Looking Out From the Garage

The statistics that point out the percentage of home owners that are upside down are staggering.  Depending on who you talk with, there are anywhere from 20% to 50% of current home owners that owe more money on their homes than they are worth on the open market...  As a home owner, I understand... I'm right there, too.

And there are a lot of experts that agree that until we deal with that statistic, and make a significant dent in it, we can't begin recovery in the housing market. In effect, many of the people that might be in the housing market are sidelined because they are trapped in their homes.  Or worse, they are being forced to walk away and be sidelined from the housing market for years as a result of the amage to their credit from a foreclosure or short sale. 

Many of those that mention these statistics do so as a means to promote one plan or another to help upside down home owners.  And while I understand the desire to help people that are financially hurting, I also think there is a fundamental unfairness toward those that aren't trying to sell their homes and aren't upside down in their mortgage.  People that were conservative or had the financial capability to pay large amounts down... or even pay cash aren't rewarded the same way... 

I am also a supporter of the FairTax.  If you aren't familiar with it, you should be...  It is a transparent and evenly applied consumption tax.  Rather than taxing income, it would tax spending.  Without going into a long explanation of the tax, it would be like a sales tax on all new goods and services sold to consumers.  It also has a "pre-bate" component that would effectively remove the added tax burden from those at or below the poverty line.  The more money a person spends, the more taxes they pay... 

Melding these two things together...

Because it taxes new goods and services, but doesn't tax existing goods, the FairTax would effectively add value to existing homes.  Initially, the price of new homes would be pushed up by the tax.  There would be a balancing factor in that "take-home pay" would increase.  No more federal taxes, Social Security taxes or Medicare taxes would be withheld. 

Initially, I think this would increase the cost of new homes.  However, within a couple of years, it this increased cost would likely melt down significantly.  Simplified bookkeeping, as well as reduced costs for suppliers (removal of their tax component) would decrease the impact of the tax... but existing homes would still maintain an advantage because there wouldn't be that tax component. 

So...

This would add value to most (if not all) existing homes.  The value would be added regardless of the situation of the current owner.  It also wouldn't be added via government redistribution of wealth. 

It is also likely that the FairTax would lead to a growth and expansion period in the economy.  But that is a different post...

Image by Getty Images via Daylife

Two years ago we were staring at the beginnings of a financial crisis.  Credit was clogged up, home values were sliding and the government was mulling over ways that they could intervene.  They wanted to save everyone…

I had opinions then, and I have opinions now.

Oddly, we are still facing many of the same issues, and we are still looking to the future when there are supposed to be even more foreclosures and ill effects.

Take a look back and see what the way forward looked like then…

In December of 2007, we hadn’t given almost a billion dollars to banks.  But the government and the blogosphere was abuzz with talk about bailing out home owners.

I have to say, I have re-read that opinion a time or two, and knowing what I know now, I’m not sure I would change it.  I still think it sucks for the millions of home owners that have lost value because a neighbor was foreclosed and the house went downhill.  Heck, I’ve been affected by that… as you probably have as well.  But at the same time, giving that neighbor that made bad decisions, and the bank that made bad decisions a free pass so that I don’t feel the impact doesn’t make sense either… especially since I would STILL feel the impact in the form of government debt and taxes.

Take a read, and let me know what you think.  Now that we have two years of hindsight…

And they were smart voices. 

Wandering around in the Rain, there have been scores of bloggers pointing out that the federal government trying to "fix" the foreclosure crisis.  Now, Inman News is saying the same thing.   (the link will only be good until it goes behind the curtain)

Most families facing foreclosure today were on weak financial ground, he says, and "will defy every effort" at workouts. "Even extraordinary rewrites will beget re-default, the poorly maintained house creating deeper loss in the ultimate foreclosure, the troubled inventory overhanging the marketplace and preventing recovery," Barnes writes.

And goes on to say...

In an effort to prevent foreclosures, consumer groups and Senate Democrats want to give bankruptcy judges the power to cram down mortgage loan modifications over the objections of lenders. (see recent blog post, and watch Inman News headlines Monday for details on how the cram down provisions in S 2136 have been rolled into a more sweeping foreclosure prevention bill, S 2636).

Supporters of cram downs say voluntary efforts by loan servicers to engage in workouts with borrowers haven't done much to slow the pace of foreclosures, and that any increase in mortgage rates won't be as drastic as the industry predicts.

Although Barnes didn't address cram downs in his latest column, I thought it was interesting that he raised foreclosures and mortgage market liquidity in the same breath, and concluded that it's the credit crunch, not foreclosures, that pose the biggest threat to a recovery.

They also point out...

Pavlov and Wachter's December 2006 paper, "Aggressive Lending and Real Estate Markets," looked at the use of ARM loans in 22 Los Angeles neighborhoods where prices fell more than 21 percent between 1990 and 1995. Perhaps not surprisingly, prices fell harder in neighborhoods where ARM loans were more prevalent. But the study's most surprising finding was that it wasn't the higher default rates on ARM loans that sent home prices plummeting, but their lack of availability during the downturn.

So, a lot of people that study these things are saying that the government, trying to provide relief is doing EXACTLY the wrong thing.  Of course, it is populist to go after the banks and talk about corporate greed and not personal responsibility.  (BTW, remember that those ideas are coming from both sides of the aisle).  Instead of helping people and getting us past this, it will only delay and increase the severity. 

The cry of all of the people that aren't being foreclosed are losing value is a valid one... but, is it not worse to drag the problem out and make it take a decade for price recovery than to let the market find its bottom and work through it in just two or three years?  Would those responsible borrowers and homeowners not be better served by the restoration of their equity sooner, rather than later?

Feel free to post links back to other blogs with arguments on both sides of this issue.  (Note:  I did not post links to A/R blogs that echoed this sentiment.  There are a lot.  I have read a bunch of them.  Feel free to post links to your blog.  I didn't want to miss a good one... and there are many.)

Game on... 

... how it is affecting the overall economy.  This is a great post, but I will admit it is pretty deep.. not casual reading.  Matt Heaton might like it (agreeing or disagreeing... I think he will like the depth).  Here are a few excerpts, but I would recommend visiting the post and reading it in its entirety:

I mean, why else would the Fed so aggressively and so suddenly attempt to stimulate the economy with excessive monetary ease and advocate swift and decisive government intervention with fiscal stimulus? Do you think they don't know the moral hazards of what they are doing? What is at stake here are the risks of another debt-deflation spiral like we had in the 1930's and therein lies their concerns. Even if they won't speak it, others are beginning to.

Consider this if you will:  "In the fourth quarter of 2007, new foreclosures averaged 2,939 a day, double the pace of a year earlier. In the 1930s, lenders were seizing homes at an average rate of 3,000 a day, adjusted for today's housing stock size,"  according to RealtyTrac Inc.,

...

If the median home price declines anywhere near 25%, this could spell B-I-G  T-R-O-U-B-L-E for the U.S. economy. "Keep in mind, says Merrill's Rosenberg, that the relatively puny price decline to date has already pushed home-loan delinquencies to their highest level in 20 years."

...

Laissez-Faire Economists of the 1930's
Elaborating on the solutions attempted by the government and Federal Reserve during the 1930's Freidrich Hayek observed that, "To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which bought it about- because we are suffering from a misdirection, we want to create further misdirection....We must not forget that for the last six to eight years monetary policy all over the world has followed the advise of the 'stabilisers.' It is high time that their influence which has already done enough harm should be overthrown." - Monetary Theory and the Trade Cycle circa 1933

A century before Von Mises, Ropke, and Hayek, there was John Stuart Mill, another laissez-faire proponent who held the opinion that "in all the more advanced communities, the majority of things are worse done by the intervention of government than the individuals most interested in the matter would do them, or cause them to be done, if left to themselves." - Principles of Political Economy, circa 1848

Modern Day Laissez-Faire
Echoing Wilhelm Ropke of yesteryear is Pimco's Mark Kiesel who has recently been quoted as saying that "rescuing borrowers will only worsen the economic misery for everyone. Keeping the market from correcting itself only prolongs the problem....The housing market will find its own bottom, without a government bailout." Kiesel is suggesting that market forces today are akin to the debt-deflationary spiral of the 1930's and that they are simply far more powerful than any interventionists measures can hope to achieve.

...

"Because, Gross goes on to say, demand in the form of consumption has been artificially and fictitiously stimulated in recent years by financial engineering run amuck, there is a legitimate question as to whether its black hole imploding destructiveness can be totally countered with another dose of lower yields and deficit spending packages. The $150 billion "return to sender" deficit plan advanced by Bush and the Congress, for instance, amounts to just 1% of GDP and is of marginal benefit to long-term prosperity…

The U.S. needs a Krugman "demand-based" fiscal package alright, but a $300-$500 billion permanent one,  because as the system of modern day levered shadow finance slows to a crawl or even contracts at the edges, its ability to systemically fertilize economic growth must be called into question. To provide a stable recovery path, government spending needs to fill the gap - not consumption. Public works programs, badly needed infrastructure repairs, as well as spending on research and development projects should form the heart of our path to recovery. 

This is the comment I left:

Very interesting post.  Admittedly, there is a good bit of it that is above my head since I am not in the world of finance to the same degree.  

One thing did strike me though.  One of the issues that we have seen increasing in the last decades is the increase of debt with decrease of savings.  We are only consumers.  This coupled with the unfriendly climate towards business has led to the US no longer being a destination for business, but just an important market... Offshoring of both profit and operations.  

So, that leads me to wonder if something like the FairTax would strike the right balance.  It would encourage individual savings (making a larger investment pool available) while encouraging business capital investment.  It would also encourage a repatriation of both profits and operations since the corporations wouldn't have either taxes or the costs of determining taxes (and the costs of figuring it out isn't cheap).  

I think that the FairTax bill, as written might actually spur the US economy to a large degree.  Of course, generally when I see the plan criticized, it is modified and then the modifications are criticized (like the President's Advisory Panel on Taxation).  

What do you think?

To really dive into would take more of a wonk than me...  But, I liked the read, if not the details.  I think this is well written and reasonably defended.  Of course, it takes a high octane crystal ball to really know the right path, and I'm afraid that those are all to rare.  Even the people that we look to for predictions can't agree on the direction, much less the amplitude of a solution.

Now let's see if my comment ever gets published.

During my daily blog run, I came across this little gem.

The house price is from 1977... Just to be real here, I ran a Constant Dollar Calculator on that $3,500 from 1977. I wasn't buying that point without something a little stronger. The cost for the house in 2008 dollars came out to $12.452.15. I am not pre-disposed to think that these folks bought a four bedroom house in North Minneapolis in 1977 for less than $12,500. In 1977, one could walk into a dealership and buy a Mustang for just over $6,000... (that would be a 1977 Mustang II King Cobra).

I just have a hard time believing that the price is accurate.

Now that the credibility of the writer is in question, let's talk about the rest of the story...

They needed to do a few things to the house, and pay off some credit card debt, so they got $228,000. Does that seem a touch extreme? Now the house appraises for $174,000, and the writer says that is optimistic. So, there is a good $60,000 in negative equity.

According to the story, the borrowers signed a thick stack of paperwork and never read now understood what they were signing. And then they got a check for a little shy of a quarter of a million dollars. And the implication is that they can't do anything but go into foreclosure because they have a $228,000 mortgage and a house worth less than $174,000.

I want to know what happened to the money.

My point is that I think they could solve this situation by selling some of the stuff they (no doubt) purchased with the proceeds. I would almost be willing to bet money that there are at least two new cars and a flat screen unaccounted for in this deal. Maybe a bass boat and a trip to Hawaii, too. I guess the trip to Hawaii isn't getting returned.

The bank is being punished for their stupidity. Even if this property doesn't go into default, plenty of others are and will. The lenders are and will continue to be on the hook for hundreds of millions of dollars.

I don't think that these folks deserve a free ride or absolute victim status. If the numbers presented in the article are to be believed ($4000 for an appraisal) then one could be sure they are dealing with a sleazy lender... but they still chose to sign the docs without even looking at them... and there wasn't a complaint when they got the money.

I posted similar comments to this blog. They have to wait to be moderated. We'll see if they show up.

Anyone know where I can buy a house for under $12,500?

While glancing through today's REALTOR(R) Magazine Daily News Brief, there were two stories that jumped out at me.  One was a call to action, and the other looked like the groundwork for a call to action later...

The first was:  Withholding Mortgage Help Could Hurt Everybody.  Among other things, it said:

The Center for Responsible Lending, a consumer group, found that an increase of 1.1 million foreclosures would lower the prices of as many as 44.5 million homes by a collective $223 billion. "If we don't help homeowners having problems paying their mortgage, everyone's net worth is going to go down," says Zandi.

There is also mention of crime increasing with the foreclosure rate, and a mention of a CNN poll that showed 51% of respondents feel that those facing foreclosure need to butch up and deal with their problems.  

The second was:  Latest Re-Fi Boom Leaves Many Out in the Cold.  And, it had a few choice quotes like:

At 6 percent about 37 percent of homeowners could refinance their mortgages and save money on monthly payments, estimates Bear Stearns Co., but many of them can’t refinance because in the current environment their mortgage is too big or their credit score is too low.

It goes on to say that those that will be able to take advantage of the low rates are those that have 30% equity or a credit score above 679.   

So Lane... I see dots.  Are you going to connect them?

Sure.  A few months ago everyone figure out that people that had gotten the "too good to be true" loans were going to have to pay the piper before much longer.  We started hearing how many people (that had chosen these loan products) were going to be damaged and/or lose their homes.  A call to action was initiated, and our glorious legislators, seeing votes, responded.  Forget the Constitution.  People are looking for the government to help them out of their mistakes. 

Now, we are seeing rates that hearken back to 2005... and nobody (except me... [sidebar]ok, I really wasn't alone, and I blew the timeline.  I thought it would take more than a year to sort out, but it only took a few months) saw that coming.  But, there are millions of families that can't get those rates because their credit scores aren't good enough. 

Basically, they aren't going to have the same advantages as their more responsible neighbors.  That's gotta suck.  Before, millions of families were going to be displacedby those evil banks, because of their poor decisions.  Now, millions of families will be paying more to those evil banks, because of their poor decisions. 

How long before a bunch of our "esteemed" legislators start looking at the numbers and notice that there are WAY more people with sucky credit than there are bankers?  And how long after that until they figure out that more votes are to be had attacking the evil banks than in allowing the greedy corporations to continue to stick it to people that have enough money for a new bass boat, a Tahoe and a flat screen TV, but not enough to pay their mortgage? (where is an eye rolling smiley when I need it?)

My final thought... and it is a doozy... Maybe we need to let values drop.  Maybe values HAVE gotten out of line, and that paper wealth needs to evaporate.  Easy for me to say... didn't happen here in Atlanta.  We didn't have that kind of boom.  But, look at the Dutch Tulip bubble in the 17th Century.  Did anyone suggest that those that lost money or wealth should have recourse for their voluntary actions?  What about the tech boom of the 1990s?  I lost money.  Wealth evaporated.  Did the government bail us all out?  Did the markets correct?

A friend of mine forwarded a Moody's study that was called "Aftershock - A study of the post Mortgage Meltdown."  I went through it, and most of it is pretty dark... but then I started to notice something.  The maps didn't look that bad.  Ok, they didn't look that bad for the Southeast in general, or for the area around Atlanta, GA in particular.  It isn't all happy, happy, joy, joy.  

The first map is a map of the depth of correction for different areas around the country.  Green = good, red = bad...

The red areas are forecast to have a more than 10% correction.  Orange areas are between 5% and 10%.  Blue areas are less than 5%.  Green areas are not expected to decline.  

The second map is looking at mortgage defaults.  The Atlanta area isn't faring as well in that regard, but the national average is 1.8%.  I think that while it certainly isn't good that the Atlanta area is tracking along with the national averages , it certainly isn't calamitous.  One other fact to keep in mind is that the Atlanta market led the nation in mortgage fraud for quite a while.  It was only recently that we relinquished that title... and we are still in the top five.  

The final map is a lot more important in my view.  That is a measure of economic expansion/contraction.  Again, we can see that the Atlanta area is in the green, and looking good.   

In this case, green means that the area is expanding economically.  Blue is in a recovery.  Orange is at risk.  Red is in a recession.  

So, from each of these maps we can glean a little piece of the puzzle.  And it certainly is a puzzle.   

While there certainly is a mantra of All Real Estate is Local that has been echoed here, and has now been picked up by the NAR, there is a national component.  With very few exceptions, bad news is like an infection and it infects nearby areas.  Good news doesn't get to act like an antibiotic, though.  It certainly helps, but it isn't the cure-all to say that real estate is local, and my market is rocking.  

As a counter point, I think it would be nice if some media personalities could look past their own backyard to see that DC, LA, NYC and Chicago aren't THE housing market.  They are just a part...

For us here in Atlanta, the fundamentals are strong.  The economy is good.  The national issues are taking away with one hand (adding fear to the market) and giving with the other (incredible interest rates).  Rental rates are rising, so owning your own home or investing in rentals that offer positive cash flow are good ideas. 

If you are going to own your home, talk with a GOOD mortgage broker.  Get a mortgage that you understand, and can afford.  Get a home that you can afford.  Take advantage of the fear in the market to find good deals.  That doesn't mean that list prices are a good deal, and it doesn't mean that they aren't.  You also need a quality real estate agent to help find the right properties, and determine the right price.   

Through a search a few weeks ago I ran across Real Estate Radio's blog.  I have been enjoying the read for quite a while, and even listening to some of the podcasts (they are full radio show recordings, and are two hours long).  I don't listen to as much of the podcasts as I'd like, because of the length.  

But, the show from January 10th has very interesting notes. 

Barry C started off the show by letting us know Geppeto has spoken again and the rates are coming down! Think this is not the time to buy real estate? Fine with me, sit on the sidelines and I will be making the money.

There are a few things to keep in mind while reading this statement...  

First.  These are real estate investors.  They aren't here as agents of members of the NAR (I don't know if they are licensed or members).  These are people that invest in real estate to make money.

Second.  They are not drinking the NAR Kool-Aid.  Lawrence Yun, the Chief Economist for the NAR, has been chided for making the same "the worst is behind us" report for the last 14 months or so... even though he would have to know otherwise.  

Third.  They aren't particularly friendly to real estate agents or REALTORS(R)... The "All real estate is local" war-cry doesn't play well with them, nor do the tactics, ethics and work-habits of many practitioners.  

Why do I say that?

If this call for investment was coming from the inside, I would look at it with less than a trustful eye.  Seriously.  The NAR, as well as most agents, have been saying that "now is the time to buy" since the earth started to cool (or warm if that is your predilection).  Even in markets that have been crashing down around them, many of the old school agents were telling anyone that would listen that it was the time to buy.  While I will give them a little bit of a pass for not having a crystal ball, at some point we have to step back and look at the local situation.  And be honest... but I digress. 

The point is that we are starting to see investors looking at the market and see deals.  Instead of trying to catch the falling knife, they are seeing that there are properties right now that will offer positive cash flow and make money.  When the bargain shoppers hit the streets, they pick up the bargains... that means that the first sign of the turnaround is starting to show. 

If you've been sitting on the sidelines, you might stop looking at the view and start thinking about getting in.  

A word of caution.

Don't think that we are entering a flipping market.  We aren't there yet.  And, flipping is always dangerous.  But, if you are looking for a personal home to live in for a while, or if you are looking for a property to hold for a while... now might be the time.  

Rates are GREAT.  Fundamentals aren't bad.  Inventory is plentiful.  Prices are good.  Sellers are motivated.   

When I logged on to the computer this morning, I ran across this story from Yahoo News.  It is from the AP, and basically says that in 2007, new home construction dropped 24.8% from 2006 levels.  That is the highest drop since 1980... when interest rates on mortgages were worse than credit cards are now. 

Of course, the effects are a lot more localized.  The story goes on to say:

• The drop was 30.8% in the Midwest
• It was 19.6% in the West
• The Northeast saw a 25.8% drop
  
• The drop in the South was 3.3%... not a misprint... 3.3%

Now, I have to say that for the national housing picture I am glad to see the sharp drop in new construction.  It NEEDS to happen.  There is too much supply on the market.  Even in reasonably strong markets, there are too many properties on the market.  The best way to correct the imbalance between supply and demand is to lower the supply.  Demand can be toyed with, but it is a much slipperier slope.  The recent and future interest rate cuts are starting to show a little bit of effect for demand.  

But, what about here in the South?

That was a bit of a surprise to me.  I expected that there would be a bigger drop in the numbers for the South, but I think that there are a couple of reasons for the small bump instead of the dump in other regions.  

• Strong fundamentals.  Unemployment and job growth look great in this region
• Continued market strength.  The highest concentration of rising markets is in the South
• Timing.  Even in the slowing markets, the slowdown started later here than other regions. 
  

I expect to see a more pronounced drop for the later quarters, and going in to this year as well.  But, I would also mention that I don't think the drop will be anywhere near the magnitude of the other regions because of the underlying strength.  

So, let's toast the good news that this correction is moving along as scheduled...