My car got repossessed this morning
Harder times I haven't seen in years
Able to throw me a life preserver
'Cos I'm about to drown in my own tears
The Federal Government is contemplating rebuilding the housing market on shaky ground by attempting to lower mortgage interest rates to 4.5%. Now that they control the GSEs, they might be able to do it -- at least temporarily. The Federal government's current borrowing costs are very low. Current yields on 30-day treasury Notes are essentially zero, and the yield on 10-year Treasury Bills is at its lowest level since... I don't know if they have every been this low.
All this means that the government can act like a bank and loan profitably even at 4.5%. So why do they want to do this? It is one way of temporarily supporting prices giving them the ability to control the implosion.
Interest rates went down during the price decline in the early 90s. That softened the impact and made the decline take somewhat longer. When interest rates are declining, bubbles take longer to deflate, and the bottom is at a somewhat higher price point. When interest rates are increasing, bubbles deflate faster, and the bottom is at a lower price point. Mortgage Interest rates during the Great Housing Bubble were at historic lows so a repeat of the steady decline in rates witnessed during the 90s is not very likely. Higher interest rates translate into diminished borrowing, lower prices and a lower bottom. A lower bottom means large bank losses and a weaker economy. Therefore, the government wants to control and limit the drop in house prices as much as they can.
During the early 90s while prices were declining, interest rates were also declining from 10.6% in 1989 to 7.2% in 1996. These 30% declines in interest rates made housing more affordable and helped limit the price declines in the early 90s. If interest rates had not declined, house prices certainly would have dropped further than they did. If the Federal Government were to engineer a mortgage interest rate decline of 30% from the 5.8% they were during the bubble down to an unprecedented 4.1% to match the debt relief of the early 90s, it would help control the implosion, but it will only temporarily arrest the decline of prices. As with any government attempt to manipulate prices, it will probably have unintended consequences.
Of course, also like a bank, the government would be borrowing short to loan long, and if the government's cost of capital were to increase, they would lose a lot of money. In short, any attempt by the government to lower interest rates would be temporary. They would not hold to 4.5% interest rates forever as a permanent housing market subsidy. Therefore, anyone foolish enough to buy when interest rates are 4.5% would know that their future buyer (remember Your Buyer's Loan Terms) would be paying a higher interest rate. So what does that mean for future home values?
I don't know if I can state this emphatically enough, so I will type it in realtorese:
ANYONE WHO BUYS AT 4.5% INTEREST RATES IS A FOOL WHO WILL LOSE MONEY!!!
The table above should be very handy to anyone contemplating buying at 4.5% interest rates. You can calculate the loss of home value based solely on increasing interest rates in the future. It is possible we will see 10% interest rates again? You only have to look back to the late 80s/early 90s to see interest rates that high, and that is half of what it was in the early 80s. In my opinion, 8% interest rates are likely during the next several years. When the FED starts raising interest rates after the current crisis is over, 8% interest rates may come faster than you think.
Today's featured property is another speculative venture funded by easy money that is turning out badly. These are not too difficult to find.
All
Housing Bailout Proposals Are Doomed to Fail, Fraught with Moral Hazard, and
Intended Merely to Encourage Homeowner Denial Says Housing Bubble Cassandra,
Lawrence Roberts, in New Book.
Lawrence
Roberts, considered the Housing Bubble Cassandra, in his new book, The Great
Housing Bubble, asserts that all housing bailout proposals will fail. He contends
these programs have a built-in moral hazard guaranteed to promote foolish
borrower behavior, and that the real purpose of these proposals is to promote
homeowner denial to keep them enslaved to their lenders.
Irvine, Calif., Dec.
6, 2008 – Lawrence Roberts, author of “The
Great Housing Bubble,”
claims the main problem with all bailout plans is the moral hazard they create.
He contends, “Those who did not participate in the bubble and instead behaved
in a prudent manner would be penalized at the expense of those who were
cavalier about risk. In one form or another either through free market impacts
or direct subsidies from the government paid by tax dollars, these bailout
plans all ask the cautious to support the reckless.”
Roberts observes
that many homeowners held out hope that if they could just keep current on
their mortgage long enough, the government would come to their rescue in the
form of a mandated bailout program. According to Roberts, part of this fantasy
was not just that people could keep their homes, but that they could keep living
their lifestyle as they did during the bubble. He notes that few borrowers seem
to realize was any government bailout program would be designed to benefit the
lenders by keeping borrowers in a perpetual state of indentured servitude, and
with all their money going toward debt service payments, little was going to be
left over for living a life.
Housing bailout
proposals are part of the myriad of issues surrounding the housing bubble.
Roberts discusses each of these issues in detail in the book, “The
Great Housing Bubble.”
About the Author, Publisher and
Book
Lawrence Roberts,
author of “The Great Housing Bubble,” is known as the Housing Bubble Cassandra. He publicly predicted the
housing price crash as the primary writer for the Irvine
Housing Blog (http://www.irvinehousingblog.com/). From his unique vantage point
in Irvine, Calif. – the center of the subprime universe – Roberts carefully
documents in his book the conditions and practices that inflated the largest
real estate bubble in history. He holds a Master of Science in Land Development
from Texas A&M University, and he consultants to the land development
industry.
Monterey Cypress Publishing is a small press specializing in
real estate and personal finance related books, audio books, and video
presentations.
Irvine Renter will be speaking at the monthly meeting of the Green Party of Orange County on Sunday, December 7, 2008, at 2:00 at the offices of the Irvine Ranch Water District located at 15600 Sand Canyon Ave., Irvine, CA. Also speaking will be Dave Levy, a valued return Green Party visitor from Orange County Fair Housing Council. He will speak about public and private ways to protect the quality of life in Orange County by ensuring equal access to housing opportunities, an important way to foster diversity and preserve dignity and human rights. December's GPOC meeting topic will cover the importance of housing in these uncertain times, and will focus on the Green Party's Key Value of Social Justice. "Radical Housing for Radical Times" will concentrate on novel approaches to help reach the goal of affordable, stable, quality housing for all.
Everyone is invited, so if you are interested in hearing a discussion of this issue, please stop by.
Does anyone have any good news they would like to share? I have been reading all the headlines lately, and I can't find anything even remotely positive going on in the economy or the housing.
I don't care what topic it is on. You can make it personal if you like. Just give me some good news...
I'm the son of rage and love The Jesus of Suburbia From the bible of none of the above On a steady diet of soda pop and Ritalin No one ever died for my sins in hell As far as I can tell At least the ones I got away with
And there's nothing wrong with me This is how I'm supposed to be In a land of make believe That don't believe in me
Get my television fix sitting on my crucifix The living room or my private womb While the moms and brads are away To fall in love and fall in debt To alcohol and cigarettes and Mary Jane To keep me insane and doing someone else's cocaine
And there's nothing wrong with me This is how I'm supposed to be In a land of make believe That don't believe in me
Washington D.C., Dec. 5, 2008 -- Treasury Secretary, Hank Paulson, announced a moratorium on defaults today. "We have been considering a moratorium on foreclosures," said Paulson, "but a moratorium on defaults will be much more effective."
While other lawmakers are still considering foreclosure moratoriums, Paulson is convinced a default moratorium is a better approach. He hopes others in State and Local legistlatures will follow his lead. "We want to keep people in their homes," said Paulson, "and we need to keep our lending institutions healthy."
When asked how a default moratorium would help, Paulson had this to say, "Foreclosures are the result of defaults, and defaults are also causing lenders to take write-downs on mortgage loans. By putting a moratorium on defaults, we solve both problems." Paulson provides clear guidance on how the program would work, "Homeowners need to keep making their payments. That will put an end to the housing crisis."
Experts agree that falling home values are not the root of the problem. Paulson goes on, "But let me emphasize that we do not need a system-wide solution for the vast majority of loans where a homeowner temporarily has negative equity. Negative equity does not affect borrowers' ability to pay their loans. Homeowners who can afford their mortgage payment should honor their obligations."
When pressed for more details on how such a moratorium would be implemented when so many homeowners cannot afford their payments, Paulson responded, "We are still working on the details. We may provide direct government assistance. The American people are kind and generous. They certainly won't mind helping out their fellow citizens with tax dollars as necessary."
When confronted with the possibility of creating a moral hazard, Paulson scoffed at the notion, "Homeowners need this help to stay in their homes. It would be immoral to throw them out on the street."
You're gonna realize that Some of my lies are true
When our various politicians propose foreclosure moratoriums, do you think they are serious? I believe most of them are simply pandering to their constituents that want to believe they are doing something about the housing price crash. If you give the idea of a foreclosure moratorium even a moment's thought, you realize it could never accomplish anything. We just had a defacto foreclosure moratorium here in California when we instituted a new 30-day waiting period for lenders to contact borrowers to try to work something out. Of course, this only delayed the inevitable, but perhaps it gained some homeowners in foreclosure an extra month of free rent from the bank. I suppose the idea isn't any crazier than subsidising mortgage interest rates at 4.5%. Why not zero percent? Why not pay people to live in homes? That would probably reduce the inventory. Any thoughts on what half-baked idea they will come up with next week?
Today's featured property is another HELOC abuser who won't get bailed out.
When I first started researching the property records for my daily posts, I was astounded by all the mortgage equity withdrawal. I still am. At first I was surprised that borrowers would do it. It would have never occurred to me to actually increase my mortgage indebtedness (yes, I have had a mortgage before). I can understand taking out a loan for home improvements, but never for consumer spending. Then, the more I pondered the issue; I came to realize that borrowers are like drug addicts: if you make money available to them, they will take it. Combine that tendency with a drug as addictive as kool aid, and you get people who truly believe their house is providing them with free money, so it is OK to borrow this money. Once the fear of debt is gone, even fiscally conservative people get into the act.
Finally I came to realize it was the lenders who were the stupid ones. Rational lenders want to make sure they are going to get their money back with interest. They are supposed to be the experts at determining the creditworthiness of a borrower because they are the ones ultimately taking on all the risk. Lenders started drinking the kool aid and began giving out any amount of money to just about anyone. They also believed they had no risk because they believed house prices would always go up. Even if people defaulted, they would not experience any default losses. It is the stupidity of lenders and investors in mortgage-backed securities that is truly mind-boggling.
You never give me your money You only give me your funny paper
Most of the houses for sale today have some amount of mortgage equity withdrawal. The conservative ones only added a little, but the average Irvine homeowner who bought before 2001, and who is selling today, doubled their mortgage. That's right, most of them doubled their mortgages. However, some people really got carried away. Some people borrowed every penny of equity as it accumulated and spent it.
Usually when people go on an irresponsible borrowing and spending spree, there are consequences for this action. People get burned, and they learn not to repeat their mistakes. However, those people who were the most egregious HELOC abusers, are the ones being punished the least. Borrowers who took out all their equity have transferred 100% of the loss in value to the lenders (remember Mortgages as Options?) What have these people learned? And what lesson is being taught to everyone else?
The worst HELOC abusers have learned there are few consequences for their behavior. Yes, they will lose their homes and face bad credit issues, but they still got to spend all the money. Perhaps they will suffer the loss of their lifestyles as the free money dries up, but I imagine they will be first in line to buy another home and start the process all over again when their credit clears up. The rest of us witnessing this behavior have to be asking ourselves, "Why won't we max out or debt during the next cycle and pass the losses on to the lenders?" Based on what we are seeing, perhaps the fiscally conservative ones were the fools.
Out of college, money spent See no future, pay no rent All the money's gone, nowhere to go Any jobber got the sack
Today's featured property is a particularly bad case of HELOC abuse enabled by Stearns Lending Inc. (Bears Stearns?). The peak appraised value of this property based on the loans attached was $1,138,500. The asking price is 40% off this figure. I have profiled this property before, but since the discount is so large, it is worth revisiting.
Lawrence
Roberts, the Housing Bubble Cassandra, Proposes National Association of
Realtors Regulation and Outlines Future Housing Bubble Prevention in New Book
Authored by real
estate insider, Lawrence Roberts, who is considered a housing bubble Cassandra due
to his prediction of the housing price crash, the book, The Great Housing
Bubble, calls for National Association of Realtors regulation through the
Securities and Exchange Commission. The book also outlines proposals for future
housing bubble prevention, and it is among first to examine the causes of the collapse
of U.S. home values.
Irvine, Calif., Dec.
3, 2008 – Lawrence Roberts, author of “The
Great Housing Bubble,”
believes the members of National Association of Realtors (NAR) should be
subject to oversight by the Securities and Exchange Commission (SEC) due to the
false statements they routinely make concerning the investment potential of
residential real estate. Financial services professionals are strictly
regulated as to the representations they can make regarding the financial
performance of certain investments by the SEC. Roberts believes their
activities should be similarly regulated since the false investment
representations of the NAR contributed to the housing bubble.
Roberts proposes a
series of changes to our current system of appraisal, lending and sales of
residential real estate. He contends our system of property appraisal needs to
be overhauled to rely on valuations based on a properties potential rental
income rather than merely verifying and perpetuating irrational exuberance by
using the comparative sales approach.
Roberts believes lending
standards need to be tighter to ensure those who are loaned money to purchase
real estate can comfortably afford the payments necessary to sustain ownership.
The documentation standards of residential loans needs to be improved with both
parties having more stringent civil and criminal penalties for lending outside
of reasonable standards or committing fraud or misrepresentation on a loan
application.
About the Author, Publisher and
Book
Lawrence Roberts,
author of “The Great Housing Bubble,” is known as the Housing Bubble Cassandra. He publicly predicted the
housing price crash as the primary writer for the Irvine
Housing Blog (http://www.irvinehousingblog.com/). From his unique vantage point
in Irvine, Calif. – the center of the subprime universe – Roberts carefully
documents in his book the conditions and practices that inflated the largest
real estate bubble in history. He holds a Master of Science in Land Development
from Texas A&M University, and he consultants to the land development
industry.
Monterey Cypress Publishing is a small press specializing in
real estate and personal finance related books, audio books, and video
presentations.
Liar I have drunk the wine (or kool aid) Liar time after time
Not long ago, we had a realtor trolling the forums. He tried all the standard hooks, but he found those fish were not biting. One of the more ridiculous ideas he put out there was the notion, "You can't predict which way the market will go, so you should buy." WTF? Anyone with half a brain or any amount of investment experience would know the old truism, "When in doubt, stay out." Beyond that the remark is stupid for another reason: it is pretty obvious that the market is going to go down. The decline has momentum, we are entering a recession, and prices are still greatly inflated.
Realtors thrive by creating fear in buyers. They will use lines like:
It is a good time to buy!
Hurry. This one won't last.
Don't throw away your money on rent.
If you are serious, you had better buy now or you might be priced out of the market.
They are not making land anymore.
If you see a property you love, you really need to make an offer.
The more earnest money you put down, the more seriously your offer is taken.
Things have been a bit slower than last year, but the last two weeks we have seen a lot more traffic.
Rates are at all time lows and buyers have more choice than ever!
Rates are creeping up, so you better get in now.
If you wait until the bottom, you will miss out on getting a property that you really like.
This property is priced at below market value.
Incentives this good won't be available after...
Don't worry about the asking price - just offer what you're willing to pay.
Don't worry. You can afford this house.
I will show my client the offer, but I just want to let you know that we have another offer for more coming in this afternoon.
Trust me.
It’s not just the commission. I really care about you.
In a buyer’s market these ploys are all lies (the truthfulness of these statements is questionable in all market conditions). Don't believe them.
Liar liar liar liar Liar that's what they keep calling me
Do not forget that when you are buying a house, the realtor is the agent of the seller. The primary responsibility of the realtor is to serve his client by obtaining the greatest possible purchase price. The realtor may be nice and disarming, and you might honestly believe they have your best interests at heart. They don't. In a perfect world (for them) they would lead you to believe they are looking out for you while they are extracting as much money out of you as possible. That way, you will be inclined to use them again when it is your turn as a seller to get as much as possible from your buyer.
Realtors are paid to say the things that would make you cringe with a straight face and a smile. That is how they get that extra few percent out of buyers that justifies their existence. Sellers pay them to say all of the things in the list above for one simple reason: it works. Buyers fall for it, almost every time. Financial manias are not enabled by realtors presenting rational arguments and objective advice. Housing bubble psychology is exploited by realtors to sell homes. That is their job.
When I sold my home before moving to California, I used a realtor. When it is my turn to sell a home here in California, I may do the same. If I find someone who I believe will get me at least 4% more in a sales price than I could on my own, I will hire them. I just won't be there when they go into their sales pitch. My facial expression would give me away...
Today's featured property is in the Northwood II neighborhood. The stress of the low end is working its way up to this next tier of the housing market. This one is going for less than $300/SF.
WTF? 
