Wednesday, February 25, 2009 Article: U.S. Existing Home Sales, Prices Slumped in January

According to this article U.S. Existing Home Sales, Prices Slumped in January.
The gist ofthe article is that the declining economy is going to going to continue to drag down the housing market as consumer confidence also declines.
According to the article the economy will likley not rebound with respect to unemployment until 2011.
The article quotes Lawrence Yun, the chief economist for the National Association of REALTORS (NAR), as saying that the recent goverment actions may lift home resales by as much as 900,000 units this year.
Being a REALTOR myself, I have read Mr. Yun's predictions many times over the past 3 years. 
I have to say that he has said the market would improve in 2006, 2007 and 2008.
Each time he was wrong and he will be wrong this time as well. Despite what NAR would like
consumers to believe, homes are still not affordbale. NAR's way determining home affordability is
to factor in financing (see the NAR Home Affordability Index). The problem is that when financing
is abnormally cheap (i.e. like during the market boom) it lends itself to over-inflated prices (like during the market boom).
The result is that when rates increase the home owners cannot sell their home for as much as they paid and a whole
new problem starts just like what we see now. The fact is that prior to the huge run up in home prices that started
around 2000, the median home price in a given area was more related to the median income in that area.
For homeowners to be financially solvent the ration of home prices to median income needs to be around 2 to 1
with an absolute maximum of 3 to 1. Now even after the market declines that started in 2006
the median price of a home in most areas of the US is 3-4 times the median household income
meaning that 2 people now need to work to buy a home as opposed to just one worker in each
household. Two family incomes helped push up the median price and this was worsened by
consumers accepting more debt as being OK. Historically, the values of real estate were
determined by the quality of life that the location offered, the size and type of property and
local employment prospects. Unfortunately, during the most recent run up in prices the major
factor was the monthly housing payment versus household income. As rates went lower and
financing became more available, prices increased until the prices reached a popping point.
That cannot happen again, otherwise, we will see the same problems all over again. The solution
is that real estate prices need to continue to decline for a while longer in order to bring affordability
more in line with common sense criteria, not monthly housing payments.

In Bloomberg Interview, Harris of Barclays Capital Says President Obama is doing the "Right Thing" for U.S. Housing

Accroding to this Bloomberg interview with Ethan Harris, Co-Head of U.S. Economics Research for Barclays Capital, President Obama is Doing the "Right Thing" for U.S. Housing.

I disagree with his assessment.  This entire financial crisis was caused by:
  1. Too much total consumer debt including real estate and non-real estate debt.
  2. A natural waning of housing prices after a "too good to be true" run up in real estate prices.
  3. A decline in the secondary market for debt instruments largely due to concerns about issues above.
Unfortunately, President Obama's plan is to try and solve a problem caused by debt with more debt to finance his massive spending plan.   Economists and media pundits are now referring back to the Great Depression to try to analyze the effectiveness of President Roosevelt's New Deal to compare it to President Obama's "Newer Deal".  Increasingly, economists are forced to admit that Roosevelt's New Deal did not stop the Great Depression, and in fact, according to some economists made the economy worse.  While that is still an issue to be debated, there can be no doubt that the current financial crisis differs from the Great Depression in one significant repspect: one major cause of the Great Depression, drought and widespread crop failures, are completely absent from our current situation.  Drought and crop failure is a tangible and understandable problem.  Our current financial crisis, on the other hand, is almost entirely due to poor financial decision making by banks (mortgage companies and investment banks) and individuals (the people who borrowed more than they ever could repay).  Therefore, I fail to see how a small number of infrastructure projects and some other haphazard spending can get us out of a mess caused by debt if those projects are going to be financed by debt.  In order to solve this problem total debt cannot be increased and debt payments must decrease in order to lessen the burden on consumers.

In order to properly address this current financial crisis I think a simpler solution would be for the Federal Reserve to take all the debt off of all the banks' books at current market value by:

  • Swapping out all the residential mortgage debt held by US Banks (totals approximately $11.3 Trillion) in exchange for US Treasuries with a guaranteed yield of say 2.5% with provisions for the banks to sell of the Treasuries in controlled allotments in order to raise cash.  Currently the total value of all US Federal debt is $10.76 Trillion.  Therefore, this plan would essentially double the national debt.  However, since it is really a debt swap the total of all US public and private debt would remain the same at about $53 Trillion.
  • The Fed would then alter the terms of all the mortgages "purchased" so that all people current on their mortgages and have equity would receive a reduced interest rate of 3%.  People who are current, but have no equity would receive 3.5%, people who have equity, but are delinquent (assuming they can pay the mortgage after the reduction) would get 4% and people who have no equity and are delinquent (assuming they can pay the mortgage after the reduction) would get 4.5%.  Any people with negative equity would have been dealt at the time of the Fed's "purchase" of their mortgages since the Fed would be paying a discounted amount for their mortgages (i.e. the banks would take a haircut by reducing the face values of these assets).  The delinquent homeowners with negative equity would also share the pain by agreeing to pay the Fed 10% of future home appreciation in order to make up for the higher rate of default.

The initial cost of this plan would be very little.  The long term cost to the Fed (and US Taxpayers) would be the risk of mortgage default, which would be spread over time anyway.  Since the banks would now have 100% performing and guaranteed assets on their books instead of non-performing mortgage assets they would be saved.  Since there would be a provision for the banks to sell off the Treasuries in controlled amounts their capital would be replenished in an organized fashion thus leading to a return of normal lending.  Since the problem in the economy was and is too much consumer and business debt including, but not limited to, real estate and the near complete evaporation of the secondary market for debt instruments this plan would work by creating the secondary market (the Fed) and reducing debt payment levels by reducing interest rates of homeowners.  In short this would be the same as a tax cut for homeowners thus putting more money back into the economy, some of which would surely be spent.  Since my plan is a debt swapping/debt shifting plan it will not increase total debt, thus not creating any additional burden on taxpayers or the economy.  Conversely, the President's plan of borrowing more money to spend will increase debt and probably make things worse in the long run.

Tuesday, February 24, 2009

Foreclosures now hitting previously untouched areas of the US

The foreclosure problems in California, Florida, Nevada and Arizona continue to batter those markets.  This has been well covered.  However, now foreclosures are hitting areas previously spared from the problem.  I recently came across this article on the website of the Nashville Business Journal.  According to the article approximately 25% of the Middle Tennessee are home builders are either out of business, or bankrupt and that buyers have been able to buy foreclosures that previously sold for almost $600,000 for only $250,000.  The article also states that part of the problem is "equity calls" (similar to a margin call) that lenders are hitting home builders with that are a result of the declining market value of the builders' inventories.  Based on some research that I conducted it appears that this market is still significantly overbuilt due to a boom in new construction from 2005 through 2008.  It will take some more time and some larger price declines before hitting bottom.

Top 10 Things to Do When You are or Will be Behind on Your Mortgage Payments or are already in Foreclosure

The purpose of this blog is to help people who are or will be behind on their mortgage payments, or are already in foreclosure.  I know that being in that situation is very stressful.  I have seen it first hand as I have helped many clients through those difficult times.  I welcome questions and comments from people needing assistance.


As a first attempt at providing some assistance, I came up with the following list of the “Top 10 Things to Do When You are or Will be Behind on Your Mortgage Payments or are already in Foreclosure”.


    1. Take a step back to reflect - Take a deep breath and regain your composure.  Getting behind on your mortgage payments or being in foreclosure is a difficult problem.  You cannot solve any problem if you panic and are not capable of reasoned thought.
    2. Relax - What is the worst that can happen?  You will lose your home and possibly have to move in with relatives, or into an apartment at least for some time.  It might be embarrassing and even humbling, but it is not the end of the world.  No one is going to throw you in jail.  Your life is not over.  You can and will rebuild your life after you get through this.
    3. Gather information - Put together a monthly budget of all your income and expenses.  Use your net take home pay (i.e. after taxes).  Be sure to include all your living expenses (i.e. food, health insurance, housing payment, vehicle payments, gas and vehicle repairs, meals, grooming, pet expenses, entertainment, child support, alimony, etc.  You need to know exactly where your income is going and how much you are really short each month.
    4. Be honest with yourself - Ask yourself some difficult questions and be honest with yourself.  How did you get here?  Did you buy more home than you could reasonably afford?  Do you buy too many things on credit?  Are you a shopaholic?  Can you do without things?
    5. Analyze - Put together your monthly budget (income and expenses).  Analyze your budget to see if you can eliminate things from your budget.  After cutting your budget see if there will be enough money left each month to pay your mortgage/housing payment?
    6. Make your plans - If you cannot afford your home with your current mortgage even after you have trimmed your budget, you have 2 basic options: (1) contact your mortgage company to see if they will modify your loan terms.  (2) Sell your home.
    7. Decide - If you prefer to try and stay in your home then a loan modification is your first option.  Call your mortgage company and tell them that you cannot afford your housing payment and that you need a loan modification.  They will likely send you to their loss mitigation department who will then fax or mail you their loss mitigation package, which you will need to fill out.  Your mortgage company will then review the information to see if a loan modification is desirable for them.
    8. React promptly - If the mortgage company does not offer you a loan modification (or offers one that still will not help enough) then you need to sell your home.
    9. Decide - You will need to make a decision to agree to the loan modification, or accept the sale of your home.  If you need to sell your home price it lower than any other home to get it sold fast.  Buyers will not pay retail prices for homes in foreclosure, or homes where the mortgage balance is greater than the market value (a short sale) due to the “as is” risk or to the lengthy time involved for a response in the case of a short sale.  In either case, you will need to price your home with this in mind.
    10. Act – Regardless of what you decide to do you need to act quickly and decisively.  Letting the bank foreclose on your home will severely harm your credit for several years and in many states the bank can still come after you for their net loss after liquidating your home as an REO (this is called a deficiency judgment).  If you opt for the short sale you should be able to lessen the impact to your credit and eliminate the threat of a deficiency judgment.