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

[jiimbergin]

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

Originally Posted by medved
Modern christian faith in god is harmless, maximum it can do, if practiced wrong, is hurt the practitioner himself.

I'd like to believe that, Medved. But try telling that this evening to the family of Dr George Tiller of Wichita Kansas.

I have avoided polictics and religion on Itulip as I am here for econonics. But just a brief comment. Prior to August 1982, I was a very very strong anti abortionist. Then I became a Christian. Since I now believe the aborted babies are with the Lord I pray for the mothers and their doctors as I wil pray for Dr. Tiller's family and his murderers.

I am simply saying all anti abortionists are not Christians.
jim

[flintlock]

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

As anecdotal evidence from the Phoenix area, the worst of the worst, my father told me a group of investors from California recently bought 500 inventory homes from distressed builders for about $65K each with the intent of turning them around in 30-60 days. They were listing for about $130K. I think this is similar to what Tybee has been saying (although still too high a price to pay?).

What bothers me is that transactions like this, where the same house might sell 2X in one month, will inflate home sale stats while driving prices into the ground.

That's exactly why I don't pay much attention to sales stats. Everything has its price. Even bloated inventories.

[bungee]

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

"The operation was a success, but the patient died."

Isn’t the patent already dead or did I miss the miracle resurrection?

In which case this is a true case of The Emperors new clothes. The central bankers / politicians / MSM can continue the charade in whatever direction they want for as long as they want. All the old rules have gone out the window.

I mean, it’s not like they have to worry about the patient dieing is it?

[cjppjc]

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

I am simply saying all anti abortionists are not Christians.
jim

Who can be a Christian? All anyone can do is TRY to be a Christian.

[Aerius]

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

Are we missing the forest because we are looking too hard at the trees here?

If there is a consensus that inflation is coming (think the prediction was 50%+ over several years?) you have got to think that will provide a boost to nominal housing prices. Is there anyone here who thinks that prices on a nominal basis will be cheaper in 10 years? or even 5 years?

The cost of construction ex-land should set some sort of a bottom for pricing in the medium term and many of those costs (ie, raw resources) are going to be much higher if inflation kicks in.

I do agree that it will be partially offset by rising rates, but that may be underestimating QE and buying at the relatively less liquid long end of the curve. Let's face it, the US has a big debt problem and are trying to inflate their way out of it. Treasuries are already dominated by CBs who are trying to stay competitive in the export game by managing their currencies/inflation a bit. Is the untold game-plan not to simultaneously inflate all currencies to get the US/world economy out of the mess? If so, what precludes the CBs from continuing to support the interest rate somewhat for the next couple years?

As for all the resets, that can be mitigated by various government actions such as the profit sharing idea, or even the tried and tested extension of the amortization schedule (which worked in UK/Canada).

I think we are going to see a dichotomy where regions that make stuff (ie, Texas with O&G) will see population inflows (as national unemployment increases) to support higher housing valuations.

Just a devil's advocate point of view.

[ASH]

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

As I see it, the only way out of this reset massacre is if interest rates remain at very close to the initial teaser rate of these loans until home values recover enough to allow borrowers to refinance without writing a hefty check at closing. Can you say massive "QE" for the next three years? With interest rate going up sharply this week it looks like the latest $300 billion of treasury purchases by the Fed is not nearly enough. Is it really possible to keep rates this low for another 3 years with all of the borrowing and spending this administration is doing?

Remember that the $300B in treasuries is by far the smaller portion of the QE. Most of the planned purchases by the Fed are of mortgage-backed securities ($1.25T, I think). Which brings me to Plan B (entirely speculative).

Step #0: Plan A fails. (One assumes that Plan A is to keep mortgage rates low, and the supply of mortgage financing high, simply by creating market demand for securitized mortgage debt and getting existing MBS off the balance sheets of commercial banks. But, Plan A doesn't involve major write-downs of principal or changes to interest rate -- it's still a quasi-market-based approach.)

Step #1: The Federal Reserve monetizes additional mortgage debt, including that backed by ARMs. The Fed now owns the mortgage contracts.

Step #2: The Federal Reserve offers home "owners" loan modifications that solve the cash flow problems of those who still have jobs. (Note that since the Fed can print as much money as it wants, it has no "profit motive" -- it can accept "below market" interest rates and even a reduction of loan principal if there is a compelling policy reason to do so. This is done outside of the normal, soon-to-be-dysfunctional, commercial mortgage market, and only applies to the interest rate on mortgage contracts owned by the Fed. However, it is true that by modifying the contracts to help out the home "owners", the Fed is creating a problem for itself vis-a-vis eventually getting the contracts off its balance sheet and back out to the market.)

Outcome: The banks and other financial institutions have been paid "cash" for their MBS, and are now solvent. They can extent consumer credit to customers if they can find any with enough cash flow to service more debt. Coincidentally, the home "owners" with mortgages and jobs who got to stay in their homes now have enough cash flow to consume again. This gets credit expansion going again. The housing market stabilizes, because there is no longer the pressure on nominal prices from foreclosures flooding the market, and employment can recover thanks to the resumption of credit expansion. On the other hand, the housing market won't be very good, because only the folks rescued by the Fed will have access to low mortgage rates; they will have a powerful incentive to stay in their homes, and everyone else will face very high mortgage rates for the origination of new loans because... all this was accomplished by the Fed printing money. The Fed will have exchanged reserve credit for what would have been illiquid assets while simultaneously creating the conditions required to get credit expansion going again. Further, the Fed will have very little scope to sell the mortgages carried on its balance sheet back to the market. When inflation ticks up, the Fed will probably only be able to sell treasuries back to market to sop up reserves. If that isn't enough, they'd need to change the reserve fraction rules.

[grapejelly]

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

Step #2: The Federal Reserve offers home "owners" loan modifications that solve the cash flow problems of those who still have jobs. (Note that since the Fed can print as much money as it wants, it has no "profit motive" -- it can accept "below market" interest rates and even a reduction of loan principal if there is a compelling policy reason to do so. This is done outside of the normal, soon-to-be-dysfunctional, commercial mortgage market, and only applies to the interest rate on mortgage contracts owned by the Fed. However, it is true that by modifying the contracts to help out the home "owners", the Fed is creating a problem for itself vis-a-vis eventually getting the contracts off its balance sheet and back out to the market.)

Fanny and freddie are taking over more and more loans.

And the rules encourage the servicers to give EVERYONE a 90 day "trial period" with lower payments even if they are hopeless.

Outcome: , the housing market won't be very good, because only the folks rescued by the Fed will have access to low mortgage rates; they will have a powerful incentive to stay in their homes, and everyone else will face very high mortgage rates for the origination of new loans because...

Housing prices will drop. It will be like living in a rent controlled apartment. If you live in a place you can't afford, suddenly you can afford it thanks to subsidies on interest. The rest of the world will see housing prices dropping because interest rates have climbed.

This is the next shoe to drop...

[ThePythonicCow]

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

Isn’t the patent already dead or did I miss the miracle resurrection?

The American economy is still running. It might be an obese patient that just had a coronary, and in grand denial of its horrid condition, but it is not actually dead ... yet anyway.

[phanatic]

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

Remember that the $300B in treasuries is by far the smaller portion of the QE. Most of the planned purchases by the Fed are of mortgage-backed securities ($1.25T, I think). Which brings me to Plan B (entirely speculative).

Step #0: Plan A fails. (One assumes that Plan A is to keep mortgage rates low, and the supply of mortgage financing high, simply by creating market demand for securitized mortgage debt and getting existing MBS off the balance sheets of commercial banks. But, Plan A doesn't involve major write-downs of principal or changes to interest rate -- it's still a quasi-market-based approach.)

Step #1: The Federal Reserve monetizes additional mortgage debt, including that backed by ARMs. The Fed now owns the mortgage contracts.

Step #2: The Federal Reserve offers home "owners" loan modifications that solve the cash flow problems of those who still have jobs. (Note that since the Fed can print as much money as it wants, it has no "profit motive" -- it can accept "below market" interest rates and even a reduction of loan principal if there is a compelling policy reason to do so. This is done outside of the normal, soon-to-be-dysfunctional, commercial mortgage market, and only applies to the interest rate on mortgage contracts owned by the Fed. However, it is true that by modifying the contracts to help out the home "owners", the Fed is creating a problem for itself vis-a-vis eventually getting the contracts off its balance sheet and back out to the market.)

Wow this makes too much sense. The Feds already ballooned its balance sheet over the last 2 years, why not go all in and add another trillion or so of junk mortgages. I'm not sure how this would go over with the general public though. There have been very few loan mods so far so it's hard to gauge, but I'd have to imagine if modifications were to made on a grand scale that there would be a lot of pissed of people come election time as responsible people watched their neighbors borrow up to their eyeballs to buy that new car, boat.... and would then watch them get a free lunch. I know this would make my blood boil.:mad:

When inflation ticks up, the Fed will probably only be able to sell treasuries back to market to sop up reserves. If that isn't enough, they'd need to change the reserve fraction rules.

Could you elaborate a bit on this? Are you talking about the Feds fraction reserve rules? Can't the Fed create as many reserves as it can print?

[jk]

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

they could, as you say ash, reduce liquidity by increasing reserve requirements. but that is essentially a tax on banks, lowering their profits, and just to say it that way is to show it's not about to happen.

[ASH]

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

Could you elaborate a bit on this? Are you talking about the Feds fraction reserve rules? Can't the Fed create as many reserves as it can print?

Hi phanatic. I was talking about what the Fed has to do after it gets credit creation going again. Once banks start lending against all the reserves the Fed created, we will get an inflationary explosion unless the Fed can take those extra reserves back off the table. Normally the Fed only buys and sells treasuries, and normally treasuries are easily marketable, but we're talking about the Fed monetizing a big stack of mortgage-backed securities that weren't too spiffy to begin with... and I'm hypothesizing the need to write-off principal and offer lower interest rates on the loans, neither of which will improve the market value of those mortgages. So, the Fed is in danger of creating more reserves by buying these MBS than it will be able to drain from the system by selling them. If that actually turns out to be a problem, and the Fed has less scope to pull reserves out of the banking system than previously, it may be necessary to rewrite the fractional reserve rules to give them more teeth, and reduce the amount of credit which can be extended against reserves.

(Most of us around here don't believe the Fed will be successful in controlling inflation, even if its eye is on the ball, anyway. I was just making the point that there's still a policy tool left, even if the Fed monetizes a bunch of junk that it's later unable to sell. At the end of the day, fiat money is mostly fairy dust anyway, so it's hard to have a truly intractible problem related to the under- or over-supply of money. Rather, it is the consequences of action taken to adjust the money supply -- like triggering recessions or spawning asset bubbles -- which cause the policy headaches.)

[ASH]

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

they could, as you say ash, reduce liquidity by increasing reserve requirements. but that is essentially a tax on banks, lowering their profits, and just to say it that way is to show it's not about to happen.

I'm being devil's advocate. But I also think it's not quite that simple.

Really high inflation is a tax on the wealthy, and tends to hurt creditors. It also makes it difficult to earn a living by loaning money. I think banks want to make money, and that it is easiest for banks to make money in a boring economy with a low rate of inflation. It will not be in the banks' self-interest to obstruct revision of the reserve fraction rules if things get so far out of hand that the Fed can't regulate things through open market operations.

Also, I don't hold with the "banks control everything" theory of politics. The elites (including bankers) get first crack at policy, and normally get their way so long as J6P has a job and some hope. However, if economic conditions worsen, I think we'll shortly find ourselves in a period of populist politics.

[jiimbergin]

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

Also, I don't hold with the "banks control everything" theory of politics. The elites (including bankers) get first crack at policy, and normally get their way so long as J6P has a job and some hope. However, if economic conditions worsen, I think we'll shortly find ourselves in a period of populist politics.

Ash, I also don't buy the "banks control everything" theory. And I believe you are absolutely correct that we could very easy be in a populist politics period within the next year.
jim

[phanatic]

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

Hi phanatic. I was talking about what the Fed has to do after it gets credit creation going again. Once banks start lending against all the reserves the Fed created, we will get an inflationary explosion unless the Fed can take those extra reserves back off the table. Normally the Fed only buys and sells treasuries, and normally treasuries are easily marketable, but we're talking about the Fed monetizing a big stack of mortgage-backed securities that weren't too spiffy to begin with... and I'm hypothesizing the need to write-off principal and offer lower interest rates on the loans, neither of which will improve the market value of those mortgages. So, the Fed is in danger of creating more reserves by buying these MBS than it will be able to drain from the system by selling them. If that actually turns out to be a problem, and the Fed has less scope to pull reserves out of the banking system than previously, it may be necessary to rewrite the fractional reserve rules to give them more teeth, and reduce the amount of credit which can be extended against reserves.

(Most of us around here don't believe the Fed will be successful in controlling inflation, even if its eye is on the ball, anyway. I was just making the point that there's still a policy tool left, even if the Fed monetizes a bunch of junk that it's later unable to sell. At the end of the day, fiat money is mostly fairy dust anyway, so it's hard to have a truly intractible problem related to the under- or over-supply of money. Rather, it is the consequences of action taken to adjust the money supply -- like triggering recessions or spawning asset bubbles -- which cause the policy headaches.)

Hi Ash, thanks for elaborating. As you know this goes against everything the Fed has done for at least the last fifteen years or so, but I do see how it would be possible to use the reserve ratio as a tool to try and stem inflation. Do you know if there is any history of this being done in the states or elsewhere?

[ThePythonicCow]

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

Hi Ash, thanks for elaborating. As you know this goes against everything the Fed has done for at least the last fifteen years or so, but I do see how it would be possible to use the reserve ratio as a tool to try and stem inflation. Do you know if there is any history of this being done in the states or elsewhere?

India uses the reserve ratio as an important monetary management mechanism. See for example the recent news article TIMELINE-Changes to Indian banks' cash reserve ratio.