I Guess She Was Right

This gal proclaimed on election day that Obama was going to pay for her gas and cover her mortgage payments. I've said from the beginning that the Powers-That-Be believe that housing is a human right and that before it's all over the Govt.--probably through Fannie and Freddie--will end up letting those who default stay in their homes. Free housing, owned by the Govt. (Who's going to pay to fix the roof or buy a new water heater when you're squatting in a Fannie-owned house?)

The banks are all halting foreclosure proceedings due to legal technicalities but I wonder if there's not some other reason. After all, if you're not making your mortgage payments, eventually someone will be knocking on the door no matter what's in the fine print.

I guess those continuing to make their mortgage payments--especially those who are under water--are just suckers.

Real Estate Doom

At this point, there is no light at the end of the tunnel--the real estate deflation tunnel. Read about it here.

More homes are in or are entering foreclose than there are homes for sale. Ballooning supply and no demand.

Tidbits of Good News

Good news in the news in the last couple days.

First, home sales are way up in the Land of Arnold. Twice as many California homes sold in Jan. '09 as did in Jan. '08. Of course, the median home price dropped 40% year-over-year. But isn't that good for the buyers?

What's even better is that the inventory of homes plummeted from a 16.6 month supply to a 6.7 month supply. A shorter supply may lead to price increases. Time will tell. Read the article here at IBD.

Of course real estate is local and just because prices may be nearing a bottom in La La Land doesn't mean it's necessarily a bottom for the rest of us. BUT, if the Left Coast is bottoming out, the rest of the country will follow and will probably end up hitting a bottom that's no worse than California's. The most recent Case Shiller Report puts L.A. at 37.5% off it's Nov. '05 all-time peak. That's Dec. '08 data. If this does end up being the bottom in L.A., look for the rest of the country to follow in the next year or so. Of course a bottom is one thing and a rebound is another.

The other bit of good news is that the Baltic Dry Index seems to have bottomed. This index tracks the cost of transporting dry goods such as coal, cement, ore, and grain by ship. The higher the index, the greater the demand for shipping. A Baltic Dry Index on the rise means that credit must be flowing and countries are trading. A good thing. Read about it here.

Foreclosure Mess

Fannie and Freddie, which are now government-run entities, announced last week that they are suspending foreclosure sales until after the holidays. Read about it here, but let's paste in one little blurb:

"Freddie Mac is on track to help three out of every five troubled borrowers with Freddie Mac-owned loans avoid foreclosure this year," Freddie Mac Chief Executive David Moffett said in a statement. "Today's announcement builds on this momentum and provides a new measure of certainty to many of these families during the holidays."

A couple of comments.

The government couldn't clean up after Katrina, how does anyone expect it to be able to clean up an economic crisis so complex that it can't even be explained, let alone understood? Prediction: this will only prolong the misery both for homeowners and taxpayers.

Note the term "avoid". Government is much better at avoiding (and helping others to avoid) than it is at achieving. What's being avoided is the inevitable. Unfortunate as it is, this is the bursting of a bubble. Some people own homes that they never could and never will be able to afford. Others bought or borrowed at the top and now owe more that their home is worth. Putting the sale off until after the New Year is simply that--putting it off.

As I predicted, now that the government runs Fannie and Freddie, feelings are being introduced into the decision process. Freddie now is the the business of "provid[ing] . . . new measure[s] of certainty" to delinquent borrowers. This is to be expected bc. where there is government involvement, there is politics, and where there is politics, feelings often become more important than sound economics.

Finally, this policy will encourage others to stop making payments. After all, if you and your neighbor both are under water and he has stopped paying but gets to stay in his house, why should you pay? There's no consequence.

Who knows, maybe it's better for everyone if delinquent borrowers are allowed just to squat where they are for a while. The banks certainly don't want the properties and vacancies only add to the downward spiral of real estate values in any neighborhood. On the other hand, moving folks out who can't afford to be where they are, and moving them out as quickly as possible, may be more humane and will certainly bring this mortgage mess to a speedier conclusion.

Tipping Point?

I read somewhere last year that the nationwide total real estate market had never gone down more than 20% since the Great Depression. It took ten years after the great depression for prices to come back to their former highs.

The July S&P Case-Shiller index indicates that we hit that low over the summer. [Look at that graph and tell me if that's not the nastiest thing you've ever seen.] Granted, Case-Shiller is not a clear reflection of the total U.S. real estate market. It measures single family units in 10- and 20-city composites leaving out commercial real estate, raw land, condos, townhouses, and new homes. That being said, as of the end of July, the 10-city composite showed a 21.1% decline from the June/July '06 high and the 20-city composite showed a 19.5% fall from the high. So we are nearing Great Depression territory at least among lived in, single family homes in the big metro area markets.

Who knows where we're headed. Some suggest that the market is showing signs of bottoming in some areas. The rate of price decline in some markets is slowing. It's hard to believe we're bottoming, tho, given the fact that the credit markets are nearly frozen and we have yet to see many of the bank-owned foreclosed-upon subprime homes hit the market. At the same time, the number of existing subprime mortgages is falling as more and more people refinance or leave the keys on the counter for the bank. Certainly the market will not turn until the inventory heads back in the other direction. In August there was a 10.4 month inventory of houses on the market. Tho, down from a high of 11.1 months in July, that needs at least to get back down below 9 months.

The determinant--and the big mystery--is the effect the economic turmoil over the last few weeks will have on all this. It can't make things any better. And surely there will be unintended consequences, most of them probably negative, that come with any new legislation and regualtion from inside the Beltway.

I Guess It Is Against the Law

Back in my teaching days I used to tell kids that being dumb is not against the law. You can't go to jail for that.

Evidently, Massachusetts wants that to change. H&R Block made some mortgage loans to people without requiring a down payment. Other loans--often called "liar loans" and for good reason--required no verification of employment. Now that's dumb. But is it against the law?

Massachusetts is suing H&R Block demanding that all foreclosue preceedings againt HRB borrowers be halted "to give local authorities time to review each mortgage". The new twist is that giving such loans was racist.

Obviously HRB learned its lesson: it no longer makes mortgage loans after losing a billion dollars and selling its mortgage unit.

What No One Will Say

Or rather, let's just say this is what very few people are willing say.

One of the reasons for the subprime mortgage debacle, the debacle that has led to what is certainly the worst real estate slump since the early 1990s and what may well become the worst since the Great Depression, is found here, to wit, banks and lenders were pressured to relax lending standards in order to make more loans to minorities.

Writes Liebowitz, "Countrywide's chief executive bragged that, to approve minority applications that would otherwise be rejected 'lenders have had to stretch the rules a bit.'" I love it: instead of the borrower having to have a down payment, a job, and a credit score, now all that was needed to get a mortgage was a diploma from a credit counseling program.

Skip to today and what was once just a little "stretching of the rules a bit" (in order to provide loans to minorities in order to avoid discrimination lawsuits), has now (inevitably) been dubbed "predatory lending". Nice. Compel the banks and mortgage companies to make these loans and then brand them as thieves and carnivores when the folks don't master the skills taught in their ACORN credit counseling sessions.

It was great politics then and it's great politics now.

Sometimes you just can't win.

Once again, the law of unintended consequences.