Did someone say, ``Housing market recovery?''

[FRED]

Did someone say, "Housing market recovery?''

Throwing new potential home buyers into the maw of ARM resets and rising interest rates is a formula for a second housing disaster

We receive frequent reports that housing is "recovering" and hear anecdotal stories about potential home buyers looking to take advantage of "low" housing prices and the government's tempting $8,00 HUD tax credit for new home buyers. Readers are reminded that government subsidy of the housing industry is what got us into this mess in the first place, and luring unsuspecting new buyers into a falling market will not correct the trust problem created by years of permissive lending.

As Janet Tavakoli, President of Tavakoli Structured Finance told us in a recent interview, the first step toward fixing the U.S. housing market is making solid loans based on the tried and true formula of 20% cash down and traditional measures of creditworthiness. Throwing new potential buyers into the maw of ARM resets and rising interest rates is a formula for a second housing disaster.

The Census Bureau issued the new housing permit data this week. We've been tracking housing permits for years as a measure of how our housing-dependent FIRE Economy is faring. For example, back in late 2006 we published this chart used in our analysis to forecast a recession to begin in Q4 2007:

The new data on permits reveals a terrible market for new housing development.

Personal Consumption Expenditures (PCE) are strongly correlated in our housing-dependent FIRE Economy.

But as bad as both the housing permits and PCE data are, the historical relationship between issuance of new housing permits and PCE has never looked like this:

After holding steady around $4 million of PCE per permit issued since 1990, the ratio of $PCE/New Housing Permit increased from $4 million at the top of home price appreciation in the fall of 2005 to $19.5 million in March 2009 even as PCE plunged. We are reminded of the crash up of PCE to GDP from 75% to 81% in the first year of The Great Depression as GDP collapsed even faster than PCE.

Another way to look at it: half as many new housing permits were issued in March 2009 as in March 1960 when total nominal PCE was 3.3% of March 2009 PCE.

Ouch.

ARM resets: Time's up!

When we wrote Fueling the FIRE Economy in March 2007, we noted that the U.S. housing market was 26 months away from a wave of ARM resets. Well, 26 months is up!

What does the mortgage market have in store for ARM holders whose loan value totals hundreds of billions of dollars?

30-year mortgage rates rise
May 29, 2009 (LA Times)

Average rates on 30-year fixed-rate mortgages rose to 4.91% this week from 4.82% a week earlier, mortgage company Freddie Mac said.

The average rate on a 15-year fixed-rate mortgage increased to 4.53% this week from 4.5%. Five-year adjustable-rate mortgages inched up to 4.82% from 4.79%. One-year adjustable-rate mortgages fell to 4.69% from 4.82%.

We are not betting that home prices will be rising any time soon.

But let's not forget what Massachusetts representative Barney Frank had to teach us about the housing bubble in 2005.

Barney Frank now chairs the House Financial Services Committee.

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[zoog]

Re: Did someone say, ``Housing market recovery?''

Here's an updated Credit Suisse chart, starting at March 2009.

[LargoWinch]

Re: Did someone say, ``Housing market recovery?''

I just had a Friday night epiphany.

If the bulk of the resets are until March 2012 ...then if interest rates increase during that period, the economy will simply crater?

That means inflation is "double baked-in":
On one hand the money printing will come into effect - with a lag of 6 to 18 months - fueling a torrent of inflation whilst the FED will be powerless to increase the rates.

[metalman]

Re: Did someone say, ``Housing market recovery?''

I just had a Friday night epiphany.

If the bulk of the resets are until March 2012 ...then if interest rates increase during that period, the economy will simply crater?

That means inflation is "double baked-in":
On one hand the money printing will come into effect - with a lag of 6 to 18 months - fueling a torrent of inflation whilst the FED will be powerless to increase the rates.

dirty little secret about high interest rates. not such a secret to anyone who has lived in a country that has them... they can be inflationary.

huh?

interest is an expense. high interest rates only reduce inflation IF they also constrain demand.

[Jay]

Re: Did someone say, ``Housing market recovery?''

dirty little secret about high interest rates. not such a secret to anyone who has lived in a country that has them... they can be inflationary.

huh?

interest is an expense. high interest rates only reduce inflation IF they also constrain demand.

A corollary to this point was made in a video link in an earlier thread explaining how high interest rates can also cause worsening inflation by creating a supply crunch as the banks can end up controlling too much of the asset.

[LargoWinch]

Re: Did someone say, ``Housing market recovery?''

That is a good point MM and something I often forget: once inflation expectations are "baked-in" the economy, it is difficult to stop the process.

Last time around, Volcker had to increase interest rates a full 9 percentage points above the inflation rate. That is serious medicine, which would certainly kill the patient today.


Now, back to the thread at hand, it appears that some people in CA certainly do believe in the "housing market recovery".

Case in point: who is in for a Crack House?

Note: I cannot wait to apply for my $8 buck credit ;).

[cjppjc]

Re: Did someone say, ``Housing market recovery?''

Gotta love that Barney Frank.

[doom&gloom]

Re: Did someone say, ``Housing market recovery?''



The likes of Bawney Fwank & Chris Dodd are gonna need THESE kind of green chutes
when they get tossed off some high building somewhere

[Slimprofits]

Re: Did someone say, ``Housing market recovery?''

Meanwhile, back in the msm we're told:

Housing Picture Brightens in California
Wall Street Journal - May 28, 2009

Mark Zandi from Moody's says the decline of home prices will end in the fourth quarter.

any my personal favorite because it sums up the big picture:

Most U.S. homeowners think a bottom has been reached: Zillow

A majority, or 60 percent, believe their home lost value during the past 12 months, according to the Zillow Q1 Homeowner Confidence Survey.

In reality, 80 percent of homes across the country lost value during the past 12 months, according to Zillow's first-quarter Real Estate Market Reports.

[CanuckinTX]

Re: Did someone say, ``Housing market recovery?''

I think this quote about the Zillow survey is really interesting:

"Also interesting is the information we have for the first time this quarter on the levels of 'shadow inventory' - homes that people would like to sell but that aren't currently on the market, and thus aren't captured in the official number of homes on the market," said Humphries. "With almost a third of homeowners poised to jump into the market at the first sign of stabilization, this could create a steady stream of new inventory adding to already record-high inventory levels, thus keeping downward pressure on home prices."

[Tybee Island]

Re: Did someone say, ``Housing market recovery?''

As often as the MSM analysis has been discussed here on iTulip, it is stunning to me to see how captured they have become in the last 8 months.

It really became apparent after September, but since January the reporting has become something akin to a state-backed propaganda system reminiscent of the old soviets.

I am watching as the people that I am encountering, who never questioned their news sources before, are scratching their heads in bewilderment as they compare their own deteriorating financial positions and living standards.

At some point even Joe-six-pack is going to stop being the good little comrade and revolt.

Based upon nothing more than my intuition, I think that moment is closer at hand then the administration believes.

Maybe it begins as the former middle-class are evicted from their McMansions or they have no access to any form of credit whatsoever and they realize that a trip to the mall is futile and pointless no matter how much they want to pretend for a moment that they have the ability to buy anything. This of course assumes that their favorite mall is still open and there are any retailers left, which may be a stretch.

I know E.J. feels that we will just slow down and things will not unravel, but I have far less confidence in the average fellow citizen once they have lost everything and they don't have the intellectual capabilities to understand why as they seek someone to blame or worse.

I was at an event last night that was populated by the very foundation of business people who are the real drivers of my community. They looked shell shocked as they lamented how difficult things were becoming now. They all told of taking huge losses in the stock market this past Fall and how they couldn't sell their vacation homes. Many of these folks inherited family businesses and have been very good at carrying them forward, but they really lack any skills outside their respective trades.

The guy who runs the largest shoe store in town, the general contractor, the furniture showroom owner or the car dealership owner, can't reinvent themselves.

These folks are rubbing up against a different reality then what they see on the nightly news and it is now becoming abrasive.

[Tybee Island]

Re: Did someone say, ``Housing market recovery?''

And when they realize that moment of "stabilization" isn't forthcoming, do they all run to the exits at once?

[metalman]

Re: Did someone say, ``Housing market recovery?''

And when they realize that moment of "stabilization" isn't forthcoming, do they all run to the exits at once?

the way these guys have been writing about it for years... no.

housing has no 'mark to market' event like stocks... the quarterly statement that comes in the mail.

even after all the bad press, most homeowners have no idea what their home is worth... the idea of 'house as investment' still lodged in the skull after 30+ years of fire econ propaganda...

Homeowner Confidence Survey

A Zillow.com survey conducted by Harris Interactive which measures homeowners' perceptions about home value changes of their own home and the local market. Top level regional findings are below. For additional information about the Q1 Homeowner Confidence Survey, check out the regional breakdown, PDF, and graphics (below). Survey methodology and analysis can also be found in the press release and on the Zillow Blog.

Homeowner Confidence vs. Actual Home Value Change
NATIONAL
Survey Results:
• My Home's Value Has Increased Over Past Year: 18%
• My Home's Value Has Decreased Over Past Year: 60%
• My Home's Value Has Stayed the Same Over Past Year: 22%

Actual Home Value Change:
• Home Values Increasing: 17%
• Home Values Decreasing: 80%
• Home Values Staying the Same: 3%

NORTHEAST
Survey Results:
• My Home's Value Has Increased Over Past Year: 23%
• My Home's Value Has Decreased Over Past Year: 57%
• My Home's Value Has Stayed the Same Over Past Year: 20%

Actual Home Value Change:
• Home Values Increasing: 17%
• Home Values Decreasing: 79%
• Home Values Staying the Same: 4%

MIDWEST
Survey Results:
• My Home's Value Has Increased Over Past Year: 15%
• My Home's Value Has Decreased Over Past Year: 66%
• My Home's Value Has Stayed the Same Over Past Year: 19%

Actual Home Values:
• Home Values Increasing: 16%
• Home Values Decreasing: 80%
• Home Values Staying the Same: 4%

SOUTH
Survey Results:
• My Home's Value Has Increased Over Past Year: 22%
• My Home's Value Has Decreased Over Past Year: 49%
• My Home's Value Has Stayed the Same Over Past Year: 29%

Actual Home Values:
• Home Values Increasing: 23%
• Home Values Decreasing: 74%
• Home Values Staying the Same: 3%

WEST
Survey Results:
• My Home's Value Has Increased Over Past Year: 10%
• My Home's Value Has Decreased Over Past Year: 75%
• My Home's Value Has Stayed the Same Over Past Year: 15%

Actual Home Values:
• Home Values Increasing: 9%
• Home Values Decreasing: 89%
• Home Values Staying the Same: 2%

*US home values based on data found in Zillow’s Q1 Real Estate Market Reports

theory itulip pushes is... no race for the exits... the idea of 'housing as investment' goes away as prices go down, down, down for 15 yrs ala japan...






hudson's may 2006 New Road to Serfdom... holding up well. :eek:

[metalman]

Re: Did someone say, ``Housing market recovery?''

I know E.J. feels that we will just slow down and things will not unravel, but I have far less confidence in the average fellow citizen once they have lost everything and they don't have the intellectual capabilities to understand why as they seek someone to blame or worse.

latest on that topic...

EJ: That is what these guys have figured out how to do, to continuously create money by borrowing—from the credit markets, from foreign governments, from the treasury, from the Fed—and feed it back into the system and re-inflate what people think of as “the economy.” And as long as we pull out of it each time everyone seems to go along with the bribery, and don’t even see it for what it is, and they go back to watching reality TV. Maybe if it doesn’t work this time and unemployment gets very high and stays high for awhile, there might be some new leadership that comes out of some place. I’m not sure, however.

JT: Well, how much higher does unemployment have to be? Isn’t 8.2% big enough for you? They say in pockets of Illinois and other areas of the country we have 13% unemployment. That’s Depression levels. How much higher does it have to go? So at this point I’m looking around at my fellow citizens and saying where are you in this? And I think part of it is that people don’t feel that individually they have any power. So that may be true. We’ve become little fiefdoms.

EJ: There’s a common fallacy about the oppressed, which is that the people rise up when they’re oppressed. They actually don’t. They just take it unless somebody provides some leadership to show them out of it. I think there was some hope that the Obama administration would provide some of that leadership.

JT: That’s right. There was that hope and it just seems as if that has not occurred because we’ve had a bi-partisan betrayal here.

EJ: Yes.

JT: This is a bi-partisan problem and it’s really all about money and power. We Americans over time have allowed the executive branch to garner a lot of power and have not held our Congress accountable. It’s a bi-partisan sell-out. So we have a really privileged class. Congress doesn’t really have to care—their pensions have been taken care of.

EJ: I think we will remain on this road until a third party develops, a political third party that can confront the Oligarchy and shift the economy back toward a less financialized and production-based economy.

JT: Well, that may be the case. We’ve seen things like that happen in the United States before. Regulators—they’re good for about 15 or 20 years before the rot sets in.

Eric Janszen Interviews Janet Tavakoli, President of Tavakoli Structured Finance

[Tybee Island]

Re: Did someone say, ``Housing market recovery?''

I sincerely appreciate your response and I am aware of the argument, however I am not a subscriber to it.

When we permitted homes to become ATM's and showed Joe-six-pack that he could lever up and consume with a belief that housing values would only continue to rise in the future and there would never be a problem accessing more credit we moved out of the historical performance of housing and real estate and into a new mutated reality. We gave him a taste of wealth that he had never had access to before. What was once reserved for only the moneyed on Wall Street was now mainstream and simple in its workings and ability to replicate.

Homes no longer were about shelter, and proximity to good schools and access to stable neighborhoods, but became the equivalent of a drug that tightened its hold as the addiction became acute.

The experiment will play out differently then what we can statistically model on past experiences in my humble view.