Will the California Budget Crisis Put Signifcant Downward Pressure on Housing Prices?

Please weigh in.

Prime borrower delinquencies rising

This could cause higher-priced homes to fall more in value:

Mortgage delinquencies show few signs of slowing down, according to data from an industry-wide coalition of mortgage investors and servicers.

The number of mortgages that were 60 days or more late reached 5.65% in May, which makes for the highest level on record.... Foreclosure starts surged after pausing earlier this year as various states and lenders held back foreclosures through various moratoria. Some 257,000 homes entered the foreclosure process, up 5.7% from April and 34% from one year ago.

The May figures show how the housing market distress has eased for subprime borrowers while it continues to accelerate for prime borrowers. Subprime foreclosure starts fell by 16% from one year ago, even as prime foreclosure starts jumped by 83%. Housing analyst Ivy Zelman notes that an “incremental weakening in prime mortgages are likely to result in a pick-up in higher-priced foreclosures hitting the market in late 2009/early 2010.” That could put more downward pressure on the higher end of the housing market.

According to the Chicago Tribune, the surge in foreclosures is likely to continue pushing prices down:

Just as the nation's housing market has begun showing signs of stabilizing, another wave of foreclosures is poised to strike, possibly as early as this summer, inflicting new punishment on families, communities and the still-troubled national economy.

Amid rising unemployment and falling home prices, mortgage loan defaults have surged to record levels this year. Until recently, many banks have put off launching foreclosure action on many troubled properties, in part because they had signed up for the home-stability plan from President Barack Obama's administration, which required them to consider the alternative of modifying loans to make it easier for borrowers to make payments.

But with many government and self-imposed foreclosure moratoriums expiring, the biggest lenders indicate they are likely to move more aggressively to clear a backlog of troubled mortgages.

Apartment vacancies are rising and rents are falling

From BusinessWeek:

Apartment vacancies in the second quarter rose to 7.5% — the highest percentage for that period in 22 years, according to today’s apartment market report from Reis.

It seems that people are moving in with friends and family, or are finding roommates.

Effective rents, which include concessions, fell 1.9% from a year earlier and 0.9% from the previous quarter.

How to hedge the value of your home

Robert Shiller has a new way to bet on housing prices:

On June 30, MacroMarkets launched the first products that let investors make a pure directional bet on home prices. Called MacroShares, they trade on the New York Stock Exchange; their value is derived from changes in the Case-Shiller 10-city home-price index. If you expect home prices to rise, you'd buy the Up Metro Market (UMM); bears can buy the Down Metro Market (DMM). On the first day of trading the bears held sway: Investors bought 14,756 DMM shares, vs. only 6,204 of UMM.

"UMM and DMM will be the indicators that people will turn to when they want a snapshot of home-price sentiment," says Masucci. Shiller thinks they will have real practical value for homeowners. If you buy the DMM and the price goes down, the money you make on the investment will offset your lost home value. If prices go up, you lose money on the DMM, but your house will be worth more.

These are ETPs (exchange traded products). There are fact sheets about them here and here. These seem more friendly to small investors than the housing futures because they require a smaller minimum investment and you can buy them just like stocks.

A look at key economic indicators

Here is a look a several important leading and coincident economic indicators. Leading indicators help forecast the future of the economy several months in advance. Coincident indicators reflect the current state of the economy.

Leading Indicators

The most reliable leading indicator is the slope of the Treasury yield curve. The slope is typically measured by the spread between the 10-year Treasury bond yield and the 3-month Treasury bill yield. An inverted yield curve (long-term rates lower than short-term rates) suggests a recession within the next year. Meanwhile, an upward sloping yield curve (long-term rates perhaps 1.0% or more higher than short-term rates) suggests a growing economy within the next year. I don't have a graph of the yield curve, but the spread is currently 3.33%, which suggests we are headed for a recovery.

New capital goods orders are a sign of a near-term recovery or decline. Here is the year-over-year percentage change.


New building permits are another leading indicator. Due to the fact that we still have a housing bubble, I don't expect permits to turn around before the recession ends. Expecting housing to lead us out of this recession is like expecting technology to lead us out of the 2001 recession.


Coincident Indicators

While leading indicators forecast the future of the economy and thus tick up before a recovery, coincident indicators reflect the current state and thus should not tick up until the economy is actually recovering.

Year-over-year non-farm payrolls are still dropping like flies.


Year-over-year industrial production is still plunging.


Yet the year-over-year change in consumer sentiment is surprisingly strong, probably caused by the recently rising stock market (or vice-versa).

Is the economic stimulus effective?

Back when President Obama was arguing for the fiscal stimulus package, his economic team created a graph forecasting the effects of the fiscal stimulus. The blue lines below show the expected unemployment rate with and without the fiscal stimulus. The maroon dots show the actual unemployment rate so far.

The fact that the unemployment situation is substantially worse than expected didn't prevent President Obama from bragging back in late May that, "In these last few months, the American Recovery and Reinvestment Act has saved or created nearly 150,000 jobs."

It is impossible to empirically measure how many jobs have been saved, so the "saved or created" numbers Obama uses are complete fabrications based on the White House's own shifting macroeconomic estimates. No matter how bad things get, Obama can always claim—without evidence—that things would have been worse, therefore he saved jobs. The gullible news media have been falling for it.

That said, the bulk of the stimulus package takes effect in late 2009 and in 2010, so we should not expect it to have had much economic impact yet.

Update: Someone pointed out to me that I forgot to specify the source of the graph. The specific version of the graph I posted came from Harvard economics professor Greg Mankiw's blog. The original graph came from this document by CEA Chair Christina Romer. The unemployment information plotted on the graph can be found on the St. Louis Federal Reserve web site.

ADP Employment Survey graph

Here is Automatic Data Processing's measurement of the monthly job losses during the recession. Compare this with yesterday's graph of the government's job loss numbers.


Unlike last month, ADP and the government are in close agreement this month. ADP says 473,000 job losses in June and the government says 467,000 job losses.

Job losses jump

Job losses and the unemployment rate are key signs of economic decline or recovery. There is mixed news on the employment front. Job losses jumped unexpectedly, but the rate of increase in the unemployment rate slowed:

The battered U.S. labor market took a step backwards last month as employers trimmed more jobs from their payrolls in June, according to a government report Thursday.

There was a net loss of 467,000 jobs in June, compared with a revised loss of 322,000 jobs in May. This was the first time in four months that the number of jobs lost rose from the prior month.

The June job losses were also far worse than the forecast of a loss of 365,000 jobs by economists surveyed by Briefing.com.

The unemployment rate rose for the ninth straight month, climbing to 9.5% from 9.4%, and hitting another 26-year high. Economists had been expecting that the unemployment rate would hit 9.6%.

Nearly 3.4 million jobs have been lost during the first half of 2009, more than the 3.1 million lost in all of 2008.

Job losses since the recession began:

The unemployment rate over the past five years:

The reason they can disagree is because they are measured differently. The job loss number is probably more reliable than the unemployment rate.

A Blast from the Past (2005)

Cheesy Ad from Mortgage Company. [October 2005]



Powerpoint Slide from the California Assocation of Realtors [Fall 2005]

Sheila Bair tried to sell her home

From The Wall Street Journal:

Sheila Bair, the chairman of the Federal Deposit Insurance Corp., takes her 14-room home in Amherst, Mass., off the market after cutting its sale price by $100,000. She had originally listed it for $795,000 in April. Ms. Bair and her husband, Scott P. Cooper, bought the 1860s house in 2002 for $355,000. The home has five bedrooms, new roofing and a counter-current basement pool.

Since both Sheila Bair and Tim Geithner have recently tried and failed to sell their homes at unreasonably high prices, do they have a conflict of interest regarding the housing bust and financial crisis? Do they have an incentive to use the powers of their offices to prop up prices?

Americans unenthusiastic about financial benefits of homeownership

This news is actually about a week old, but I've been slow:

The long-held belief (some call it a myth) that homeownership is a sure-fire ticket to building wealth and equity might be changing, according to a recent survey from the National Foundation for Credit Counseling.

Nearly half of those surveyed no longer think owning a home is a realistic tool to build wealth.

Consider it a by-product of the housing crisis, as millions of Americans face plunging home values leaving many stuck with a house worth less than the mortgage. ...

“It appears that whether a person was directly affected or not, Americans’ attitudes toward homeownership have shifted,” said Gail Cunningham, a spokeswoman for the nonprofit credit counseling organization.

This is typical rear-view mirror thinking. Although the bubble has not vanished, prices are definitely better than when everyone was going gaga four years ago.

S&P/Case-Shiller: DC home prices up in April

Bad news: According to S&P/Case-Shiller, month-over-month Washington, DC metro area seasonally-adjusted home prices rose 0.08% in April. Non-seasonally-adjusted home prices rose 0.8%.

For the Composite-20 average, seasonally-adjusted home prices fell 0.09%. Prices continued to fall in the four heavily-battered states of California, Florida, Nevada, and Arizona.

Inflation from March to April was 0.24%.

If Florida prices keep falling while DC prices start rising, I think I'm going to have to live where summer lasts all year long.

Leading Economic Index graph

The Conference Board Leading Economic Index attempts to forecast upcoming changes in the economy. Notice the slight uptick over the past two months.

Economist and blogger Rebecca Wilder notes more signs of recovery here and here.

Dilbert on the housing bust

Hat tip: Calculated Risk. Original source.

U.S. homeownership rate graph

Hat tip: Calculated Risk

REDC runs wrong advertisement

So, here I am on a cloudy Sunday afternoon assembling a new multimedia storage cabinet while flipping through the TV channels. I noticed one of those REDC home auction infomercials but was surprised when they mentioned a home in Stockton. "I didn't know there's an area called Stockton here in the Washington, DC metro area," I thought. The home being auctioned was actually in Stockton, California. I very quickly realized that all the homes in the infomercial were in Northern California. Apparently, REDC was accidentally airing a Northern California version of their infomercial here in the DC area. Oops!

I can't imagine many people in the DC area want to run out to a Northern California home auction. That looks like a half-hour's worth of advertising dollars wasted.

Update: REDC has been running the same Northern California ad on multiple channels, so either it's intentional (I can't imagine why) or someone really screwed up.

In Support of Auditing the Federal Reserve

There are many great reasons to audit the Federal Reserve.

Ron Paul’s bill to audit the Federal Reserve (HR 1207) now has 242 co-sponsors, and the numbers keep growing! At the same time, HR 1207’s companion bill in the Senate, S 604, is beginning to attract its first co-sponsors,

Imitation is the sincerest form of flattery

Eight months late, The Wall Street Journal copies me.