John Burns an economic consultant to home builders produced a neat little video on housing cycles. He is talking to home builders but much of what he says applies to resale homes.
His intro is pretty honest for a consultant to homebuilders.
Over the next few years record numbers of home builders, land developers and homeowners will file for bankruptcy or lose their assets to the bank.
{ 16 comments… read them below or add one }
Cbass 04.02.08 at 5:15 pm
Ha Ha that was funny John.
Brian McMorris 04.03.08 at 7:50 pm
John
Here it is 8pm on April 3 and you haven’t written a thing on the big news from Treasury Secretary Hank Paulson April 1. What do you think about all the programs for home buyers and builders?
- $7000 in Tax Credits for buyers of foreclosed homes?
- $4B in funding for communities to buy up foreclosed homes for low income housing, resale, or whatever uses a city might have
- increase of confoming loan limits to over $700K (I thought this was old news, but Paulson trotted it out again).
- regulation of investment banks similar to how Federally chartered banks are regulated with capital reserve requirements and regular reporting, etc.
- federal regulation of mortgage brokers, even independent brokers, and licensing requirements in the mortgage industry (currently there are no mortgage banker licensing requirements and even real estate licensing is at the state level)
- extension of tax loss carry forwards from 2 to 4 years for home builders (this one is controversial considering how much some of these companies made prior to the crash)
- restrictions on the amount of leverage possible in investment vehicles used to generate mortgage funding
Not all the proposals are listed (the proposal from Treasury was something like 277 pages long) and not all of these suggestions will pass through legislature, but some of them surely will; the total tab for the first round of the housing bailout comes to something over $400B by some estimates. But experts think that it may require more than twice that amount of taxpayer money to stabilize the housing market nationally. We will be paying for years for the good times had by (almost) all from 2003-06.
John Wake - Real Estate 04.03.08 at 7:58 pm
Thanks for the summary! I haven’t had time to focus on it. It’s the high season for home sales and I’m very busy.
What do you think? (That will save me time.)
Brian McMorris 04.04.08 at 7:26 am
Well, it is a start. The Government had to do something to put a floor on the housing market. This type of event has the potential to snowball and that is how you end up with a 30s style Depression. The Fed and Treasury are there to make sure that doesn’t happen. Otherwise, we just have an economic version of the Wild West.
But I am a fiscal conservative and would rather see controls in place so the mortgage abuses would not happen in the first place. (which also would have contained the bubble in prices keeping houses affordable for those who SHOULD have been buying). Many of us saw this coming. I was aghast at some of the mortgage practices in 2003-05 (”no-seeum” loans, lotteries to buy condos, flipping - which is always a sign the end is near).
I actually was first upset and worried the day Greenspan told the world they should take out ARMs at a time when fixed rate mortgages were at 5% (I think that was 2003). I thought that was the stupidest advice I had ever heard, and from the leader of the free-world financial system, no less.
So yes, I am glad the Feds are finally getting on top of this. Though, I think the tightening standards and restrictions will hurt the housing market for many years (see Sarbanes-Oxley legislation after MCI and Enron, as a reference).
We will be taxed to pay for this potentially $800B stabilization program for many years, which will be a drag on the economy. But it is better than the alternative, which is a Depression. I remind my free market friends that it costs more to provide social welfare programs for an additional 15% unemployed, than to just pay up front like we will be doing. The old ad went: “You can pay me now, or pay me later”
Cbass 04.04.08 at 8:40 am
Brian,
It won’t work. Every action has an equal and opposite reaction. This legislation will just create different problems which will not solve the root issue. Wage growth in this country is at a stand still and inflation is roaring. I don’t buy the feds numbers on inflation, all I have to do is go to the grocery store or the gas station to know that.
Peter Fork 04.04.08 at 12:16 pm
CBass,
if house prices are down 20% since their peaks, don’t you think inflation numbers should be down? After all, it costs a lot less to buy a house now than two years ago.
Cbass 04.04.08 at 12:49 pm
Peter,
Did inflation numbers skyrocket when housing prices shot up? So to answer your question with a question no. Also I believe the inflation numbers in relation to actual housing prices is based on the OER or Owners Equivelent Rent.
read more here about OER
bls.gov/cpi/cpifact6.htm
Brian McMorris 04.04.08 at 3:19 pm
CBass, I agree it is a slippery slope. I am not a fan of goverment bailouts. If they could stay focused on just solving the problems at hand, it would be a lot more palatable. But, these are politicians we are talking about. They have votes to sell, and sell they will, given half a chance. (see the big tax break for rich homebuilders). (note: my apologies to John’s brother, who I understand is a AZ state legislator).
But I am also not a fan of viral foreclosure either, and what it does to neighborhoods and cities. What we don’t need is more urban blight and empty houses for the cracksters out there. Who wants to live in a neighborhood with half-empty houses? Here is a great (scary?) article on the problems they are having in Denver.
http://www.usatoday.com/money/economy/housing/2008-04-01-foreclose_N.htm
Phoenix could look like this soon.
So, though I agree it is a tightrope walk with inflation to deficit spend like we must do as a country, I will take the devalued dollar over a Depression if I have to make a choice. Devaluing dollars, if done under control, actually helps a mortgage problem, by making the loan repayment dollars forever cheaper (for those smart enough to lock in fixed rates, at least).
Cbass 04.04.08 at 5:26 pm
Brian,
I could not agree more that no one wants these empty houses creating a blight on our communities. Unfortunately I think this pain may be necessary to bring things back to normal. Inflating our way out of this mess may bring other problems we don’t want. A look at the 5 year chart of the dollar will explain why oil, gold, and other commodities are so high right now. The dollar has lost about 35% of its value to the Euro over this time period.
Also this devaluation will hurt families like mine who are saving for the time when buying a house is affordable again. Why should I be punished financially for doing things the right way by being fiscally responsible? Why should those that were irresponsible and purchased assets the wrong way benefit?
I just think this temporary relief will transfer the hardships on the wrong people in future. We as a nation need to stop borrowing from the future to make things easier on our selves today. It seems like no one wants to be accountable for their own actions anymore. If we need a recession to clense the system I say bring it on. I will be fine, you will be fine, everyone else will be fine too. There are not always good times in life. Some times we need to buckle down and make some tough choices.
MPS 04.07.08 at 5:41 am
I see you guys are still at it. Good points. I’ve read a bit on the Fed’s idea of reform. Sounds like another hoax to me.
So everything is happening as I predicted and the Canadians failed to save the Arizona real estate market. Next will be a wave of personal bankruptcies. (If you’ve already lost your house why not run up the credit cards.)
600 bucks is not going to fix anything. They need another bubble. (”Green” technologies?) They must create the fictitious trillions again to continue their efforts at creating a premature global economy so that they can dominate it. “They” being government + American corporations. “American” only means that they were born here and nothing more.
Brian McMorris 04.12.08 at 10:42 am
MPS, if you are a cynic, then I suppose just about anything can be seen as a “hoax”. But, I don’t see how ripping the government and corporate America will fix anything. Do you have any suggestions?
Or is this just the end of “everything” and we should all go buy a bunker?
mps 04.13.08 at 4:44 am
Yeah. First stop our legistlators from taking big paying jobs with lobbyist after they leave office. Second, bring back the high tax bracket. How about 90% on everything over 2 million or something like that. That would take the motivation away from CEO pay. Thrid, stop using our tax payers dollars to bail out, help out or assist the big corporations in anyway shape or form. They are not patriotic. In fact they don’t care about anything but their bottom lines. (Of course there are exceptions to this rule.) Trickle down has not worked. We’ve been sold a bill of goods. We’re not sharing in their success. Instead the CEOs make .5 million per day and the VPs make 2 million per year. Have the elite pay social security tax. (There is a cap at approx 100K) What is the point of a graduated tax system if the top bracket is 35 when working class pays 27 + 12.4 = 39.4. Someone explain that to me???? This housing market will fall until working class people can afford houses again or until a new bubble is created. (Green technology?)
A good economy is one where money flows in all directions, not just up. That’s what we should have. Instead we are teetering on a depression here. Washington is running around trying to fix the mess they’ve created.
Brian McMorris 04.13.08 at 6:52 pm
MPS, thanks for your honesty. Even though I don’t agree with most of your positions, at least we can have a conversation when you put them out there.
First, we live in a capitalist driven economy. Capitalism is a euphemism for greed or “self-interest”. As long as man has been on Earth, it is the only economic system that has proven itself to actually work, so much so that even formerly Communist nations like Russia and China have adopted capitalism as their economic system.
Government’s role is to put the reins on unfettered greed, which is harmful because it is destabilizing. Bubbles are the product of uncontrolled greed. Government is supposed to enforce regulations that prevent bubbles (though you wouldn’t know that the past 15 years). I find it curious that you have a problem with corporate greed, but you are advocating the creation of a new bubble, which is greed incarnate, to bail out the masses.
I don’t like our out-of-control executive pay, either, but over-taxation of income will crush entrepreneurial spirit and ambition. That is what makes our economy go. It is what employs people and improves productivity and innovation which improves our quality of life. So, capping earnings incentive (at what, $100K? who gets to pick?) is not a good idea. Better corporate oversight by shareholders / owners of exec compensation is the approach for our economic system.
But I agree with you on social security. If it is a social welfare tax and not a mandatory savings program as it was first designed, then there is no reason for the cap. I think the cap will be rescinded in the next Congress regardless of the presidential election.
As for getting the price down on houses for the working class, I think there is some naivete’ in that statement / hope. It was the working class over-reaching that created the bubble and the mortgage mess in the first place. People who should not have qualified, were, by unethical (and under-regulated) mortage brokers. The bidding for houses with cheap (free?) money is what ran up the prices, not corporate greed or conspiracy (unless it was the mortgage companies, which are paying with insolvency).
So, the “working class” (whatever the definition of that is) must pay for their own sins, though the wealthy will probably end up helping them out through the taxes that will finance the government bailouts, and through losses on investments in financial institutions.
MPS 04.13.08 at 7:55 pm
I’m not advocating another bubble. That is just my sarcasm. I believe that our government wants another bubble. Other
than that I agree with your first and second paragraph.
Oversight by shareholders? The big shareholders and the executives are all in the same club. They scratch each others backs.!
Look at the tax brackets in the 50’s, 60’s and 70’s.
Take a look at our top tax rates (below) and tell me when again you think our (hyper inflation/greed) bubble problems started?
No, not 100K. Top brackets should hit somewhere between 2 to 5 million. And start enforcing taxes on the super rich. Warren Buffet himself says the system is heavily slanted in his favor.
The working class does not have the information. Although all “parties” involved are somewhat guilty the “working class” on a whole is more the victim and less the cause than any of them. Here is my list of blame 1) Government 2) Mortgage industry 3) Builders 4) Speculators 5) Ordinary working folks
1945 94.00%
1946 86.45%
1947 86.45%
1948 82.13%
1949 82.13%
1950 91.00%
1951 91.00%
1952 92.00%
1953 92.00%
1954 91.00%
1955 91.00%
1956 91.00%
1957 91.00%
1958 91.00%
1959 91.00%
1960 91.00%
1961 91.00%
1962 91.00%
1963 91.00%
1964 77.00%
1965 70.00%
1966 70.00%
1967 70.00%
1968 75.25%
1969 77.00%
1970 71.75%
1971 70.00%
1972 70.00%
1973 70.00%
1974 70.00%
1975 70.00%
1976 70.00%
1977 70.00%
1978 70.00%
1979 70.00%
1980 70.00%
1981 69.13%
1982 50.00%
1983 50.00%
1984 50.00%
1985 50.00%
1986 50.00%
1987 38.50%
1988 28.00%
1989 28.00%
1990 31.00%
1991 31.00%
1992 31.00%
1993 39.60%
1994 39.60%
1995 39.60%
1996 39.60%
1997 39.60%
1998 39.60%
1999 39.60%
2000 39.60%
2001 38.60%
2002 38.60%
2003 35.00%
2004 35.00%
2005 35.00%
2006 35.00%
2007 35.00%
Brian McMorris 04.14.08 at 9:18 pm
Warren Buffett is a hypocrit. What he never tells anyone, as he speaks so piously, is that because he doesn’t pay himself much of a salary. So, he himself would never pay high taxes, the richest man in the world. His profits in BRK are carried forward by reinvestment (BRK pays no dividend). Is that a bad thing? No, not at all. It is a capitalists choice. But he misleads the uninformed into thinking he is willing to pay high taxes himself.
In any case, our country will never balance its books on the back of the “super-rich” (top 1% of income earners). The bulk of taxable income is in the middle of the bell curve. Those who read this blog, little guys trying to save and invest to give their family a better future, are in that middle.
P.S. There is no “working class” vs. a “priveleged class” (proletariat vs. bourgeoisie). You have been reading to much Karl Marx. That was the late 1800s, this is the USA in 2008. We all have a chance to do well in this country if we work hard, save and invest.
Brian McMorris 04.14.08 at 9:25 pm
One more thought going through the tax rate data provided, all the high marginal tax rates were before 1985. You may be too young to remember, but before that year, there were tremendous loopholes for the rich to reduce or completely eliminate their tax obligation.
One of the best was investment real estate with accelerated depreciation. All the rich were using accounting tricks to eliminate taxable income and therefore pay no taxes. In 1985, the tax code was “simplified” to eliminate loopholes. The result was a dramatically lower marginal rate that everyone had to pay.
So, if you draw the conclusion that back in the good old days the rich had to pay taxes through their noses, so therefore a better society, you are just wrong on your facts.