Flashback 2004: Art Laffer denies the housing bubble

Exactly four years ago today, Art Laffer, one of the founders of the quack economic theory of supply-side economics, denied the existence of the housing bubble:

The price of housing is one of those topics that grabs just about everyone’s attention. In fact, if it hadn’t been for the presidential election squeezing other topics of interest off center stage in recent months, there would have been a lot more focus on what’s been happening with the housing market. Yet, in spite of the near monopoly of politics on the media’s attention span, there still have been quite a few reports and news articles covering the virtually unabated rise in housing prices. And these stories—some of which border at times on panic—almost all invoke the word “bubble.”

A closer investigation of these alarming reports reveals that many are unsubstantiated or based on logic that is faulty. Bubbles very well may “carry the seeds of their own destruction,” but from our standpoint there is no bubble. When viewed properly, the data do not show housing to be overpriced.

Washington, DC condos are feeling the pain

From The Washington Post:

More than two years into the housing slump, the challenges facing Washington's condos are mounting. Sales prices are falling and are not expected to stabilize soon. The number of condo owners not paying their association fees is rising along with foreclosure rates, creating a budget crunch weighing down many communities.

In the face of budget shortfalls, some associations are taking drastic steps to cope, including delaying maintenance and hiking monthly assessments. Others are setting aside part of their budget to cover delinquencies for a time or looking for ways to help owners catch up on payments.... The options can often be limited by owners' personal financial realities. ...

The problem may get worse before it gets better, according to some industry watchers. Foreclosure rates for condos have been rising. By the end of October, 1,208 condominiums were in the foreclosure process in the Washington area, according to RealtyTrac, a research firm.

The average sales price of new condos fell 3.6 percent in the Washington area during the third quarter compared with the same period a year ago.... The impact on existing condos has been even more dramatic: Sales prices fell 8.1 percent during the third quarter. At the current pace, it would take 8.2 years to sell the finished and almost-completed new-construction condominiums on the market.

New home sales lowest since 1991

New home sales have fallen to an 18-year low:

Sales of newly constructed homes slumped in October to an annual rate not seen since 1991, according to government figures released Wednesday.

The U.S. Census Bureau reported that new home sales fell to an annualized rate of 433,000 in October. That's down 5.3% from the revised 457,000 annual rate recorded in September, and off more than 40% from a year ago.

"October was definitely another disappointing month for the home-building industry," said Mike Larson, real estate analyst at Weiss Research. But he added that the decline was not surprising given the ongoing weakness in the housing market.

October's sales pace was well below the consensus forecast of 450,000, according to economists surveyed by Briefing.com. And it was the lowest number since January 1991, when the sales rate was 401,000.

The number of new homes on the market decreased in October to an estimated 381,000 from 414,000 in September. At the current sales pace, it would take more than 11 months to sell through the inventory.

The median sales price of new houses sold in October was $218,000, down from $218,400 the month before. It was the lowest level since June 2004, when the median home price was $215,700.

Happy Thanksgiving!

No posts today (except this one). Have a happy Thanksgiving.

Now the housing industry wants a bailout, too!

From the Hot Property blog:

Bailouts are in fashion. The financial industry got one. The automakers have their hands out. Now the National Association of Home Builders and the National Association of Realtors are pushing their own multi-billion-dollar stimulus proposals.

The proposals are designed to get buyers off the fence and rejuvenate the flagging home sale market. The more expensive proposal comes from the home builders who want a $250 billion Fix Housing First package, which calls for a home buyer tax credit of 10% of the purchase price (up to $22,000) and a heavy subsidy from the federal government that would bring 30-year mortgage rates down to 3% for homes bought in the first half of next year and 4% for purchases in the second half, according to The Wall Street Journal.

The Realtor plan sounds is somewhat modest by comparison. The group also wants taxpayers to subsidize mortgages to bring down rates by about 2% — at a cost to taxpayers of about $100 billion. And it wants the homeowner tax credit approved by congress this year to be changed so that the $7,500 credit can be given to all buyers, not just first-time buyers and that it no longer would have to be paid back. That part of the plan would cost another $40 billion, the group’s chief economist Lawrence Yun told me today, adding that he thought the builder plan was too expensive.

Finally, the Realtors want the higher limits for federally-backed jumbo loans of up to $729,000 to be permanently extended (They’re set to expire next year).

Enough with the bailouts!

Bubble book recommendation

The Hot Property blog recommends the book Chain of Blame, which is about the subprime mortgage crisis.

Meanwhile, I have The Trillion Dollar Meltdown on my Christmas list. Since there have been so many comparisons of our current situation with the Great Depression, I have also put The Forgotten Man: A New History of the Great Depression on my Christmas list as well.

While on the subject, let me also say that although I believe Alan Greenspan deserves much of the blame for the housing bubble and the resulting financial crisis, his book, The Age of Turbulence, is still an excellent read.

S&P/Case-Shiller: House prices down 16.6% year over year

S&P/Case-Shiller released their latest home price index numbers yesterday:

Home prices continued to fall as the economic downturn deepened in September, according to the S&P/Case-Shiller home-price indexes and the Federal Housing Finance Agency home price index.

"The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals," Case-Shiller index committee chairman David Blitzer said.

For the third quarter, the Case-Shiller national index posted a 16.6% decline in home prices from a year earlier, worse than the 15.1% drop posted in the second quarter.

Don't worry. As people have been predicting for three years now, the recovery is right around the corner.

Has the bubble fully deflated?

The Wall Street Journal says two different methods of measuring home valuation disagree on whether there is still a housing bubble:

Two measures provide conflicting answers. Home price increases have traditionally kept pace with income, and that measure has returned to its historical average, suggesting that housing prices are close to returning to normal. But a separate gauge, which tracks home prices increases against rent increases, shows that the housing market is still overvalued by around 15%, suggesting that it has further to fall.

I'd say that rental prices, which are a substitute for buying, are the better measure. A third measure, which the WSJ didn't discuss, is inflation-adjusted home prices. Adjusted for inflation, housing is still way overvalued.

In fact, I'd say there's something fishy going on with the price-to-income ratio. For incomes to have kept pace with housing prices, there must have been a dramatic increase in real incomes. However, many economists like Paul Krugman have been repeatedly pointing out that median real incomes have not increased during this decade.

Are there any economists out there who want to take a stab at this?

I've been hit! You sunk my housing graphs.

Like many bloggers and web site developers, I assume, I find it interesting to see how many visitors I get and where on the web they come from. Attracting visitors to a web site or blog is a bit of a catch-22 situation. People won't visit your site unless there are links to it, but people won't link to it until they've visited it. Even showing up in Google search results requires numerous incoming links.

Ever since I created my housing graphs web site in March 2006, Bubble Meter has been a significant source of visitors to the site. Even though the vast majority of visitors these days come from Google, Bubble Meter's links to my site are primarily responsible for my Google PageRank (with the dormant Chicago Bubble Blog and Baltimore Metro Area Housing Blog also helping out).

Thus, when David started getting blogger's fatigue, one of the factors influencing my decision to become a co-blogger here was the fact that I had a vested interest in Bubble Meter's survival. My housing bubble graphs get more incoming visitors from Bubble Meter than from any other site except Google.

Every once in a while, I will get a spike in visitors when somebody links to my housing graphs on a discussion forum. I really get intrigued when the incoming links are from a foreign language forum. For example, within the past month or two, quite a number of visitors have been coming from several Japanese discussion forums. (I wish I could read what they are saying.) However, I've never had such a bombardment of incoming visits as I've had within the last few hours.

I was checking the visitor stats for my other blog on StatCounter.com last night, when I decided to check the stats for my housing graphs web site. I was surprised to see that it had gotten over 1,000 daily page loads, which is a bit more than what it normally gets. Seeing the spike in visitors, I decided to check where they are coming from. So, I looked at the recent visitor history and was surprised to be getting almost all visitors from Patrick.net.

(Click image to enlarge.)

Even more surprising, all these visits were in the last hour of the day. It appears Patrick.net linked to me at around 11:12 PM. The swarm of visitors keeps coming in. By the time you read this, even if it is before noon, Patrick.net will likely have caused more people to visit my housing graphs than I have ever had in a single day.

Anyway, I'm not really going anywhere with this post. I just thought I'd share this little bit info about watching a housing bubble web site grow.

National median house price falls to $183,300

Surprise! NAR says housing prices are still falling:

The National Association of Realtors reported that sales by homeowners slid in October to an annual pace of 4.98 million. That was down 3.1% from September's revised reading of 5.14 million. ...

The national median existing-home price in October was $183,300, down 11.3% from a year ago when the median was $206,700. In September, the median existing-home price was $191,400.

October's median existing-home price was the lowest since March 2004, when it stood at $183,200. That means that homeowners who has lived in their homes for 4-1/2 years are seeing their homes worth the same or less as when they bought them.

I bet you didn't see that coming.

McMansion Watch: For Sale McMansion

I'm not sure if this qualifies as a McMansion, but it sure is ugly. This unlovely home, with a pavement and dirt lawn, can be yours for only $879,320. It is located in Warren County, Virginia.

Flashback 2006-2007: Peter Schiff warned of danger

Cool video: Peter Schiff warned of financial and economic danger. Others laughed at him.

Foreclosure Meter?

Google searches for the phrase "housing bubble":

Google searches for the word "foreclosure":

Fannie and Freddie to suspend foreclosures during Christmas season

From CNBC:

Mortgage finance companies Fannie Mae and Freddie Mac are suspending foreclosures during the holiday season.

The two companies say they will halt foreclosure sales between Nov. 26 and Jan. 9, while they evaluate whether borrowers qualify for a new loan modification program.

Call me a softy, but I agree with this. A little extra kindness during the Christmas season never hurt anyone. Besides, how can you buy gifts from Amazon.com if you don't know where you're going to be living when the package arrives.

I encourage other mortgage lenders to do this as well.

McMansion Watch: Model Home McMansion

I've seen this McMansion on the national TV news at least once. Since it's in the DC area (where a lot of the national press is located) and easily visible from a very busy road, it's an ideal candidate for news stories about housing. Notice the luxurious vinyl siding. You can't tell from the photo, but it's got a great view of traffic! This is a great house for someone who wants other people to see where they live, because lots of cars drive by every day and it really stands out from the road.

Like Monday's under-construction McMansion, this house is located on Pohick Crest Drive in Fairfax Station, Virginia. It is a model home for the builder, Calvert Luxury Homes.

Which type of person are you?

Bubble Meter used to get criticized by commenters for being too pessimistic. Now-a-days, Bubble Meter gets criticized by commenters for not being pessimistic enough. This may be due in part to the change in bloggers. David is more pessimistic than me, but he doesn't post much anymore. There are four different types of people, and which type you are tends to affect how you view the economic outlook:

• Perma-bears usually expect the worst.
• Perma-bulls usually expect the best.
• Lemmings usually expect the current trend to continue.
• Contrarians believe in reversion to the mean.

Most people are lemmings. Lemmings are the people who cause bubbles. When everything's great, they expect it to keep getting better. When everything's rotten, they expect it to keep getting worse.

I'd guess David is a perma-bear, although you'd have to ask him. I suspect most longtime Bubble Meter readers are also perma-bears. Lance is definitely a perma-bull.

I, however, am a contrarian. I believe that over the long run, housing prices, stock prices, and economic growth correct themselves. The long-term trend is up, but when things get too good they will get worse; when things get too bad they will get better. That is why I am currently optimistic about both the economy and the stock market over the long run. Housing prices, however, are still too high. But, at some point housing will again become a great investment.

Looking at the list, which type are you?

A short video explaining the mortgage banking meltdown

This video was produced by Enspire.com

Parker Flats condos revisted

Back in 2006, Bubble Meter wrote about the Parker Flats condo/townhouse development in Washington, DC:

The condo / townhouse development called Parker Flats at Gage School is currently being marketed.

Here, the top of the webpage it still says "Urban Condos from the $300s" (as of 4/6/06).

But found this line in an email advertising for the condo development today [4/5/06]: "Homes are priced from the low $200,000's for a studio flat to the $500,000's for a 2 bedroom in the historic school.."

Thus originally studios were priced from the 300's and now the studio's are going in the low 200's. Hmm... who is going to pay over 300 for a studio?

Two-and-a-half years later, they don't list prices for studios anymore, but those $500,000 2 bedroom condos now sell for as low as $434,900.

Recession as an advertising gimmick

I got a kick out of seeing this ad on CNBC.com. For those businesses that offer products or services on the cheap, a weak economy is a potential benefit. For example, Wal-Mart's stock is up since the subprime mortgage crisis began.

NAR: Home prices down 9% year-over-year

According to the National Association of Realtors, single-family home prices fell 9% over the past year.

National home prices, driven lower by a flood of foreclosures, plummeted in the third quarter by a record 9% year-over-year, according to a report issued Tuesday.

The median price of a single-family home fell in four out of five states, the National Association of Realtors reported. The national median price was $200,500, down 2.9% from the second quarter of 2008.

A flood of foreclosures has driven home prices down. As many as 40% of all sales made during the three months that ended Sept. 30 were short sales pr properties repossessed by banks. These are eager sellers. The longer the banks hold the vacant homes, the more it costs them in maintenance, taxes and insurance.

Are you missing the real estate bust?

My other blog

I'd like to let Bubble Meter readers know about my other blog, Policy and Economy. While Bubble Meter is focused on the the decline of the housing bubble and the economic destruction it has caused, Policy and Economy gives me a forum to talk about a much broader range of topics. Going forward, the difference in focus between the two blogs will be as follows:

Bubble Meter: housing bubble, housing bust, real estate, foreclosures, financial crisis and recession caused by housing bust, irresponsible homeowners, homeowner and bank bailouts.

Policy and Economy: broader economy, financial crisis, recession, bank and automaker bailouts, economic recovery (when it occurs), stocks, politics, civil liberties, foreign policy, terrorism, national security, global warming, taxes, energy prices, etc.

As you can see, there is some overlap between the two blogs. In those cases, I will occasionally cross-post the same post on both blogs. However, Bubble Meter will have a strong housing bust focus, while Policy and Economy will not.

Thus, between your two Bubble Meter bloggers we have the following:

David's sites

• Bubble Meter blog (admin)
• Lawrence Yun Watch blog
• David Lereah Watch blog
• Recession Times blog
  

James's sites

• Bubble Meter blog
• Policy and Economy blog
• Housing Graphs website

Mortgage broker raffling off his house

For $50, you can gamble on winning a house in Maryland:

In the casino of the housing market, Tom Walters is holding the wrong cards. He's a mortgage broker, so business has been slow, and on his own house, payments have risen to about $6,200 — too much to handle.

Instead of gambling on a sale, Walters and his wife decided to let others take a chance.

So for just $50, people can buy a raffle ticket for his six-bedroom, 4 1/2 -bath, 6,000-square-foot home on a two-acre parcel just outside of Annapolis. Estimated value? One million clams.

Walters is partnering with Annapolis-based We Care and Friends in the raffle venture because under Maryland law only charity groups can raffle off houses. The charity must sell at least 31,500 tickets to pay off the loans and keep its cut of at least 10 percent, Walters said.

This is the 10th house raffle attempted this year, according to the Maryland secretary of state's office. But only one, in Hagerstown, has been successful so far.

In the Walterses' raffle, the winner (to be picked Dec. 31) gets the home, free and clear. No closing costs. No mortgage payments. No broker fees. The Walterses get to walk away.

According to this article, the home was appraised for $1.28 during the summer. He also originally tried to have the drawing on September 27.

Even if the house really is worth $1.28 million, it's a stupid bet. According to the rules, if no drawing is held, you don't get all your money back. Instead, Tom Walters gets to skim 1%. Furthermore, he gets to cancel the raffle unless it raises at least $1,575,000. That mean you're paying $50 for a bet that on average is only worth at most $40.63 (assuming the $1.28 million appraisal didn't overvalue the house).

The math: $1,280,000 / $1,575,000= 0.813; $50 x 0.813 = $40.63

Realtors want government to subsidize mortgages

The National Association of Realtors opposes any re-privatization of Fannie Mae and Freddie Mac. Instead, they effectively want Uncle Sam to continue its current subsidization of the housing market.

To insure that there is sufficient capital to support mortgage lending to qualified borrowers, the National Association of Realtors® has adopted principles that recommend continued government involvement in the secondary mortgage market. ...

“NAR believes that the federal government must continue to play a role in the mortgage markets to insure the continued flow of capital.”

McMansion Watch: Under Construction McMansion

I took this photo yesterday. This house is being built right by several other newly-constructed McMansions on Pohick Crest Drive in Fairfax Station, Virginia. It is visible from Fairfax County Parkway. The builder is Calvert Luxury Homes.

I took several other photos of McMansions right near this one, so I'll share other photos over time.

Dead Realtor blog

*** That's [dead] [Realtor blog], not [dead Realtor] [blog]. Get those malevolent thoughts out of your head! ***

Back in 2006, Bubble Meter pointed out that the National Association of Realtors had started their own housing blog. Well, after two years of Realtor spin, it is now dead. I guess people just don't believe NAR's lies anymore.

Sure, many part-time bloggers simply just get tired of doing it. NAR, however, is an organization with paid employees. If one blogger gets tired, just hire another. The only reason I see for them to stop the blog is if it isn't convincing anyone.

NAR tried to lie about the outlook for housing for a long time. They kept trying to convince people that a recovery is right around the corner. The facts of the housing decline have now become so obvious and overwhelming that NAR probably gave up swimming against the current.

Adolf Hitler faces foreclosure

Bubble blogs are stupid!

Agent Genius Mag: Are bubble bloggers crazy or ignorant?

Bubble Meter told you so!

A warning from Bubble Meter in 2006:

The recession is coming soon. Be warned. :-(

In retrospect, David's warning was early, but right.

Those in government still don't get it!

Tim Duy writes:

From the wires:

15:30 *PAULSON SAYS MARKET TURMOIL WON'T ABATE UNTIL HOUSING REBOUNDS

Such comments always leave me with a sick feeling in my stomach – if policymakers are waiting for the housing market to rebound, they had better be prepared for a long wait. Sort of liking waiting for the NASDAQ to revisit the 5,000 mark. I think the biggest potential for policy error lies in maintaining the delusion that preventing housing, and by extension, consumer spending, from adjusting is central to fixing the nation’s economy. Policy would be best focused on supporting the inevitable transition away from debt-supported consumer dependent growth dynamic.

Housing prices are falling because fundamentally the price of housing became unaffordable. The stream of expected household income necessary to repay the loans exceeded the capacity of household budgets. It is that simple – there is no sense in paying $3,000 a month in mortgage payments on property with the rental equivalent of $1,000. To be sure, a homeowner could justify such a purchase as long as they thought they were guaranteed a 15% annual risk free return. But who, other than realtors and mortgage brokers, remain under that delusion?

Similarly, I find programs that purport to “help” homeowners by reducing their mortgage payments of questionable value. Lowering your mortgage payment to 38% of income might sound like a good deal – but if you have no equity, you do not really own anything. You are just a renter by another name. So if your final mortgage payment significantly exceeds the rental equivalent, has the government really made you better off? And if, as I suspect, homeowner bailouts will not stem price declines, the program recipient could soon find themselves with negative equity again in a matter of months. If you really wanted to help underwater homeowners, you would bring their payments in line with the rental equivalent. I suspect this would be extremely costly.

Again, price and affordability are inversely related. Those who want to prop up home prices essentially want unaffordable housing.

The effect of falling prices on the conforming loan limit

From The Wall Street Journal:

At least one thing is holding steady for 2009: the conforming home loan limit, or the maximum size of loans that [Fannie Mae and Freddie Mac] can purchase. The current limit of $417,000 for single-unit homes will remain in place for most of the U.S., the Federal Housing Finance Agency, the regulator of the two mortgage buyers, said today.

The Housing and Economic Recovery Act of 2008, signed into law in July in response to the subprime mortgage crisis, established that changes in home prices in a given year would determine the loan limit for the following one. The limits could not decline, so falling home prices produce no change. ...

“For this year…all reliable metrics point to lower prices, and a price decline of any size is sufficient to determine that the national limit will not change,” the agency said in a statement. ...

Homes in “high-cost” areas are subject to different guidelines, as set by the Housing and Economic Recovery Act. The loan limits for those areas are equal to 115 percent of average local prices, but they cannot exceed the standard limit of $625,000 for one-unit homes.

Bits bucket for Friday, November 14

Please post your thoughts, links, and MLS/Craigslist finds here.

Barney Frank on foreclosure prevention programs

From CNN Money:

Rep. Barney Frank, chairman of the House Committee on Financial Services, highlighted the need for a bailout program for troubled homeowners on Wednesday. But he stressed that not all borrowers should necessarily be rescued.

"Diminishing foreclosures is an important part of getting out of this [financial crisis]," said Frank, D-Mass., in an opening statement at a Congressional hearing on bank rescue plans for homeowners facing foreclosure.

But Frank added that taxpayer money should not be used to give anyone a "free ride," and warned that aid should not go to homeowners who never could have afforded their mortgage to begin with.

"There is, in my judgment, zero likelihood that taxpayer dollars will go to those who should never have had loans in the first place," Frank said.

Mortgage Interest Rate Watch

Source: Bankrate.com

Almost 85,000 foreclosures in October

From CNN Money:

As government and industry scrambled to stem the housing crisis, another 84,868 homes were lost to foreclosure in October, according to a report released Thursday.

Last month 279,561 struggling borrowers received foreclosure filings, including default notices, notices of auction sales and bank repossessions, according to RealtyTrac, an online marketplace for foreclosures. That's a 5% increase from September, and up 25% from October 2007.

"October marks the 34th consecutive month where U.S. foreclosure activity has increased compared to the prior year," said James J. Saccacio, chief executive officer of RealtyTrac in a statement.

A total of 936,439 homes have been lost to foreclosure since the housing crisis hit in August, 2007.

Imagine what the numbers would be if we didn't have all these anti-foreclosure programs!

New York City joins housing slump

While the housing bubble decline has adversely affected much of the United States, some previous bubble markets like New York City, Boston, and Washington, DC proper, have been largely resistant. Well, according to Robert Toll, CEO of home builder Toll Brothers, New York City is now taking it on the chin.

According to the transcript of the company’s conference call, provided by Thomson Street Events, Mr. Toll is asked if there were there any areas that stood out as stronger than others. Mr. Toll responded: “I wouldn’t say so. … No, I reviewed that just this Monday night with all of the regionals, and unfortunately, I don’t see any areas of strength. We used to be able to claim New York City. We don’t claim that any more. We used to claim Connecticut, and that slowed down a little bit. I don’t see any standouts.

Later, he added: “Been a tremendous change in the last six weeks. Up to the financial debacle crisis that we’ve entered, New York City was a nice stand-alone, and a beacon, but it has now joined the ranks of the rest of the country. … I would expect the financial business in New York to probably lose 100,000 people. You don’t think it will be that high, guys? Well, I hope I’m wrong, but that’s got to have a serious impact on the price of real estate, and I would think that the foreign market, which supported in large measure the pricier condos in New York City, is not there in force as it was. What with the euro going down in comparison to the dollar lately, and with their own economic crisis. So I would think you are in for a more challenged time in New York.

Put a bunch of the city's highest paid employees on the unemployment line, and it will have an effect.

Toll Brothers is still seeing declining sales

Home builder Toll Brothers is continuing to see declining sales:

Troubles in the home-building industry keep getting worse. Toll Brothers Inc. said Tuesday that customer traffic and sales hit record lows last month, as the financial meltdown spooked an already weak market and triggered a wave of contract cancellations.

Chief Executive Robert Toll said signs of stabilizing conditions through the summer and into early September were "upended by the past month's financial crisis" and the fear of job and stock-market losses.

Don't worry, Messrs. Toll, the housing recovery is right around the corner. I know because people have been saying it's right around the corner for three years now.

Tomorrow, tomorrow, I love you, tomorrow! The recovery is always a day away!

Government announces "Streamlined Modification Program"

The U.S. government announced a new foreclosure prevention plan yesterday:

The plan centers on Fannie Mae and Freddie Mac, which between them own or back about 31 million mortgages worth a combined $5 trillion. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages.

Eligibility is determined by several factors: Homeowners must be 90 days or more late in their mortgage payments, owe at least 90% of their home's current value, live in the home on which the mortgage was taken and have not filed for bankruptcy.

Their mortgage payments would be adjusted through lower interest rates or longer repayment schedules with the goal of bringing payments below 38% of monthly household income. Interest rates could be lowered for five years and then raised to a predetermined level. Loan terms could be lengthened to 40 years.

Officials said the standards for loan modifications should fast-track changes in payments. The standards will be applied to loans owned and guaranteed by Fannie and Freddie, but officials said they hope they will also be adopted industrywide.

"We expect that it could significantly increase the number of modifications completed," said James Lockhart, director of the Federal Housing Finance Agency, the regulator that oversees Fannie and Freddie. ...

Fannie reported this week that 1.7% of its mortgages by value are delinquent by 90 or more days. Fannie's filings suggest that it has about 18 million mortgages on its books, which would work out to about 300,000 mortgages that could potentially be eligible. ...

But even in cases where declining home prices have taken the value of a home to less than is owed on the mortgage, the balance of the loan will not be lowered under this program.

"This is not loan forgiveness; the loans will be paid but at terms affordable for borrowers," said Brian Montgomery, commissioner of the Federal Housing Administration.

The fact that mortgage balances will not be reduced for the so-called underwater mortgages — those in which a homeowner owes more than the home is worth — will limit the use and impact of the program, according to some experts.

The Washington Post has more details:

Instead of the standard cumbersome loan modification process, which can include reviewing a borrower's credit report and tax returns, the new plan focuses on the borrower's income and how much he or she can afford to pay. It also creates a formula for determining what a homeowner can afford, eliminating some guesswork.

Government officials said they expect the effort, dubbed the Streamlined Modification Program, to be able to help "hundreds of thousands" of homeowners. ...

The program, set to begin Dec. 15, applies only to mortgages owned or guaranteed by Fannie Mae and Freddie Mac, which are involved with more than 50 percent of residential loans. But major lenders, including Bank of America, Wells Fargo and Citigroup, have agreed to apply the formula to loans they administer for Fannie Mae and Freddie Mac and are expected to extend it to their own loans, industry officials said. ...

A borrower who is 90 days delinquent will be eligible for a new loan with a payment that does not exceed 38 percent of his gross monthly income.

To qualify, the homeowner must provide proof that he has suffered a hardship, such as losing a job, that made it impossible to keep up with payments. The terms of the borrower's loan then could be extended from 30 years to 40 years, and if that is not enough, the interest rate could be reduced to as low as 3 percent to make the payments more affordable. The homeowner could be subject to a interest rate increase after a set time, depending on how low their new interest rate is. If those options don't reduce payments enough, part of the principal owed on the loan could be deferred until the end of the loan term.

When I first read that this program is only available to people 90 days delinquent or more, I though it would reward irresponsible behavior. (If you pay your mortgage, you don't get help.) The criteria that the homeowner must "provide proof that he has suffered a hardship, such as losing a job" may prevent this plan from rewarding irresponsible homeowners. However, it may also dramatically reduce the number of financially-troubled people who can take advantage of the program.

Of the various loan modification options available, extending the mortgage to a 40-year mortgage is the least objectionable, because it doesn't give the homeowner free money. It just reduces their payments, while slowing the pace at which they will (eventually) acquire equity in their home. Reducing the interest rate or reducing the principal on a loan effectively gives free money to homeowners, so I generally oppose them.

CNN Money points out that this plan doesn't help most subprime homeowners, who are the people in the most financial trouble.

Zillow: Seven quarters of declining home prices so far

30% of homes sold for a loss over the past 12 months:

Home values in the United States posted their seventh consecutive quarterly decline, with nearly one-third of Americans who sold in the past year losing money, real estate website Zillow.com said Wednesday.

Home values fell 9.7 percent year-over-year in the third quarter to a Zillow Home Value Index of $202,966, according to the third quarter Zillow Real Estate Market Reports, which encompass 163 metropolitan areas.

Home values have dropped a total 12.8 percent since the market peaked in 2006. ...

Over the past 12 months, 30.2 percent of homes sold were sold for a loss, up from 23.7 percent at the end of the second quarter. ...

One in seven, or 14.3 percent, of all homeowners across the country has negative equity, and of homeowners who bought in the last five years, almost one-third, or 29.5 percent, are 'under water', the reports showed. ...

Foreclosures made up almost one in five, or 18.6 percent, of all transactions in the past 12 months and areas with the highest foreclosure rates are the markets with some of the greatest home value declines.

Bits bucket for Wednesday, November 12

Please post your thoughts, links, and MLS/Craigslist finds here.

Citigroup announces new foreclosure prevention program

The plan will affect $20 billion worth of mortgages:

Citigroup says it will expand its foreclosure prevention efforts and try to keep 130,000 troubled borrowers with $20 billion in mortgages in their homes. ...

The Citi effort, dubbed the Citi Homeownership Assistance Program, targets 500,000 Citi borrowers. CitiMortgages CEO Sanjiv Das said he expects that more than a quarter of these people, with mortgages worth about $20 billion, will take advantage of the program over the next six months.

"We're reaching out to borrowers in areas of steeper-than-usual falling prices and higher-than-average unemployment," said Das, including California, Michigan, Florida, Nevada, Ohio and Arizona. "These areas are where the concentration of at-risk mortgages are the highest."

The new initiative differs from Citi's existing mortgage mitigation efforts in that it's a much more proactive plan, said Eric Eve, Senior Vice President, Global Community Relations for Citi. ...

This new initiative is open only to borrowers who are still current on their loans but are at risk of defaulting — particularly those borrowers who owe more on their mortgages than their homes are currently worth. Additionally, their loans must be owned by the bank, rather than sold off to investors. ...

For borrowers who have yet to default, Citi will now aim to reduce their monthly mortgage payment, including property taxes and insurance, to 40% or less of their income. To do that, it will freeze or reduce interest rates, extend the lifetime of the loan or even reduce the loan principal.

Das said the new plan will be implemented immediately and the workouts will be handled in a very fast, streamlined fashion to aid as many homeowners as quickly as possible.

Economic predictions for the coming year

Economists predict the worst recession in 25 years:

The U.S. economy is expected to shrink 0.4% in 2009 compared with 2008, according to the monthly survey of 49 economists published Monday by Blue Chip Economic Indicators. ...

The economists' median forecast calls for U.S. gross domestic product to fall by 2.8% in the final three months of 2008 and by 1.5% in the first quarter of 2009. ...

"The consensus strongly suggests that the current recession will be deeper and last longer than those of 2001 and 1990-91," said Blue Chip editor Randell Moore in his commentary.

"Some of our panelists believe it may rival the 1981-1982 downturn, but that is not yet the consensus view," he added.

The nation's unemployment rate is expected to average 7.4% in 2009; it was 6.5% in October. ...

The consensus sees the consumer price index, which tracks inflation at the retail level, rising by 1.5% in 2009 after a 4.2% gain in 2008.

Note again that although this is the worst financial crisis since the Great Depression, it is not the worst economic crisis since the Great Depression. The early 1980s recession was significantly worse than the current one. The two recessions since then—1990-91 and 2001—were both mild by historical standards, so it's not surprising that this one is worse.

Several bozos in the mainstream press keep getting this wrong. (Yes, I'm talking about you, Wolf Blitzer!) These journalists keep treating "financial crisis" and "economic crisis" as if they are synonyms. They are not synonyms! Journalists' ignorance of the difference between a financial crisis (a crisis affecting the financial system) and an economic crisis (a crisis affecting the broader economy) is causing them to mislead and scare the public.

Flashback 2006: "There is no bubble in real estate"

From two years ago today, Rick Snyder denied the existence of a housing bubble:

You hear it in the morning news shows, on the cable networks, and in local news papers. Screaming so called investment professionals saying the housing bubble is bursting.

As a real estate professional, I am regularly asked how I am doing with the market so far down. My answer is, “what are you talking about”? I have been working with buyers and sellers the same now as BB (Before the Bubble). I would like to take this time to say that there is no bubble in real estate. The bubble was coined for the dot com industry that exploded when the paper stock could not be sustained. Real estate buying and selling is the life blood of the United States of America; it has always run the economy and always will. ...

Boise Idaho is a hot market that families from other parts of the nation want to live. We are going to continue to be that hot market. I am proud of our Home, and will continue to provide trustworthy guidance to my clients.

Bits bucket for Monday, November 10

Please post your thoughts, links, and MLS/Craigslist finds here.

A condensed version of I.O.U.S.A.

I.O.U.S.A., condensed to 30 minutes:

Job losses causing more foreclosures

According to CNNMoney, a growing proportion of foreclosures are being caused by job losses:

For years, bad loans and their aftershocks have been sending homeowners into foreclosure. Now it's lost jobs that are putting troubled borrowers over the edge.

As the economy tanks, unemployment is the major factor driving a much larger proportion of foreclosures now than in the earlier stages of the mortgage meltdown.

On Moral Hazard

Dumb books by dumb authors

Sometimes authors try to make money by selling books that make stupid predictions about the future. When the future doesn't turn out as planned, the authors look like the idiots they are.

Reading a post on David Lereah Watch got me thinking of some of the dumb prediction books out there. Here are a few noted offenders, in chronological order:

• The Great Depression of 1990 by Ravi Batra, 1987

• Dow 36,000 by James K. Glassman and Kevin A. Hassett, 1999
  

• Why the Real Estate Boom Will Not Bust — And How You Can Profit From It by David Lereah, 2006
  

• A Bound Man: Why We Are Excited About Obama and Why He Can't Win by Shelby Steele, 2007

If you think of any others, please add them to the comments.

Bits bucket for Friday, November 7

Please post your thoughts, links, and MLS/Craigslist finds here.

Top contenders for U.S. Treasury Secretary

CNBC does some pondering on who may be the next Secretary of the Treasury under President Obama.

Here is my own list of top contenders:

• Tim Geithner, President of the Federal Reserve Bank of New York; believed to be a Democrat.
  
• Jon Corzine, Democratic Governor of New Jersey, former U.S. Senator, and former CEO of Goldman Sachs.
• Jamie Dimon, widely-respected CEO of JPMorgan; a financial contributor to many Democratic candidates.
  
• Larry Summers, Harvard economist, former President of Harvard University, and former U.S. Treasury Secretary under Bill Clinton.
• Paul Volcker, the best Fed Chairman in history; Alan Greenspan's predecessor; appointed under Carter and reappointed under Reagan. He's the guy who ended the stagflation of the 1970s. Being a decade older than John McCain, his biggest obstacle is his age.
  

On moral hazard

We need a bailout, they say. Forget moral hazard, they say. Humph! American borrowers are a bunch of liars.

What didn't cause the housing bubble

Via EconLog: Two recent popular scapegoats are not responsible for the housing bubble:

Robert Shiller wrote,

Dramatic home price booms since the late 1990s have been in evidence in Australia, Canada, China, France, India, Ireland, Italy, Korea, Russia, Spain, the United Kingdom, and the United States, among other countries.

He has charts suggesting that the Netherlands and Norway experienced greater booms than the United States. In his book The Subprime Solution, he has a chart that shows London house prices rising faster than prices in Boston.

What makes this a difficult fact is that so many explanations of the house price boom are U.S.-specific. It is hard to argue that the Community Reinvestment Act or the repeal of Glass-Steagall are what account for the home price booms in Norway or Spain.

Bits bucket for Thursday, November 6

Please post your thoughts, links, and MLS/Craigslist finds here.

America faces a new economic crisis

Experts predict that America will face yet another economic crisis in early 2009.

How McCain could have won

Bryan Caplan says McCain could have won if he had responded differently to the financial crisis:

McCain should have opposed the bailout. There was a lot of popular resentment of it; it would have put a mile's distance between McCain and Bush's failures; it would have given McCain a great populist issue to ride; and it would have put Obama in the awkward position of defending Bush to the country.

Combine that with former Pennsylvania governor Tom Ridge as McCain's running mate, and the future course of America might have been different than it is now.

Barack Obama is said to want a bipartisan administration, so I have a suggestion: John McCain for Secretary of State.

Bits bucket for Wednesday, November 5

Please post your thoughts, links, and MLS/Craigslist finds here. Also feel free to express your thoughts on the election results.

JP Morgan launches foreclosure prevention progam

From CNNMoney:

JP Morgan Chase unveiled a bold new foreclosure prevention program Friday.

The bank will step up its efforts to offer mortgage modifications for borrowers at risk, institute an independent review process to eliminate all unnecessary foreclosures and hire and train more staff to handle the added caseload that the plan will generate.

Most important, it will not put any delinquent loans into the foreclosure process during the 90 days it takes to implement its new plan.

JP Morgan Chase expects to help 400,000 families keep their homes during the next two years by working out $70 billion worth of loans. The company says its housing rescue efforts have already helped 250,000 families holding about $40 billion in loans.

18% of mortgage borrowers are underwater

According to Reuters, almost 1 out of 5 mortgage borrowers owe more than their house is worth:

Nearly one in five U.S. mortgage borrowers owe more to lenders than their homes are worth, and the rate may soon approach one in four as housing prices fall and the economy weakens, a report on Friday shows.

About 7.63 million properties, or 18 percent, had negative equity in September, and another 2.1 million will follow if home prices fall another 5 percent, according to a report by First American CoreLogic. ...

Seven hard-hit states—Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio—had 64 percent of all "underwater" borrowers, but just 41 percent of U.S. mortgages. "This is very much a regional problem, and people tend to forget that," said David Wyss, chief economist at Standard & Poor's, who expects home prices nationwide to fall another 10 percent before bottoming late next year.

"Most of the country is not in bad shape," he continued. "Things seem to be stabilizing in Michigan, but the big bubble states—Florida, California, Arizona and Nevada—are still very overpriced."

This statistic, from First American CoreLogic, seems to conflict with data from Moody's Economy.com released a month ago. This report says that 18% of mortgage borrowers are underwater. The statistic from last month said 16% of homeowners were underwater. It is possible that this apparent conflict is really the result of sloppy journalism which assumes that all homeowners have mortgages.

Also, the Rust Belt never really had a housing bubble, so it's good to see that the decline in Michigan is slowing.

Election Day!

Don't forget to vote today.

The first returns are already in:

Democratic presidential candidate Barack Obama emerged victorious in the first election returns of the 2008 presidential race, winning 15 of 21 votes cast in Dixville Notch, New Hampshire.

People in the isolated village in New Hampshire's northeast corner voted just after midnight Tuesday.

Back in early January, Dixville Notch correctly forecasted the eventual national primary results, picking Barack Obama in their Democratic primary and John McCain in their Republican primary.

Bits bucket for Tuesday, November 4

Please post your thoughts, links, and MLS/Craigslist finds here. Also please share your thoughts on today's election.

The housing bubble could have been popped

Alan Greenspan, among others, has argued that the housing bubble could not be popped, even if the Fed wanted to pop it. Economist Arnold Kling disagrees:

Megan McArdle questions whether Fed policy could have popped the housing bubble. I think that the housing bubble could have been popped easily by putting curbs on loans with low down payments. That could have been done in several ways. First, forbid Freddie and Fannie from doing anything to support low-down-payment mortgages. (Alternatively, rigidly require Freddie and Fannie to hold sufficient capital against the loans. That would have made them uneconomical to buy.) Second, adjust bank capital requirements to get rid of the loophole that allowed these high-risk loans to get low risk ratings when securitized. Third, just issue a warning against the practice.

Bernanke was a member of the Fed starting in 2002, and he could have advocated any of these policies. In my view, he shares with Greenspan any blame for not trying to pop the bubble. ...

In any case, one can argue that if the housing bubble had been popped, the excess risk-seeking funds would have gone elsewhere, creating a different bubble. I still think that the policy of encouraging high leverage in housing, a policy which continues to this day, was wrong.

World housing prices

Here's an interesting map of the world. It reflects the relative value of housing prices throughout the world.

The size of each territory shows the total value of all housing, adjusted for local purchasing power.

Western Europe contains the most expensive housing, while Africa and South Asia has the cheapest, even after allowing for the fact that money goes further here.

Source.
Hat tip: Chris Blattman.

The housing bubble and politics

An interesting tidbit from Greg Mankiw:

Obama leads in 18 out the 19 states with the largest recent declines in home prices, whereas McCain leads in 13 out the 14 states with the largest recent increases in home prices.

Don't assume a cause-and-effect relationship. Most of the states experiencing the housing bubble bust were either blue states or swing states back in 2000, long before anyone outside of Chicago had heard of Barack Obama.