Housing Market Analysis For August 2013

Posted in Real Estate by Jake on September 27, 2013 No Comments yet

What caught my eye last month is both August sales and median prices fell simultaneously for the first time since January. After a 12.0 percent pop in July, August sales fell 1.8 percent as the California real estate market digested a 100 basis point increase in mortgage interest rates in mid-June. The decline in August sales caused the nearly uninterrupted 20-month increase in median home prices to finally take a breather.

This will be an interesting trend to watch. The combination of the rapid increase in mortgage interest rates and decline in sales, primarily due to the decline in distressed property sales, cash sales and investor purchases, will likely result in decreased demand. The decrease in demand, in turn, will likely depress prices and cause an increase in inventory. Actually, as of this writing, inventories have increased and days on market have increased, creating a clear shift in market forces.

Assuming interest rates don’t rise much further, the increase in inventory will be welcome news for the California real estate market, which has been challenged by an acute shortage of inventory for much of the past year. Many potential homebuyers with solid incomes and good credit looking to finance their home purchases who have been shut out of the market due to lopsided bidding wars against cash buyers should now have a better shot at getting into contract, albeit, at slightly higher rates than three months ago. While mortgage interest rates have jumped in recent weeks, we doubt they will rise much further because the Federal Reserve is keenly aware of the importance of the housing market to an ongoing economic recovery. I believe the Fed is not likely to remove its support from the housing market anytime soon and mortgage interest rates are still low by historic standards.

Quantitative Easing To Remain For Awhile- What Does It Mean For RE?

The Federal Reserve’s decision to maintain current levels of stimulus is, of course, great news for the housing market. Within seconds of the Fed’s announcement, yields on the 10-year Treasury note fell 10 basis points to 2.75% and will likely trend lower.  Mortgage interest rates are sure to follow.

With the cloud of uncertainty concerning the Fed’s decision gone, we believe the recent volatility in the mortgage interest rate market will likely retreat until sometime next year when talk of tapering will likely return. In our opinion, the Fed’s are keenly aware of the importance of the housing market to the economic recovery. For that reason, we doubt the Fed’s will consider reducing support anytime soon.

The recent interest rate hikes should result in price declines.   Home buyers have always bought as much home as their banker told them they could afford – and they can now afford 10 percent less than they could before the rate increases. But price declines won’t happen quickly.  Sellers, unlike buyers, tend not to believe that such a correction is necessary, and therefore do not drop prices to reflect what buyers can now afford.  They are buoyed by mistaken analysis that because both interest rates and prices rose in the 80′s, rising rates don’t mean lower prices.  But those were different times.  Then we had high inflation, which included wage inflation, allowing buyers to digest both the rise in rates and price.  That simply isn’t true today. The next few months will be fascinating to watch.  Will prices correct to reflect the new rates, I doubt it.  More likely we will see slower sales and more inventory.

Americans Are Giving Up On Obama’s Economy… Is It Any Wonder?

Posted in Politics by Jake on September 27, 2013 No Comments yet

On the eve of another potentially bruising political battle over the nation’s debt, American sentiment dipped back into its post-crisis financial funk, according to the CNBC All-America Economic Survey. The third quarter survey of 812 Americans across the country found 61% saying they are downbeat on the current state of the economy and pessimistic for the economic future, a 5-point increase from the prior quarter and the highest level in almost two years… and Obama plays golf and spends 110 million dollars on a trip to Africa!

Smaller expected gains in Americans’ paycheck and housing values cast a pall on sentiment in the quarter and reversed a brief blip of optimism measured three months ago. The survey found that middle class attitudes registered some of the biggest declines. The percentage of white collar workers who believe the economy will improve in the next year declined 18 points compared to the second quarter, three times the decline for all adults. Only one in three college grads expect their wages to rise in the next year, down from one in two in the last quarter. Americans said they expect their home values to rise just 0.8% on average in the next year, down from 3.1% in the second quarter… and Obama pushes his massive healthcare bill to increase the tax burden and expense ratio for all working Americans, (except for those that he has exempted including Congress) so that free-loading, welfare grabbing societal leaches can have free coverage! (If you think they are going to contribute to the cost, you’re out’a your f_ _ _ mind!)

Although higher than in the depths of the recession, expectations for wage gains in the next year averaged 3.1%, down from 3.9% in the second quarter. More significantly, just 34% of respondents expect any increase at all in their paychecks, compared with 41% a quarter ago. When it comes to comparing the current job market to last year, 29% say it’s improved, 41% say it’s worsened and 28% call it unchanged. After deep military cuts and the embarrassing shellacking Obama took from Russian leader Vladimir Putin over Syria, more than half of respondents say America’s standing in the world has deteriorated in the past year, and almost 40% say America’s national security has worsened… and Obama the pussy just keeps talking out of both sides of his mouth. (He’s by far the biggest liar ever to hold the office of President. He and his worthless, lying AG, Eric Holder, have degraded our country to the lowest point in history, morally and socially!

The Fannie & Freddie Mess Continues

Posted in Real Estate by Jake on September 12, 2013 No Comments yet

On a Monday morning five years ago this week, thousands of employees at mortgage giants Fannie Mae and Freddie Mac went to work to find a new boss: The federal government. Crushed under the weight of thousands of defaulted mortgages and bleeding cash, Fannie Mae and Freddie Mac were put into government conservatorship.

Now, a short five years later, the two are making billions of dollars in profit—profit that goes straight to the US Treasury. Against this backdrop, lawmakers are setting the stage for an epic debate on the future of US housing finance, a future that will likely mean the end of Fannie Mae and Freddie Mac.
“Everyone gets so caught up in their profitability, but everyone forgets that profitability is tied to their direct government support,” said Jaret Seiberg of Guggenheim Partners. That’s why the debate over government involvement in the mortgage market is so fierce. Lawmakers are eager to protect taxpayers, but they also need to keep home finance afloat. How do you “wind down” two entities that now back two thirds of the US mortgage market? And how do members of Congress reconcile that goal with the fact that the two are now huge cash cows? In order to look forward, it is essential to understand how we got here.

After Fannie and Freddie were put into conservatorship, the Treasury began buying senior preferred shares of stock in the two, thereby keeping them afloat and fueling the nation’s mortgage market for the foreseeable future. During the next several years, as the housing market crashed and then began to eke its way back, Fannie and Freddie drew $188 billion from the Treasury. They were in turn forced to pay 10% stock dividends back. Then in 2012, the Treasury announced that that agreement would be replaced by a quarterly sweep of every dollar of profit that each institution earned in the future. The move was designed to, “help expedite the wind down of Fannie Mae and Freddie Mac, make sure that every dollar of earnings each firm generates is used to benefit taxpayers, and support the continued flow of mortgage credit during a responsible transition to a reformed housing finance market,” went the 2012 release. By 2012, with the housing market rebounding and newly originated loans faring better than any in history, Fannie Mae and Freddie Mac began turning annual profits. By 2013, those profits were growing dynamically, and the two are now nearing the amount they originally drew from the Treasury, although the payments do not go to pay back the draw. The Treasury still owns the preferred stock. The money simply goes to the government.

Now, as individual investors in Fannie and Freddie stock cry foul, launching lawsuits against the government and demanding their share, lawmakers are under increased pressure to find a fitting end for the conservatorship and the entities. The question is whether or not to put a government backstop into the market yet again. “The construct of a government-guaranteed, mortgage-backed security is absolutely going to be needed,” said David Stevens, CEO of the Mortgage Bankers Association. “You can’t have a functioning housing finance system where private capital just leaves it in the next recession. You need to have constant liquidity provided to the US system, and that comes from the guaranteed mortgage-backed security.” Confidence is key going forward, and investors are unlikely to pour money back into the mortgage market without a guarantee that in another catastrophic crash there won’t be some government backstop. One of the leading bipartisan proposals in Congress, introduced by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., does create an investor and borrower-funded backstop. It will make loans slightly more costly, but the government guarantee on mortgage-backed securities would be there. “The biggest problem is that Congress wants super cheap mortgages and they want to eliminate taxpayer risk for the housing market, and that’s just a holy grail to get,” said Guggenheim’s Seiberg. “Anything less than 100% government backstop is going to raise questions about whether fixed income investors are really going to be there to pick up the slack and to buy those securities.”

Federal regulators are already trying to shrink the portfolios of Fannie Mae and Freddie Mac, even as Congress still debates their future. They have layered on heavy fees to lenders, which have actually made conforming loans (those backed by Fannie and Freddie) more costly than jumbo loans funded by banks. There is also a move to lower the loan limits on conforming loans, which would push banks and investors to take on more of the markets. Government-backed loans, which also include those insured by the FHA, now make up 90% of the all mortgage originations. While investors are slowly coming back to the jumbo market, they are nowhere to be found in the nongovernment-backed conforming market. There is plenty of cash on the sidelines; what is lacking is confidence. It’s essential that the government is involved, both because that encourages lenders to be more creative, and that benefits the market and because it assures us that people in underserved communities will have access to lending going forward,” said Alys Cohen of the National Consumer Law Center. “That’s been a huge problem in the past, and we need to make sure that banks and investors are interested in serving all parts of the market and doing it in a way that’s sustainable to everybody.”

While lawmakers are positioned to take on the future of mortgage finance this fall, they could be sidetracked yet again by troubles in Syria and by the so-called “fiscal cliff” budget crisis. Should they finally agree on a plan, it is not as if Fannie Mae and Freddie Mac can just close their doors overnight. The two employ thousands of workers and have valuable infrastructures and knowledge bases. “You can keep that core infrastructure and protect it in its future state and have a transition that is virtually seamless to the American homeowner but creates a safer system going forward,” said Stevens. The devil, of course, will be in details that will be many years in the making.