Unlocking the Housing Market Recovery
King of Pain—Alanis Morisette (The Police)
Here at the blog we joke about the “analysis” put out there by some of the local realtors. Most of this is thinly-veiled, self-serving bull$hit, or utterly incompetent nonsense. In either case, the purveyors of this information are not widely respected in the world of land development where those with deep pockets often pay large fees for good information. However, there are a number of very good market forecasters who are respected in big-money land development, and these consultants are well paid for the analyses they provide.
There are four main market consulting firms in Southern California that provide detailed market studies for residential land development projects. These are Market Profiles, Real Estate Economics, The Concord Group, and John Burns Consulting. I have met with the principals of all four of these firms at one time or another. They are all highly reputed in the industry.
I recently had a meeting with John Burns just to network and find out what he is seeing in our industry. We ended up sitting and talking for almost 2 hours. He shared with me his proposal for Unlocking the Housing Market Recovery (PDF warning). It is a great report. Over the course of several posts, I intend to revisit many of his proposals to see what the IHB community thinks about it.
The core of his proposal is as follows (from the executive summary):
The U.S. is undoubtedly in the worst financial and economic crisis since the 1930s. Home prices are falling rapidly across the nation, which has resulted in more than $2 trillion in losses in the last two years. The declining stock market has wiped out trillions more. These tremendous losses have created a vicious downward spiral that requires government intervention to avoid a 1930s-style economic collapse. This problem is affecting both Wall Street and Main Street.
There has been a lot of rhetoric and not a lot of facts about the current economic and financial crisis. In this report, we use facts to assess the current situation and provide our recommendations to save the U.S. economy from collapse.
To stabilize home prices, we believe Congress needs to do four things in conjunction with the Federal Reserve and US Treasury Department. Some of our recommendations have already been accomplished, but many of them have not.
1. Stabilize The Banking System - Save local businesses by saving the local employers’ bank.
- Continuing insuring deposits up to $250,000 and unlimited amounts in payroll accounts
- Close all poorly managed and undercapitalized banks ASAP
- Keep lending money to stabilize the best and largest banks
- Properly dispose of bad loans, RTC-style, instead of the way it is currently being done
- Finance new banks to create competition for good loans
- Continue supporting commercial paper liquidity
- Continue liquidity guarantees on new bank debt
2. Stimulate Job Growth - Bring more jobs to the economy with short-term stimulus and smart government spending.
- Fund infrastructure projects to create jobs
- Stimulate short-term spending while recognizing that long-term saving is also needed
- Allow companies to utilize their current losses to recapture taxes paid over the last 4 years so they can keep enough cash in the bank to meet payroll
- Create government–backed initiatives to help banks lend
3. Stimulate Responsible Home Buying – Stop home price declines by stimulating home buying by responsible individuals, to bring demand and supply back into balance.
- Keep mortgage rates low
- Keep Fannie and Freddie lending and FHA insuring
- Temporarily provide a down payment match to all home buyers
- Temporarily double the mortgage interest rate deductions for all homeowners
4. Support responsible loan modifications – Stop home price declines by helping keep responsible people in their homes.
- Provide financial incentives for loan servicing firms to modify loans
- Create a vehicle to buy loans that have been responsibly modified
There you have it. There is much more detail in the report: Unlocking the Housing Market Recovery (PDF warning). I am not going to bias the comments with any of my own commentary at this time. As I mentioned previously, I intend to revisit some of these proposals.
Just for giggles, lets look at a property offered for sale at 37% off its peak purchase price.
I guess Im always hoping that youll end this reign
But its my destiny to be the king of pain
Asking Price: $359,000
Income Requirement: $71,800
Downpayment Needed: $89,750
Monthly Equity Burn: $2,991
Purchase Price: $567,500
Purchase Date: 1/25/2006
Address: 2321 Scholarship, Irvine, CA 92612
| Beds: | 2 |
| Baths: | 2 |
| Sq. Ft.: | 1,037 |
| $/Sq. Ft.: | $346 |
| Lot Size: | - |
| Property Type: | Attached, Condominium |
| Style: | Other (See Remarks) |
| Year Built: | 2006 |
| Stories: | 1 |
| View: | Pool |
| Area: | Airport Area |
| County: | Orange |
| MLS#: | H09004177 |
| Source: | MRMLS |
| Status: | Active |
| On Redfin: | 1 day |
 New Listing (24 hours) |
|
ONE OF THE BEST AREA IN IRVINE , 2 BEDROOMS 2 FULL BATH LOCATED 3RD
FLOOR NICE POOL VIEW WITH GRANITE COUNTER TOPS NEWER APPLIANCES CLOSE
TO 2 CAR PARKING. EVERYTHINGS LIKE NEW !!SEE AGENT REMARKS
Agent Remarks: “The seller doesn’t care if this sells. He is planning to stay in the unit through foreclosure. I don’t care either because I will never see a commission on this property.”
Do you like how the agent got in the picture of the bathroom? At least he put something in the picture so we couldn’t see inside the toilet bowl. Did you notice the abundance of counter space in the kitchen? Great staging…
I don’t have any loan information on this property, but we know it is a short sale, and it is most likely a 100% financing deal (weren’t they all?) If this sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $230,040. That is a quarter million dollar loss on a tiny condo. Ouch!
Theres a little black spot on the sun today
Its the same old thing as yesterday
Theres a black hat caught in a high tree top
Theres a flag-pole rag and the wind wont stop
I have stood here before inside the pouring rain
With the world turning circles running round my brain
I guess Im always hoping that youll end this reign
But its my destiny to be the king of pain
King of Pain—Alanis Morisette (The Police)
Who becomes a realtor anyway? They can’t be bothered to clear countertops. They photograph toilets as selling points (are they optional?) Garbage can staging is de rigueur as shown on this blog and http://www.doctorhousingbubble.com/. They can’t spell or punctuate and confuse caps lock for emphasis. How is it that anyone who really wanted to sell a property wouldn’t want to insist on decent photography and literacy in the description? Wouldn’t someone hiring a realtor want to see that agent’s other listings? Who’d ever hire the agent who showed this listing as an example of his work?
There is a spellung test that we have to pass.
There is also a bonus for adding a photo of yourself in the listing. Free advertising!
-IR2
There are many similar condos for sale in the area. What price will this sell for owner occupant? and investor?
“They can’t be bothered to clear countertops.”
I’ve sold several homes in the last 24 years with my husband. Before we ever listed our home (not just a house), we went through and removed half of the crap off the walls, packed away the knicknacks, cleaned off the counters, scrubbed the hell out of the floors, cleaned the carpets, and patched/painted the dings in the walls. Then we’d call in the agents and see what they said.
The agents should tell the owners to do all this stuff, some of the owners will be offended since they think their shit is wonderful. They really don’t see the Big Gulp cup on the table with the burger wrappings as anything out of the norm.
“Stabilize the banking system”
Nobody really knows what this means. The big banks still have around 30% of their assets in off balance sheet assets. This can not be good. In addition you have hedge funds insolvent with frozen funds that were leveraged 30 to 50:1. At some point their customers will have a right to their money. When the hedge funds start selling again this year, look out.
I’m sure most of the other points made will come to fruition in one form or another. You can’t change the underlying problem that people are greedy. Politicians and US citizens will try to monetize every single program to their benefit. The money will be spent inefficiently and always be a day late and a buck short.
The other issue here is that this is not a US problem, it’s a global problem. Coordinating programs around the world is a monumental task, one that is doomed to fail. You can not just focus on the USA, and fix the USA independently, the problems are systemic around the world.
http://globaleconomicanalysis.blogspot.com/2009/01/frightening-global-downturn.html
Every home that has been profiled here at a huge loss is leveraged into massive shareholder destruction and job losses.
One way to stabilize is to create new banks with clean balance sheets. Similarly, you can take a moderate sized bank with good management and few problems, make sure it has everything it needs to grow.
The thing you don’t want to do is throw good money to bad management. Never works.
Bingo. Banks started in 2010 should be sweet investments.
I agree on both accounts. Throwing good money at bad should be avoided and new banks will at least be healthy. It still doesn’t change the fact that mega banks have a huge amount of toxic debt to unwind in off balance sheet assets. Debt deflation still occurs even with some niche investments. I don’t think new banks will be good investments due to leverage contraints, banks never were a good investment until they were temporarily allowed to leverage up to absurd ratios… and they were only temporarily good investments. (until they became horrid investments)
“One way to stabilize is to create new banks with clean balance sheets.”
The problem with this solution is that the banking system already has too much capacity, and it needs to shrink. There are plenty of banks out there that are not basket cases, and they need to be supported. The banks with the dodgy assets need to be closed. Transfer their good assets (reserves, depositors) to the healthy banks and sell off, or absorb (via another Resolution Trust Corp.)the bad assets. If you greatly shrink the system, and adequately support the remaining banks, the rest will straighten itself out.
If I read this correctly, the proposal is to treat insolvent institutions (Banks + GSEs + AIG…I’m sure I’ve left some off the list) as if they were insolvent. I’m in favor of this, but observe that the political leadership of this country has taken historically unprecedented measures to make sure this is exactly what doesn’t happen. By selecting Geithner for Treasury, Obama seems to be indicating strongly that no real change is going to happen any time soon. “Yes, we can, but no we aren’t going to” just doesn’t have that stirring ring to it.
You are correct that this is not a good political solution. If they shut down all the insolvent banks, those shareholders would be wiped out. And the fallout would drive the stock market down to new lows. And the politicians are trying to prevent that. Most people view falling stock prices (and falling home prices) with alarm, and expect the government to protect them.
However, the result of a smaller and better capitalized banking system, regardless of the short term pain, would benefit everyone in the long run.
It is an interesting question whether there is enough banking capacity. There are more employees in banking than there needs to be. There are also more employees than you will have in 2-3 years.
There is not enough manpower in certain parts of the system. There is also not enough credit capacity in some parts. Clearly, foreclosure and mitigation do not have enough people, especially qualified people. Same thing with commercial loan workouts.
At the moment the is almost no need for M&A and IPO people. However, that can’t remain true in the long term.
Finance has been a game for quite some time; I don’t expect this to change.
We are all waiting to see how the rules will change.
Once we discover the new rules, each of us will need to decide if we want to play the game.
Somewhat OT - occasionally I go over to realtor.com just to get a sense of how bad things are. I ran a search of homes in Las Vegas priced between 100 and 110K. There are 807 of them.
That’s not off-topic: that’s providing additional perspective. Thank you.
I look at those insanely cheap Vegas properties, too. A friend of mine who lives there suggests there are more bad parts of town than one might imagine and that a lot of the properties have been gutted.
/of course, if I really want to go cheap I’m moving to Detroit.
I’ll bet over 700 of them are vacant.
I was in Vegas in October. Drove through a residential area near the airport. Maybe 5% of homes had a light on. Almost no cars parked in driveways or on the streets. This went on for miles and miles.
I like to check out the Palm Springs area. There are a lot of houses UNDER 100k and a few in Desert Hot Springs UNDER 50k. Go to Redfin.com and you can see what fools paid for these properties over the last 5 years. It is just amazing.
I am starting to wonder if I will be able to pay cash for a vacation home in the desert. Not like “Oh, it’s $80,000, I can write a check”. More like “My daily ATM withdrawal limit is $700. After a few days, I’ll have enough cash to just give them a wad of twenty dollar bills”
Works in Detroit. Coming soon to Coachella, San Jacinto, maybe Palm Desert or Palm Springs.
“I am left with these questions - who is going to be left standing, to tax in the private sector, to pay for all these public sector make-work jobs? Is Washington really to be considered some sort of savior for creating unproductive jobs in place of the productive jobs they eliminated?
We are at an economic dead-end and those in power are in denial. The truth is our economic problems are due to loose monetary policy, central economic planning, and the parasitic expenses of government. Unless we assess these problems honestly, we unfortunately have a long way to go until, like the junkie, we hit rock bottom.”
Ron Paul
<a>http://www.safehaven.com/article-12307.htm</a>
I rather like this proposal. The parts about closing undercapitalized banks and disposing of bad loans RTC style would result in actually unwinding this mess instead of trying to keep everything afloat.
Are those the real realtor comments, or are you putting us on?
Because if they are real, they are both sad, and epicly funny.
No. Those were a put on. I was, however, reading his mind…
The real estate market does not need to be stabilized, just as an earthquake does not need to be stabilized. Stabilization will occur when government stops trying to help. Ditto banking and the economy.
We all know this will never happen. This is just the start of government intervention. There is too much opportunity for conveniently inefficient spending. What bubble will emerge out of this? People are saying the green energy bubble, but I’m not buying it. I see the cash and t-bill bubble forming in earnest.
IR,
Glad to see this post. Now that you have been considered one of the “gurus” of forseeing and understanding of this cycle of housing bubble, it appears to be a really good time for you to put your new found “influence” to work, and suggest some “fixes” to this problem based on the same fact based analysis.
The person who understands the issues is probably in the best position to propose the best solutions.
Yes, it is great to see how far IR has come in his writing and influence.
When Irvine Renter becomes Irvine Homeowner, it will make national headlines!
“# Temporarily provide a down payment match to all home buyers
# Temporarily double the mortgage interest rate deductions for all homeowners “
I don’t care for those two at all, unless there is additionally an equivalent value rent payment match and rent payment deductions, which obviously won’t happen!
The German government is giving incentives to purchase new cars - I don’t support that approach either, but adding crap like that would at least level the tax-funded feed trough for those of us who don’t want to knife-catch our way in to still- or re-inflated house prices.
I think that “temporarily double the home mortgage interest deduction” is lunacy. Nothing like giving people bigger incentives to buy bigger homes.
Matching downpayments is odd, but not crazy. If the Federal Govt matched up to a certain percentage of down payment, it would pull a lot of leverage out of the system. However, you have to have some limits, or people who can pay cash will get their entire purchase reimbursed.
Policy recommendations should follow several rules:
1. Trying to keep housing prices above equilibrium is either: an unbelievably expensive program that you have to keep throwing money at, diverting that money from much better uses, or; impossible.
2. The emphasis should be on reducing the damage caused by prices going back to equilibrium. For example, minimize weather damage, vandalism, and overall damage to the financial system.
3. Any recommendation which increases leverage is a very bad idea. While not all methods of reducing leverage are desirable, it should be a primary policy goal to get homeowners closer to historic (~1960-1980s) leverage ratios.
Those proposals in particular stood out to me as being counterproductive. Short term, they might boost housing, but long term it will create even more problems as you describe.
I plan on writing a post on manipulating the standard deduction and the home mortgage interest deduction and how these would impact housing.
This idea of temporarily matching the down payment and doubling interest deduction is absolute madness. Even if it were a good idea, what happens when “temporarily” runs out?
And let me get this straight; with respect to doubling the deduction, essentially I am going to be penalized for an all cash purchase?
What happened to housing prices that simply were fundamentally overstated? There’s a big difference between markets prices that need fixing and market prices that need correcting.
Absolutely infuriating.
When “temporarily” runs out ... that’s when the salary inflation bubble kicks in ...
I was wondering why I had to scroll down this far to find people objecting to that part.
matching downpayments and tax incentives to buy are a silly when the deficit keeps growing—one keeps the price artifically higher and the second reduces taxes that local gov. needs badly—
both won’t fly—
Taking down interest rates is about the only thing to get a person to buy an overpriced home—when housing comes under the price point of renting—As IR has mentioned before.
Problem is the fed waited a year too long to do this. They should of frozen those rate increases putting a hold on foreclosure but you know they were the low lifes that no one cared about until it’s too late now to stop the free fall.
Alt-A loans will be interesting to see how many refi or walk away?
Same here!
Aren’t we still waiting for some sort of rental parity?
I think bailout plans should include prison time.
You know, widespread fraud on mortgage applications, appraiser fraud.
It would also be a really good idea to frogmarch some executives out (with the media watching) for fraudulent accounting, lying to investors, or lying to regulators.
I’ve been saying this for a while. wanna create jobs? here you go! lots of lawyers, assistants, fraud hunters, etc.
I read this blog every day, rarely comment.
The proposals 3 and 4 show that John burns
a) does not understand the problem
b) a shill for the real Estate industry.
Loan modifications is difficult is because of the secularization. This is not S & L type situation when banks owned the loans. Any amt of incentive to services will change the contract that the servicer has with the trust/investors
Additional incentives to buy homes is just nuts. I thought that is what got us into the current problem.
Stabalization would kill the market for years to come. There will never be any move up equity because houses will not appreciate until fundamentals catch up with the stablization.
People will still have high DTI’s until the fundamentals meet.
Rental Parity will not exist and investors will not buy.
This is like pulling off a band aid. Might as well just rip it off quickly and get it over with.
I totally agree. Your analysis is right on.
Stabilization will just reward the wrong folks AGAIN!
I wonder, is it a band aid that is being ripped off or a tourniquet? If it is the latter, then the person (collective homeowners) may die if we pull it off immediately.
have yet to read the full report but on bullet point 3 while I agree with “Stimulate Responsible Lending” - I think there was broad consensus on that in yesterday’s post, that is not going to stop home price declines. Home prices need to decline until a responsible buyer can get responsible financing.
While I think propping up prices isn’t going to work I do think it is valid to put in place actions to help ensure that we don’t overshoot on the downside. This is where making sure there is responsible financing is available. I think also being honest with the public that houses aren’t going back to peak anytime soon is better than pretending we can wave a wand to fix the problem.
Stabilization will come when prices drop A LOT. This is like removing a Band Aid - make it quick, very painful and be done with it. To do this we need:
1) Federal investigation of EVERY foreclosure. Get a copy of their tax returns for the year they applied for the loan,if there is any deviation between the stated income on the loan application and the tax return, the Feds prosecute, demand TRIPLE damages, lien their wages and all assets and give them five years in federal prison, sentence suspended so long as “restitution is made as ordered.” That should slow down foreclosures.
2) Suspend the mortgage interest deduction and the deduction for property taxes. This will force prices down to where REAL buyers can afford to buy without impoverishing themselves. It will also raise badly needed revenue and put buyers on par with renters.
3) Impose a 50% tax on any interest paid with respect to a new HELOC. So that 8% HELOC with cost you 8% to the bank and 4% to the feds. Then housing will be just housing, not an ATM machine.
4) Eliminate the tax break for capital gains on housing. Make it taxable just like any other gain. Again, this helps make housing a place to live, not an investment.
5) Make Realtors and appraisers PERSONALLY LIABLE for an “fraudulant inducement” to purchase housing.
These steps will stabilize foreclosures, punish the irresponsible and bring prices down quickly and dramatically, which will get product moving and people into truely affordable housing.
I think you are confusing stabilization with a necessary and destructive market crash. This will include huge unemployment and a stock market crash; both rivaling the Great Depression. I agree that it would be fair, but I don’t think it will happen. I also think the alternative reality that will happen with government intervention might be worse.
buster wrote: “2) Suspend the mortgage interest deduction and the deduction for property taxes. This will force prices down to where REAL buyers can afford to buy without impoverishing themselves. It will also raise badly needed revenue and put buyers on par with renters.”
Wouldn’t this effect renters too? Don’t landlords get to deduct the taxes and interest too? If so, they’d have to raise rents to cover the additional cost. This sounds more like an anti-stimulus. I know if my property tax suddenly became an after-tax expense, I would certainly have to cut my consumption. That doesn’t sound like what we need right now.
The association dues for this place is $325. That’s just wrong.
Wow, a down payment match for an even more tax shelter investment inflation hedge ... that’d be cool.
It just means you will pay more for a house.
Then when they take that rule away, your home will instantly be worth less….
Then you can beg for a bailout.
Reading the doc, proposed match was only to $25,000 which doesn’t go far in Irvine anyhow…
Thanks for sharing Anon. I have been meaning to read the doc for more details.
IR, thanks again for doing the research and keeping us all informed. This was an interesting post.
“2. Stimulate Job Growth - Bring more jobs to the economy with short-term stimulus and smart government spending.”
“Smart government spending”! LOL! Thanks for the laugh!
I agree.
The government should be spending less due to the national debt and defficit.
http://www.reason.com/news/show/131010.html
The fix:
Disband the Federal Reserve.
Disband the IRS.
Go back to the gold standard.
Constitutional ammendment forbidding the federal government to borrow and forbidding Congress from spending more that it receives in any given year.
Constitutional ammendment equating fractional reserve banking and fiat currency to counterfeiting and treason.
If treason is not still punishable by hanging, make it so.
You rock awgee! Wish I had a better way of putting it.
http://www.youtube.com/watch?v=87yq372R4Ts
does this involve blood? or flowers and copulation?
I’m not sure either has worked so far but one is more fun than the other.
“Stop home price declines by helping keep responsible people in their homes.”
- Responsible people don’t need help to stay in their homes since the definition of responsible is careful examination of and personally acceptance of risk (i.e., they haven’t accepted risk for anyone but themselves because they’ve only gambled with what was theirs or what others willingly and knowingly loaned them).
“Provide financial incentives for loan servicing firms to modify loans”
-Who actually provides the incentives? Fine if this is voluntary and private. If these incentives are profitable, no need to force taxpayer participation, allowing the stupid majority to steal from the smarter minority.
There’s a lot in this ‘solution’ I don’t trust but these two statements alone are enough for me to distrust whoever authored this proposal.
Immediate solutions to this particular problem should start and stop with prosecuting those who committed fraud/stole and refraining from giving (read ‘stealing’) one taxpayer cent to bail out individuals who made stupid and/or deliberately immoral decisions. Any other solution will be the product from the hindquarters of a different animal - the smell might not be exactly the same but it will still stink.