Archive for August, 2010
Five state real estate associations along the Gulf Coast will receive a total of $60m from BP for damages related to the Deepwater Horizon oil spill.
The states to receive the funds are Louisiana, Florida, Alabama, Mississippi and Texas. Representatives from these five associations have been negotiating with Kenneth Feinberg, administrator of the new Gulf Coast Claims Facility (GCCF) handling the BP oil spill fund.
Steve Randy Waldman at Interfluidity writes about a discussion last week with several bloggers and Treasury officials.
A few excerpts:
Obviously the headline act was Timothy Geithner. Off the record (or “on deep background”), Geithner is entirely different from the sometimes stiff character who appears on television. He is fun to argue with, very smart, good natured, and intellectually wily. As Yves Smith quipped afterwards, Geithner “gives good meeting.”
Despite that, our seminar was an adversarial affair.
The question of what to do about Fannie Mae and Freddie Mac — the two government-created enterprises that have backed massive loans to the housing market — involves much more than finance or real estate. It marks the end of an era. The relentless promotion of homeownership as the embodiment of the American dream has outlived its usefulness.
Historically, the pursuit of homeownership dates to the Great Depression of the 1930s, notes historian A. Scott Henderson of Furman University. In some ways, it's a great success story. In 1940, 44 percent of households owned a home; by 1985, the rate was 64 percent. The size and quality of homes have increased dramatically. Owning a home contributes to neighborhood stability and encourages property improvement.
It took just one sentence in the 2,300-page financial reform law to end federal preemption for mortgage lenders that operate as subsidiaries of national banks…
For more than 20 years, the mantra in Washington has been "more, not less" when it comes to Fannie Mae, Freddie Mac and the expansion of homeownership.
But in light of the financial crisis and Fannie and Freddie's near-collapse, policy leaders are also rethinking the government's role — and many Americans are starting to question whether homeownership is the only path to the American Dream.
New data suggests that mortgage fraud—which got tougher to pull off after the collapse of the U.S. real estate market—is returning in a big way.
Data prepared for The Wall Street Journal by research firm CoreLogic, examining about seven million home loans made by hundreds of lenders, show that losses from mortgage fraud—ranging from falsified credit reports to identity theft—rose 17% last year after declining 57% in the two years after its 2006 peak.
When Linda Falcão applied for a mortgage from Wells Fargo, she didn’t realize she would be required to write the type of essay that’s more commonly included with a college application.
So she and her husband, Kemuel Ronis, were taken by surprise when Wells Fargo asked the couple, both 50, to pen a “motivational letter” explaining why they were moving. What they found even more shocking, however, were some of the themes that Wells required them to include in their statement, specifically, their plans regarding an “increase/decrease in family” or property size.
Home prices have fallen 34% from their peak in the middle of 2006, according to Standard & Poor's HPI data — but is that enough? Or is there further to go? How much further could we fall?
It's worth noting that the question of what happens next with home prices isn't merely an academic exercise. With CoreLogic estimating that more than 11.2 million U.S. borrowers were underwater on their mortgages at the end of the first quarter, the direction of U.S. home price trends over the next few years will have a direct impact on bank and related financial balance sheets the world over.
With that in mind, take a look at chart 1, below. It shows data from the Standard & Poor's/Case-Shiller monthly housing price index, using the 10-city index (unadjusted) from July 2006 until today.
You can see the downward leg in housing prices, followed by an apparent stabilization starting in April of last year. This chart largely captures the frame of reference used by most in the financial press. And if this is your window frame, you'd think housing has stabilized as of late — which is precisely what much of the current administration and the financial press has been suggesting.
But there's a problem here. The frame is too narrow to give proper context. So let's take the frame all the way out to 1987, and see what we get (in chart 2, below).
The world here starts to look very different, indeed, and shows a run-up in housing prices that began in mid to late-1997, and ran all the way through the middle of 2006 — which is, of course, precisely what took place. Between 1997 and 2006, U.S. home prices averaged growth of 11.35% annually.
The same chart also shows that for the decade prior to 1997, housing gains were typically far more modest — an average of 2.4% per year, in fact, using the same S&P data. And the so-called housing recovery that looked so great earlier? From this vantage point, it appears more like what it really is: a ledge.
Home prices could continue to float along sideways for years from this point, as some of my colleagues have suggested earlier. But I tend to think we have another 8-10% to fall. Here's why.
Across the entire S&P/Case-Shiller dataset, more than 23 years worth of data, average home price appreciation is 4.5% per year–and that average includes the gonzo 1997-2006 years, which effectively skew the long-term trend upward.
Nonetheless, if you apply the generous 4.5% trend across the data you find that home prices still sit well above what the trend would project. For example, applying 4.5% trend growth starting in 1999 (when the growth rate began to transition towards parabolic) suggests that current home price levels through May 2010 are still 8.5% above where they would otherwise be expected to be. Apply it all the way back to 1997, and home prices are still 4.3% too rich versus the trend.
I get the feeling that few truly understand that despite the severe crash in home prices observed thus far, we yet remain above the long-term trend. That's how severe the price bubble really was.
We could realistically have further than 8% to fall, as well. Apply a more realistic trend value of 3.5% per year (countering the disproportionate effects of the boom years), for example, and U.S. home prices could be considered 15.6% to nearly 19% too rich.
CoreLogic's negative equity report estimates that roughly 2.4 million households were nearly underwater by the end of the first quarter (defined as within 5% of being in a negative equity position). Even if home prices simply revert to a 4.5% growth trend dating back to 1997, most of these households would join the ranks of the underwater.
While it's been discussed very little thus far — because, let's face it, how gloomy do we really want things after being beat sideways for three years now? — there is even some possibility that housing prices could over correct and head below the trend, thanks to the effect of stimulus demand hangover and a burgeoning supply of distressed real estate still waiting to enter the re-sale market. In other words, U.S. housing could be setting itself up to get really cheap (and at that point, you'll see me transform into a huge housing bull, BTW).
Through the end of July, 2.6 million mortgage loans were 90+ days delinquent and not yet in foreclosure, according to Lender Processing Services; do you honestly believe that these problem loans and the houses tied to them are simply going to go away without affecting the overall market? Of course not.
Right now, housing isn't particularly demand driven; it's supply driven. And as I wrote in March, right now we face a supply problem of epic proportion. It's a problem we have yet to address, and home prices eventually must reflect that.
Paul Jackson is the editor of HousingWire Magazine and HousingWire.com. Follow him on Twitter: @pjackson
[Update 1: Clarifies time frame of job losses.]
As several investment banks with operations on and around Wall Street quietly reduce staff as business shrinks, job losses in the financial services are not isolated to New York, as surrounding states are reporting a reduction in this industry's workforce.
The Federal Reserve Bank of Philadelphia reported Monday that Pennsylvania lost 7,000 nonfarm payroll jobs during the month. Jobs within the financial-activities sector are down 2.5% for the 12-month period, representing the largest loss of any sector in the Keystone State.
New Jersey lost 21,200 jobs in July, according to the latest data from the Bureau of Labor Statistics. For the trailing 12 months, employment in the financial sector in the Garden State is down 2.1%.
The Philly Fed said Pennsylvania posted a slight, 0.3% gain in its overall employment during the month and the state’s unemployment figure is now 9.3%.
July was the third consecutive month the state added jobs, but New Jersey hasn’t seen any monthly employment gains since the recession began. The Garden State’s July unemployment fell another 0.9% and the overall unemployment figure is now 9.7%, which is higher than the national rate of 9.5%.
Delaware, the other state included in the Fed’s third district, reported an increase of 0.9% in the number of new jobs added in July, including a minimal, 0.2% decrease in the financial sector. Delaware’s current unemployment rate stands at 8.4%, according to the Fed.
Last month, Wells Fargo announced 3,800 job cuts by the end of the year. Weekend reports in The New York Times and Wall Street Journal are speculating that banks such as Barclays Capital and Credit Suisse are also considering job cuts.
Write to Jason Philyaw.
