“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis. We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”

-Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund

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I have some good news and some bad news for you:

The bad news is the $75 billion HAMP program to protect homeowners from foreclosure has been widely pronounced a disappointment. The good news is that more than a few mainstream economists — and even some policy makers — are slowly being recognizing that it has only delayed the inevitable. We may end up with something more functional as a result.

Some of this is discussed in a front page NYT article. It echos what I have been writing for 2 years now — that the mortgage modifications and foreclosure abatements programs are counter-productive.

The $75 billion program Making Home Affordable:

“has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program has raised false hopes among people who simply cannot afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.” (emphasis added)

That sums up the situation perfectly. I am a “rip-off-the-band-aid-quickly” kinda guy, and what we are doing instead is peeling it off as slowly as possible, lengthening the pain, while only delaying the inevitable.

As we have long argued, national home prices remain too elevated for a healthy real estate market; The cheaper properties — primarily distressed units, foreclosures and short sales — are what is driving the bulk of real estate transactions today.

Why so few get this is simply astounding.

Prices should be allow to normalize through ordinary foreclosure processes. Banks should be compelled to write down bad mortgages. Underwater borrowers should be given the option of a cram-down or a foreclosure.  I favor sharing the write-down between the borrower and lender, with a zero interest, 10 year balloon payment for a chunk of the write down (A modified version of our 30/20/10 proposal).

For more details, I have to go to chapter 21 of Bailout Nation, titled The Virtues of Foreclosure:

“It’s not that people are unwilling to buy real estate in the United States; it’s that buyers are now unwilling to over pay.

And therein lies the heart of the problem with most rescue plans. They are designed to prevent the continued downward spiral of the housing market, which unfortunately is precisely what is needed. The artificial demand of the ultralow rates and lax lending standards sent prices to unsustainable levels, and put millions of people into homes they could not afford. The markets are correcting these excesses as people trade out of those homes. It is a classic unwind of a bubble.

In much of the country, home prices remain too high, and the over priced homes are not moving. That’s reflected in the huge inventory overhang of unsold homes. (See Figure 21.4.) And the inventory data of homes for sale does not include the shadow inventory—all of the homes purchased as investments, by flippers, as second homes, or as rental units. These owners are waiting in the shadows for the opportunity to get rid of their properties. Any improvement in the real estate market is likely to bring forth this additional supply.

Until prices revert back toward historical nor ms, the excess inventory will not be removed, the foreclosures will not stop, and the total sales will remain depressed. The sooner Washington, D.C., figures this out, the better off the economy and U.S. homeowners will be.”

The healthiest thing we could do would be to:

1. Allow foreclosures to proceed normally;

2. stop subsidizing purchases at elevated prices;

3. force banks to take writedowns of bad loans;

4. do a “shared pain” cramdown where both the borrower and lender split the loss  of an underwater mortgage, replacing the old original loan with something more sustainable.

We could also bring rates to more reasonable levels — say 2% from 0% — to further stop the subsidy and normalize prices. I am less confident this is likely anytime soon.

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Previously:
Fixing Housing & Finance: 30/20/10 Proposal (September 22nd, 2008)
http://www.ritholtz.com/blog/2008/09/fixing-housing-finance-302010-proposal/

$15,000 Home Buyers Credit Costs $292,000/home (October 22nd, 2009)
http://www.ritholtz.com/blog/2009/10/why-expanding-home-buyers-credit-is-a-mistake/

Source:
U.S. Loan Effort Is Seen as Adding to Housing Woes
PETER S. GOODMAN
NYT, January 1, 2010
http://www.nytimes.com/2010/01/02/business/economy/02modify.html

The latest data from Case Shiller, covering the October 2009 period, shows an ongoing improvement in price data.

This was the 9th consecutive month of gains. As the chart below shows, year-over-year data for the 10-City and 20-City Composite Home Price Indices, fell 6.4% and 7.3% respectively.

Peak-to-date figures for the indices through October 2009 are -29.8% and -29.0%.

Home Prices Still Improving but at a Moderating Pace Entering the Fourth Quarter of 2009

more shortly

“The rich aren’t as rich as they used to be.”

-Alex Rodriguez, a Miami real estate agent with JM Group USA

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Real Estate agents are masters of the obvious, aren’t they? “This is the kitchen” they proclaim as if a buyer couldn’t deduce that from the refrigerator, stove and dining table.

And so too, is that obvious quote up top. Yes, the rich have less money. But so does nearly everyone else. With the rich, the amounts in question are simply much greater, individually and collectively, in terms of assets lost. As David Rosenberg has pointed out, “In 2009, household net worth contracted nearly 20% over the past year and a half. That’s an epic $12 trillion of lost net worth, a degree of trauma never seen before.”

The improvements in Housing appear to be driven by lower end subsidies. The most recent Housing data makes clear the dominance of low end sales. As noted earlier, last month’s existing home sales saw a 60% increase in cheaper condos and coops.

This reflects several ongoing themes that will continue to impact Housing the next few quarters:

1) Credit availability remains tight: The pendulum has swung from giving anyone who can fog a mirror to denying creedit to well qualified applicants. For entry level homes, a strong mortgage applicant has a good credit score, steady income, and can put 0% down. Higher end homes are tougher to finance. Anecdotally, some deals require 30-40% down on a $1 million plus home;

2) Housing Bailouts aim at the low end: Extensive government subsidies (1st time tax credit, low mortgage rates) falls primarily to low end purchasers; The higher end purchaser has the benefit of lower interest rates but pay a 100 bp premium on Jumbo mortgages; Credit for jumbos (> $417k) are especially tight.

3) Homeowners with mortgages of more than $1 million are defaulting at 2X the median rate. Lower-end homes are now decreasing as part of the total foreclosure pie; Zillow.com reports middle- and high-end homes are becoming a larger proportion of defaults.

This is significant, due to the important role more expensive (aspirational) homes play in the food chain. A big driver of sales is the “trade up” buyer. Now that entry level sales are improving, the chain of transactions needs to keep moving on up. The potential for

While its been a huge improvement to see starter homes selling, its primarily been driven by distressed transactions — 30-50% of alle existing home sales — and government subsidies.

The low end bailouts are ill conceived and counter-productive. Foreclosures serve a valid purpose, one that is driving the real estate market back towards its proper levels. These housing bailouts are populist driven, with a quid pro quo in them for the bank bailouts. Both will prove to be counter productive over the long haul.

Case Shiller Index out today at 9am . . .

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Source:
Higher-End Homes Face the Price Pressure
MARK GONGLOFF
WSJ, DECEMBER 29, 2009

http://online.wsj.com/article/SB20001424052748704134104574624661382421076.html

Why 2010 Looks So Dicey
David Rosenberg
BusinessWeek, December 17, 2009,

http://www.businessweek.com/magazine/content/09_52/b4161112222655.htm

Luxury-Home Owners in U.S. Use ‘Short Sales’ as Defaults Rise
Kathleen M. Howley and Dan Levy
Bloomberg Dec. 17, 2009

http://www.bloomberg.com/apps/news?pid=20601214&sid=aQED_96QBBkk

Bill over at Calculated Risk put together an excellent survey of Government Housing Support programs. It is reproduced with permission here in its entirety:

Posted by CalculatedRisk on 12/27/2009 05:52:00 PM

Sales of new one-family houses in November 2009 were down (seasonally adjusted annual rate) This is 11.3% (±11.0%) below the revised October rate, and is off 9.0% (±15.3%)* below the November 2008.

The median sales price of new houses sold in November 2009 was $217,400; the average sales price was $280,300. Current inventory is a 7.9 month supply.

As I have warned many times in the past (see this from 2005), New Home Sales are highly volatile (primarily) self reported data, and subject to significant swings.

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Charts courtesy of Calculated RIsk

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Previously:
New Home Sales Data: Don’t rely On Them Either (November 30th, 2005)

http://www.ritholtz.com/blog/2005/11/new-home-sales-data-dont-rely-on-it-either/

Source:
New Home Sales in November 2009
U.S. Census Bureau and the Dept of Housing and Urban Development, December 23 2009

http://www.census.gov/const/newressales.pdf

Here is a sign that things are artificially stimulated: Abnormally high Existing Home Sales for November 2009, pushing ginormous annual gains:

“Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 7.4% to a seasonally adjusted annual rate of 6.54 million units in November from 6.09 million in October, and are 44.1 % higher than the 4.54 million-unit pace in November 2008. Current sales remain at the highest level since February 2007 when they hit 6.55 million.”

Now granted, we are comparing the heart of the credit crisis, a very weak seasonal period one year ago, with the present sub-5% mortgages and the (expected end of) a government home buying credit.

Sales are up as prices continue to fall. Lower priced homes — especially Condo and Coop sales — were up a whopping 60% over last year.

While seasonal adjustments might have impacted the monthly data, the year over year numbers are simply off the charts.

Other data points:

-The national median existing-home price was $172,600 in November 2009, 4.3% below November 2008.

-Single-family home sales jumped 8.5% (SA annual rate) 5.77 million in November; Up 42.1% above November 2008.

-The median existing single-family home price was $171,900 in November, down 4.4%from a year ago.

-Distressed properties accounted for 33% of sales in November;

-First-time buyers purchased 51% of homes in November

-Total housing inventory at the end of November declined 1.3% to 3.52 million existing homes (6.5-month supply);

-Unsold inventory is 15.5% below year ago levels, and the lowest since April 2006;

-Existing condominium and co-op sales in November were unchanged monthly, but gained 60.1% from a year ago.

-Median existing condo price was $178,000 in November, down 3.1% from year ago levels.

Bottom line: Improving sales numbers, falling home prices, reduced inventory, distressed sales still driving the narrative.

Bill over at Calculated Risk notes that going forward:

• Months-of-supply will now increase sharply as sales plunge. Do not be fooled because months-of-supply is close to “normal” levels. This is primarily because sales were distorted by the tax credit.

• Excess inventory includes existing home inventory, rental units (vacancy at record high), and various shadow inventory.  This is still near record levels.

• House prices are now falling again – and this will show up in the Case-Shiller index soon.

• This is probably the end of the “good” housing news for a while.

Here’s a NSA chart:

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Chart courtesy of Calculated Risk (annotations mine)

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Source:
Another Big Gain in Existing-Home Sales as Buyers Respond to Tax Credit
NAR, December 22, 2009

http://www.realtor.org/press_room/news_releases/2009/12/another_respond

Here is a fascinating twist on the underwater homeowner walking away fromt heir bad purchases: This time, its Morgan Stanley.

They spent over $8 billion on commercial property in 2007 — the peak of commercial real estate in the US.  Now, they are going to preemptively “Walk Away” from five San Francisco office buildings, letting them go back to the lenders.

The buildings Morgan Stanley is giving up are :

One Post
201 California St.
Foundry Square I
60 Spear St.
188 Embarcadero

So this is now a new category of real estate financing: Preemptive “Walks Away” from bad CRE purchases.

Here’s Bloomberg:

Morgan Stanley plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

The bank has been negotiating an “orderly transfer” of the towers since earlier this year, Alyson Barnes, a Morgan Stanley spokeswoman, said yesterday in a telephone interview. AREA Property Partners will take over the buildings. Barnes declined to say when the transfer will occur.

“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”

The San Francisco transfer would mark the second real estate deal to unravel this year for Morgan Stanley, which bet big on the property markets as prices were rising. The firm last month agreed to surrender 17 million square feet of office buildings to Barclays Capital after acquiring them for $6.5 billion in 2007 from Crescent Real Estate Equities. U.S. commercial real estate prices have dropped 43 percent from October 2007’s peak, Moody’s Investors Service said last month.

Morgan Stanley spokeswoman is correct when she says it is technically not a default. Instead, it is a case of Commercial Jingle Mail. Rather than make payments, they are turning the keys over to the lender — just like underwater homeowners do!

Good luck making moral arguments against homeowners doing just that in the future . .  .

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Source:
Morgan Stanley to Give Up 5 San Francisco Towers Bought at Peak
Dan Levy
Bloomberg, Dec. 17 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aLYZhnfoXOSk&pos=5

Today’s Housing Starts data:

HOUSING STARTS: Privately-owned housing starts in November were at a seasonally adjusted annual rate of 574,000. This is 8.9% (±10.2%)* above the revised October estimate of 527,000, but is 12.4% (±9.1%) below the November 2008 rate of 655,000.Single-family housing starts in November were at a rate of 482,000; this is 2.1 percent (±9.2%)* above the revised October figure of 472,000. The November rate for units in buildings with five units or more was 83,000.

BUILDING PERMITS: Privately-owned housing units authorized by building permits in November were at a seasonally adjusted annual rate of 584,000. This is 6.0% (±1.6%) above the revised October rate of 551,000, but is 7.3% (±1.8%) below the November 2008 estimate of 630,000.

Single-family authorizations in November were at a rate of 473,000; this is 5.3% (±1.1%) above the revised October figure of 449,000. Authorizations of units in buildings with five units or more were at a rate of 86,000 in November.

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Chart:

click for larger graph

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Source:
NEW RESIDENTIAL CONSTRUCTION IN NOVEMBER 2009
U.S. Census Bureau and the Department of Housing and Urban Development, DECEMBER 16, 2009

http://www.census.gov/const/newresconst.pdf

The Fed’s Flow of Funds report was released yesterday and, as usual, it contained a treasure trove of (somewhat stale) data that’s nevertheless fascinating. Herewith some observations:

Household net worth rose by about $2.7 trillion in Q3. It now stands at about $53.4 trillion, the highest level in a year:

click for giant charts

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Our debt-to-income ratio, unfortunately, is still too elevated at 128%, and is only coming down very slowly. Continued improvement needs to be seen here, as we’re still about $1.5 trillion above the trendline, which is at 114% (forget about mean reversion — that’s about 77%).

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Owners’ Equity as a Percent of Household Real Estate was revised (downward) to a first quarter trough of a staggering, almost unthinkable, 33.5%. It has rebounded in the subsequent two quarters to a merely hideously pathetic 38%.

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The chart above ties in beautifully with a WSJ article (referenced in yesterday’s reading), titled American Dream 2: Default, Then Rent — the same day the Flow of Funds report was released:

“People’s increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.

Thanks to a rare confluence of factors — mortgages that far exceed home values and bargain-basement rents — a growing number of families are concluding that the new American dream home is a rental.

Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That’s freeing up cash to use in other ways.”

As a societal matter, is the appeal of home ownership — notwithstanding the various (mostly tax) advantages of owning (e.g. having mortgage interest deductions) over renting — going the way of the dodo ?

Could one not infer as much from the steady decline in owners’ equity over the past many decades, as this metric has moved steadily downward from over 80% to under 40%?

Are we destined to become a nation of renters, particularly in light of the pain that’s been inflicted by the bursting of the housing bubble? What are the longer-term implications if such a shift is, in fact, taking place?

Our demographics — an aging boomer population — are going to further slow the housing market’s recovery, but that’s another post.

There is a long investigative piece in the Washington Post on Ginnie Mae, titled Mortgage agency’s growth gives fuel to risky lenders.

“More than a dozen lenders with Ginnie’s endorsement have made loans that are now delinquent at rates far in excess of what regulators consider acceptable. And some of these lenders have been accused of misleading both borrowers and the government about these loans.

Created more than four decades ago to help expand homeownership, Ginnie Mae works in the guts of the financial system, offering a secondary layer of government insurance that helps make it easier for mortgage lenders to provide financing for home buyers. The first layer of government backing comes primarily from the Federal Housing Administration, which principally seeks to help first-time home buyers who have impaired credit or little money for down payments. The FHA insures the mortgages made to these borrowers, promising that the lender will ultimately be repaid if the borrower defaults. The FHA has the primary responsibility for monitoring the lenders.

Then Ginnie Mae enters the picture. Mortgage lenders often want to bundle the loans they’ve made into securities and sell them to investors. Ginnie Mae guarantees those securities, ensuring that investors continue to get their principal and interest without interruption if any of the loans go bad or lenders are otherwise unable to make payments to investors. This additional insurance makes the securities easy to sell, generating new cash for lending.”

Ginnie Mae has evolved into a monsterously large portion of the otherwise nonfunctioning mortgage securitization market. In 2009, Ginnie Mae guaranteed “nearly one in five new mortgages” that were securitized.

Note that there are huges differences between the current issues at Ginnie Mae, and the erroneous blame heaped upon Freddie and Fannie for the credit crisis and the subsequent collapse of the economy. Do not conflate the two: By the time Fannie was involved in sub-prime securitization, it was all over but the crying.

The Ginnie Mae issues discussed are new, and are part of the misguided Fed/Treasury attempt to get the Housing market moving again . . .

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Source:
Mortgage agency’s growth gives fuel to risky lenders
Brian Grow and Zachary A. Goldfarb
Washington Post, December 10, 2009

http://www.washingtonpost.com/wp-dyn/content/article/2009/12/09/AR2009120904635.html