The Ownership Society

[don]

A mortuary of 7,000,000 foreclosures and counting: Nation still faces 9.1 million properties that are seriously underwater.

If a foreclosure happens in the wilderness, does it make a sound? It seems like people have conveniently forgotten that since the housing crisis hit we have witnessed more than 7,000,000+ foreclosures. Do you think these people believe the Fed is almighty and can stop a speeding train or turn water into wine?

Apparently some people forget that the Fed failed to prevent the tech bust or the housing bust in the first place. Now, the Fed is somehow the cult leader and the leader will not let housing values fall. The nation still has 9.1 million seriously underwater homeowners on top of the more 7 million that have gone through foreclosure. It is abundantly clear that the mindless drivel of “buying is always a good decision” is just that. Investors are starting to pull back in expensive states because value is harder to find. I see the lemmings at open houses and you can see the drool at the side of their mouths hoping for a morsel of real estate. The Fed, for better or worse, has turned us all into speculators. Simply putting your money in a bank is a losing battle because inflation is eroding your buying power. Yet wages are not keeping up. What you have is people competing with investors, foreign money, and a market with low inventory and trying to guess the next move from the Fed. Yet the tech bust and housing crash (keep in mind these happened only since 2000) were major events not prevented by the Fed.

Does buying today make sense?The big question for many is whether buying today makes sense. Hopefully the 7 million foreclosures within the last decade highlights that housing isn’t always a simple buying decision. Investors have been dominant in the market since 2009. Big money is clearly pulling back from inflated markets like those in California. This trend is fairly new but even with this minor twist, inventory is picking up and sales are still very low.It helps to understand that many foreclosures are happening because people are spread thin. People are still maxed out. Unlike big banks with sophisticated deals and systems in place, most households are living paycheck to paycheck even those with higher incomes. First, take a look at some foreclosure history:




Print this chart out and just remember that housing is a big freaking purchase. Probably the biggest you will ever make. Just because someone is house horny doesn’t mean they should act on it. What fascinates me is that late in 2012, most of those in the housing industry failed to see the big run-up in prices for 2013. Most were predicting 2 to 5 percent price gains. Instead, we saw double-digit gains. At the end of 2013, the predictions were incredibly optimistic for 2014.If the trend is so obvious and clear, why do we see low volume in housing sales?




Existing home sales are down more than 35 percent from their peak reached in 2006. Our population is growing and prices are going up. Yet the push for higher prices has come from Wall Street, low rates, and normal buyers competing with the investor group. A big question that many are wondering is what will happen when big money starts to flow out of real estate. We are starting to find out slowly. Rates are also likely to go up – so for those that believe the almighty Fed can do anything they should listen to their leader that is utterly telling the market rates will go in one direction.What we don’t have to guess on is that this recent trend has made it tougher for first time buyers:



First-time home buyers are a small portion of the market today because of investors crowding them out. We also have a large number of young ones living in the basement of their parent’s granite countertop sarcophagus.Still underwaterDespite the recent rise in home prices we still have 9.1 million home owners seriously underwater. What this tells us is that many people pushed their budgets to the financial limits merely to squeeze in. If this were truly a solid housing uptrend we would be seeing home builders doing what they do, building homes. We would also see existing home sales kicking butt. Yet we have a juiced up system with countless forms of accounting shenanigans. Some try to make it out as if economics and finance are somehow a new science. Unlike Newtonian physics on Earth, the Fed can act like a deus ex machina and literally change the rules for a brief period of time. And people are emotional and the reptilian part of our brain goes haywire when you talk about the “nest” – you need only go to an open house to see the house horny folks battle it out.We’ve been adding many more rental households over the last few years, just in line with the big investor buying (those 7 million foreclosures have to move somewhere but foreclosures are also slowing down):



What is telling about this chart is that we have never had a sustained period of actually losing home owner households since, well this last crisis. Why? Take a look at the graveyard of 7,000,000 foreclosures. The Fed has turned the housing market into a speculative vehicle and with this volume of investor buying, you should proceed with the caution of buying a stock. This is another critical point here in regards to perceived risk. You have people staying miles away from stocks (which are up 170+ percent since 2009) yet are more than willing to stuff their entire $100,000 or $200,000 down payment into a highly priced piece of property that just went up by double-digits courtesy of investor fever. Yet they feel this is safer! California was a big chunk of the 7,000,000 foreclosures folks. You have people with pathetic 401ks and retirement funds yet 80 to 90 percent of their wealth tied up in one piece of real estate.7 million foreclosures and currently 9.1 million seriously underwater home owners. It should be apparent that when it comes to buying a house, you really need to run the numbers. Investors have and they are pulling back from certain markets.

[Slimprofits]

Re: The Ownership Society

In August 2006 I moved out of this apartment. Three friends and I rented it for a couple of years and our last lease was for a total of $1800.00/ month. Today, almost 8 years later, it's on the market for $4800.00/month. ---- http://boston.craigslist.org/gbs/nfb/4393406244.html Judging by what can be seen in the photos, there haven't been a lot of changes to structure or the interior.

[don]

Re: The Ownership Society

There's a reverse snowbird for rent here. Up until recently rents were in the $1500 range in season, with a summer discount if they could rent them at all. They're asking $2500 for this one, from May to September. Call it the sauna special. Good luck.

[ProdigyofZen]

Re: The Ownership Society

The question is where are these foreclosures? I bet most are now in the economically depressed regions of the US as the country continues to create a dichotomy between regions.

The TX, LA, AL gulf coast corridor is booming as well as most of Houston, Dallas, Austin etc along with the typical places of NYC, SF etc.

In these areas rents are high but in the more economically depressed areas (some midwest, Ohio/PA/WV, some southern states etc) rents are also high because these areas were historically higher costs than the newer southwest and south of the US.

I believe what helps individuals in the TX area is decent jobs and the ability to spend 70% of your disposable income (the other 30% is on debt payments) on food/going out/rent with no savings left after the month.

Dallas 30,000 millionaires

There are even comedies about it....

[vt]

Re: The Ownership Society

85 million baby boomers trying to sell to 65 million of the next generation, some of who are living with parents or don't have jobs.

[lektrode]

Re: The Ownership Society

with 'service economy' jobs...

[lektrode]

Re: The Ownership Society

or IF they have 'service economy' jobs...

or maybe those .gov 'stimulated' occupations such as
social 'scientist' and political 'science' degreed jobs - coupled to 10's of 1000's of DEBT-financed
'educations'

[ProdigyofZen]

Re: The Ownership Society

Yes but if you have a good education (Harvard, Yale etc) it is extremely easy to get a high paying job. A friend just switched from McKinsey Consulting to Google's Marketing Strategy team in the blink of an eye.

But most consultants are in high demand.....

[Fiat Currency]

Re: The Ownership Society

85 million baby boomers trying to sell to 65 million of the next generation, some of who are living with parents or don't have jobs.

I personally don't think that's even a factor for the following reasons ...

- There are many elderly baby boomers also living with their children
- There are many baby boomers (widows etc) who have pooled resources & are house sharing
- Between Gen X and Millennials of house buying age (which grows every day) there are more than enough people to buy all those houses

Screen Shot 2014-04-21 at Mon21 7.43PM.jpg

[don]

Re: The Ownership Society

nice, albeit incomplete, RE overview . . .

So far we have experienced 7 million foreclosures. Beyond that there are still 9 million homeowners seriously underwater on their mortgages and there are millions more who are stranded in place because they don’t have enough positive equity to cover transactions costs and more stringent down payment requirements.

And that’s before the next down-turn in housing prices - a development which will show-up any day. In fact, another downward plunge is a positive certainty now that the buy-to-rent LBO speculators are rapidly pulling out of those “flash” bull markets in Arizona, California, Los Vegas, Florida and elsewhere. The latter were merely short-lived price eruptions which were an artifact of the Fed’s free money policies.

Yet even as Wall Street heads out of Dodge City the normal wave of organic buyers is nowhere to be seen. That’s because the inexorable normalization of interest rates is already beginning to drive housing affordability even further south among the diminishing cohort of buy-to-occupy households with sufficient income to meet today’s financing standards.

Among the latter, incomes are stagnant in real terms and have been so for a decade. In the absence of real income gains, therefore, the “affordable” price of housing is essentially an inverse function of the cost of leveraged carry. As the latter goes up, the former goes down.

In short, the socio-economic mayhem implicit in the graph below is not the end of the line or a one-time nightmare that has subsided and is now working its way out of the system as the Kool-Aid drinkers would have you believe based on the “incoming data” conveyed in the chart. Instead, the serial bubble makers in the Eccles Building have already laid the ground-work for the next up-welling of busted mortgages, home foreclosures and the related wave of disposed families and social distress.



Yet none of this carnage was inexorable or necessary. In fact, a housing bubble of the fantastic magnitude that unfolded during the Greenspan era could not occur on the free market. The 3X gain in housing prices between 1994 and 2007 was entirely an artifact of the massive outpouring of cheap mortgage debt that occurred during that period. The latter, in turn, is a consequence of the Fed’s financial repression policies—–maneuvers that disable and paralyze market interest rates and thereby enable runaway speculations fueled by virtually unlimited cheap debt.


Case Shiller Index – Click to enlarge

Oddly enough, even the baby-steps toward normalization of interest rates recently taken by the Fed make it easy to benchmark the monumental scale of the mortgage bubble ignited by the Maestro’s abject capitulation to Wall Street after the Bush Republicans gained the White House in December 2000. On an all-in basis, Greenspan’s reckless money printing increased mortgage volumes by up to 5X what would have prevailed in an honest free market.

As I laid out in chapter 20 of the Great Deformation (“How The Fed Brought The Gambling Mania To America’s Neighborhoods”), during the 30 months after the Fed’s first bubble splattered—the dotcom crash—-Greenspan foolishly cut money market interest rates over and over until the 6.5% cost of money on Christmas eve 2000 had been reduced to 1% by June 2003. Never before in the Fed’s 100-year history had rates been reduced by 85% in such a short interval with such reckless abandon.

Not surprisingly, variable rate mortgage issuance exploded because teaser interest rates plummeted to lower levels than even during the Great Depression. Whereas mortgage issuance had rarely topped $1 trillion in earlier years, the run rate of issuance topped $5 trillion during the second quarter of 2003.

Such a massive explosion of ultra-cheap mortgage debt was guaranteed to elicit a frenzy of speculation in residential housing. Indeed, as is evident in the chart above during the roughly 60 months after Greenspan’s panicky rate reductions incepted, the national housing price index doubled.

The great Fed Chairman of yester-year like William McChesney Martin and Paul Volcker would have been appalled by such an outbreak of speculation and would not have hesitated to pick up the punchbowl and march straight out of the party. That’s what Martin did in August 1958 when he suspected too much speculation on Wall Street only six months after a business recovery had started.

But Greenspan had by then been coroneted as the Maestro and proceeded to prove exactly why monetary central planning is such a dangerous doctrine. When it became evident that large amounts of this massive outpouring of mortgage debt were being used as “cash-out” financing and applied to current spending on new carpets, autos and Caribbean cruises, Greenspan pronounced this destructive raid by mortgage borrowers on their own home equity nest-eggs as a fabulous new advance in financial innovation called “mortgage equity withdrawal”. It would even outdo Keynes: the people, not their government, would imbibe the magic elixir of more debt, and thereby generate more spending, income and economic growth.

In truth, America’s baby-boom generation was robbing its own future retirement years, but the Maestro was oblivious. Instead, he was busy tracking the quarterly rate of MEW (“mortgage equity withdrawal”) and crowing about how it was contributing to unprecedented prosperity on Main Street. It ended up in a conflagration of exploitive lending, fraud, default and trillions of financial losses, of course, but not until $5 trillion of cumulative MEW during the decade through 2007 had ruined the financial well-being of America’s middle class for a generation to come.

Under a regime of free market interest rates $5 trillion of MEW—that is, robbing from the future to party today—could not have happened. Long before the 2003-2006 blow-off top, mortgage interest rates would have soared to double digit levels, causing monthly debt service requirements to double or triple. Moreover, in an environment of market-set interest rates there would have been no Greenspan Put or ultra cheap wholesale financing that enabled Wall Street to fund mortgage boiler shops with warehouse credit lines and buyers of its toxic securitization products with cheap repo.

In short, free market interest rates are the vital check and balance mechanism which prevents runaway spirals of debt issuance and frenzied bidding-up of asset prices. Yet it was Greenspan’s “wealth effects” doctrine that destroyed the mechanism of honest price discovery once and for all. The carnage that has ensued in the nation’s credit and housing markets, therefore, is on you, Alan Greenspan.

The outcome of the Bernanke money printing spree of 2008-2013 provides even further evidence of Greenspan’s original culpability. During that five-year period, the Fed drove the 30-year mortgage rate from 6.5% to a low of 3.3%, thereby trigging a renewed wave of “refi madness” as shown below:



Since the spring of 2013 when the Fed signaled that its massive bond purchases would enter the “taper”, however, the mortgage rate has rebounded to about 4.5%. Accordingly, about 35% of the Bernanke repression has already been retraced and even that modest start toward interest rate normalization has had dramatic impacts on mortgage volumes.

The mortgage refi machine is now virtually shutdown, meaning that the run rate of mainly purchase money mortgage originations has plummeted to about a $1 trillion per year. So the math is pretty basic: During much of the Greenspan housing bubble the mortgage origination rate was $3-4 trillion annually—a level dramatically above what is being generated right now in a market that has taken only a baby step toward normalization.

Needless to say, it was this massive and artificial excess of mortgage financing that created the original Greenspan housing bubble; that induced his successor to try to overcome the carnage of the bust with a new round of refi madness; and that has now left the nation’s residential housing market high and dry for the fourth time since 1990.

As shown below, this short-term flash boom in housing prices induced by Bernanke’s money printing spree has driven first time buyers out of the market. And now more and more “trade-up” buyers will be forced out too— as they face steadily higher interest rates on new purchase mortgages and therefore progressively lower levels of home price affordability:


So the housing market is on the eve of another trip through the grinder of falling prices, rising defaults and spreading socio-economic distress on Main Street. Yet because the Fed gets away with ludicrous excuses about the mayhem it causes—such as Greenspan’s pathetic claim that the housing bubble was caused by the propensity of ex-rural serfs in China to save too much when they moved into the factory cities— the debilitating cycle of bubble finance goes on.

As this recent Wall Street Journal story so starkly conveys—policy makers and lenders are so desperate to restart a new round of phony housing finance that the 3% down mortgage is already back, and 10,000 pages of Dodd-Frank regulations have done nothing so stop it:

One such lender is TD Bank, Toronto Dominion’s U.S. unit, which on Friday began accepting down payments as low as 3% through an initiative called “Right Step,” geared toward first-time buyers and low- and moderate-income buyers.

Excess savings by Chinese factory girls, indeed!

David Stockman

[Slimprofits]

Re: The Ownership Society

One-bedroom housing wages, by county ---- http://www.washingtonpost.com/wp-srv...ges/index.html

[mmr]

Re: The Ownership Society

Florida, certain rust belt states (IL / IN / OH), and parts of the northeast are experiencing relatively higher foreclosure rates.

http://www.realtytrac.com/content/fo...et-report-7997

In addition to economic conditions and home prices, one of the other key factors is the length of time required for a bank to complete the foreclosure process, which can vary widely by state.

In some states, it's possible to foreclose on a house within a year after the borrower stops payments. Other states require foreclosures to go through a judicial process that can delay the completion of foreclosures for 3-4 years. In NY or NJ, foreclosures in 2014 are likely related to borrowers who defaulted as long ago as 2010 or 2011.

[Fox]

Re: The Ownership Society



Ya know what strikes me about this picture is that foreclosure starts haven't once dropped below foreclosure completions. The backlog of foreclosures must be getting astronomical. Here are some not so academic questions:

How many months are people getting to stay in there homes without paying the mortgages now?
What do banks list on their balance sheet for these limbo mortgages?
With these limbo houses, and foreclosed houses the banks are holding off the market, how big is the Shadow inventory getting?
The next leg down is starting now, how bad is this really going to get?

Seriously though, beneath the surface, things are really bad in this "recovery" and now we're going to crash from here??
Damn, look out below.

[goodrich4bk]

Re: The Ownership Society

I can tell you what I know from my own experience as a bankruptcy attorney. Banks are foreclosing first on loans that are either above water or only slightly underwater. They are using sophisticated databanks and computer programs to triage their portfolio of zombie loan so that they aggressively pursue foreclosure only once the property is close to or above water. If you are very much underwater, they will record a Notice of Default but never a Notice of Sale unless you abandon the house. They use the Notice of Default to scare the homeowner into making short term payments, but rarely will they modify a mortgage so that the homeowner has any chance of recovering any equity.

The idea that there are enough Millennials to buy the Boomers' homes neglects to factor in forced sales upon retirement. Many boomers have no retirement plan other than Social Security, yet their mortgages, often refinanced within the past ten years to pay for their children's college tuition, will require the same or higher payments regardless of their lack of income. This is the nightmare many of my clients are facing: certainty that they will be forced to sell as soon as they retire, yet with no prospect of getting any sales proceeds to put down on the purchase of a retirement home.

So rather than Millennials buying from the Boomers and the Boomers buying another home (which would effectively turn a single sale into aggregate demand for two homes), we are probably going to see many of these Boomers move to apartments, granny flats or trailer parks. I have found no data quantifying this effect, but from my personal experience this is going to be a significant headwind to further price appreciation.

[EJ]

Re: The Ownership Society

[QUOTE=goodrich4bk;280426]I can tell you what I know from my own experience as a bankruptcy attorney. Banks are foreclosing first on loans that are either above water or only slightly underwater. They are using sophisticated databanks and computer programs to triage their portfolio of zombie loan so that they aggressively pursue foreclosure only once the property is close to or above water. If you are very much underwater, they will record a Notice of Default but never a Notice of Sale unless you abandon the house. They use the Notice of Default to scare the homeowner into making short term payments, but rarely will they modify a mortgage so that the homeowner has any chance of recovering any equity.

The idea that there are enough Millennials to buy the Boomers' homes neglects to factor in forced sales upon retirement. Many boomers have no retirement plan other than Social Security, yet their mortgages, often refinanced within the past ten years to pay for their children's college tuition, will require the same or higher payments regardless of their lack of income. This is the nightmare many of my clients are facing: certainty that they will be forced to sell as soon as they retire, yet with no prospect of getting any sales proceeds to put down on the purchase of a retirement home.

So rather than Millennials buying from the Boomers and the Boomers buying another home (which would effectively turn a single sale into aggregate demand for two homes), we are probably going to see many of these Boomers move to apartments, granny flats or trailer parks. I have found no data quantifying this effect, but from my personal experience this is going to be a significant headwind to further price appreciation.[/QUOTE}

A long time trusted contact answers this in response to my question to him re:

Mortgage lending slows to a 14-year low
What with higher interest rates and fewer home sales nationwide, just $235 billion in home loans are started in this year's first quarter.

He replies:

My California data hasn’t been this weak since 1994 when Greenspan took a stick to the economy.

Except for stellar FICOs, I know credit is very tight and discourages some. A lot of cash sales. I haven’t researched know how much of that is because of the baby boomers retiring.

Overall market weak with relatively low inventory. Also there are still a lot of underwater houses out there. I saw the figure 9 million recently from 12 million peak. Zillow CEO said about a third of all homeowners were still impaired. He was on CNBC yesterday.

The issue has many facets but probably a big soft factor is that homes have gone from assumed quick growth to long term value proposition, so implied rent is now the concern as opposed to the flip which can hide a lot of financial stretching. No animal spirits. A real shame.

Have great weekend.