The Obama plan is a little better than I expected, but it still dances around an issue that is sacrilegious to many economists: Home prices are still way too high for any stabilization an/or housing bottom to form.

While houses are not nearly as wildly over-priced as they were one or two years ago, they are still too high by most valuation metrics. Propping up home prices and the desperate attempt to forestall foreclosures only serve to delay this inevitable process.  To effect a stabilization, housing bottom and recovery, overpriced assets need to fall even further.

Notice that the States where home sales are increasing are those where we have sen enormous foreclosure surges (80-120%) and huge price decreases (40-50%). The major bubble areas — California, South Florida, Arizona, Las Vegas — have seen price collapse lead to an eventual sales surge.

Why is it that prices are so important to the housing market?

Real Estate is unique from most other goods and services, in that the purchase is not independent of other transactions. Buy 100 shares of stock, or a new or used car, or a can of soup, and only two parties are involved: The buyer and the seller.

Buy a home, and you are likely involved in a long transaction chain with five, six or even more other buyers and sellers. A newlywed couple buys a starter home from a family (with another child on the way), who are moving to a bigger home, and whose seller is moving to an even nicer part of town, and so on. It is a long chain, not of mere lateral moves, but increases in size, cost (and property taxes). If any of those sales fall through, the entire chain collapses.

And therein lies the problem.

Go to any suburban neighborhood — the one you or a freind/family member lives in. Look at the starter homes that a newlywed couple just starting out might consider. Small capes, 2/3 bedroom houses or cottages. Assume that this couple are late 20s/early 30s, and are making decent — but not 6 figure — salaries.

Can they afford that starter house? If not, then the entire real estate chain is frozen.

What’s left is mostly lateral moves, greatly reducing the overall sales.

House sales peaked in 2007 at well over 7 million units. We are now running about 4.25 million sales. A more normalized number would be between 5 and 5.5 million. That’s not gonna happen if the starter home market is dead.

>

Home Prices as a Percentage of GDP

chart courtesy of Calculated Risk

>

Existing Home Prices vs. Median Income

chart courtesy of The Mess That Greenspan Made

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

79 Responses to “Homes: Still Too Pricey to Stabilize”

  1. hrobbins says:

    So why do you think there is so much emphasis in Washington and Wall Street on shoring up/stabilizing housing prices? I have my theories but they are social and class-based, not economic. The decision-makers live in houses that are worth hundreds of thousands of dollars more than the median home price. A fall of another 10% in value is pretty big money comparatively. Your thoughts?

  2. dafox says:

    honest question: how is it that this is such basic fundamentals of RE, yet it really seems like NOBODY in DC can figure this out?
    “We want to make homes affordable to everyone by keeping the prices up” seems like what they’re saying.

  3. H Salmon says:

    Friends and colleagues have repeatedly asked me why I insisted on renting as they piled into overpriced homes with ridiculous (NY/NJ) taxes. My answer was “I can do math.” Still can’t figure out why Washington can’t figure that out.

    But my layman’s guess is that in a country where the populace and the government are deeply in debt, the only way out is inflation to maintain nominal prices and make repayment easier. So the plan is to weaken the dollar and keep up nominal home prices. Of course that raises a whole new set of issues and those are scary. . .

  4. DL says:

    dafox @ 12:40

    “We want to make homes affordable to everyone by keeping the prices up” seems like what they’re saying.

    Exactly right.

    And add the following:

    We want the banks to lend more, but at the same time, to hoard money so that they can improve their capital structure.

  5. austincompany says:

    Nor will this plan work without some type of change in the Jumbo mortgage market. Since the average price in LA and other parts of California (and the country) is over the conforming loan amount, these and other government programs will do no good for a very large portion of the market. The housing market (new and used homes) over $417,000 continues to be frozen solid in the U.S. – just try getting a loan for a home over $417,000, even with a down payment and good credit score.

  6. leftback says:

    Hrobbins has hit the nail on the head; even congress and Bernanke are in over their heads and underwater on their mortgage, no wonder they are peeing their pants to “stabilize” the market.

    HSalmon is right: they will try to inflate away debt and artificially stabilize prices. The “R” train is getting ready to leave the station, folks. Be sure you’re right. This is the “R” train to higher consumer staples prices. All aboard !!

  7. jmay says:

    Price is a factor. But interest rates are important too.

    The theory behind this plan (as it appears to me) is that as long as we’ve got these really low rates, let’s try to get more people into more stable loans. A low interest rate can make a $400,000 house pay like a $300,000 house on a month to month basis. Notice that they are giving folks an $8,000 tax break to help with the down payment.

    The problem is that foreclosed homes don’t go on the market to the average first time home buyers — first time home buyers are scared of buying an empty, foreclosed home, they think something’s wrong with it — so they get snapped up at REO auctions by investors who then rent them or put them back on the market at a premium.

    There is no perfect fix here.

  8. karen says:

    Leftback, R u sure? “Fed not stoking inflation, Bernanke says”

    WASHINGTON (MarketWatch) – The “extraordinary measures” taken by the Federal Reserve to restore the flow of credit vital to the economy won’t stoke inflation, Fed Chairman Ben Bernanke said Wednesday. In a rare appearance before journalists at the National Press Club, Bernanke said the Fed will be able to quickly reverse much of what it’s done to expand credit, once the economy improves. Bernanke emphasized that restoring the economy to vigor is the Fed’s one and only job now, and that concerns about inflation must wait. For now, deflation is a greater concern. “Extraordinary times call for extraordinary measures,” he said.

    Who are ya gonna believe here?

  9. wally says:

    I saw a statement that the amount to stabilize prices might be ‘as much as’ $6000 per home. If that is true, I wouldn’t worry very much about it.

  10. jmay says:

    On the other hand austin is right –

    This plan seems to leave CA very much out in the cold and that is where the action is.

    But with the CA state government in complete disarray maybe they’re just writing us off.

  11. Dervin says:

    I think you are missing a part of the problem, when people move up the food chain, they use their proceeds from the sale of the first house as the down payment to the next house. But if the prices fall to such a level that we have negative equity. The homeowners wouldn’t have the finances to buy their next house.

    Secondly, we are forgetting about how investor psychology, you note many times people are reluctant to sell a stock if it starts falling in price. And for those investors we’re talking about a loss of maybe two or three thousand. Could you imagine the average homeowner facing a $30,000 or greater loss on their home. You can raise three kids in 1100 square feet quite easily. Throw them outside and lock the door for a couple of hours.

    If we are able to minimize the losses, the homeowner can look at it like an expense, it’s easier to rationalize it.

  12. pmorrisonfl says:

    > The “R” train is getting ready to leave the station
    “R”=”Re-flation”?

    If so, can you humor my ignorance and critique my theory:

    M = physical dollars (and Treasuries?)
    C = loans made
    S = total supply = M+C

    C jumped greatly between 2002 and ~2007
    It’s declining now as its discovered those loans won’t be repaid
    Bernanke’s goal is to replace the decline in C with M

    Does the “R” train leaves the station when he can print enough M to get S to stop shrinking?
    Isn’t that a rather large number? And, being short of helicopters, how does he get it spread around?

    I know there are real names for these things, I really ought to have taken a course or something.

  13. karen says:

    C is declining? that’s news to me… what is the 787 billion stimulus plan? it’s not borrowed into existence money?

  14. xnycpdx says:

    in the 80s, a drinking buddy who was in economics classes at U of texas (so TTFWIW) had this theory:
    despite screaming about lefties doing the same, reagan greatly increased unfunded mandates to states, while at the same time slashing their checks from the fed; states and cities were then left to scramble for raising funds by any means possible… mainly, by raising property taxes. he predicted a housing bubble would mysteriously come along and shoot the values of homes up, allowing higher tax revenues. he had it beautifully diagrammed on cocktail napkins and everything.

    i have no clue if he was correct, but i think of him every time i see the asshats in dc trying to prop up house prices for no logical reason.

    prices need to fall at least another 20% – my wife is a doctor, and we can’t afford to buy a home in any school district with more than a 60% reading and math comprehension scores!

    all my neighbors are home owners; when they ask how the house hunt goes, i explain why prices need to fall further to restart the economy, etcetc. i am not popular in the playground… however, i am used to it, as my former apt building was full of wall street traders, and i had similar conversations with them before the crash about their coming doom.

    thanks to barry, i am bicoastally unpopular. thanks, BP!

  15. bondwiz says:

    There’s a larger issue here. Much of this country’s economic growth is based on mobility. So lets say you’re a middle manager at GM with a wife and 2 kids and a house that you bought in2006. You’re current on your mortgage but you lose your job at GM and get one in Missouri. Most likely you are underwater on your home, so do you stay? Get foreclosed on and move, etc.

    There in lies the crux of the problem. Stocks falling only affect shareholders, housing prices affect a much larger segment of unrelated people. A buddy of mine bought a house in the high 600′s here in Seattle about a year ago. A foreclosure just hit the the market at 425. If he wants to move for any reason, unless he’s got 100K lying he’s not going anywhere. Multiply that by the thousands and you’ve got a eocnomic problem.

  16. HCF says:

    > Buy a home, and you are likely involved in a long transaction chain with five, six or even more other buyers and sellers.

    Barry, your description of the housing market is perfect!
    In many places, it would be called a Ponzi scheme =)

    HCF

  17. gnomic says:

    I think start homes is a smaller part of the problem than BR noted. You would have to look closely at microsegmentation of those seeking a “first time home” and the offerings. Cost may not be the issue; it is credit availibility that is likely the problem. And foreclosures are closing this gap. But the problem in this space is not larger than any other segment and is likely to be smaller because the loan size.

    A bigger problem is the systemic impact of the inability to sell an existing home to move to a location where one can get a job. Housing has become a burden to the few companies that need people, but can’t afford relocation assistance. Workers can’t afford to both rent and own, so they can’t pursue jobs beyond thier tolerance for commuting. The result is greater unemployment and business imparement, assuming anyone is hiring.

    I’ve seen a half dozen homes in my moderately priced neighborhood on the market for over a year, and I’ve seen a couple sell within hours, all to “starter home” people. People aren’t selling thier home if they don’t have to because of low market prices. People who want to buy can’t get credit at “reasonable” terms (based on a view of reasonable calabrated on the last few years). But to these people, a price difference of $10K ,$20K, or even $50K will make little difference. At the price point that does make a difference, renting is a better deal.

  18. Brendan says:

    Sounds to me like the plan is to inflate our way out of this mess. Like H Salmon said, the government and populous are both in deep debt. And that’s not to mention the balance of accounts. With all those other countries holding lots of dollars, making those dollars less valuable doesn’t sound like such a bad proposition. And with the Euro and Oil seeming to lose their mojo, too, the threat of the dollar losing its status seems less in peril than it did just a short while back. Sure there are serious issues with inflation, but to my untrained eyes, the pros seem to outweigh the cons right now. Uncle Sam can get some dollars into the bottom half’s pockets though universal health care, social programs, cutting mortgage payments and dumping dollars hand over fist into these banks and viola, we get inflation. Sure this radiation therapy sounds pretty scary, but when you’ve got cancer…

  19. pmorrisonfl says:

    > C is declining? that’s news to me… what is the 787 billion stimulus plan? it’s not borrowed into existence money?

    Yes, the stimulus and the TARP and the Fed’s balance sheet increase, all borrowed-in-to-existence money… and if they together were large enough to halt the decline, I’d think that C+M was flat or increasing. But that doesn’t seem to be the case. I take C to be ‘lent-into-existence’ ‘money’, whether directly to home-buyers, or indirectly through the vehicles (and CDS’s against those vehicles) created on top of the 500,000 loans to 40,000/year customers. Not to mention all the car loans, and credit card balances generated by all those formerly good credit homeowners. I’m imagining there’s 10-20 trillion or so out there, although I’d have to look at Steve Barry’s chart again for confirmation. I’m just hand-waving here.

  20. karen says:

    Brendan, you got my vote. Exactly. But, your words will fall on mostly deaf ears here at TBP : )

  21. Mannwich says:

    @karen: I think many of us here agree (at least I do) that eventually we’ll get inflation (maybe even hyper-inflation) again at some point. The question is when and many of us (myself included) just don’t think it will happen just yet. I think we go through a truly rough period of deflation/delevaraging (can’t make people borrow when they know the game is up and joke is on them) first for much longer than the inflationistas think and then it’ll hit us like a ton of bricks maybe 1-3 years down the road…….

  22. karen says:

    pmorrison, don’t forget to add in the daily cost of the on going/never ending wars in iraq and afghanistan as well.

  23. batmando says:

    @Mannwich, karen, and Brendan
    Agree with each of you, esp. Mannwich’s first D, then I or HI down the road.
    IF the gov’t is going to create massive debt ot offset massive credit destruction, then let it at least primarily be funneled through things that will (mostly) directly benefit the most people

  24. Porsche87 says:

    Besides the fact the post was oversimplified, I think Dervin has it right, you need profits off of an existing home to move up. Another possible move in the near future is empty nest Baby Boomers moving back down to starter homes, but part of that is to take equity out of their existing homes as well.

    Everyone seems to be focusing on housing prices going up in the last decade, but stagnating incomes are every bit as important. If incomes had increased along with home prices, the current situation would be far better. If you want a simple solution, take the salary caps off of TARP and instead require the highest paid employee to only make 100 times what the lowest paid employee gets (and consider all income, not just salary). Janitors making $100k can certainly afford starter homes, at least until a new bubble forms.

  25. call me ahab says:

    change of subject- FT indicates Obama and Senator Graham ( a republican) are leaning towards the Swedish model- i.e- nationalization of banks. Makes me wonder though- it seems to me that the federal government forced BofA to swallow Merril- so I wonder if the govenment is somewhat complicit in its failure. Not sure if they would have been able to weather the acquisition of Countrywide anyway but still . . .

  26. The Jeffersonian (George, not Thomas) “..and I’m moving on up…” scenario in the housing market described by TBP rests on a fundamental truth about the history and prosperity of the US–it has all been dependent on growth, either personally (moving up) or collectively (empire-building).

    Which is why, once all this artificial juicing of demand fails, once this monetary mischief has run its course and nothing has substantively changed, once we all seem stuck at the same rung of the ladder, whose legs are slowly being whittled down by the lilliputian beavers of international wage arbitrage, it is then we will likely turn to a new, much bigger stimulus plan of empire-building, not unlike the one (WWII) that got us out of the last Great Depression.

    The reason the dollar has strengthened over the last few months is not because of US economic might. It is because we are still, even w/ China and Russia, Iran and others nipping at our heels, perceived as the most powerful country militarily on the planet. It is a perception that might get tested in the near future.

  27. constantnormal says:

    @ pmorrisonfl –

    try this:

    S = total supply = consumer debt + commercial debt + government debt

    We are a debt-based society, with all money having its basis in created debt. This is not bad, so long as the amount of debt is “right-sized” for the economy, neither too much (devaluing the currency and stoking inflation) nor too little (causing a liquidity crisis and stoking deflation). The amount of physical money, in paper bills and currency, is insignificant and can be ignored.

    When Greenspan got lead-footed on the monetary (debt) printing press to pull us out of the post-Y2K recession (a questionable action for sure), all that excess credit fueled speculation and inflation in a lot of things, among them housing and stocks. Combine that with the abrogation of any regulatory/oversight responsibilities in society as a whole (it was the mantra of the neocon revolution), and you also get a bull market in fraud, which intertwined with the flood of easy money, creating such tailor-made-for-crookery vehicles as CDOs, CDS’s, and SIVs, and then Wall Street investment bankers (the organized crime of the financial world) commoditized them and sold them to the world.

    So we had this immense bubble/cloud of vaporous phony “investment” vehicles out there, trillions and trillions of dollars worth, and eventually it popped.

    Faced with a collapsing global economy, the central bankers have decided not to try to “right-size” the amount of money(debt) to fit the new reality , but try to maintain/restore the prior status quo by printing money(debt) to offset the amount of debt that has disappeared in a puff of smelly smoke.

    That is why the consumer and commercial debt pools are cratering and the government debt pool is exploding, and why Bernanke can say that (when viewed from the perspective of the past ginormous bubble of money(debt) being “normal”) he’s not “stoking inflation”. These large amounts of money/credit/debt (debt is activated credit) will be circulated by the highly efficient China money pump, where China buys Treasuries from US, then we buy goods from the Chinese, sell them in this country, and via the miracle of middlemen, multiply the demand for money and spread it throughout our consumer-oriented economy. Problem is, that pump is broken, at the moment, with consumers scared witless and buying little.

    If you believe that the true real economy is a lot smaller now, you might well choose to believe your own lyin’ eyes before you believe an academic Ahab intent on pursuing the Great White Whale of his academic theories.

    Myself, I tend to think that the tsunami of unemployed are sending a clear message that the global economy is a LOT smaller now, and that attempting to quickly restore the previous state of things is a Fool’s Errand. Perhaps it is more important to remove excess capacity than to try and reflate the debt pool.

    GM cutting 20% of its global work force is a good start. If we were to roll up Chrysler and eliminate it, that would be a good second step, and if we were to obliterate Citi and eviscerate BAC, those would be some excellent steps as well. Then restructure the nationalized behemoths (AIG, Freddie & Fannie), and return them to the public markets (preferably in tiny pieces), and you would have a good chance at supporting that kind of economy. It could probably support itself, and with a lot less money(debt) sloshing around.

    To head back toward the current topic, I do think that the Obama plan for mortgages is on balance, more good than bad. It helps to reduce the foreclosure madness, which is one of the major driving forces of the contraction, while it does little to support housing prices, which will continue to decline until supply and demand agree to call a truce. But at least we won’t see millions bankrupted and thrown out of their homes, and this will engender some increase in consumer confidence as the months roll onward. I wish it did not inflate the role of Freddie & Fannie, but I suppose I have to take the bad with the good, and even I can see the utility of having these large control points over millions of mortgages readily at hand for the government to dictate how they will change, and have those changes implemented NOW.

    I can still dream of some future legislative/executive mandate to deconstruct Freddie & Fannie, replacing them with a couple of dozen large regional entities that do about the same thing, but as public companies without government ownership or backing. Yes, I HAVE A DREAM.

    Now if only the jobs program were credible, we might have enough hope to cut short the collapse in equities. But it will take a year or so to see how these changes are performing. Plenty of room at the bottom until then.

  28. GRV305 says:

    You can squeeze into the chain the empty nesters and retirees wanting to downsize, but who can’t sell the big house

  29. rww says:

    Exactly right, BR. Everyone is frozen in place.

  30. Mannwich says:

    Very well put, constantnormal.

  31. leftback says:

    @Ahab said: “change of subject- Obama and Senator Graham are leaning towards the Swedish model-

    Can’t fault their logic there. I’ve enjoyed a few Swedish models myself over the years…

  32. Jim C says:

    Starter Home..new…1500-2000 square feet range from $100k to $150k here.

    I think two people on non six figures can afford that. Does it sting some? Sure, but it is approximately the same or less than rent.

    In short, move to Oklahoma…we’d love to have someone else paying taxes.

  33. GB says:

    Makes sense then to have foreclosures. It takes out the chain and you have the 1 buyer and a seller then.

  34. rockyj says:

    I completely agree with the OP, except for one fundamental point– starter homes are an anachronism, a quaint concept that was marginalized by the mainstream RE business years ago. I was house-hunting a few years back, and there simply were no small houses in even mediocre towns, much less “desirable” communities. The few appearing because of elderly people moving out of their 1960s museum piece were immediately knocked down or doubled in size, never marketed as-was. I don’t think many upscale towns around me have many small houses left. I can’t quote numbers, but I bet they’d be interesting.

    Further, I’d argue that a starting-out couple doesn’t want a 2/3 bd cottage, even if they can find one. They want and expect their parent’s house. It’s the generation where every child is above average, every expectation is met, and you never need to step back to move forward. Starting-out couples will run back to share mom and dad’s granite countertops, stainless steel appliances and private bathrooms before slumming down to a house like mom and dad started out in.

  35. ottovbvs says:

    BR: with due respect you do live on LI. Not a totally typical area surely. In my neighborhood in the NE starter homes are a little on the high side at around 200 bucks a foot, but by no means out of sight, nor are they in Baltimore, Charleston, Atlanta, Savannah or LA which are all areas of which I have some knowledge. You have to remember in most places there has been a 15 to 35% decline over the past two years. I’d say they are more or less in line with rentals.

  36. ottovbvs says:

    rockyj Says:

    February 18th, 2009 at 3:09 pm
    I completely agree with the OP, except for one fundamental point– starter homes are an anachronism, a quaint concept that was marginalized by the mainstream RE business years ago

    ….Can’t agree. There are plenty of starter homes around in most suburban and ex urban contexts.

  37. Mannwich says:

    @rockyj: There are plenty of really great older, smaller “starter homes” (if you want to call them that, I personally think that’s a term made up by the housing industry) here in Minneapolis (and St. Paul) within city limits, many of which in some really good neighborhoods (e.g. SW Mpls, NW up by the UofM campus, etc.). Of course, many of them were torn down/rebuilt as McMansions, but many, many solid smaller homes remain and are selling quite nicely in my neighborhood if priced right and well maintained. The true test will be this spring’s selling season though.

  38. Mannwich says:

    I meant NE Mpls, not NW.

  39. pmorrisonfl says:

    constantnormal – thanks for the elaborate response.

    For my own clarification and edification:
    > the central bankers have decided not to try to “right-size” the amount of money(debt)
    From the top of your post is this consumer debt + commercial debt ? (what I called C)

    > but try to maintain/restore the prior status quo by printing money(debt)
    From the top of your post is this government debt? (what I called M)

    If so, it seems to me that the govt is trying to replace (consumer debt + commercial debt) with (govt debt). Is seems Bernanke’s view of the ‘right size’ is enough to cover all those promises implied by c+c debt, never mind that those promises won’t all be kept… and to return the economy to the growth path implied by a rising line made by all those former promises.

    Judging by the number of people I know without jobs, and the number of empty houses I drive by, it isn’t working so far.

    Thanks for your input.

  40. leftback says:

    “The true test will be this spring’s selling season though.”

    Tulip bulbs will be selling. Not houses.

  41. cheepnis says:

    Stopping a decline in housing prices stabilizes the banks that hold this debt. It won’t work, but thats the purpose of this plan by Obama. Helping the homeowners is mostly a way to sell this thing

  42. wally says:

    pmorrisonfl,
    Ben may try to replace destroyed debt with money… but he cannot even begin to fill that gap. It is in the many, many trillions.

    Second, why would he try? His theory says that is the right thing to do… but what if you know that credit collapses when there gets to be so much of it that if loses credibility? In that case, his efforts represent a deliberate building toward another collapse.

  43. Bruce in Tn says:

    @Wally:

    He is certainly going to try to replace destroyed debt with money:

    http://finance.yahoo.com/news/Fed-cuts-US-growth-view-and-rb-14402999.html

    Fed cuts U.S. growth view and considers inflation target

    The inflation target they are writing about is the exact opposite from the past…heretofore the target was to keep inflation down to a certain level…here they are talking about as deflation gets worse how the FED will do whatever it takes to create a certain level of increasing inflation…

    …the business cycle is not being manipulated..it is being drawn, quartered, smashed, rebuilt, burned, frozen, thawed, smoked, dried, wet, etc…this toy, the business cycle, is going to be manipulated until the desired outcome is obtained…

    …we are not in new territory..we are somewhere that has not been imagined before..hope they get it right…whatever that is.

  44. ottovbvs says:

    cheepnis Says:

    February 18th, 2009 at 3:39 pm
    Stopping a decline in housing prices stabilizes the banks that hold this debt. It won’t work, but thats the purpose of this plan by Obama. Helping the homeowners is mostly a way to sell this thing

    ……Why isn’t it going to work? The reality is it will work in some places and not in others. The US housing market is not one huge homogenous whole. Overall therefore, the effect will be ameliorative. There’s also the collapse of single family housing starts to 460,000 units which is like nothing I’ve ever seen in an industry I used to be involved in and is going to assist shrinking inventory. I also wonder if the credit squeeze is somewhat overblown too. I was talking to a realtor friend a few days ago and sure the ninja loans have gone but if you are reasonably credit worthy and can put 10% down there’s not really a problem.

  45. danm says:

    how is it that this is such basic fundamentals of RE, yet it really seems like NOBODY in DC can figure this out
    ————-
    Because the only sector left to go through a bubble is government?

  46. leftback says:

    “…we are not in new territory..we are somewhere that has not been imagined before..”

    @Bruce: Hardly new territory. We are turning Japanese.
    In fact we are more like them than we ever imagined.
    Pass the sake….

  47. Yes, Bruce N Tennessee, because the prescription for the monetary mischief that got us in this mess is more monetary mischief.

    Massive amounts of capital that were flooded into places where it shouldn’t have been during the boom years, and now, while the capital is trying so hard to go back where it should, the government is filling sandbags, trying to hold the flood in place.

    This new administration is nothing about change. It’s about thinking it’s more clever than the previous one in manipulating things such that they stay the same. But the flood of misallocated capital will recede, no matter how best and brightest are the brains that try to prevent it.

  48. danm says:

    Sounds to me like the plan is to inflate our way out of this mess. Like H Salmon said, the government and populous are both in deep debt.
    ————
    They’ll do what it takes to inflate but can people still afford a 3000 square foot house over the long term. When I look at houses that size in rich neighborhoods, I’m always amazed at how little they have been maintained over the last couple of decades.

    Young people are buying big houses at inflated prices but even if prices tank future maintenance and renos will cost an arm and a leg.

    The size of waht was built over thelast 2 decades was based on oil and commodities staying cheap.

  49. manaconda says:

    Sorry can’t agree.

    Statements relating to housing are frequently missing 2 factors (location, price). Not all geographic regions are equal, some have tanked harder than others, a reasonable bottom is not out of the question there.

    Here in Southern California the picture is that the lower priced homes have fallen far more than high-end inventory. Sales are vibrant on the lower range, specifically for starter homes where mortgage to rent ratios are looking pretty good.

    Problem with housing at the moment is that generalizations aren’t going to be accurate.

  50. Bruce in Tn says:

    Lefty and Curmudge:

    Well, I wasn’t a fan of Bush, and I don’t think the new guy is doing much better with the appointees, and Timmmmaaayyyy, and his daily gloom sessions in front of the camera…I wrote before that most of the men in the Presidency are pretty ordinary men, and I haven’t seen much to change that opinion, even if some had high hopes for this particular man..

    I do have problems with the degree of manipulation I see here, and although it angers some, I feel like we are taking problems of this generation and by throwing money at it…creating a debt problem for those who will follow us that will be much greater than that in our lifetimes. I think we should be men and women and let some of these overextended undercapitalized gambles fail. For those who have all the answers (which Icertainly do not) what makes you think we wouldn’t have had a severe but managed recession if we’d done this differently?

    It seems the more money thrown at this, the longer we create uncertainty, and the deeper our problem becomes. I think we’d have done better with less interference..

    May be time to consider sacrificing another of Barry’s toes…

  51. leftback says:

    Brucey: it is all so so so much like Japan in the 90s now, almost a complete carbon copy.
    I have more or less given up on stocks, except for little trades and a few materials stocks.
    Commodities, TIPS and high yield bonds for me until this standoff resolves itself.

    Here is Martin Wolf on the Japan parallels once again:
    http://www.nakedcapitalism.com/2009/02/martin-wolf-rethinking-lessons-of.html

    We all agree that it would be best to take our medicine. But it is not going to happen.
    We’ll be here a while.
    Got popcorn??

  52. Hulkster says:

    Housing stories give me a headache. So many stories report crazy month-over-month declines. Give me a 300 unit condo complex and show me fluctuations for the last couple of years. Most of the variability in average house price sales is due to the mix of what is being sold, not homes dropping in value like the stock market. Cheaper units are more popular during times of austerity. A bunch of $200k homes being sold instead of $400k homes doesn’t mean average house prices are falling 50%.

  53. Bruce in Tn says:

    Well, I’m not trading in my Black Jack for sake, Lefty….

  54. miamiocean says:

    My what a web those troubled assets weave. I think Obama’s plan has a few targets which are not all that bad.

    1) shore up consumer and homeowner confidence
    2) take some pressure off the “good banks” that need to stop some bleeding, but aren’t insolvent…yet
    3) try to slow down the single family home price depreciation before it spirals into a catastrophe

    Homes in the Fort Myers, Fl area which were selling for $350k and up are now priced closer to $120k. How much further do they need to go to be affordable ? Unless wages completely tank, I think they are there. At least in the Florida, home market prices (as opposed to what owners want to sell for) are settling down to about where they should be. Perhaps there are some locations in Florida that could stand another 10-20% drop, but another 20-30% drop makes no more sense to me now then the outrageous inflationary prices that developed in 2006. Just my two cents.

  55. Bruce in Tn says:

    And Lefty….do you agree with me that a U3…when he or she cannot find a job and enough time goes by..becomes a U6…and that U6 is a better metric?

    If not, why not?

  56. ashpelham says:

    I agree with the President’s efforts to try and stop the foreclosure avalanche. I also agree with the above poster who said that every market is different and any generalizations made will be incorrect. There is a lot of truth to that. Every housing market is different, and every market has different employment characteristics. Some areas, such as Alabama and Mississippi didn’t have the scale of overbuilding and over-leveraged homebuyers as other areas have had. I speak from experience as a resident of one of those states. Heck, even certain areas of certain metros are different. Here in the Birmingham, AL metro, areas where too many uneducated homebuyers got in over their heads show a lot of homes for sale, as they try to get out from under what they’ve done to themselves. However, LOCATION is still everything about real estate, and the better areas tend to have more educated homeowners, and therefore less people trying to dump their homes, or being foreclosed upon.

    This nation is still all about the haves and have-nots. In times like this, the desparity between the two is as large as the Grand Canyon is wide.

  57. hrobbins says:

    The people making the decisions don’t live in Oklahoma or rural Indiana. They live in price Washington, D.C. (or northern VA) or Manhattan or the expensive CT towns like Greenwich. Their houses are $1 million plus, I imagine. Another 10% drop is $100,000 lost wealth. My particular loss, if my house drops further, is under $20K.

    Moreover, their portfolios, which include bank stocks, are probably fairly large too.

    They have MUCH more at stake in stabilizing/shoring up home prices than most Americans.

  58. Bruce in Tn says:

    Excellent article and comments, Lefty.

  59. DL says:

    From http://www.nakedcapitalism.com/2009/02/martin-wolf-rethinking-lessons-of.html

    “The Japanese lived with zombie banks for nearly a decade. The explanation was a political stand-off: public hostility to bankers rendered it impossible to inject government money on a large scale, and the power of bankers made it impossible to nationalize insolvent institutions”.

    Sounds familiar.

  60. leftback says:

    Miamiocean makes a good point. The low end of the market in CA and FL, NV etc. has probably already corrected. So some of the pain is already ending. Unfortunately as Bruce points out, U6 is already enormous and more layoffs will force more foreclosures at the low end, resulting in the “undershoot” below the mean reversion that CR and Barry have alluded to many times.

    In addition, the high end of the market in CA and places like CT – the Jumbo and SuperJumbo market has shown little sign of correction so far, and all those $4M houses have to come down to $1-2M. Then there is the small matter of the condo and co-op market bubble in Manhattan, where the absence of the bonus babies will soon be putting the squeeze on those who paid too much.

    Hmm.. I wonder if they will take beads?

  61. DeDude says:

    It looks to me like we are getting close to the range of the last 30 years with respect to the ratio or price and income.

  62. Paul Jones says:

    I’m mobilizing against this atrocity:

    the first rationale is that it punishes the people who got this right at the expense of the economic arsonists.

    The second reason to fight this nightmare is that, since they have mis-gauged the cause and the severity of the macro problem (excess consumption fueled by debt) THEY ARE GOING TO KEEP REPEATING THEIR ERRORS UNTIL STOPPED!

    I’ve maintained throughout that all this political meddling would make matters worse: it has, but now they are accelerating into a nose dive and the system may disintegrate.

  63. ottovbvs says:

    leftback Says:

    February 18th, 2009 at 5:30 pm

    Exactly. There have been price adjustments across the country of the order of 15-35% in markets I know about and in some areas much greater. This is not an homegenous market. The overall effect of this plan which as many as 9 million people facing foreclosure could take advantage of is broady ameliorative. The total price tag including the aid to F/F is around $275 million and it’s going to have some impact.

    Paul Jones Says:

    February 18th, 2009 at 6:01 pm
    I’m mobilizing against this atrocity:

    the first rationale is that it punishes the people who got this right at the expense of the economic arsonists.

    The second reason to fight this nightmare is that, since they have mis-gauged the cause and the severity of the macro problem (excess consumption fueled by debt) THEY ARE GOING TO KEEP REPEATING THEIR ERRORS UNTIL STOPPED!

    I’ve maintained throughout that all this political meddling would make matters worse: it has, but now they are accelerating into a nose dive and the system may disintegrate.

    …..Mobilize all you want buddy…it’s going to happen and it’s going to assist in stemming foreclosures……also adding to the deficit ….sorry Bruce your great grandchild is going to have to go without that IPOD….and sorry the system isn’t going to disintegrate

  64. KevinTren says:

    Declare 28-36 Debt-to-Income [DTI] Qualifications to underwrite mortgages in default which facilitate mark-to-market holdings for Financial Institutions. Those homeowners who cannot qualify for at least 75% of what they originally borrowed under 28-36 DTI, sign Deeds-in-lieu of Foreclosure for lease-purchase agreements with note holder(s) at fair market rent and purchase rights at market value (market value is based on others in market who can qualify under 28-36 DTI) today. Qualify the loans and the real estate market and values settle out while credit and trust are restored in mortgage backed securities producing financial market stabilization. The 25% write down is backed by the U.S. Government. This 25% is substantially less than the bail-outs to date. Banks and servicing agents are already in place to grasp the underwriting and non-performing loans become qualified so values are validated. This entire process could take 18-24 months but with immediate impact as this plan is less costly.

    I may be the only one in the world who ever purchased his own mortgage at a deep discount and then sold the collateral for significant gain. I’ve learned one thing: He who controls the debt, controls the equity. We have to go back and underwrite what was not done the first time around. Simple. The accountability is back in the marketplace and credit markets restored.

  65. AGG says:

    We’re getting there but we’re not there yet. In particular, I question the ratio of median household income to median home price. The accelerating unemployment picture distorts the hell out of median household income because it deals with a smaller subset (the employed) of the population. In addition, the dual earner household is a 1980 to the present phenomenom which further distorts the numbers. We could fix the numbers quite easily if you take 4 household income totals, have them all move in to a mansion, then compute the ratio of the mansion price to the 4 household income, WA-LA! you have 3 or less. I guess pooling our resources is the survival lesson of this depression. At any rate, if you look at single person median income versus house median cost then the chart tells the real story of declining capital for the middle class in order to multiply the top 1%s bottom line.
    In order for sanity to return to real estate the median home price must return to 4 times the median annual income of ONE person. Furthermore, income below $50,000 a year should not be taxed at any level be it federal, state or local. Inflation should index this figure so it is adjusted upwards along with the CPI. Finally, this bullshit of capital gains not being income has to stop! It IS income and you WILL be taxed for it mr. and mrs. money bags. Try to sneak out of the country with your loot and say goodbye to your physical assets. Welcome to the elctronic world. We can find you anywhere.

  66. usphoenix says:

    @danm: you nailed it. After all these times I was picking at the scab, you simplified it.

    It’s all about the government bubble. Beginning and end. Revenue. Expenses.

    Only after massive inflation, revolution, or collapse will we come to grips with the single real underlying issue.

    Maybe. Maybe not. If they can keep the soma flowing and increase the surveillance perhaps we can all be transformed into “Stepford Wives” taxpaying zombies.

  67. johnmg47 says:

    How’s this for an idea?

    A Mortgage Assistance Solution to the Financial Crisis

    There are an estimated 111,162,259 households in the United States, and 69%
    (76,701,958) of these are homeowners with mortgages.

    Proposal: The TARP provides mortgage relief for millions of U.S. homeowners by reducing monthly payments on all residential mortgages 10-12% per year for the next two years (2009-10), with an option to renew the program for an additional year.

    Cost of the bill: $230BL/year (76.7 ML mortgages x $3000/year)

    Pre-Condition: a national moratorium on all residential foreclosures for 6 months (to allow this bill time to work).

    Qualifiers: Homeowners apply for the credit through an addendum to their 2008 & 2009 IRS tax return. Homeowners must prove owner-occupancy of the residence to which their credit is applied. The U.S. Treasury pays the credit directly to an approved FDIC/FHA lending institution (bank certification of receipt required), not to the taxpayer.

    Benefits:

    + Program immediately adds $3,000 in purchasing power to a family’s budget, money that would otherwise have been spent on their mortgage
    + No distinction for moral hazard is made. It treats all residential mortgage owners equally.
    + Stimulates home-buying and thus shrinks the supply of homes on the market. In some geographic areas it may render home buying cheaper than renting.
    + Those who do not need this assistance will apply for the credit but likely spend an equal amount into the economy.
    + Although this money flows as a benefit from the Federal Government to homeowner families as a credit towards their mortgage, it’s paid directly to lending institutions by Treasury. The effect is bottom up; not top down.
    + Because lending institutions must certify the credit has been applied to an outstanding mortgage payment, anticipation of this guaranteed flow of capital will backstop their balance sheets for the two years the program is in effect. This will restore investment confidence in the banks and also put a floor under the MBS securitization market.

    Two important Considerations:

    1) A “new baby boom” began in the United States in 1982 (see citation 1, below). The birth rate has risen every year to a new record of 4.315 ML births in 2007. This eclipses the peak years of the baby boom generation of the 1950-60s. The early children of this new boom are now in their mid 20s and forming families.

    By clearing the supply of available homes off the market in 2009-2010, the stage is set for a more rationale real estate market in the future. Given the current birth demographics, we are on the cusp of a decade-long resurgence in residential home buying and building.

    2) Because the real estate boom of 2000-2006 dramatically eclipsed prior real estate cycles in U.S. history, today’s home prices are still 25% above the inflation-adjusted upper median price for homes that existed between 1890-2000 (See citation 2, below).

    It is almost certain that home prices will continue to fall in a natural real estate correction for two more years, troughing sometime in 2011-2012 [years 5 and 6 of the current correction; See “When Bubbles Burst”, below).

    That is why this two year $3,000 per residential mortgage deferment is so critical. It cushions the likely fall in prices for current homeowners and buyers-to-be during 2009-2010 and acts as a spending stimulus.

    It also backstops bank balance sheets so that institutions may be able to pay-back the first installment of the TARP funds they received in 2008, thus funding the second year of this program.

    Citations:

    Attachment 1
    “The New Baby Boom.” Bespoke Premium. 30 July 2008. Bespoke Investment Group. 18 Feb. 2009 .

    Attachment 2
    Chart “U.S.House Prices, 1890 – 2008”. Data derived from Robert Shiller, “Home prices, building costs, population and interest rates since 1890, updated.” (see below), 18 Feb. 2009 .

    Shiller, Robert. “Home prices, building costs, population and interest rates since 1890, updated.” Department of Economics, Yale University. June & july 2008. 18 Feb. 2009 .

    “When Bubbles Burst.” IMF — International Monetary Fund. 2003. 18 Feb. 2009 .

  68. usphoenix,

    w/this: “Maybe. Maybe not. If they can keep the soma flowing and increase the surveillance perhaps we can all be transformed into “Stepford Wives” taxpaying zombies.”

    the soma–the flicker rate of our favorite chattering box-the TV, and its effect on our cognitive processes–now new & improved with DTV, augmented by our gross addictions to all manner of psychotropic substances–from our abuse of simple foodstuffs to the most potent meds–is deep into our Societal Circulatory System.

    the surveillance-State, soon to have its amperage increased via ‘Smart Grid’ implementaion, has one of the true Growth Sectors of our *Economy in the 21stC.

    we all know the old adage re: Trends: “They continue, until they Change”

    maybe Holder’s honest commentary on Race is the first spark of the positive current many thought the Obama Administration would bring to our Polity..

  69. JasRas says:

    The interesting thing I find when I think about this problem is how few people can see what happened. Housing and Auto sector parrallel each other perfectly. In both cases, cheap, easy money enabled people to fast forward their purchase cycle. It got even worse in housing because unlike cars, there was an assumption that home prices never go down versus the “everyone knows” a car loses value the moment the papers are signed and you drive off the lot. Regardless, both industries canibalized measured, future sales by dangling “free money” in front of the consumer. Once that occurs, you can’t get it back. Housing was even worse because it wasn’t just free money, it was free money to unqualified buyers. Without understanding this basic concept, it is all too easy for politicians to adopt the view that consumers have been “wronged” and need “saved”. Sadly, this is going to bleed into population who don’t deserve to lose their homes, but only because we didn’t flush the system of the crap soon enough. Now we have an economic crisis that is causing serious collateral damage. The

    If I told you I was going to stop the tide from coming in today, you would think I was insane. If I told you enough times, eventually I would be “right” because the tide would be going out…and the illusion would be complete.

    The government is under the illusion that they can stop this with their mortgage flim-flam–if they try enough times, they will eventually be correct. The cost to us as a country is going to be terrible. It won’t kill the housing sector for a few years, but for much, much longer.

    And for my next act, I will prevent the sun from rising…

  70. danm says:

    The government is under the illusion that they can stop this with their mortgage flim-flam–if they try enough times, they will eventually be correct. The cost to us as a country is going to be terrible. It won’t kill the housing sector for a few years, but for much, much longer.
    ——————–
    Not so sure they all believe this. I think what they know is that they need to do something so as to not be burned at the stake.

    And after all sectors got their time in the sun over the last couple of decades, it’s finally their time to shine. With all the money flowing into government, I’m sure you can see the dollar signs sparkling in their eyes. Give them a break, they’re only human and we now know what happens when a sector gets too much money. Same thing will happen with the governement.

    The writing is on the wall.

  71. rktbrkr says:

    Buy a home, get a greencard. A couple million home buyers added to the equation could be a real shot in the arm. Our nation can survive 12 million illegal day laborers living in urban bunkhouses I think we could accomodate a couple million middle class professionals buying vacant McMansions and Detroit row houses. A lot of the day laborers are drifting back home anyway since they can’t find work.

  72. rktbrkr says:

    I don’t think the O’B plan will work well. 1) Too many struggling homeowners won’t meet the terms and conditions of the plan. 2) Too many have lost their jobs. 3) Too many will redefault.

    How many in the bubble states will meet the -5% equity threshhold where those prices have dropped 40% – unless they had 20-30-40% equity in their homes or the US uses some sort of mark-to-model valuation for their homes.

    A lot of people in the (non-recourse) bubble states are rolling stones who will suffer the consequences of a default rather than try to pay themselves out of a 30-40% hole with a 40 year mortgage at any rate.

  73. Jim Canuck says:

    Chris Martenson wrote an article last evening on his website whic agrees that house prices are too high. Here’s the link: http://www.chrismartenson.com/blog/obama-punishes-responsible-parties/13548

  74. AlonPlitt says:

    That Ratio Chart (median home price to income) doesnt look so bad anymore. It looks like we are closing in on a ratio (3-3.5) that put us back to a reasonable level. I guess fear of a downside overshoot is warranted given the size of the run up – but past pullbacks didnt overshoot on the downside from the look of this particular chart.

  75. [...] are getting closer to typical levels. They remain elevated, but no longer outrageously so, as they revert back to historic [...]

  76. [...] are getting closer to typical levels. They remain elevated, but no longer outrageously so, as they revert back to historic [...]

  77. [...] are getting closer to typical levels. They remain elevated, but no longer outrageously so, as they revert back to… more on the original website Report This Post: Illegal content | Broken link | Spam | [...]

  78. [...] are getting closer to typical levels. They remain elevated, but no longer outrageously so, as they revert back to historic [...]

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