Today it was clearly visible that the historical data he looks at to predict the future is not working. The current appreciation in housing and other economic indicators are not what the models would suggest. Time and time again he said “this is a time of great uncertainty.” He’s clearly puzzled by the rapid appreciation in home prices while disturbed by the “bail out economy” and the national deficit. He admitted, “Things seem to be working right now but we’re in a GRAND experiment.” I found it incredibly telling.He's had other recent interviews:
At one point I said, “You seem so conflicted.” He said, “I am terribly conflicted. This is the most uncertain time that I can remember. Things are violating the laws that I learned. The turn around in real estate is so dramatic. The whole country is experiencing an upsurge but I don’t know what to make of it.”
Government has been dumping $40,000-$80,000 in cash into each marginal home purchase. With that kind of money, it would be shocking not to have a housing recovery. That spending gets added to the national debt. The people who get the hand out are often different from the people who pay the bill, so this is a case of robbing Peter to pay Paul.
Also, this massive spending changes the mark-to-market (short-term) value of homes, but since it does nothing to change the owner-equivalent rents those homes generate, it does not change the discounted cash flow (long-term) value of homes. Like credit card spending, we'll still be paying the cost when the benefit is long gone.
Hat tip to an anonymous blog commenter, who shall remain anonymous, and hat tip to Kevin for a link to the video.
Posts
Where's my hat tip? I posted the link!
ReplyDeleteAnyway, I think Shiller is being kind by pulling punches on what's obviously horrible economic and fiscal policy with these risky FHA loans and the awful tax credit. The market isn't violating economic laws, it's just being manipulated. The backlash from this will be terrible.
It would be interesting to hear how much revenue the credit generates. The "trickle down" effect.
ReplyDeleteFor example, taxes on the RE agent's commission. (And subsequent RE agents who particpate in the seller's next transaction.).
The RE agents themselves who might not be collecting unemployment benefits, or who remain in their homes a little longer due to the income (thus not flooding the market, depressing the assets held by society as a result of TARP spending, etc.).
The employees at retail, still working (and paying income tax) because RE agents had some money to spend.
The depictions of the credit seem a bit contrived to me. They're narrowed down to causing only 1 in 8 purchases, which means they can't have any significant affect on the RE market (of willing buyers and sellers). Then we're told it's creating a "bubble." And, there's absolutely no attempt to account for "trickle down" effects which should be equally as substantial as "the bubble."
This stuff seems more geared to pitchforking than objectivism.
Objectivism? It's become clear to me that this blog is dedicated to simplistic libertarian ideals. GOVERNMENT BAD...FREE MARKETS GOOD...ECONOMIC STABILITY BAD...ECONOMIC COLLAPSE GOOD.
ReplyDeleteA few days ago I said "...I feel like despite the housing crash, the same irrationality on housing has come right back. No one I know has ever said anything about fundamental measures like price/income or price/rent ratios. They just know they should buy cause its a good deal or something. In any case, I'm unable to understand the psychology of the housing market so come this summer I'm gonna really get out there and start looking too....".
ReplyDeleteI guess my confusion puts me in good company.
As far as Kevin's comment:
"Shiller is being kind by pulling punches on what's obviously horrible economic and fiscal policy with these risky FHA loans and the awful tax credit."
The idea that FHA insured loans are driving the market is unsubstantiated as far as I know. Its along the lines of the thoroughly debunked idea that fannie and freddie drove the original bubble, which is completely false (see my post here http://bubblemeter.blogspot.com/2009/10/is-bush-to-blame-for-housing-bubble.html ". As far as the stupid tax credit, it does seem to be driving some of the current price run-up but more out of consumer psychology than real economics. After all, its still only 8k per house despite an estimated marginal cost of 40-80k. So it seems to me to be driving foolish people to waste ten's of thousands in order to "save" 8k. Its weird but true.
> same irrationality on housing
ReplyDelete> has come right back
I am sitting on $200K cash (sold house, split proceeds with Ex and old stock gains I locked in).
So I am "homeless: (I rent) and on top of a a little cash hoard. What do I do with it?
- Stocks? Yeah, right, after the recent run-up no way.
- Gold? Probably a good buy still, but what do I do with it? It's shiny and pretty, but it doesn't improve my lifestyle.
- Bonds? When interest rates rise - and they will since they can't go lower - their value will go down.
- Cash? Dollar decimated against world currencies. No way to come back.
A house? Hmmm...improve my standard of living AND interest rates are low, low, low. I can't benefit from the govt giveaways (I am JUST over the cut-off), so for me I am buying since I really can't find a better way to use my money unless I go to Vegas and blow it (now, THAT is irrational)lly don't like. Rental houses meh.
kevin said...
ReplyDelete"Where's my hat tip? I posted the link!"
Sorry Kevin. I've added a hat tip to you now.
I actually found the Fox Business article and the Gurufocus.com video through Google News before reading your comment.
Mark F said...
ReplyDelete"It would be interesting to hear how much revenue the credit generates. The 'trickle down' effect.
For example, taxes on the RE agent's commission. (And subsequent RE agents who particpate in the seller's next transaction.).
The RE agents themselves who might not be collecting unemployment benefits, or who remain in their homes a little longer due to the income (thus not flooding the market, depressing the assets held by society as a result of TARP spending, etc.).
The employees at retail, still working (and paying income tax) because RE agents had some money to spend."
Your concern for the welfare of real estate agents makes me wonder what profession you're in. Could it be...? No.
So let's see, the median priced U.S. house is $175,000. The federal government is enduring a marginal cost of $40,000-$80,000 per house, but let's assume the low end of that range. That's 22% of the price of a home.
The real estate agents get a 6% commission on the home. That's $10,500 in their pockets. Of that, they pay perhaps 25% in taxes. So the government spends $40,000 per home and the "trickle down" effect is $2,625 in tax revenue.
Even that $2,625 is exaggerated, though, because part of the agent's commission goes to the RE company. The company pays taxes on profits, not revenues. Profits of the typical business are generally 5-10% of revenues.
This analysis assumes that the house remains unsold forever, rather than just selling later for a lower price. I think this is an unrealistic assumption in most cases. This means that much of that $2,625 in taxes would simply be paid to the government at a later date. So the trickle down effect is less than you make it out to be.
Keep in mind also that the $40,000-$80,000 per home that the government is spending could be spent on keeping teachers employed, thus adding to our nation's human capital. Or it could be used to build roads, rail systems in dense metropolitan areas, or bridges, which adds to our nation's physical capital. This kind of spending has a long-run positive effect in addition to the short-run positive effect. Heck, even spending money to BUILD new houses would add to our country's physical capital. But no, we'd rather spend the money to TRANSFER EXISTING HOUSES from one individual to another.
But it's really the RE agents who count, isn't it?
"A housing bubble blog dedicated to tracking the continuing decline of the housing bubble throughout the USA. It is a long and slow decline."
ReplyDeleteIt might be time to update the tag line for the "Bubble Meter," no? The decline of the housing bubble has clearly ended and it was neither long nor slow. The government's use of tax policy to bring stability to the housing market has proven to be amazingly effective. Let's see what happens to incomes over the next couple of years and whether they come into alignment with home prices. It will take some political courage to enact policies to prevent another run-up in home prices as incomes rise.
Perhaps in the U.S. the bubble has largely ended but in other countries it is still going strong and hasn't popped yet.
ReplyDeleteJames said:
ReplyDelete> Even that $2,625 is exaggerated,
> ...
> This analysis assumes that the
> house remains unsold forever,
> ...
> Your concern for the welfare of
> real estate agents makes me
> wonder what profession you're
> in. Could it be...? No.
I just wanted to reply to the above points.
1. I was suggesting a larger "trickle down." For example, the seller in the example proceeds to purchase a house she wouldn't if her house hadn't sold. (And the seller of that "trickle down" transaction buys a house they wouldn't have..., etc.).
2. I agree that the stiumulus moves future transactions to the present (i.e., reduces today's pain at the expense of tomorrow's delight.).
But, we do that all the time. Whether it's unemployment insurance (reducing the market forces which would compel me to find my "true" worth as a willing seller among willing buyers), or unemployed individuals living on credit cards rather than starving on the street in the name of "loyalty to pure market principles."
The way society took ownership of mortgage-backed securities ("troubled assets"), I think it has more than sufficient reason to stimulate the RE market to create liquidity, and improve the value of the securities its sitting on (and the chances that AIG might repay its bailout, etc.).
That's why I don't understand some of the analysis on this blog. We're told:
- The stimulus has a mediocre effect (1 in 8 buyers are affected by the credit?).
- It's causing a new "bubble" (which is hard to believe if so few people are enticed to buy when they wouldn't).
- The only trickle-down effect is one RE agent's commission, not all the other agents who benefit from more sellers becoming buyers (the cascading effect). Plus all the retailers who benefit from RE agents with cash in their hands. Or, the number of RE-occupied homes that don't go into foreclosure.
- And, there's no mention of the effect this newly-liquid market has upon the *huge* assets which the Treasury and Fed have taken off the hands of financial institutions as a "buyer of last resort."
I think you make good points about how roads, bridges, worker retraining, etc. might be better targets for stimulus spending. Those all have merits. But, I don't believe the home-buyer credit's getting a fair shake. It seems like the analysis is presented to generate opposition.
3. I'm a computer programmer who's never worked in the RE industry, or any industry even remotely connected to it.
James-
ReplyDeleteYour calculations about the net cost to the government of the tax credit misses a number of other potential benefits, but they are things that are virtually impossible to quantify.
Consider that if they succeed in stabilizing housing prices, the result might be fewer foreclosures, and fewer banks that need to be taken over by the FDIC. If the economy turns around, there would be less that would need to be spent on unemployment benefits, and it would reduce the risk that the Federal government might need to bail out one or more of the states.
How real is this effect? Impossible to say - we can't run the clock back and try it the other way so we can compare. It would be nice if we could - it would make the decision making a lot easier.
Furthermore, at this point we have no way of knowing whether the market will stabilize once the tax credits go away, or whether it will resume the slide.
Tuskenrayder said:
ReplyDelete>It might be time to update the tag
>line for the "Bubble Meter," no?
>The decline of the housing bubble
>has clearly ended and it was
>neither long nor slow.
Your comment reminds me of Shiller's remark that the market isn't behaving according to the models.
It seems funny the way economists develop models to explain reality, and when reality changes, they focus on the models instead of reality.
During the recent bubble, many economists denied there was a bubble because their models said a bubble couldn't exist. "The market's always right." Whatever price willing buyers and sellers negotiate, that's the true market -- not a bubble.
(A very lengthy NY Times article about how Economists missed the bubble here: How Did Economists Get It So Wrong?. To go to new pages within the article, copy the URL of the next page, and prefix it with "http://www.google.com/url?q=" . NY Times allows non-subscribers to view articles this way.).
That mentality largely drove the Credit Default Swap market (an opaque, unregulated derivative, like insurance without capital requirements to ensure claims can be paid). Since they didn't have historic data concerning mortgage defaults, they simply set the risk variable to the relative rise and fall of existing CDS contracts. If the price of existing CDS contracts rise, then the risk is greater. If they fall, it's lower.
(A good article describing the "quant" formula used to price Credit Default Swaps, and the Collateralized Debt Obligations they were based upon: Recipe for Disaster: The Formula That Killed Wall Street)
The implication was that willing buyers and sellers can't be wrong. Whatever price they set *is* the market price, and truly reflects the amount of risk in the market.
No regard for how those buyers and sellers cavalierly assumed CDS underwriters were capable of paying claims (or, that subordinate CDOs were appropriately rated for risk). No regard for how CDS underwriters assess risk when setting premiums. Just a circular feedback loop which ignored how the self-interest of buyers and sellers isn't rational like a computer model.
In the end, society was stuck bailing out AIG just so it can pay off it's "bets" to the big institutions (everyone who acted irrationally, making it appear the risk of CDS claim was low).
(A pretty good article about how the big Wall St. banks benefited from AIG's bailout (as lessor CDS counterparties had to settle for cents on the dollar with other failed underwriters): Is Goldman Sachs Evil? Or, Just Too Good?)
Mark F:
ReplyDeleteSupply/demand shifts don't have to be huge to cause huge shifts in price. Adding a few hundred thousand buyers to the market will drive up prices a good 5%, creating that mini-bubble. It's bad economics, and an irresponsible waste of taxpayer dollars.
"It would be interesting to hear how much revenue the credit generates. The "trickle down" effect. For example, taxes on the RE agent's commission."
Why would I or any other sane person give a shit about an agent making commission? They're ridiculously overpriced as it is. Cut the commissions and that will be more money in the pockets of homeowners.
Pardon me if this comes off as being a little antagonistic, but are you an agent? If not, why would you care about these cockroaches and their commissions?
Kahner:
"The idea that FHA insured loans are driving the market is unsubstantiated as far as I know."
They just replaced the subprime loans of years' past. Their reserves are nearly depleted because of high default, which is a result of risky loans, which is something Barney Frank says is good policy because it keeps home prices from falling.
Fannie, Freddie, Counterparty Risk and More
An FHA Loan Example
FHA's Lender Approval Process Did Not Ensure That Only Eligible Applicants Were Approved
She wanted a house but no lender would touch her. The Federal Housing Administration was more obliging.
New Home Sales: Shift to FHA Financing
FHA has replaced subprime. Risky loans given to people at ridiculously low interest rates with a high probability of default and down payment assistance. What part of this doesn't sound just like the last housing bubble? Only now, it's our government doing it rather than the stupid banks.
Kevin said:
ReplyDelete>Why would I or any other sane person give a shit about an agent making commission?<
I'm just presenting the macro-economic reality, not a personal hatred for Real Estate agents. I may dislike them as much as you do. But, at the moment, they're what we have to deal with. And, there's no doubt a "trickle down" effect which occurs if market liqudity is stimulated (and RE agents have more cash to spend, etc.).
I'm not saying the system is good. Just that it doesn't seem to get a fair shake on this blog (due to the kind of predilections evidenced in your comment.).
>Only now, it's our government doing it rather than the stupid banks.<
The borrowers got out of predatory loans. Not all "subprime" mortgage recipients were bad credit risks. Some people who trusted the system were steered to subprime due to the problem of Agency (brokers, lenders driving up their fees without regard to the effect it would have on the investor).
FHA would, presumably, have more latitude over renegotiating these loans rather than forcing them into default. The problem with private loans (from what I've read) was that the mortgage servicers could not renegotiate the terms of the loan due to the way mortgages were bundled and sold to a multitude of investors.
Finally, you have to keep in mind that society, for all intents and purposes, owns many of these loans already (in the form of "troubled asset" relief.). It became the "buyer of last resort."
Based upon what you describe, all it's doing is converting those mortgage borrowers into classic, socially-held mortgages instead of the toxic waste that it was forced to buy up, and take off the books of banks. This liquidates the problems with CDOs (subordinated tiers which now have no market), and all the corresponding CDSs.
There's a lot of good reason to move these things to true social loans instead of the convoluted, opaque and unregulated private-market devices that society has had to "own" for the past year.
Those of you who think the bubble has completely deflated and we have now reached a new equilibrium need to get outside of the beltway once in a while. The DC area is the only metro in the US that has reached any stability. Check out the situations in the largest states: CA, TX, FL, NY. Only TX is holding together at all (it also has the smallest bubble).
ReplyDeleteNow that the frenzy over the tax credit is done, the uptick in volume and prices will be quickly erased. Watch the Dec numbers(SAAR will be especially ugly) to get a cleaner picture of the markets. Once the fed stops buying all the mortgages in the spring it will be even uglier. Sell now or be priced in forever.
Loans in these days is a 100% risk game. i suggest don't go for any home loans or Mortgage.
ReplyDeleteMark F:
ReplyDeleteThe propositions that the tax credit was ineffective and it caused a new bubble are not mutually exclusive. The tax credit was largely ineffective with respect to what it was allegedly designed to do: cause more home sales. However, it was effective in reinflating sales prices.
Also, more money in RE agents' hands means less money in their clients' hands. The fact that RE agents are being more richly compensated for the same amount of work merely means that transaction costs have increased. This represents an economic inefficency. Increased transaction costs are bad for an economy as a whole even though they migh be good for the individual transacting agents.
Also, can you identify any evidence to show that CDOs have become liquid, i.e. attractive to private investors? I'm not saying that there isn't any such evidence; I'm just unaware of any such evidence.
To the extent that CDOs have become liquid at their former prices, I would argue that they continue to represent malinvestment and that they should remain illiquid until they are correctly priced.
soft landing said
ReplyDelete>Only TX is holding together at all
>(it also has the smallest bubble).
I'm not an expert on regional trends, but I just saw this article saying Arizona foreclosure activity down sharply.
"The state reported 13,345 foreclosure-related filings — default notices, scheduled foreclosure auctions and bank repossessions — during the month, a decline of 10 percent from the previous month and down nearly 24 percent from the same month a year ago.
"Nationwide, 332,292 properties were involved in foreclosure activities, down 3 percent from the previous month but still up nearly 19 percent from October 2008.
"It was the third consecutive month of decline, and `on first blush an indication that the foreclosure tide may be turning,` said James J. Saccacio, RealtyTrac chief executive."
Tangelo Mozilo said...
ReplyDelete>>>The propositions that the tax credit was ineffective and it caused a new bubble are not mutually exclusive. The tax credit was largely ineffective with respect to what it was allegedly designed to do: cause more home sales. However, it was effective in reinflating sales prices.<<<
I didn't say the claims were mutually exclusive, only that they are contradictory and used for maximum effect depending on which point is being promulgated.
An $8k credit which alegedly stimulates only 1 out of 8-9 buyers to buy when they wouldn't have, can't possibly have much effect on the supply of "willing buyers" within a market. And, $8k to subsidize every sale can't appreciate prices that much (about 5%?).
If people think 5% artificial price inflation is a "bubble" then what we just experienced 2-3 years ago was something else.
>>>Increased transaction costs are bad for an economy as a whole even though they migh be good for the individual transacting agents.<<<
I wasn't suggesting increased transaction costs (home prices inflated 5%, which RE agents take 6% of?).
I suggested that the increased volume of transactions certainly does have a macro-economic effect. Keeping RE agents in their homes (which might otherwise be foreclosed). Getting sellers out of homes, who then become buyers (getting more sellers out of homes, creating larger volumes of sales, etc.).
>>>can you identify any evidence to show that CDOs have become liquid, i.e. attractive to private investors?<<<
No. But, it stands to reason that if mortgages contained in CDO securities are liquidated, and the property re-mortgaged without all the derivative trickery, then the CDO (the assets which back it) has become more liquid.
My point is that when society stepped in and became the "buyer of last resort" for these toxic assets, there was an intent that they would be unwound and the market which no longer existed for them would resume under more transparent (traditional) mortgage services.
I believe the complaint that FHA is now making bad loans ignores the fact that society owns those loans (through TARP, etc.) and what is happening now is a natural consequence of that much larger problem that existed, and must be unwound. The benefit of this unwinding is that mortgage market becomes more transparent, and more liquid.
Mark F: "An $8k credit which alegedly stimulates only 1 out of 8-9 buyers to buy when they wouldn't have, can't possibly have much effect on the supply of "willing buyers" within a market."
ReplyDeleteRead up on supply and demand. It absolutely can have a big impact. Now relatively speaking, the impact wasn't massive. Prices ticked up no more than 5% in any of the regional markets, but anecdotal evidence suggests that prices in some neighborhoods have gone up as much as 20%. Anybody keeping track of prices can see this.
>but anecdotal evidence suggests
ReplyDelete>that prices in some neighborhoods
>have gone up as much as 20%.
That doesn't surprise me. Some markets were more heavily distressed than others. Markets which over correct tend to have the strongest rebound.
In my area, there aren't many homes for sale, and prices aren't forming a "bubble." But, in newer parts of town (further out), prices fell much harder. More homes on the market. It wouldn't surprise me if they bounced higher than you'd expect from merely a 5% buyer subsidy.
Would that be a "bubble?" Or, just an expected rebound from an oversold condition?
"Read up on supply and demand. It absolutely can have a big impact."
ReplyDeleteA bit snarky here Kevin and not much of an argument. Care to explain what effect the credit has on the "supply of willing buyers," besides that it is big?
More on FHA
ReplyDeleteHA was also adversely selected from 2000 through 2008 because it was the only guarantor willing to accept loans using seller-funded downpayments. Such downpayments were channeled through nonprofit organizations in order to meet FHA requirements on direct sources of funds. Those facilities created too many homeowners in the FHA portfolio that were not equipped for the financial responsibilities of home ownership. Indeed, the FY 2009 MMI Fund actuarial study for single-family loans notes that, if FHA had not insured any loans with seller-funded downpayment assistance, the net capital ratio today would still be above the statutory required two percent. FHA’s estimated economic net worth would be $10.4 billion higher today were it not for those loans. ... Their claim rates have consistently been between 2.5 and three times those of other FHA-insured home purchase loans.
----
These programs are reinflating the bubble by pushing people into houses that cannot afford them. People should NOT be buying houses without bringing money to the table. That's exactly what created this fiasco. Not by swelling the demand, prices get reinflated and more people will be underwater down the road. All this is at a massive cost to taxpayers.
I remember in the early 1990's being told that I need to bring at least a 10% downpayment for a condo. The norm back then from what I recall was to bring 20% in order to avoid paying mortgage insurance.
ReplyDelete