Home sales may dry up in December

BusinessWeek's Hot Property blog warns that home sales will dry up when the $8,000 tax credit goes away:

Just when the home building industry seemed to be bouncing back, news from California raises troubling questions. The California Building Industry Association says its members reported a significant drop in traffic to their developments in July because the state stopped taking applications for a $10,000 tax credit for new home buyers.

The $10,000 credit was authorized by the state legislature last February as a way to jump start California construction jobs. The credit, coupled with the $8,000 federal new home buyer credit, had been a big reason why builders in California saw a jump in sales this past spring.

Now with the initial funding exhausted, buyers are less eager. “Activity stopped as quickly as it started, which is bad news for housing and the broader economy,” says Robert Rivinius, the builder association’s president. ...

That the expiration of the state tax credits already seems to be dampening buyer enthusiasm in California doesn’t bode well for the home building, real estate sales or auto manufacturing industries nationwide. As the initial boost from government incentives ends, those industries could post poor sales numbers again. ...

“The federal tax credit for first-time buyers played a critical role in the purchase decision of many buyers,” says California Association of Realtors President James Liptak. “Nearly 40 percent of first-time buyers said they would not have purchased a home if the tax credit was not offered.”

Has housing hit bottom?

The arguments for and against a bottom, by USC professor Richard Green:

Everybody wants to know if we have hit bottom. There are three indicators suggesting we have—and three suggesting not. The good: prices in many markets have fallen below replacement cost (which is a pretty robust fundamental in the absence of population declines). Morris Davis at Wisconsin has shown that rent to price ratios have returned to be more in line with long term ratios, and given how low mortgage rates are, this is comforting. And resale inventories in California have dropped to under 4 months.

On the down side, we may have a lot of foreclosed houses coming at us in the next year. The employment picture is still atrocious. And if rents keep falling, prices will follow.

I would also guess that the first-time homebuyer tax credit is time-shifting sales, rather than raising them for the long term, but we shall see.

It's funny how rising asset prices are always "good" and falling prices are always "bad". More people need to study Warren Buffett's investment philosophy, because he considers low prices to be "good" and high prices to be "bad". As Warren would say, "The price you pay determines your rate of return."

Housing has likely bottomed. New bubble forming?

I hate to be the bearer of bad news, but as I'm sure you're already aware, almost all data seems to be indicating a bottom in housing.

Despite the claims of the Calculated Risk blog (which I have echoed), the bottom appears to have occurred simultaneously in permits, starts, sales, and prices.

The bottom also appears to have occurred simultaneously in nearly all parts of the country. The S&P/Case-Shiller seasonally-adjusted home price index shows month-over-month increases in price for 15 of the 20 metropolitan areas it tracks, including here in the Washington, DC area.

The bottom in housing is coinciding with the bottom of the economic cycle (i.e. the end of the recession).

Housing permits:


Housing starts:


Housing prices (via Rebecca Wilder):

There is a somewhat strong possibility that the $8,000 first-time home buyer tax credit, which ends November 30, is creating a false housing bottom.

By transferring wealth from some taxpayers to others (apparently a Democratic Party specialty), the tax credit is creating artificial housing demand. As confirmation of the effect of this wealth transfer, we can observe a similar pattern in auto sales due to the Cash For Clunkers program. Cash For Clunkers artificially stimulated auto sales by rewarding gas guzzler owners with a $3,500-$4,500 tax credit to buy slightly less gas guzzling vehicles. (We fuel-efficient car owners get to pay the tab via our taxes.)

Low mortgage rates are also stimulating housing demand. Mortgage rates today are lower than they were earlier in this decade when they helped fuel the housing bubble. These historically low mortgage rates are likely to remain low for some time, as the Fed and Treasury do everything they can to strengthen the economy.

Just as the Fed happily encouraged a housing bubble to stimulate the economy after the 2001 bubble burst-caused recession, I fear it will happily encourage another bubble to stimulate the economy after this one. As the stock market demonstrated earlier this decade, a new bubble can form before the previous one completely deflates.

Stock market double-bubble:


The big question is, what is the primary driver of current housing activity? Is it the $8,000 tax credit, which will go away soon, or is it the historically low interest rates, which won't?

The Cash For Clunkers program, and the fact that housing activity is much stronger at the low end of the market, suggest that perhaps the $8,000 tax credit is the primary driver. Low mortgage rates should equally encourage sales of all conforming mortgages, regardless of price. By contrast, the tax credit should heavily favor low-end sales. This is because an $8,000 tax credit is 10% of the cost of an $80,000 house, but only 2% of the cost of a $400,000 house. The fact that new home buyers are currently making up a disproportionately large percentage of home buyers is further evidence of the first-time home buyer tax credit's effect.

That said, as the tax credit stimulates housing activity and prices, it may change market psychology. Rising prices and low mortgage rates may then encourage others to jump on the bandwagon, causing yet another housing bubble before the current one has fully deflated. I can't predict the future, but this is a possibility that worries me.

What could prevent such a scenario? If Nouriel Roubini's warning that the economy may experience a double-dip recession comes to pass, then that will likely knock the wind out of the housing market a second time. However, the upward sloping Treasury yield curve—the most reliable and far-sighted leading economic indicator—suggests this will not happen.

Rebecca Wilder expects home sales to surge in the next few months as the end of the tax credit nears. Due to data lag, we likely won't know until spring 2010 whether home prices continue falling after the tax credit expires.

Case Shiller Price Index Up

"The prices of single-family homes in 20 major cities rose a seasonally adjusted 1.4% in June, the second increase in a row after falling every month for three years, according to the Case-Shiller home price index released Tuesday by Standard & Poor's." (Market Watch)

Fully 18 of 20 markets in the Case Shiller Home Price Index showed a rise in prices, demonstrating that the trend is broad-based. Only Las Vegas and Detroit saw declining overall prices in June. Nevertheless, on a year-over-year basis prices still are off by a considerable margin, 15.1% for the Composite-10 index and 15.4% for the Composite-20. (Seeking Alpha)

In the Washington, DC area prices were up 2.2% (seasonally adjusted) in June compared to May; Annually prices are down 11.8%.

For more info:

• Case Shiller Home Price Index (Standard & Poor's)
• Case-Shiller House Price Index Increases in June (Calculated Risk)

More bubbles to come

"Helicopter" Ben Bernanke, a guy who cannot recognize asset bubbles, is to be reappointed Chairman of the Federal Reserve. From The Wall Street Journal:

President Barack Obama will announce the nomination of Ben Bernanke to a second term as Federal Reserve chairman on Tuesday, opting for continuity in U.S. economic policy despite criticism in Congress of the low-key central banker's frantic efforts to rescue the financial system.

Mr. Obama's decision had become a subject of growing speculation and uncertainty in financial markets and in Washington policy circles.

The president called the Fed chairman to the Oval Office this past Wednesday to offer him another four-year term. Mr. Bernanke then flew off to Wyoming where he gave a defense of his controversial policies at the Fed's annual meetings in Jackson Hole. Mr. Obama left for Martha's Vineyard, Mass., where he will deliver the news Tuesday with Mr. Bernanke at his side.

Mr. Bernanke is seen by supporters inside the administration and in markets as a creative and steady hand who helped to keep the financial chaos, which became especially dangerous in the past year, from becoming much worse. White House chief of staff Rahm Emanuel said the president credits Mr. Bernanke for "pulling the economy back from the brink of depression."

My Bernanke poem:

Real estate was
The way to get rich.
Just buy a home
And give it a flip.

If you bought more house
Than you can afford,
Helicopter Ben
Will dump cash your door.

He's Helicopter, Helicopter,
Helicopter Ben,
The money-throwing man
Who works at the Fed.

Money from the clouds,
Money from the sky,
Manna from heaven,
Thank that helicopter guy.

Correcting two related housing bubble myths

A number of times I have heard journalists—who helped cheer-lead the housing bubble and who regard any price correction as a bad thing—falsely claim that the housing bubble began around 2003-2004. After all, that's when the bulk of the sub-prime lending began so that must be when the bubble began. A look at the inflation-adjusted data, however, shows that the bubble began growing in 1998 and we were clearly in mild bubble territory by 2000.

The extensive sub-prime lending that occurred in the middle of this decade was therefore a result of, not a cause of, the housing bubble. That said, the extensive sub-prime lending allowed the bubble to last longer and grow bigger than it otherwise would have.


In summary, the bubble did not begin in 2004 and sub-prime lending did not cause the bubble.

An economic recovery forecast

The Economist makes its prediction for the shape of the economic recovery:

A gloomy U with a long, flat bottom of weak growth is the likeliest shape of the next few years.

They also have a discussion about the housing market here.

Urban planners vs. "suburban sprawl"

Cato Institute Senior Fellow Randal O'Toole discusses urban planning and suburban sprawl.

Existing home sales are up, but...

From CNBC's Diana Olick:

Just like in retail, where the big bargain stores are showing gains, only the low end of the housing market is moving. ... I spoke with Spencer Rascoff of Zillow.com today, who claims, "this is not a real recovery." Higher sales on one end of the market do not a full recovery make.

1 in 8 mortgage borrowers behind on their mortgage

More mortgage borrowers are falling behind:

More than one in every eight homeowners with a mortgage was behind on home loan payments or in some stage of foreclosure at the end of the second quarter, as mounting unemployment aggravated the housing crisis, the Mortgage Bankers Association said on Thursday. ...

Jay Brinkmann, chief economist at the MBA, said signs were growing that mortgage performance is being affected more by unemployment than by the structure of risky home loans, indicating a new stage in the foreclosure crisis...

While the proportion of foreclosures started on borrowers with subprime adjustable-rate mortgages fell dramatically in the second quarter, foreclosure starts on traditional prime fixed-rate loans saw a dramatic increase.

Ever wanted a house on the Chesapeake?

Here is Zillow.com's estimate of ten years' of home values on Kent Island (specifically Stevensville, MD) on the Chesapeake Bay. Give it time. Prices are still falling.


Kent Island is where the Chesapeake Bay Bridge crosses. It's circled in the map below.


The only downside (besides the current price): Mapquest says a commute to DC takes roughly an hour each way. Anybody know of good jobs available in Annapolis?

Robert Shiller: "There could be another bubble. Absolutely. There could be."

...But the market is predicting flat housing prices over the next five years.

It's a 10 minute interview.

Quote of the day

Megan McArdle:

People still have something of a bubble mentality. They want to get in now, when things are cheap, because they expect that we'll return to the housing price inflation of the 1990s, if not the last decade.

Her entire blog post is well worth reading.

"Most of the country is about half-way there"

Update: As a loyal reader points out in the comments, Kendra Todd is an idiot. To quote Kendra from September 26, 2006:

You can't go anywhere without hearing people talk about "the real estate bubble." Such talk drives me to distraction, and I'll tell you why. It's because there is no real estate bubble. Bubbles are for bathtubs. Despite a thousand articles in Sunday newspaper real estate sections, the bubble is a myth.

Lawrence Yun Makes Another Inane Comment

With all the competition in the market for mid- and low-priced homes, Yun said there are reasons for potential homebuyers to be optimistic about the current market.

“People who are buying today might see a home equity gain a year from now,” he said. “Further decline in prices could be minimal -- if there are price declines at all.” (San Diego Source)

What is this statement supposed to be? Spin. More Spin. Another inane statement from Lawrence Yun, who is the Chief Economist for the National Association of Realtors.

An interview with Karen Weaver

Here's an interview with Karen Weaver, one of the Deutsche Bank analysts who predicts that 48% of all mortgage borrowers will be underwater by 2011.

Here's an sampling:

The obvious takeaway of falling home prices and being underwater is what it does for defaults. But there's a bigger implication, which is that when we look at the economy over the past decade or two, it's been very much a consumer economy.

What has been driving the consumer hasn't been gains in incomes. What has been driving them is easy credit and rising home values. And the fact that their home price was rising and they could borrow against that through home equity lines or loans or refinancing, it augurs for a very different economy going forward if people don't have that option.

Home price reductions

Zillow COO's housing prediction

Zillow.com's Chief Operating Officer, Spencer Rascoff, gives his prediction for the housing market:

"In the second half of 2009, home values are going to continue to decline. Foreclosures are going to keep making up a significant part of the sales, probably about a quarter of all sales in the back half of 2009 nationwide will be foreclosures," says Rascoff, adding, "I think you'll have those homes clear off the market but new foreclosures come on the market right behind them."

Rascoff believes we are a full year away from a true national bottom in housing, but even then, he says, don’t expect to make money fast. "You're not going to see a return to rapid appreciation from a couple of years ago," he opines. "This is probably going to be an L-shaped recovery where home values stay relatively constant once they hit the bottom."

Dow Jones: Home prices have not bottomed

Foreclosures up 32% year-over-year

More bad news for homeowners, foreclosures keep rising:

The foreclosure plague continued to devastate last month.

There were more than 360,000 properties with foreclosure filings — including default notices, scheduled auctions and bank repossessions — an increase of 7% from June and 32% from July 2008, according to RealtyTrac, an online marketer of foreclosed homes. In fact, one in every 355 U.S. homes had at least one filing during July. ...

The jump occurred as several foreclosure moratoriums phased out. They were initiated by many states to give the administration's foreclosure-prevention efforts time to work. But for many help did not come: The modification and refinancing programs have met with less success than hoped.

Where the foreclosures are:

Another major mortgage provider goes belly up

A major bank seizure occurred this weekend:

Troubled Colonial BancGroup will be bought by rival BB&T Friday, the government said after state regulators closed the bank whose assets had been frozen by a federal judge.

The Montgomery, Ala., bank, which has 346 branches spread across Florida, Alabama, Georgia, Nevada, and Texas, is the sixth largest bank failure in U.S. history and by far the largest failure of 2009.

With $25 billion in assets and $20 billion in deposits, Colonial is 100 times larger than the typical bank to have failed this year. ...

The failure of Colonial is another blow to the FDIC trust fund, which has had to cover 77 bank failures so far in 2009 — including four more late Friday.

How this could affect the mortgage market:

The collapse of Colonial BancGroup poses another hazard to the still-shaky housing market: Mortgages could become even harder to get.

The Southern regional bank, based in Montgomery, Ala., was the largest remaining player in warehouse lending, which provides short-term financing to independent mortgage bankers. At one time, these mortgage bankers originated half of all U.S. home loans using these funds.

Today, the warehouse lending market is decimated. In 2007 it was worth an estimated $200 billion; now there is just $25 billion available — 25% of which belongs to Colonial. With Colonial's failure, those funds could become even more scarce.

Ask your landlord for lower rent

MarketWatch.com gives the reasons why:

There are several reasons landlords may be willing to make a deal these days.

Eighty-eight percent of property owners who participated in a recent Rent.com survey said that job losses are contributing to vacancy rates. Fifty percent said would-be tenants can't afford rent or are trying to save, and 45% said that the trend of more people doubling up with roommates is causing units to sit vacant. The survey polled owners representing 3,192 apartment communities throughout the country.

Plus, there's even more inventory to compete with these days because in sluggish housing markets many homeowners rent their homes instead of selling, said Peggy Abkemeier, general manager of Rent.com. And some renters are becoming homeowners as affordability improves and the government entices them with a first-time buyer tax credit. ...

In response to vacancies, 68% of landlords said they were lowering rents and 68% also said they were giving one or more months of rent free; 38% said they were reducing deposits; and 18% were offering upgrades or allowing more leniency for breaking leases or changing status, according to the Rent.com survey. Fifteen percent are offering storage or parking at reduced rates, and 8% are relaxing pet policies. ...

And yet another survey by TransUnion, which screens credit for property-management companies, found that half of property managers are having difficulty locating qualified renters, compared with last year. Eighty-one percent are concerned they won't find reliable tenants for the rest of 2009.

Lessors of real estate are earning significantly less so far this year, according to Sageworks, a financial information company. Profits are falling, company research shows, and empty units cost money to maintain.

Personally, in my apartment complex in Centreville, Virginia, I'm surrounded by empty units. Still, my landlord is trying to slightly raise my rent above the going rate for new tenants.

Have home prices hit bottom?

The Center for Economic and Policy Research (CEPR), one of the first organizations to spot the housing bubble, has a new paper out analyzing home prices in different markets throughout the U.S.A. Here's the introduction:

As explained in our earlier papers, home prices have typically risen at approximately the rate of overall inflation over the course of the last century. Keeping with economic theory, which contends that a home’s sale price is derived from the rents it can generate, home prices in the United States have also moved in line with rental prices. Beginning in 1995, however, this seemingly stable relationship between home prices, rents, and inflation radically diverged from the historical trend. Home prices shot up while rents continued to move in line with inflation. Where the ratio of median sales price to median annual rent had hovered close to 15 to 1 in recent decades (i.e. it took $150,000 to buy a house that would rent for roughly $10,000 per year) at the peak of the bubble in 2007, it went above 25 to 1 in many inflated markets.

For purposes of analysis, this paper treats a home price that is 15 times the annual rent of a comparable home for rent as being at an equilibrium sale price, and defines a bubble market as one in which the ratio of price to annual rent exceeds 18 to 1. The paper also compares the current monthly costs of owning and renting.

Based on this measure as well as fairly conservative mortgage underwriting and rental market assumptions, this paper seeks to provide insight into two important questions:

1. After two years of decline in real estate markets, has the monthly cost of a modest home purchased today reached a level that is comparable to the historical cost of renting? and
2. Can a household that buys a moderately-priced home today expect to gain equity within five years?

Short answer: It depends on where you live. Full answer: Read the paper here.

Freddie Mac: Housing recovery is only seasonal

Via Calculated Risk, Freddie Mac says the housing recovery is "largely seasonal."

Do you agree? Will home prices continue their decline once the spring/summer selling season is over?

A creepy way to get a bargain on a house

I'd rather pay more money.

BubbleSphere Roundup

Research on Homeownership Rate through 2030 (Calculated Risk)
NODs Increasing, Foreclosures Decreasing (Calculated Risk)
Government's Mortgage Company Turns a Profit. What's Next? (O.C. Register)

The recession is ending; may be over

The number of new job losses continues to decline. Compare these U.S. Bureau of Labor Statistics job loss numbers with the numbers from Automatic Data Processing, which I published on Wednesday.


The unemployment rate is no longer spiking. It may drift upward at a slower pace if we have a jobless recovery, but the end of a sharp upward spike has historically been a sure sign of the end of a recession.


Weekly initial unemployment insurance claims peaked about a month ago. This graph shows the year-over-year percentage change for emphasis.


Finally, the bulk of the economic stimulus package is yet to be spent. That's a lot of money that will be dumped into the economy over the next year or two.

48% of homeowners with mortgages to be underwater by 2011

That's the forecast of Deutsche Bank, via The New York Times:

The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29 percent, it said. ...

Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011, it added.

Note: I believe The New York Times has made a significant and sloppy error. It says 48% of homeowners will be underwater, when it should be 48% of homeowners with mortgages. Not all homeowners have mortgages. A homeowner without a mortgage cannot go underwater. If memory serves me correctly, roughly one third of homeowners own their home free and clear. That makes it mathematically unlikely that half of all homeowners could end up underwater. I checked Bloomberg, and they say 48% of homeowners with a mortgage, not 48% of all homeowners.

July 2009 ADP employment report numbers

Source: Automatic Data Processing, Inc.

It looks like the recession is slowly ending, but it will still take a while. Note that job gains need to be positive just to keep up with population growth. The government's numbers come out on Friday.

Home rental scams

From the FBI, via Bruce Schneier:

Nigerian scammers find homes listed for sale on these public search sites, copy the pictures and listings verbatim, and then post the information onto Craigslist under available housing rentals, without the consent or knowledge of Craigslist, who has been notified.

After the posting is listed, unsuspecting individuals contact the poster, who is Nigerian, for more information on the "rental." The Nigerian scammer will state that they had to leave the country very quickly to do missionary or contract work in Africa and were unable to rent their house before leaving, therefore they have to take care of this remotely. The "homeowner" sends the prospective renter an application and tells them to send them first and last month's rent to the Nigerian scammer via Western Union. The prospective renter is further told If they "qualify," they will send them the keys for their house. Once the money is wired to the scammer, they show up at the house, see the home is actually for sale, are unable to access the property, and their money is gone.

DC area tiered house price indexes

From Calculated Risk:

The Daily Show makes fun of Tim Geithner

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Home Crisis Investigation
www.thedailyshow.com
Daily Show Full Episodes Political Humor Joke of the Day

Back from vacation

In answer to David's earlier question, I was in Maine. Unfortunately, the weather was lousy except for 3-1/2 sunny days.

Here are some photos from the few good days:




For those who weren't aware, the three short blog posts that I posted over the past two weeks were pre-scheduled. I created them before I left for vacation, then had them appear while I was gone so I could be sure the blog would remain somewhat active. Thanks to David for stepping in while I was gone, too. (I'm sure a lot of long-time readers would love to see David active again on a regular basis.)

I've had no TV, Internet, or newspaper for the past two weeks. I'll get back to blogging about the housing bubble as soon as I find out what's been happening in the world. If anyone wants to fill me in, consider this a bits bucket post.