In a much-anticipated, widely-applauded policy decision, the Fed announced today that it is shifting its buying from the near end of the yield-curve toward the middle, a move that will hugely benefit bond-investors by increasing the market worth of their holdings. Thank you, Ben. I never wanted to be “middle-class”, and now I don’t have to be. Your policies during your reign have pushed me out of the 60% of Americans whose incomes are falling and into the 40% group whose incomes are rising. While not yet part of the class called the “rich”, my annual income has doubled since 2000, as compared with the 7% decline experienced by the “middle class” (from 2000 to 2010). Median Household Incomes1990, $48,4232000, $53,1642010, $49,445 The 2010 figure is 7% decline compared to 2000, but a 2% overall gain compared with 1990, though just a 0.10% annualized gain when a 20-year look-back is used. But, hey, that’s still a move in the right direction. So be content, all you median incomers. Things could be worse for you. ----------------------------------------- http://money.cnn.com/galleries/2011/news/economy/1109/galler...
29% of the bonds purchased about 130 billion, are going to be from the long-end of the curve, 20-30 years, fyi, fwiw. long-term rates are going down.
To me this is a macroeconomic non event. Who cares if the 30 year home mortgage rates go another 1/2 of 1% lower? If you cannot get people buying homes with long term rates near 4%, then I don't see how 3.5 or 3% will make a big difference.The Fed is fighting the wrong war. They are trying to use interest rates as a way to entice investment. The problem is this recession isn't about low demand perse. This recession is about people being overloaded with historical debt obligations on assets with declining values. When you are a typical American underwater on an existing mortgage, no amount of lowering of mortgage rates will force you to invest in a new home.The only effective way to accelerate resolving this down economic cycle is for the Fed (or Federal government) to come up with programs that help individual homeowners to clear their debts permanently. For example, you could set a floor price on real estate with programs that offer to buy home mortgages for 50% of their 2007 assessed values. Rather than paying for that with debt, simply print money and monetize the purchases. Put those assets onto the government balance sheet for 15 years and make the homes rentals. By carefully controlling the purchase prices you could control how much money flows back into the economy. It's unlikely that this would be inflationary since it would only be fed to a smallish percent of households willing to sell out at steep losses. The program would help fight deflation and should be tuned and sized for that goal.Without arguing the specifics, all that is clear to me is that programs that adjust interest rates are a complete waste of everyone's time. It's the wrong tool for the problem we have here.
For example, you could set a floor price on real estate with programs that offer to buy home mortgages for 50% of their 2007 assessed values. How does this solve the problem? Artificially reinflate housing prices? House prices in many cases are down substantially, but often they're still not priced right. As a buyer, I shouldn't pay too much because the last buyer paid too much.A major stumbling block to moving houses in today's market is that based on the longevity of this downtrun, many of the houses on the market are sufferring from deferred maintenance. With today's lending rules, a HELOC to bring houses up to standards and perform this deferred maintenance is not available.As someone who bought their second home in 2010, I can tell you we passed on numerous houses that were priced right for their existing condition, but which required any type of work. Financing for house renovations is not available over 80% of the appraised value.If the FED were to do anything, possibly guaranteeing or backing mortgage/financing BASED upon "2007 appraised values" would free up capital for new buyers to make purchase/renovate/upgrade scenarios possible or an allowance (say 20%) over a 2008-201? purchase price. Essentially the FED would be saying house prices are "artificially" low and the FED is confident that house prices will return to some arbitrary level and is willing to put their neck out.It's a bit of chicken and the egg in that until the financing is there, many houses are locked in a downward spiral where upkeep is being put off and off and the value of property is headed down.Scott
You miss the point entirely. It's not about reinflating the *asset*. It's about removing the *debt*.Any programs aimed at *new* investors are simply misguided and will have minimal impact on our economy going forward. You need to tackle the overhang of existing debt that is keeping large numbers of US households nailed to the ground. That's what is keeping the economy down.
persistentone,Who eats the loss? If we write down the current loan to current market conditions someone needs to eat that difference. Hypothetically who should eat that loss? The Govt for failure to regulate? The banksters for preying on the ignorant? The borrower for failure to account for rainy days and bubbly markets? If we allow current upside down loans to refi who owns the risk that lies between the market value of the property and the mortgage? If it is a government program then would it be the government? If it is the government's problem what keeps the borrower from walking away? If it is the government's problem why should banks bother to manage their risks? As a tax payer who managed his finances and that is now on the hook for 1.4 trillion of debt used for bailout and stimulus how much more OUGHT I pay for the mistakes of others? What argument compels me to believe it is in my best interest to eat someone else' risks or losses? Re-inflate the asset and it is artificial and unsustainable. Mark down the loan and the loss must be absorbed somewhere. Refi the loan and there is still is not enough collateral to support the loan; the better risk adjusted rate is the higher interest mortgage.The best way out is down the long ugly road that allows the market to set prices and interest rates.jack
The more people you enable to buy homes, the more people are alleviated of their debt. The more realtors, home inspectors, and movers who get a paycheck. If you do it in a way where the buyer can perform renovations, the more hardware store clerks or contractors get a paycheck.To Jack's point, if 50% of 2007 values don't cover the debt, who eats the difference?Scott
The homeowner eats the loss. The government takes a risk asset onto its balance sheet.In my proposal, the government monetizes this expenditure, so debt is NOT transferred from private sector to public.Again, this is not a reinflation of assets. This is an attempt to help clear private debt. There is a huge difference, and understanding that is key to understanding why this economy cannot be cleared by programs to incentivize spending alone.Clearing the current situation by free market alone would be a 10 to 15 year journey much like the great depression, maybe without the 30% unemployment.
The seller eats the difference.But by creating a floor price for assets, supported by monetized government money, you create certainty for all buyers and sellers. Currently most investors don't step up because they see another 20%+ downside in housing prices and want to wait for it. Without buyers, sellers willing to take their loss simply cannot realize the loss and move on.
Is your program also going to provide no-colateral loans to the sellers to bridge the gap from 50% to what they owe? Sellers can't obsorb the losses and banks won't discuss short sales without them being in default. Personal financing to bridge the shortfall, good luck getting the bank to call you back.In your program, what happens to houses that aren't up to code? Aren't rentable? Do you think the government should buy $2m homes? $500k? 200k?There are buyers out there, at least in the Northeast, but the houses on the market are horribly run down. People who have "nice" homes have in many instances decide to sell and the ones that need to sell have let their house hang out there for an extended period of time.Scott
persistentone,I'm not trying to be argumentative only to explain where I have issues with your proposal, which has the support of at least one Yale prof of econ.The homeowner eats the loss.If they can afford to take the loss they already would have. There are buyers if they are willing and able to sell at current market prices. There is no need for an artificial floor. 5 million(adjusted annual rate) or so existing homes sold last month. We can compare that to the beginning of the run up of around 6 million in 2004. Factor in scared underwriters and the proper exclusion of a large number of buyers and it is not as bad as it is made out to be, from a macro view point. Bubbles distort near term perceptions. The prices and sales volume of the bubble years need to be excluded or severely smoothed. If we project a more normal trend through the bubble we see that we are below trend and within natural variation.The housing market is correcting on its own. This is not an over supply of beanie babies that can be unloaded on E-bay or O.Com. They are large ticket items that take a much longer time to find their buyer. The housing market will find a sustainable rate if allowed to do so and it will take time for it to level out. Meanwhile the debt remains which is the primary issue. Households are servicing a high debt load under greater stress. There are two primary choices going forward sell now and eat the loss or service the debt and struggle forward. Social engineering a 'vibrant' housing industry is partly what got us into this mess. Money was too cheap, houses were too many and loan standards were too low. Providing a floor price addresses none of the primary causes of this debacle. The government takes a risk asset onto its balance sheet.And the banks remove a risk that went south that they willingly took onto their balance sheet. And the government is suddenly the largest holder of private real estate in the nation. The very same group that failed in proper over site of the secondary market for mortgages. The very same group that did not enforce underwriting standards. The very same group that is always looking for a feel good quick fix in order to get re-elected. The very same group that cannot pass something as basic to governance as a budget. Clearing the current situation by free market alone would be a 10 to 15 year journey much like the great depression, maybe without the 30% unemployment. By the numbers I'm watching I think we are much closer to the bottom. 4.5 - 6 million annual sales rate for existing homes is a sustainable rate add to that 400,000 + or - 50,000 new homes sales. August's number was 298,000 which is a common sense below trend number. There is approximately a 8.5 month supply of exiting homes and 6 months of new homes. The 8.5 months of supply is down from the prior months 9.5 months supply. The 6 month supply of new homes is encouraging. The further below 6 months that number falls the more housing starts and permit applications we can anticipate. Talking to real estate folks and having recently gone through the buying process the biggest impediment is scared underwriters. Having bought and sold homes over 20 years I have never had to undergo the level of scrutiny we endured for this purchase and our credit history is spotless. We were denied an ARM which we were more than capable of servicing solely because the underwriter would not deviate one iota from some in house policy and how she defined X which had little to do with common sense and reality. A friend received +$5,000 in wedding gifts and his bank wanted to exclude that money because he could not document where it came from. IMHO hyper-vigilance and fear of hyper-vigilance of new and old regulation is the largest impediment to the housing industry. That hyper-vigilance will fade over time. One way to encourage that would be by forcing banks to make their profits on the streets instead of from the Fed. jack
I don't pretend to have answers to the housing situation, but I found the information and ideas in the following articles to be much closer to earth than anything else on the subject that I have read. The author works in the industry.http://www.searchlightcrusade.net/2011/04/the_mortgage_loan_...http://www.searchlightcrusade.net/2011/07/fixing_the_real_es...http://www.searchlightcrusade.net/2011/07/fixing_the_real_es...
I wasn't suggesting that the Federal government save the world, or even the balance sheet of every single citizen. But what is clear is that if you are a homeowner who wants to do a short sale and get rid of a property, even if you can take the loss yourself, there are still no buyers. The market is in an insidious downward cycle, and this makes it impossible for anyone to even take an orderly loss. Investors have cash on the sidelines, but they aren't seeing an end to the decline so the big money isn't buying up available inventory.I think the key to clearing the balance sheets of individuals caught in this trap is to first stabilize market pricing. Then, over time, implement programs that make it easier for sellers to liquidate and take their losses. The market will do all of this on its own over 10 to 15 years, just like it did in the 1930s, just like it might eventually do in Japan. If you don't mind wasting a quarter of a century, let's let the free market work its magic.I agree with you that the government should not buy properties that require heavy service / maintenance.
You make good points. And I rarely advocate government interventions, but this situation is something special that could take a long time to clear on its own.I understand and agree with your concern do we want to have the government become the largest owner of real estate assets. But if those purchases are monetized rather than funded by debt, and if we even stipulate that any rental income received must go to pay back principal on the national debt, these additional government assets would not increase our national indebtedness, but would certainly help to relieve indebtedness of some individuals.There would be risk of inflation, and that aspect would need to be watched closely. You could start the program off in a very minimal way, so as to run the experiment in a controlled fashion and observe effects on a small scale, before in later years gearing up.
Without passing judgement on all of the suggestions in those articles, one thing I will say is we don't need easy credit as a solution to our problems. Easy credit is what caused the problem. Personally I think a 15% downpayment and clear proof of income are both appropriate any time a person is buying a major risk asset. It was completely misguided that the Federal government ever tried to make it a right of poor people to own their own real estate. That was never a riskless transaction for society.
persistenone,But if those purchases are monetized rather than funded by debtI am a bit confused by this concept. Are you suggesting that the Fed print money to buy these underwater mortgages? If so I would suggest that if this was done it be done instead with the bonds currently being held on the Fed balance sheet. If we can twist further out onto the curve then we could twist into asset backed debt. You could start the program off in a very minimal way,No you cannot. Unlike a tweak to welfare programs there is a basic fairness issue that cannot be addressed with a small roll out. Who gets first shot, the South East, Florida, the North East, California? If the 'wrong' choice is made this can quickly morph into an issue of race or another salvo in the class warfare argument from either side of the argument. Because this would be highly political in its details they Fed ought not to be involved. You really do not want to get into the business of renting these houses if the plan is to sell them. Houses with renters are a pain to sell. There is always the contingency that the renters be given x days in order to move out. Month to month renters have little emotional ownership in the place they are living; why would they if they could be somewhere else next month?The underlying question/problem you addressed in a different post; What should be our national policy relating to the housing and real estate markets? My largest concern is that this question has no clear answer. Without answering that question any program that is devised, emergency or long term, is stab in the dark or attempts to set a course. If it is an attempt to set the policy course and it does not have enough political backing then it is prone to whipsawing which further acerbates the problem. The Obama team used the stimulus money to attempt to set a course for some of their policy initiatives but they only had near term stimulus support and now sustaining those programs has run into other political resistance. As I stated prior I believe around 5 million existing homes and 400,000 new homes sold annually is likely to be sustainable. Some economist peg those numbers much higher in the +6 million +700,000 range. Who is mostly right? If we do not answer that question then we do not know where we are going. If we do not know where we are going we are not going to go anywhere useful. Answering that question also has significant ramifications on GDP growth and anticipated growth. Target the higher number and you are stating a belief that real estate, new and old, should be a higher percentage of GDP than if we choose the lower number. "We have got to fix the housing market?" is the populace question of the day. I am asking "To what end?" If we cannot answer the second part we are better off letting the market work things out even if it takes your estimate of 10+ years. I would love to see more construction workers back to work as long as it is the right number of construction workers. The previous number was inflated any attempt to re-employ that many construction workers within the industry again is misguided. I know it is callus but I have little sympathy for the debt burdened. They choose to take on that debt. The fact that the underlying asset has changed value underneath them does not change the fact that they chose to buy that house for that price. The argument that they do not have as much discretionary income because of the upside down mortgage as before is false. The house payment has not changed. If they were leveraging the house to buy stuff that was their choice and it was built on a thin, unsustainable premiss. If income has changed within the household it has nothing to do with their mortgage or the house's market value. We over built. We overspent often using inflated equity values of homes. Many planned poorly. I don't see where a do-over benefits us in the long run. One program I would get on board for would be a public/private partnership for relocation. If someone has a job offer in hand and they are in an upside down mortgage providing some government assistance in partnership with the employer makes sense to me. Employers will often offer relocation as part of an incentive package to hire the right employee but under current conditions few are willing to eat the difference between loan value and market value. The employee cannot afford to take the loss and thus must pass on the job. I suspect tens of thousands may be stuck in this situation. If they can take the new better job their standard of living improves. If they can take the new job it leaves their old job vacant for the next up and comer who is likely to also improve their standard of living. People are more important to the economic engine then property. Get the right people in the right places and the economy starts lumbering in a more positive direction. jack
I know there's always a lot of discussion about bad loans to individual homeowners, and I am certainly in agreement that the notion of an "ownership society" leading to low downpayment and lack of steady-income requirements in government-backed loans, as well as the non-existent credit standards of the make-a-buck private lenders and the packaging of bad home loans, etc. created a disaster for which no one has a viable solution—I think the consequences of doing nothing to stabilize the housing market are probably worse than doing something, but attempts to do something have so far proven ineffective. Obviously low lending standards are not the solution,although there ought to be some flexibility as to standards—when we bought our house, when rules were strict, we did not yet have the savings for a downpayment (my in-laws chipped in) but clearly were on an income path that we could easily have paid the mortgage with 5% down instead of 10%.What has not been sufficiently discussed is bad loans to developers. In my investigations to try to prevent our city officials from leading us to ruin (we think the tide has turned, but not out of the woods yet), I have been amazed, cynical as I was, at just how bad the loans were. Mega loans to a poorly-capitalized developer with a poor credit risk profile who had never developed anything of consequence(one bank, which was one that ended in a forced merger with collapsed stock price because of bad commercial loans, lost about $80 million on this one developer alone). As folks here helped me understand, this developer (and I assume many like him) operated what amounted to a Ponzi scheme: soliciting capital for new developments to pay the bills on earlier developments (not to mention huge executive compensation) then, when no new capital came available when the bubble burst (what we are trying to prevent with our boondoggle) he simply walked away from limited liability companies leaving lenders with losses totaling something like $200 million. There were no restrictions in place. Full mortgage amounts were given for future (i.e., completed development) collateral. Bankers got their bonuses (who needs kickbacks?) and were never punished. Taxpayers bailed out the banks.
"""It was completely misguided that the Federal government ever tried to make it a right of poor people to own their own real estate""" Been busy, so I haven't been following the board. But what level of net worth do you classify as "poor" ?? I would argue that a lot of people involved in forclosures are not "poor"....not by my standards anyways.
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