants to put 80k down on a declining asset?
2008-12-05 02:25:57
The Bubble
This article points out something I have been saying all along that what we are going through is natural in all industries and the Government should stop taking on more debt.
Jaime Sandoval
http://www.sanantoniotx
realestateforsale.com
Jaime Sandoval
http://www.sanantoniotx
realestateforsale.com
2008-12-05 06:53:33
Dear Brother Jeff,
Will all of you please stop talking about the "free market" as though the two words were Siamese twins joined at the hip? Any market that includes subsidies, production limits, & tax breaks for certain industries & interests is anything but free.
The US built its economy behind high tariff walls & there are still lumps on the system, as anyone who isn't stone blind can see. What was "free market" about the oil-depletion allowance? Subsidies for clean energy programs? And what about paying farmers not to plant? Whatever you might think about the goals of those programs, they are warts on the nose of the "free market."
The genius of the "free market" is that it moves everything in the world in the direction of money. A million starving, homeless, & penniless human beings will continue to be starving & homeless until they stop being penniless. Meantime, its the fat kid with pimples & incipient diabetes & a buck that gets the ice cream cone.
In Peru not too long ago (last month) a kilo of apples cost 4 soles. Yesterday, my wife paid six. When I got here in 2001, you could buy 3 or 4 kilos of potatoes, yams, or yuca root for a sol. Now one kilo of any of the above will cost more than a sol. With all of your "free market" & globalization, more people are going hungry than ever before.
Enough with the propaganda terms of art. A market is a market & freedom is freedom.
Best,
Seamus O'Bannion.
Will all of you please stop talking about the "free market" as though the two words were Siamese twins joined at the hip? Any market that includes subsidies, production limits, & tax breaks for certain industries & interests is anything but free.
The US built its economy behind high tariff walls & there are still lumps on the system, as anyone who isn't stone blind can see. What was "free market" about the oil-depletion allowance? Subsidies for clean energy programs? And what about paying farmers not to plant? Whatever you might think about the goals of those programs, they are warts on the nose of the "free market."
The genius of the "free market" is that it moves everything in the world in the direction of money. A million starving, homeless, & penniless human beings will continue to be starving & homeless until they stop being penniless. Meantime, its the fat kid with pimples & incipient diabetes & a buck that gets the ice cream cone.
In Peru not too long ago (last month) a kilo of apples cost 4 soles. Yesterday, my wife paid six. When I got here in 2001, you could buy 3 or 4 kilos of potatoes, yams, or yuca root for a sol. Now one kilo of any of the above will cost more than a sol. With all of your "free market" & globalization, more people are going hungry than ever before.
Enough with the propaganda terms of art. A market is a market & freedom is freedom.
Best,
Seamus O'Bannion.
2008-12-05 07:41:22
lake shore drive vs cape coral fl.
Frank,
Another example: You can buy a 800 sqft condo in San Francisco, albeit in a pretty exclusive neighborhood for $900k. Or, you can go across the Bay to the, also exclusive, Berkeley Hills and buy a 4000 sqft modern mansion with a view of the entire bay for $1.3m and essentially get the land for free. So, if you assume that someone looking to buy may consider both, and that the prices "should" converge, is it more likely that the SF condo appreciates or the Berkeley mansion depreciates?
Similar to your Chicago v Florida example: there is no rush to buy just because home prices in some areas are starting to get below replacement costs.
Andrew
Another example: You can buy a 800 sqft condo in San Francisco, albeit in a pretty exclusive neighborhood for $900k. Or, you can go across the Bay to the, also exclusive, Berkeley Hills and buy a 4000 sqft modern mansion with a view of the entire bay for $1.3m and essentially get the land for free. So, if you assume that someone looking to buy may consider both, and that the prices "should" converge, is it more likely that the SF condo appreciates or the Berkeley mansion depreciates?
Similar to your Chicago v Florida example: there is no rush to buy just because home prices in some areas are starting to get below replacement costs.
Andrew
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