This post first appeared on Minyanville and Cirios Real Estate.
Despite Herculean efforts, the Federal Reserve is losing its battle to keep mortgage rates at all-time lows.
As fear that we're headed for imminent collapse slowly wanes, investors' appetite for risk is coming back. This renewed confidence has helped buoy stocks, and the major equity indices have rallied more than 30% from their March lows. The shift, however, has come at the expense of the Treasury market, which has been in a 7-week slump.
According to Bloomberg, big money managers like Blackrock (BLK) are betting the Fed will step in to support the Treasury market (again), as regulators hope renewed Treasury purchases will push down mortgage rates (again).
Bond prices and yields move in opposite directions. When investor demand falls, so do prices, pushing up yields. And as investors shun the safety -- but relatively low return -- of government-backed debt, the impacts are felt throughout the credit markets. Of concern to the Fed, and what has led Chairman Ben Bernanke to increase Treasury purchases in the past, is the effect this dynamic has on mortgage rates.
A mortgage is nothing more than a long term bond, given to a borrower to purchase a home. So when lenders get fearful they're not being compensated for tying up money for as long as 30 years, they increase rates. Further, as the specter of inflation rises, lenders demand bigger interest payments to keep up with higher prices. In other words, when dollars in the future are worth less than dollars today, banks demand higher payments to make up the difference.
Keeping mortgage rates low has been a cornerstone of Washington's efforts to jump start the flagging housing market. But with rates at the highest level since April, the "smart money" is betting the Fed may return to the Treasury market en masse.
Paradoxically, even as the Fed tries to keep interest rates low -- which are rising in part due to the expectation that higher prices loom in the years ahead -- its actions increase the likelihood of future inflation. Running its printing presses around the clock has consequences, even if Fed officials are loathe to admit it.
Minyanville's Mr. Practical often discusses the fallacy that credit markets are improving. As he points out, only in corners of the market where the government has stepped in to support lending is any so-called "normalcy" returning.
So too in the mortgage market.
Loans backed by Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Housing Administration account for the lion share of mortgages currently being issued in this country. Aside from the occasional jumbo loan written by banks like JPMorgan (JPM) or Wells Fargo (WFC), government mortgages are the only game in town. Coupled with the Troubled Asset Lending Facility (or TALF), which funnels money into the market for mortgage-backed securities, the home-loan market remains completely dependent on government support.
This is one reason recent "strength" in the housing market will provide transitory. There's a limit on how much government can control markets, as evidenced by mortgage rates that move persistently higher every time the Fed eases its aggressive intervention. Fundamentals, not subsidies, will provide a true floor in prices.
And as banks prepare to unleash a firestorm of foreclosure inventory into the market, fundamentals will remain pointed south, thereby pushing down prices. And as foreclosures continue to infect higher end real-estate markets, these price declines will be felt by a growing -- and more prosperous -- segment of the population.
Mortgage rates, left to their own devices, would be far, far higher without government support. This is the message of the market - one bureaucrats in Washington seem unwilling to learn.
Showing posts with label FHA. Show all posts
Showing posts with label FHA. Show all posts
Monday, May 11, 2009
Sunday, March 29, 2009
Keepin' It Real Estate: Housing Recovery? What Housing Recovery?
This article first appeared on Minyanville and Cirios Real Estate.
This week, 2 data points led optimistic market-watchers to declare the bottom in the housing is nigh: Indeed, one widely read trader-writer proclaimed, “The oversupply of housing that so plagues the market at present will be a figment of our memory a few months hence.”
The first: On Monday, the National Association of Realtors said existing home sales jumped 5.1% in February compared to the previous month, largely due to the high number of foreclosures being dumped onto the market by big banks like JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC).
While indicative of buyers gingerly dipping their toes back into the market, existing home sales are still down 13.4% from a year ago.
The second: On Wednesday, the Commerce Department released data on February new home sales which showed a similar trend: Transactions bounced 4.7% from January, but remain a whopping 41% below sales this time last year. Nevertheless, shares of beleaguered homebuilders like Centex (CTX) and Lennar (LEN) had stellar performances this week, capping a nearly 100% gain since the beginning of the month.
Prices, however, continue to slide for both existing and new homes. And while median (and average, for that matter) price data is skewed to the downside due to the mix of homes sold in a given period -- in this case, more cheap houses than expensive ones -- property values remain in a decidedly downward trend.
But since transactions typically find a bottom prior to prices, the number of people who believe prices should stabilize in the near future is growing.
Examining the data, unfortunately, tells a different story. Below is a chart produced by my firm, Cirios Real Estate, showing home prices and sales transactions in for the eastern part of the San Francisco Bay Area. The East Bay is a fairly representative sample of California housing markets: A little high-end, a little middle-class and a little low-rent all mixed in.
Click to enlarge
The red line shows average home prices, while the blue line shows sales transactions, as measured by their change from a year ago. Notice how, even as sales have spiked from the previous year, prices continue to plunge.
Two things jump out at me on this graph (aside from the massive increase in transactions and precipitous decline in prices):
First, transactions began to ramp up as prices moved down toward levels where borrowers could get government-backed loans to buy homes. That means Fannie Mae (FNM), Freddie Mac (FRE) and the FHA have financed a whole swath of homes in the past 18 months that are now severely underwater.
Second, transactions bottomed in September 2007, not long after the market peaked. 18 months have passed and prices have dropped more than 50% since that time.
With that in mind, the current “euphoria” over housing data -- after a single month-over-month increase in sales, when year-over-year measures remain well behind even last year's weak totals -- seems a bit premature.
This is not to say prices will never stabilize, or that increased sales are a bad thing. In fact, the more sales we have, the quicker price discovery happens and the faster a true bottom can be found. Nor is this some proclamation that this part of California is a perfect proxy for home prices nationwide.
But given the backlog of foreclosed homes sitting on the books of the major American banks, continued price declines across the country and tight mortgage market conditions, calls for the devouring of supply by voracious home buyers causing an imminent housing bottom is downright premature.
To be sure, we may be one step closer to a housing bottom, but that’s one step on a very, very long path.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
This week, 2 data points led optimistic market-watchers to declare the bottom in the housing is nigh: Indeed, one widely read trader-writer proclaimed, “The oversupply of housing that so plagues the market at present will be a figment of our memory a few months hence.”
The first: On Monday, the National Association of Realtors said existing home sales jumped 5.1% in February compared to the previous month, largely due to the high number of foreclosures being dumped onto the market by big banks like JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC).
While indicative of buyers gingerly dipping their toes back into the market, existing home sales are still down 13.4% from a year ago.
The second: On Wednesday, the Commerce Department released data on February new home sales which showed a similar trend: Transactions bounced 4.7% from January, but remain a whopping 41% below sales this time last year. Nevertheless, shares of beleaguered homebuilders like Centex (CTX) and Lennar (LEN) had stellar performances this week, capping a nearly 100% gain since the beginning of the month.
Prices, however, continue to slide for both existing and new homes. And while median (and average, for that matter) price data is skewed to the downside due to the mix of homes sold in a given period -- in this case, more cheap houses than expensive ones -- property values remain in a decidedly downward trend.
But since transactions typically find a bottom prior to prices, the number of people who believe prices should stabilize in the near future is growing.
Examining the data, unfortunately, tells a different story. Below is a chart produced by my firm, Cirios Real Estate, showing home prices and sales transactions in for the eastern part of the San Francisco Bay Area. The East Bay is a fairly representative sample of California housing markets: A little high-end, a little middle-class and a little low-rent all mixed in.
Click to enlarge
The red line shows average home prices, while the blue line shows sales transactions, as measured by their change from a year ago. Notice how, even as sales have spiked from the previous year, prices continue to plunge.
Two things jump out at me on this graph (aside from the massive increase in transactions and precipitous decline in prices):
First, transactions began to ramp up as prices moved down toward levels where borrowers could get government-backed loans to buy homes. That means Fannie Mae (FNM), Freddie Mac (FRE) and the FHA have financed a whole swath of homes in the past 18 months that are now severely underwater.
Second, transactions bottomed in September 2007, not long after the market peaked. 18 months have passed and prices have dropped more than 50% since that time.
With that in mind, the current “euphoria” over housing data -- after a single month-over-month increase in sales, when year-over-year measures remain well behind even last year's weak totals -- seems a bit premature.
This is not to say prices will never stabilize, or that increased sales are a bad thing. In fact, the more sales we have, the quicker price discovery happens and the faster a true bottom can be found. Nor is this some proclamation that this part of California is a perfect proxy for home prices nationwide.
But given the backlog of foreclosed homes sitting on the books of the major American banks, continued price declines across the country and tight mortgage market conditions, calls for the devouring of supply by voracious home buyers causing an imminent housing bottom is downright premature.
To be sure, we may be one step closer to a housing bottom, but that’s one step on a very, very long path.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
Friday, February 13, 2009
Keepin' It Real Estate: How Good is Zillow?
This post first appeared on Minyanville and Cirios Real Estate.
This may seem like a preposterous statement, what with the entire global financial system in disarray after the collapse of the US housing market, but we Americans are stubbornly optimistic people, content to ignore calamity as long as we possibly can.
A study released this week by Zillow, a real estate information website best known for its wildly inaccurate estimates of property valies, shows Americans have finally succumbed to the notion that home prices aren't going up anymore. 57% of homeowners polled believe their own home lost value during 2008, up from 38% who felt that way just 6 months earlier.
Interestingly, when asked about the future, respondents were upbeat: Only 30% estimate the value of their house will decrease in the next 6 months. Of course, their neighbors aren’t so lucky: Forty-seven percent believe home values in their local markets will fall during the same time period.
Zillow has become something of a cult phenomenon in the past few years, as it allows homeowners to go online and see how much their house is “worth.” By its own admission, Zillow’s values are merely estimates based on amalgamating sales data from nearby homes, comparing bedroom counts, living area, lot size and other salient characteristics.
What few people realize, however, is that Zillow’s valuation algorithm isn’t just used by John Q. Homeowner: Every big lender in the country uses a similarly opaque formula to price real estate.
Wells Fargo (WFC) -- now the biggest US home lender in the country after its acquisition of Wachovia -- holds tens of thousands of mortgages on its books, each backed by a unique house. It’s impractical to regularly review each home for a fresh value, so Wells and other big banks like Citigroup (C), JP Morgan (JPM) and Bank of America (BAC) rely on analytics firms to provide property values churned out by what are called Automated Valuation Models, or AVMs.
AVMs rely heavily on recent sales data to drive their valuation estimates. This works reasonably well in a vanilla market, one where home prices move uniformly in a single direction - namely up. Even rapidly rising prices are well accounted for, since liquid markets provide reliable, normal data sets upon which calculations can be made.
AVMs are a bit behind the curve in an appreciating market, offering a conservative estimation of a home’s value. But in a declining, choppy, illiquid market like the one we’re in now, AVMs fall apart.
As sales volume dries up and prices gap down, transactions that are even 3 months old become woefully out of date. Even in distressed markets that are now seeing frenetic buying activity, active listings -- and therefore true market prices -- are well below all but the most recent sales.
By using AVMs to value housing assets, banks are constantly underestimating losses in a declining market. Unfortunately, there isn’t much of an alternative.
Small, independent valuation firms offer the most reliable estimations of value, but they specialize in local markets by definition, which limits the scale with which huge lenders can effectively use their results to evaluate nationwide portfolios of loans.
Next time you laugh at Zillow’s estimation that a home that just sold for $250,000 is really “worth” between $315,000 and $375,000, remember that your bank is looking at the same data. No wonder they keep asking Uncle Sam for so much money.
This may seem like a preposterous statement, what with the entire global financial system in disarray after the collapse of the US housing market, but we Americans are stubbornly optimistic people, content to ignore calamity as long as we possibly can.
A study released this week by Zillow, a real estate information website best known for its wildly inaccurate estimates of property valies, shows Americans have finally succumbed to the notion that home prices aren't going up anymore. 57% of homeowners polled believe their own home lost value during 2008, up from 38% who felt that way just 6 months earlier.
Interestingly, when asked about the future, respondents were upbeat: Only 30% estimate the value of their house will decrease in the next 6 months. Of course, their neighbors aren’t so lucky: Forty-seven percent believe home values in their local markets will fall during the same time period.
Zillow has become something of a cult phenomenon in the past few years, as it allows homeowners to go online and see how much their house is “worth.” By its own admission, Zillow’s values are merely estimates based on amalgamating sales data from nearby homes, comparing bedroom counts, living area, lot size and other salient characteristics.
What few people realize, however, is that Zillow’s valuation algorithm isn’t just used by John Q. Homeowner: Every big lender in the country uses a similarly opaque formula to price real estate.
Wells Fargo (WFC) -- now the biggest US home lender in the country after its acquisition of Wachovia -- holds tens of thousands of mortgages on its books, each backed by a unique house. It’s impractical to regularly review each home for a fresh value, so Wells and other big banks like Citigroup (C), JP Morgan (JPM) and Bank of America (BAC) rely on analytics firms to provide property values churned out by what are called Automated Valuation Models, or AVMs.
AVMs rely heavily on recent sales data to drive their valuation estimates. This works reasonably well in a vanilla market, one where home prices move uniformly in a single direction - namely up. Even rapidly rising prices are well accounted for, since liquid markets provide reliable, normal data sets upon which calculations can be made.
AVMs are a bit behind the curve in an appreciating market, offering a conservative estimation of a home’s value. But in a declining, choppy, illiquid market like the one we’re in now, AVMs fall apart.
As sales volume dries up and prices gap down, transactions that are even 3 months old become woefully out of date. Even in distressed markets that are now seeing frenetic buying activity, active listings -- and therefore true market prices -- are well below all but the most recent sales.
By using AVMs to value housing assets, banks are constantly underestimating losses in a declining market. Unfortunately, there isn’t much of an alternative.
Small, independent valuation firms offer the most reliable estimations of value, but they specialize in local markets by definition, which limits the scale with which huge lenders can effectively use their results to evaluate nationwide portfolios of loans.
Next time you laugh at Zillow’s estimation that a home that just sold for $250,000 is really “worth” between $315,000 and $375,000, remember that your bank is looking at the same data. No wonder they keep asking Uncle Sam for so much money.
Thursday, October 16, 2008
Washington Continues to Ignore Root of Housing Problem
This post first appeared on Minyanville and our sister site Cirios Real Estate.
Despite overwhelming evidence that we're in the middle of a debt crisis, regulators insist they're wrestling a liquidity crunch. And all the while, a cancer continues to eat away at the guts of the economy: The housing market. Only when it stabilizes will the financial system and, by extension, the economy -- recover.
And yet, despite this widely recognized fact, the recent $700 bailout package contains little support for struggling homeowners. Even the $250 billion being dumped into banks will have only a minor effect on property values.
Smothered under the weight of falling home prices and tight credit conditions, consumers are reining in spending, as evidenced by yesterday’s bleak retail sales data. The economy is following the housing market into the abyss.
Since last summer, Washington's tactic has been to encourage loan modifications through HOPE NOW and Project Lifeline and to widen the scope of government-backed loan programs via the Federal Housing Administration, Fannie Mae (FNM) and Freddie Mac (FRE).
As noted in the Wall Street Journal and discussed ad nauseum here in the 'Ville, these measures are woefully inadequate to stem the continued decline in housing prices.
As property values fall, over-leveraged borrowers find themselves underwater, or owing more on a house than it's worth. In order to sell, the homeowner must come up with the difference between the sales price and the balance of their mortgage. For most, this is cash that simply doesn’t exist.
As a result, homes sit on the market for months, further pressuring home values. Despite the insistence by some real-estate agents that this is a buyer’s market, it most certainly is not. Until bloated inventories fall, home prices will continue to slide, making buying a home a dangerous proposition in the vast majority of the country.
Meanwhile, politicians continue to bang their heads against the proverbial wall, backing programs simply that do not work with the scope and efficiency that’s needed. Loan modifications, opening up mortgage guidelines and providing tax breaks so homebuilders like Centex (CTX), Pulte Homes (PHM) and KB Homes (KBH) can sell more overpriced houses may help a select few, but they do little to address the root of the problem.
Until taxpayer funds are appropriated to absorb negative equity, price discovery in the housing market will be a long, agonizing process.
Despite overwhelming evidence that we're in the middle of a debt crisis, regulators insist they're wrestling a liquidity crunch. And all the while, a cancer continues to eat away at the guts of the economy: The housing market. Only when it stabilizes will the financial system and, by extension, the economy -- recover.
And yet, despite this widely recognized fact, the recent $700 bailout package contains little support for struggling homeowners. Even the $250 billion being dumped into banks will have only a minor effect on property values.
Smothered under the weight of falling home prices and tight credit conditions, consumers are reining in spending, as evidenced by yesterday’s bleak retail sales data. The economy is following the housing market into the abyss.
Since last summer, Washington's tactic has been to encourage loan modifications through HOPE NOW and Project Lifeline and to widen the scope of government-backed loan programs via the Federal Housing Administration, Fannie Mae (FNM) and Freddie Mac (FRE).
As noted in the Wall Street Journal and discussed ad nauseum here in the 'Ville, these measures are woefully inadequate to stem the continued decline in housing prices.
As property values fall, over-leveraged borrowers find themselves underwater, or owing more on a house than it's worth. In order to sell, the homeowner must come up with the difference between the sales price and the balance of their mortgage. For most, this is cash that simply doesn’t exist.
As a result, homes sit on the market for months, further pressuring home values. Despite the insistence by some real-estate agents that this is a buyer’s market, it most certainly is not. Until bloated inventories fall, home prices will continue to slide, making buying a home a dangerous proposition in the vast majority of the country.
Meanwhile, politicians continue to bang their heads against the proverbial wall, backing programs simply that do not work with the scope and efficiency that’s needed. Loan modifications, opening up mortgage guidelines and providing tax breaks so homebuilders like Centex (CTX), Pulte Homes (PHM) and KB Homes (KBH) can sell more overpriced houses may help a select few, but they do little to address the root of the problem.
Until taxpayer funds are appropriated to absorb negative equity, price discovery in the housing market will be a long, agonizing process.
Monday, July 7, 2008
No HOPE NOW For Mortgages
This post first appeared on Minyanville.
Washington’s war on foreclosures isn’t going very well.
Or is it? It depends on who you ask.
In the past few days, contradictory reports have emerged over the status of efforts to stem the rising tide of foreclosures.
HOPE NOW, the foreclosure prevention program started by Congress last July, reports that it’s successfully preventing thousands of repossessions a day - 170,000 in May alone, and almost 2 million overall. The group includes such mortgage behemoths as Wells Fargo (WFC), JP Morgan Chase (JPM) and Countrywide (CFC).
Consumer groups, on the other hand, aren’t so sure. The California Reinvestment Coalition (CRC), which advocates for low-income communities, says that servicers are failing to keep troubled borrowers in their homes, and that HOPE NOW's methodology in counting "prevented" foreclosures is deeply flawed.
The CRC also alleges that the loan servicing industry hasn't adequately met the demands of millions of homeowners who were victims of predatory lending during the boom.
On Housing Wire, Paul Jackson aptly points out that public perception about homeownership and lending practices is changing, despite the public-relations war being waged by both sides. During the boom, community development groups chided banks for shutting out low-income borrowers. Even President Bush got involved, pushing the Federal Housing Administration to offer “no down payment” loan options.
But public perception can send organizations headlong from one side of an issue to the other: Consumer advocacy organizations have now turned against lenders, in some cases incriminating them for following the very advice they themselves hawked just a few years ago.
Politicians, as they’re wont to do, are responding with cries for vast reams of legislation to protect borrowers. Consumer groups are now pitted against the formidable housing lobby, which has been very generous with its donations this election year.
Minyanville’s Professor Depew often writes about the concept of “social mood,” and how consumer preferences lead trends, rather than visa versa: "As social mood continues to darken and turn against symbols of excessive wealth and consumption, the former icons of bull market glee and prosperity begin to tarnish in the public eye."
If there’s one sure bet in housing, it's that writing a new mortgage will be a lot trickier in five years than it is today. Disclosure will increase, conflicts of interest will be regulated away and bureaucracies needed to police the new regime will be created out of whole cloth.
Regulators may succeed in preventing another bubble, but the cost of legislation that unduly constricts mortgage lending will be borne for years to come.
Washington’s war on foreclosures isn’t going very well.
Or is it? It depends on who you ask.
In the past few days, contradictory reports have emerged over the status of efforts to stem the rising tide of foreclosures.
HOPE NOW, the foreclosure prevention program started by Congress last July, reports that it’s successfully preventing thousands of repossessions a day - 170,000 in May alone, and almost 2 million overall. The group includes such mortgage behemoths as Wells Fargo (WFC), JP Morgan Chase (JPM) and Countrywide (CFC).
Consumer groups, on the other hand, aren’t so sure. The California Reinvestment Coalition (CRC), which advocates for low-income communities, says that servicers are failing to keep troubled borrowers in their homes, and that HOPE NOW's methodology in counting "prevented" foreclosures is deeply flawed.
The CRC also alleges that the loan servicing industry hasn't adequately met the demands of millions of homeowners who were victims of predatory lending during the boom.
On Housing Wire, Paul Jackson aptly points out that public perception about homeownership and lending practices is changing, despite the public-relations war being waged by both sides. During the boom, community development groups chided banks for shutting out low-income borrowers. Even President Bush got involved, pushing the Federal Housing Administration to offer “no down payment” loan options.
But public perception can send organizations headlong from one side of an issue to the other: Consumer advocacy organizations have now turned against lenders, in some cases incriminating them for following the very advice they themselves hawked just a few years ago.
Politicians, as they’re wont to do, are responding with cries for vast reams of legislation to protect borrowers. Consumer groups are now pitted against the formidable housing lobby, which has been very generous with its donations this election year.
Minyanville’s Professor Depew often writes about the concept of “social mood,” and how consumer preferences lead trends, rather than visa versa: "As social mood continues to darken and turn against symbols of excessive wealth and consumption, the former icons of bull market glee and prosperity begin to tarnish in the public eye."
If there’s one sure bet in housing, it's that writing a new mortgage will be a lot trickier in five years than it is today. Disclosure will increase, conflicts of interest will be regulated away and bureaucracies needed to police the new regime will be created out of whole cloth.
Regulators may succeed in preventing another bubble, but the cost of legislation that unduly constricts mortgage lending will be borne for years to come.
Friday, April 25, 2008
This post first appeared on Minyanville.
It's interesting that the Office of Housing and Urban Development (HUD) - that oversees the FHA - doesn't support Sen. Frank's proposal to expand its role in helping troubled borrowers.
This says two things. First, the FHA knows keeping borrowers in homes they can't afford may be good for individuals who got in over their heads, but it's bad for the system itself.
Second, compare FHA's attitude to that of Fannie Mae (FNM) and Freddie Mac (FRE), whose profit motive makes them ask for a bigger and bigger role regardless of risk it poses to the system. Incentives are the key to understanding why these entities do what they do.
Reprinted by Permission copy write 2008 Minyanville Publishing and Multimedia
It's interesting that the Office of Housing and Urban Development (HUD) - that oversees the FHA - doesn't support Sen. Frank's proposal to expand its role in helping troubled borrowers.
This says two things. First, the FHA knows keeping borrowers in homes they can't afford may be good for individuals who got in over their heads, but it's bad for the system itself.
Second, compare FHA's attitude to that of Fannie Mae (FNM) and Freddie Mac (FRE), whose profit motive makes them ask for a bigger and bigger role regardless of risk it poses to the system. Incentives are the key to understanding why these entities do what they do.
Reprinted by Permission copy write 2008 Minyanville Publishing and Multimedia
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