“Wake Up and Call John!” - John Wake, Associate Broker, HomeSmart Real Estate

I had no idea it was this bad! (I wonder how accurate the graph is?)

It’s going to be tough for consumers to spend more when the value of their assets has tanked but the amount of their debts hasn’t changed.

Michael David White (via John Lounsbury).

ADDED: Which reminds me. People focus on consumer confidence but consumer sentiment doesn’t matter much when consumers can’t borrow more to spend more.

I met a gentlemen, Bob Eggert of Blue Chip Economic Indicators fame, who said during one economic downturn when he was at Ford Motor Company he predicted sales would increase soon. He said the consumer had already paid off debt during the downturn so they now were able to take on more debt and buy more cars whenever they, the consumers, decided they were ready. And that’s exactly what happened. Soon consumer confidence improved and consumers started borrowing more money to buy more cars.

My point is that until the consumer has more credit available, consumer confidence is not a great economic indicator. And it could take a long time before consumer balance sheets are strong enough that their access to credit is increasing instead of decreasing.

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Comparing this current new home construction bust to the earlier ones is stunning. Those earlier ones were terrible, I remember them, but this one is a lot worse!

On the other hand, I don’t think there is anywhere to go but up from here… well, I guess we could go sideways for a while. Like in the past, Arizona will eventually pull out of it. (The graph is for U.S. housing starts, not just Arizona housing starts.)

Factoid: If you use 2010 as your base year, the U.S. construction industry built enough new homes in 2005 to last four years.

The Arizona new home construction industry was HORRIBLE about cutting production even after it was clear the party was over. I learned that homebuilders build until they run out of money. Arizona homebuilders continued to overbuild until the bankers cut them off.

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More apparent corruption at Fannie and Freddie.

An ongoing investigation by a House of Representatives committee revealed a VIP lending unit at Countrywide Financial Corp. targeted senior leadership at Fannie Mae.

…

These documents linked 153 VIP loans to borrowers employed by Fannie and another 20 VIP loans to borrowers employed by Freddie Mac.

The Committee noted two spikes in the volume of VIP loans to Fannie and Freddie employees: one in 1998 as Countrywide negotiated a deal to sell billions of dollars in mortgages to Fannie at a discount. The second spike in the volume of VIP loans to Fannie employees occurred from 2001 to 2003 on the leading edge of a mortgage boom that lasted from 2002 to 2004.

And the VIP loan program went far beyond Fannie and Freddie employees.

It always amazes me how cheaply people can be bought off.

Curiouser and curiouser!

But what if Countrywide used their VIP loan program influence to get Fannie and Freddie to look the other way when they sold Fannie and Freddie bad mortgages?

Is Fannie going to now force them to repurchase those bad mortgages? (Meaning Bank of America would repurchase those bad mortgages because BofA bought Countrywide.)

A lot of bad BofA mortgages are already being pushed back to BofA to repurchase.

Fortunately for BofA, it’s too big to fail so the government would probably just give BofA the money to pay back the government for the bank fraud. Just kidding… I think.

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Looking at actual home price appreciation - not median home prices - we see in the last few months through April 2010, according to Karl Guntermann of ASU;

• By Region. Generally, prices were flat in Phoenix and the West Valley while prices fell in the East Valley.
• By Sale Price. Prices of lower priced homes were generally stable while prices of more expensive homes continued to fall.
• Foreclosure / Non-Foreclosure. Foreclosure prices have been ranging from $115,000 to $120,000 since last October but non-foreclosure prices are declining, in April the year-over-year decline for non-foreclosure sales was 8.7 percent.

Carl Guntermann at ASU uses a modified Case-Shiller statistical technique to look at home price appreciation within metropolitan Phoenix. Case-Shiller only looks a home price appreciation in metropolitan Phoenix as a whole. I (John Wake) created the graph above based on Karl Guntermann’s data.

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The quote below is from a review of a new book by a former chief economist at the International Monetary Fund, “Fault Lines: How Hidden Fractures Still Threaten the World Economy.”

The credit market—at least as regards housing—was distorted by government policy, not by a sudden and mysterious escalation in “greed.” The trends that shook the world economy came out of Fannie Mae and Freddie Mac, out of the Federal Housing Administration, and out of their “regulator,” the U.S. Department of Housing and Urban Development.

By 2000, HUD required that low-income loans make up 50 percent of Fannie and Freddie’s portfolios. Out of “compassionate conservatism,” perhaps, the Bush administration raised that mandate to 56 percent. Rajan cites Fannie Mae’s former chief credit officer, Edward Pinto, who notes that, by 2008, “the FHA and various other government programs were exposed to about $2.7 trillion in subprime and Alt-A loans, approximately 59 percent of total loans to these categories.” Peter Wallison of the American Enterprise Institute found that government-mandated loans accounted for two-thirds of “junk mortgages.” (emphasis added)

Although I think some of what Rajan writes is whacked, that’s a pretty convincing argument that contradicts economist Paul Krugman’s constant assertion that Fannie and Freddie had nothing to do with the real estate boom and bust.

Maryvale

On a tangentially related note, I found a nugget in this article that may help explain the economically fascinating but tragic crash of home prices in the low income area of Maryvale in Phoenix.

They found that, if you look at the period between 2002 and 2005, the number of mortgages obtained in a given ZIP code “is negatively correlated with household income growth.” In other words, lenders preferred un-creditworthy borrowers to creditworthy borrowers.

So it may be that lenders were actually targeting unqualified borrowers in low income areas like Maryvale (because loan officers got paid phenomenally more for selling subprime loans). That would help explain the subsequent huge number of quick foreclosures in Maryvale when the market tanked. The massive number of foreclosures in Maryvale drove prices down to only 25% of the peak price and half of what home prices were before the real estate boom began.

So those Maryvale loans went bad fast, the lenders foreclosed fast and the lenders forced home prices down far below where they were before the real estate boom began.

It’s ironic that Federal measures intended to help low income home buyers ended up wiping out a lot of Maryvale homeowners and their families financially.

The human cost of the real estate boom and bust is huge throughout the Valley but it may be highest in the lowest income areas because it seems lenders targeted those areas for subprime loans.

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Despite incredibly low mortgage interest rates, people aren’t applying for mortgages.

From Calculated Risk, “Mortgage applications have fallen off a cliff. The weekly applications index is at the lowest level since December 1996.”

I should add that mortgage applications spiked in April because of the $8,000 first-time home buyer tax credit and then fell back more towards trend after the program ended.

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Using the number of searches for “arizona homes” on Google as a proxy for the underlying demand, it appears the demand for Arizona homes has not started to rebound yet.

This certainly fits the fact that the current low mortgage interest rates haven’t spurred home sales.

Comment (Video)

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This graph makes me think things are worse than I thought.

On the other hand, after the election the politicians will probably stop contantly extending unemployment benefits and that will cause the unemployment numbers to fall. (People tend to be much more successful about finding jobs after their unemployment benefits run out.)

But nevertheless, that median weeks of unemployment number is huge!

Via The Atlantic.

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Feeling too chipper today!

Nouriel Roubini makes a cogent argument here but keep in mind that in the spring of 2009 his economic predictions were way off, way too pessimistic.

Also keep in mind that Roubini is giving a global scenario and Arizona, although swimming in that ocean, is unique.

My assumption is that Arizona will be one of the first economies to rebound… whenever that may be. I’m thinking sooner rather than later.

The global slowdown – already evident in second-quarter data for 2010 – will accelerate in the second half of the year. Fiscal stimulus will disappear as austerity programs take hold in most countries. Inventory adjustments, which boosted growth for a few quarters, will run their course. The effects of tax policies that stole demand from the future – such as incentives for buyers of cars and homes – will diminish as programs expire. Labor-market conditions remain weak, with little job creation and a spreading sense of malaise among consumers.

The likely scenario for advanced economies is a mediocre U-shaped recovery, even if we avoid a W-shaped double dip. In the US, annual growth was already below trend in the first half of 2010 (2.7% in the first quarter and estimated at a mediocre 2.2% in April-June). Growth is set to slow further, to 1.5% in the second half of this year and into 2011.

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In many markets — including Washington DC, California’s Inland Empire, Las Vegas and Phoenix — paying for a mortgage is less expensive than renting.

An increase in U.S. mortgage interest rates, of course, would quickly make U.S. home ownership less amazingly affordable.

If you can get a mortgage loan and you want to move, this could be your time. (Click on graph below.)

From Credit Suisse via HousingWire.

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Everything is “green” these days.

I was thinking of introducing a dolphin-free home buyer program to jump on the environmental bandwagon but these green mortgages are actually… well, green.

The general idea behind a green mortgage is that in the process of buying a house, funds can be set aside for energy efficient improvements…

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Great news for Arizona luxury home buyers and Arizona luxury home sellers too!

Just a year ago, the average rate on a 30-year jumbo mortgage—a loan of more than $729,750 not backed by government-sponsored agencies Fannie Mae or Freddie Mac—was 6.86%, according to Greg McBride, a senior financial analyst at Bankrate.com. Now it is 5.48%—a rate that rivals those available during the height of the credit bonanza.

Let’s see, the median home prices in most luxury home zip codes in the Phoenix area are similar to 2003 or 2004 prices (not adjusted for inflation so really 2010 prices are lower than the 2003/2004 prices in real terms), and the interest rate on luxury home loans is the lowest since 2003.

Boy, the Arizona luxury home market is now an entirely different market than it was even last summer!

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Hey, but don’t you lose most all your other assets in a bankruptcy? I don’t know bankruptcy. I suppose if you don’t have many assets to lose anyway, bankruptcy could work.

Any BK lawyers out there?

For many borrowers, this makes a Chapter 13 bankruptcy a better choice than a foreclosure. With a foreclosure, the borrower loses the house - and the 2nd lien holder might still pursue the borrower (unless they release the lien for some compensation, like under HAFA).

With a bankruptcy - under certain circumstances - the borrower keeps the house, and the 2nd lien is converted to unsecured debt and does not have to be paid in full. This is probably part of the reason for sharp increase in bankruptcy filings.

Boy, I don’t get this at all.

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We’re wondered before what the effect of all the distress sales would have on the size of the pool of potential home buyers.

… historically, only 15 percent of consumers have found themselves with a credit score below 600. Now, a quarter of consumers fit the profile.

Well, there’s 10% shut out of the market because it’s nearly impossible these days to can get a mortgage with a FICO score of 600 or less. And really, you need a credit score of 660+ to be in the game.

So I’ll guess that we’ve lost way over 10% of the potential home buyers to the increase in bad credit ratings caused by short sales, foreclosures, deeds-in-lieu, bankruptcies, a bad economy and other stuff. The article doesn’t say that. I’m just extrapolating.

The Good News

When those Arizonans start qualifying for Arizona home mortgages again in a few years, it’ll be as if a huge stream of people started to move to Arizona ready to buy homes.

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