I studied a lot about international economic development in my college days. In fact, my M.S. degree focused on international agricultural development.
Just the word “nationalization” scares me.
In those days, third world countries would often nationalize a company for the “good of the people.” Usually, the real reasons were politics and money; to silence a political rival (the company management) and milk the company for personal and political cash.
Companies usually tanked following nationalization, becoming a drag on the economy instead of an engine of economic growth.
After nationalization, the company’s goals became political, not economic.
My worry is that our political geniuses in Washington D.C. will soon figure out that they now control a company that controls 44% (?) of the mortgages in the United States. The politicos could soon use that power to their political advantage, for example by stopping foreclosures by Fannie and Freddie on their constituents, or some other shenanigans.
I’m leaning tonight towards the idea that in the future we should not allow companies to become so big that they become “too big to fail.”
The sooner the government denationalizes Fannie and Freddie the better.
We saw how just being a “government sponsored entity” led evenually to private and political corruption.
I fear the speed and depth of corruption we could see with a government controlled Fannie and Freddie.
Almost two-thirds of property owners who sold homes in San Diego County this summer lost money on the deal, according to an analysis by MDA DataQuick, a San Diego real estate research firm.
Those who lost money were down an average of $161,000, or 35.5 percent less than the home had sold for previously.
Interest rates will go lower as investors move from stocks to bonds and the Fed may make a rate cut.
Housing prices will continue their sharp decline even though previously the declines were starting to lose some momentum.
Sweet Spot for Arizona Real Estate?
We may be looking at an unusually good scenario for home buyers in coming months with both low home prices (at least in some areas) and low interest rates.
However, only those who have good credit and a large down payment will be able to borrow money to buy a home.
Could you elaborate on the subsidy these agencies are providing?
If Fannie Mae [ticker: FNM] and Freddie Mac [FRE] stopped all of their activity — for a moment, forget about shutting them down and being insolvent — in order to sell off mortgages as normal loans without this guarantee, the interest rate would have to be around 9% or 10%.
So the government, by buying Fannie Mae and Freddie Mac securities, is essentially providing money for the market at about 5%. They are subsidizing the interest rate that the private-capital markets would require by about 400 or 500 basis points [four or five percentage points]. That helps finance the housing market. Loans will be available at a subsidized rate, and that will help to cushion the blow, over the medium term, for the housing market.
Who benefits and who loses out from this bailout?
It is a moderate positive for the housing market over the intermediate term, and it is a modest positive for the consumer economy over the short term. But none of these is a major positive. It is not going to reverse the consumer’s distress entirely, and it is not going to stop housing prices from falling between now and year end.
What other negatives do you see?
Inflation risk down the line. [The federal government is] going to probably overstimulate and over support in an attempt to stem these deflationary forces. We are looking at a longer-term inflationary force that is pretty substantial. This has been my view for a long time. Interest rates went into a very long decline from the late ’70s and early ’80s until earlier this decade, when first we saw rates bottom out. Then rates went up a couple of times.
Basically, we are getting back down toward those low levels again. The multiyear bottom in interest rates that started around 2002 will probably last into 2009. Then we are going to see the inflationary aftermath of these government policies, and you might be surprised at how high interest rates go.
Another explanation of a possible upcoming “sweet spot” for home buyers, that point when home prices AND interest rates are both low.
Where else does this rescue effort come up short?
The government can subsidize the interest rate for mortgages, and I suppose that is going to help some. But it is not going to change the person who basically doesn’t want to pay the loan back because since the loan now exceeds the value of the house, they are going to own this big loss if they pay the loan back. So the only solution for those people would be a big modification in which some of the principal gets written down. Then maybe they wouldn’t default.
But let’s face it: A lot of people don’t know about modifying the terms of their mortgage or don’t know how to pursue it, and the system is log-jammed anyway.
So homeowners tend to bail out when the mortgage is higher than the home value and government programs can’t do much about that.
How much more pain are we going to feel in the housing market before things start to stabilize?
I think we are about half way through. There is high momentum in terms of home-price declines, so it is pretty clear they are going lower. It always looks a lot like the hills on a roller coaster. It starts out with a flattish period. Then it starts to go down, and then it really starts to drop, and we are clearly in that period. That period is going to be with us for about another year before it flattens out and bumps along in 2010.
The S&P/Case-Shiller Index is down a little more than 15% from its peak in 2006, and I’ve believed for some time that the index will have dropped 30% from its peak. That means some markets are going to drop by 50%. That includes Miami, Las Vegas and Phoenix, all of which were fueled by subprime lending. The foreclosure overhang is so big in those areas.
I don’t know if Phoenix overall will see a 50% decline, although we’ll see some zip codes hit that.
What else has to happen? More housing inventory has to get worked off?
Exactly. Everything is supply and demand. Unfortunately, the fundamentals of supply, with the foreclosure overhang being a very important part of that, are really discouraging. Supply is at its highs. This bailout by the feds helps liquidity, but it is on the margin. And the fundamental problem of liquidity is not getting any better.
Could you elaborate?
First it was hedge funds that couldn’t use any more leverage. And now the banks are taking write-downs, so there is less money that can be lent. Now, I hear over and over from the largest investment pools in the world that they are cash-constrained. I just had a meeting with one of the biggest endowments in the United States. They said that for them to invest in something they have to sell something. I often hear people saying, ‘We love thinking about distressed-mortgage opportunities because they sure are cheap, but we don’t have any money to invest.’
Since lenders don’t have a lot of money to lend, they tighten their lending criteria and only make very safe mortgages which leads to an excellent return on their money.
What’s ahead for mortgages?
The agency-guaranteed mortgages have been spectacular, performing strongly this year. Most people wouldn’t believe that, because you think anything but that would have to be true.
Does that include mortgages backed by Fannie and Freddie?
Yes, it does. Fannie, Freddie and Ginnie Mae mortgages altogether are up more than 5% year to date. The stock market is down 15%, and these securities are up 5%; Treasuries are up even less.
Mortgages that are guaranteed are the top performer, mainly because they have paid all of their interest and they have a guaranteed principal payback, thanks to Uncle Sam.
“Spectacular” Wow!
How much difficulty will we have to go through, with mortgage rates resetting?
Very little. One of the greatest misconceptions now is reset risk. Reset risk was very real on subprime, because the teaser rates were very low compared to what the ultimate rate is, usually like 600 or 800 basis points over Libor [the London interbank offered rate]. With today’s Libor at 2.50%, the reset rates can go to 8% or 9%. But most of the subprime mortgages reset after two years, and all of the subprime resets are going to be over by the end of this year.
Good to know! “… all of the subprime resets are going to be over by the end of this year.”
Of course, it will take months for those last resets to work their way through until they hit the foreclosure market but at least the real estate market will be looking at a tapering off of the reset effect on the supply of bank owned homes.
What about for prime loans and Alt-A loans, which are between prime and subprime?
The reset problem really isn’t a problem, thanks to the Fed having engineered the fed-funds rate down to 2%. These loans typically reset off of Libor or T-bills, plus no more than 3%. So when they do reset, it’s going to be at a lower rate, or at about the same rate that the homeowner is paying now, in many cases.
This is good news. I suspect the prices in some areas of metro Phoenix will start bottoming out at the end of the year. However, I was worried about the impact of the upcoming Alt-A resets, especially that graph showing the huge size of future Alt-A resets.
At the Morningstar conference in June of last year, you called subprime “an unmitigated disaster” that would get worse. What’s your assessment today?
It is unmitigated disaster times 10; subprime continues to get worse in terms of delinquencies and defaults, which are worse every month.
Will delinquencies and defaults from this point forward surprise on the upside? I doubt it, because the market has accepted the idea that subprime defaults are going to be up at about 50% of the original volume.
When you look at subprime lending patterns, the defaults really spike for loans underwritten in 2006.
It is like somebody flipped a switch right around the second half of ‘05, and the world went crazy. You can see it all in the volume of structured-finance vehicles, including CDOs [collateralized debt obligations] and SIVs [structured investment vehicles], and in the underwriting standards, which went to hell. The gap between the origination point and risk-taker point, where the loans were actually held, got wider and wider.
It was clear in the summer of 2005 that the market had peaked. I never quite figured out why prices continued to climb for another year.
It turns out it was because the mortgage world “went crazy” and they continued to pump more and more money into residential real estate.
… on the other hand his counterpart, Robert Shiller of Case-Shiller fame, does not see the real estate market near bottom.
Wellesley College economist Karl Case, the “Case” in the widely followed S&P/Case-Shiller index of U.S. housing prices, says he thinks that the housing market may be near a bottom. If he is right, financial firms may be able to breathe a sigh of relief.
At its most recent reading for June, the Case-Shiller index was 19% below its July 2006 peak, and many analysts say the decline is far from over. The inventory of unsold homes on the market is still very high, they point out, and until that excess is absorbed, it is a buyers’ market. Moreover, financial firms, hobbled by mortgage debt gone bad, are trying to rebuild cash reserves, making the firms less willing to extend loans to would-be buyers.
And the combined effects of the housing and credit crises have damaged the balance sheets and credit-worthiness of many households, leaving them a high hurdle to buying a new home. Yale University professor Robert Shiller, the co-creator of the Case/Shiller index, is among those who think it will be some time before prices stabilize.
But in a paper presented before the Brookings Institution in Washington yesterday, Mr. Case argues there is cause for optimism. He notes that of the 20 metropolitan areas covered by the Case/Shiller index, nine have shown prices slightly improving in recent months. He also says that the relationship between incomes and home prices has neared a level seen at the end of past housing slumps.
That last sentence is particularly intriguing.
“He also says that the relationship between incomes and home prices has neared a level seen at the end of past housing slumps.”
That means to me, if true, that when home prices do indeed bottom out that home prices may return more quickly than I expected to “normal” appreciation and that it’s less likely that home prices will troll along the bottom for a few years after bottoming out.
That is, we may see home prices move more like a “V” instead of an “L” after home prices bottom out.
Okay, I’m going to have to eventually declare a Fannie & Freddie free zone here but I’m still floored by the way Washington works.
Bloody hell, Fannie and Freddie were created by the government but became top manipulators of the government.
“They tied up almost every lobbying firm in Washington, whether they used them or not, over the past several years,” said Joshua Rosner, a financial analyst with Graham Fisher & Co. and long-time critic of both companies.
Freddie Mac (FRE, Fortune 500) spent over $94.8-million on lobbyists since 1998, making it the nation’s 12th-largest lobbying client, while Fannie Mae (FNM, Fortune 500) bought $79.5-million of influence, the 20th biggest spender, according to the Center for Responsive Politics.
“They wanted to fend off regulation of their enterprises,” said Massie Ritsch of the Center.
Until recent months, Fannie Mae and Freddie Mac largely succeeded in that effort - functioning with relatively little oversight as they aggressively grew their portfolio of mortgages to try to increase earnings.
I guess I just have to learn to accept the fact that Washington is screwed up.
These banking soap operas affect the value of your Arizona home. The value of your Arizona home is determined by how much a buyer will pay you for it. Duh!
And if potential buyers find, because of disarray on Wall Street, that it is more difficult to get the money to pay you for your home, then you have fewer potential home buyers and the value of your home goes down.
As Lehman Brothers teetered Friday evening, Federal Reserve officials summoned the heads of major Wall Street firms to a meeting in Lower Manhattan and insisted they rescue the stricken investment bank and develop plans to stabilize the financial markets.
Timothy F. Geithner, the president of the New York Federal Reserve, called a 6 p.m. meeting so that bank officials could review their financial exposures to Lehman Brothers and work out contingency plans over the possibility that the government would need to orchestrate an orderly liquidation of the firm on Monday, according to people briefed on the meeting.
Flanked by Treasury Secretary Henry M. Paulson Jr. and Christopher Cox, the chairman of the Securities and Exchange Commission, he gathered the executives in person to impress on them the need to work together to resolve the current crisis.
Policy makers fear its losses could ripple through the financial industry at a time when banks and securities firms are trying to overcome $500 billion in write-downs.
One observer briefed on the situation described the session as a “game of chicken” between the government and the heads of the major banks.
Bank of America and two British firms, Barclays and HSBC, have expressed interest in bidding for Lehman Brothers, according to people briefed on the situation. But they have indicated that their bids are contingent upon receiving support from the government, just as it did with the rescues of Bear Stearns, and the government-sponsored agencies, Fannie Mae and Freddie Mac.
But Mr. Paulson and Mr. Geithner made it clear to the company, its potential suitors and to the meeting participants on Friday that the government has no plans to put taxpayer money on the line. The government is deeply worried that its actions have created a moral hazard and the Federal Reserve does not want to reach deeper into its coffers. Instead, Mr. Paulson and Mr. Geithner insist that Wall Street needs to come up with an industry solution to try to stabilize Lehman Brothers and calm the markets.
Still, some of the other Wall Street banks, facing billions of dollars in losses themselves, have resisted this approach. They argue that Lehman Brothers overreached and brought its current troubles on itself. If there are no bidders for Lehman Brothers, these banks say they can collect their collateral and liquidate the troubled firm’s assets. In this high-stake game, they may also be trying to call the government’s bluff, knowing that if push came to shove, it would provide financial support.
And in practice, taxpayers could still end up on the hook for at least as much money as they were in the case of Bear Stearns. Lehman’s successor will still be able to borrow from the Fed’s new lending program for major investment banks, which the Fed created in response to the collapse of Bear Stearns in March. If Lehman were to borrow money and then default on its loans, the Fed’s losses would reduce the amount of money it turns over to the Treasury.
For political and economic reasons, both the Federal Reserve and the Treasury Department are loath to save financial institutions from their own folly.
But as the housing crisis has deepened, they have abandoned free-market orthodoxy, fearing that the collapse of institutions like Bear Stearns or either Fannie Mae or Freddie Mac could cripple the financial markets, and perhaps the economy itself.
One of the biggest differences between the challenge facing Lehman and the one that faced Bear Stearns is the availability of the Fed’s emergency lending program for investment banks.
When confidence evaporated in Bear, with major hedge funds pulling their prime brokerage accounts, Bear’s financing ran out almost overnight, creating a panic situation. Lehman has had the power to plug any cash shortfalls by borrowing from the Fed, though it has not actually borrowed any money from the program since March.
WaMu’s shares have fallen about 85% in the past year, and analysts say its financial position is among the worst of any major U.S. financial institution. WaMu has large holdings of mortgages made in regions where house prices have fallen sharply. More than $50 billion of its holdings are option adjustable-rate mortgages, a kind of loan where borrowers have the option of making a minimum payment that may not even cover the interest due.
Home prices are becoming quite attractive in many areas of metro Phoenix. But if it turns out that a lot of potential buyers can’t find anyone to loan them any money…
U.S. Treasury Secretary Henry Paulson says in this AP video;
“I have long said that the housing correction poses the biggest risk to our economy. It’s a drag on our economic growth and at the heart of the turmoil and stress for our financial markets and financial institutions.”
“Our economy and our markets will not recover until the bulk of this housing correction is behind us.”
If by “housing correction is behind us” Paulson means home prices have bottomed out, then there is no better place to see when “our economy and markets” will start to recover than right here at Arizona Real Estate Notebook, the best place to follow metropolitan Phoenix, Arizona home prices.
Actually, I feel a bit of remorse myself when I have a client with “seller’s remorse.”
Seller’s remorse happens when a seller rejects an offer for their home because they thought the price was too low but then they deeply regret it later when they have lowered their list price far below the price they rejected… and the home still isn’t selling.
Or seller’s remorse happens when a seller regrets “testing” a high price when they first put their home on the market and then slowly, slowly, slowly lowering their price… following the market down, down, down. They end up selling the home for far less than they could have at first or not selling the home at all, perhaps forcing them to change their life plans.
Every real estate agent has many sad stories of seller’s remorse.
When it’s my client I wonder, “Should I have been more forceful in my advice on pricing?”, “Could I have presented the data on pricing in more convincing way?”, “Should I have refused the listing when I suspected it was way over-priced?”.
In the end, I let my clients drive. I give them the information they need. But the decision on pricing is theirs.
For many sellers, the culture of constantly rising real estate prices has been hard to shake, and now a new condition has appeared: seller’s regret, or flashbacks to offers past.
Ms. Swanberg, who works in public relations, has spent a lot of time recalling early offers of around $270,000 that she rejected.
Mr. Diaz still thinks longingly of his first potential buyer, whose offer of $770,000 he turned down near the end of 2006.
“I should have taken it,” Mr. Diaz said, his voice echoing inside the empty home he visits every few days to clean. “I guess I was a little cocky, or stupid.”
Although this article in Yahoo! Finance somehow puts a negative spin on it, the unexpectedly large economic growth April-June is nothing but good news.
The United States needs as much economic strength as it can muster to weather the U.S. banking industry train wreck… slow motion train wreck.
Gross domestic product, or GDP, grew at a 3.3 percent annual rate in the April-June quarter, its fastest pace in nearly a year, the Commerce Department reported Thursday. The revised reading was much better than the government’s initial estimate of a 1.9 percent pace and exceeded economists’ expectations for a 2.7 percent growth rate.
I showed a home yesterday to a very analytical gentleman.
Many of my clients are numbers people; real estate investors, engineers of all stripes, IT guys, business owners, a former trader on the Chicago Mercantile Exchange, a current international investment banker, and similar people who appreciate my highly analytical approach to managing their buys and sells of real estate.
The gentleman yesterday believes that inflation is building and that although home prices in his area may decline a bit more, any such decline will be more than offset by increasing interest rates caused by inflation.
That is, he believes the downside risk of home prices is less than the downside risk of interest rates so he wants to buy soon.
I mentioned that some believe that after the U.S. presidential election the Federal Reserve will be more likely to increase interest rates but he hadn’t used that idea in his calculations.
Let’s see how this idea plays out.
Let’s say you take out a 30-year mortgage for $200,000 at 6.0% interest. The monthly payment will be $1,199.
At 6.0% interest, $1,199 a month will get you a 30-year loan for $200,000.
At 6.5% interest, $1,199 a month will get you a 30-year loan for $189,695.
At 7.0% interest, $1,199 a month will get you a 30-year loan for $180,219.
At 7.5% interest, $1,199 a month will get you a 30-year loan for $171,478.
At 8.0% interest, $1,199 a month will get you a 30-year loan for $163,404.
