The Back Alley Archives

Why the surge in home sales is bad news[/size]
Yes, a few bargain hunters have stepped up and put a dent in the housing glut. But the slow cycle of foreclosure sales and falling prices will continue to wreak havoc as it works its way through the economy.


By Mark Gimein, The Big Money
For the first time in a year, the housing market is stirring. Sales that had come to a halt are revving up with the benefit of what look like fire-sale prices.

In Southern California in September, the number of homes sold jumped by close to two-thirds from a year earlier; in the Great Foreclosure Belt around Los Angeles, places like San Bernardino and Riverside counties, the jump was even bigger, with houses selling at twice the pace of a year ago.

At another time this would be welcomed as good news: Buyers are back! Except that it's clear that this wave is driven by lenders trying to get anything they can get right now for the many thousands of houses they've foreclosed on, because as bad the housing market looks now, it'll get even worse.

When I wrote about housing six months ago, I pointed out some of the houses on the market at asking prices 30% or 40% off what they'd sold at just a year or so earlier. The response was disbelief. Did I select my examples at random, one reader snidely asked, or did I cherry-pick to get the most dramatic numbers?

Well, I didn't cherry-pick, and now you won't find anyone doubting that drops of this scale are par for the course.

Unfortunately, we have a lot further to go.

The Case/Shiller price index, a measure of home prices going back to 1987, shows California home prices still at about twice where they were at the peak of the last big housing cycle back in 1990. So just to get back to the top of the last peak, prices would have to drop another 50%.

Interest rates at that time were substantially higher, in the range of 10%. If you take that into account and look not at sales prices but at the cost of paying mortgages, we're still in for a drop of an additional 30%.

That's if prices don't fall below the last peak and interest rates stay at 6.5% or less. In other words, it's a best-case scenario.

These numbers are so dire that they might sound like scare-mongering, except that if you look through the recent sales listings at any number of online sites, you won't have to search very hard to find price drops right along the lines of these numbers.

This house in Riverside, Calif., for instance, was bought for $586,000 in 2006, foreclosed on in November 2007 and sold again this summer for $147,000 -- just 25% of what it sold for two years ago. And here's another heart-stopping fact: Even that vastly diminished sales price was financed, according to real estate records, with a 100% mortgage. Good luck getting one of those now.

What this means for homeowners is that if you happened to buy at the peak of the boom, your house is unlikely, in inflation-adjusted terms, to get back to the price you paid for it for another decade at best, if ever.

You may think that this goes just for the most inflated markets like the real estate speculation capitals of California and Florida, but that's not true. Look at the historical numbers, and you'll see that just about any coastal market is still priced 75% higher than it was in 2000.

And even markets like Charlotte, N.C., and Cleveland have real-estate prices twice (and sometimes three times) where they stood at the end of the late '80s boom.

The bottom line is that incomes just haven't risen enough to support this kind of increase.

Just a few days ago, Alan Greenspan, the pope of the economic boom, confessed that he had no idea that home prices would crash the way they have because, well, it had never happened before.

Clearly, we're past the point now at which anybody believes that.

But the prevailing wisdom remains that if you hold on to your house for a long time, eventually you'll do fine. Don't count on that.

Yes, markets come back, but a bubble is an irrational rise in prices, and once the balloon is pricked, it doesn't magically inflate again. For a cautionary lesson, look to Nasdaq, the stock market on which most technology companies were listed at the height of the Internet and tech boom. Even before the market crash of the last weeks, Nasdaq hadn't come anywhere close to getting back to its March 2000 top.

The consequence for anybody who owns a home is that the reigning turn-of-the-millennium assumption that you could count on your house not only maintaining its value but providing a nice cushion that you could cash out for a comfortable retirement is no longer in effect.

Over the long run, this will have some good effects, as folks start actually saving money and as we see our catastrophically low savings rate go up to a more realistic level.

But over the short run, it'll have terrible effects as the cycle of foreclosure sales and falling prices works its way through the system.

Some policymakers have worried that a bailout of homeowners could encourage people who can afford their mortgages to go into foreclosure and take advantage of generous bailout terms. They can stop worrying: Homeowners already have incentives to walk away from their upside-down mortgages a lot bigger than any bailout would give them.

The only consolation here if you're watching your house plummet in value is that this will hurt the world's banks even worse than it hurts you. This has been the year of the butterfly -- you know, the one that flaps its wings in Brazil and causes a hailstorm five months later in Guangzhou, China. For many years, it was vaguely assumed that we were all connected in some ineffable way. Well, we now know pretty well what glue was connecting us: the U.S. real estate market.

Every time a borrower defaults on a condo in Miami, a bank in Switzerland or an investment fund in Norway takes a hit. Every time a bank writes off another few billion dollars in bad debts, analysts cross their fingers and mutter "maybe this time it's the last." As long as the padlocks are on the doors and fire-sale prices are in the yards in places like Riverside, it won't be

Officials with the Treasury and the Federal Deposit Insurance Corp. are crafting a plan under which the government would guarantee the mortgages of as many as 3 million homeowners now struggling to avoid foreclosure, according to three sources familiar with the discussions.

Under the program being discussed, the lender would agree to reduce borrowers’ monthly payments, for example by lowering the interest rate or principal of a mortgage loan, based on the homeowner’s ability to pay. These reconfigured loans could help homeowners avert foreclosure.

To attract financial institutions to the program, the government would then guarantee to repay the lender for a portion of its loss if the borrower defaulted on the reconfigured loan.

The mortgage guarantee program would vastly expand the role of the Treasury Department in helping homeowners, while at the same time ensuring some return for lenders.

It would cost between $40 billion and $50 billion, sources said.
The program is being discussed as members of Congress are voicing frustrations that the $700 billion rescue program thusfar has been aimed at helping banks, but not homeowners.

While Treasury and FDIC officials have reached an agreement on the principles of the program, the White House is resisting, according to the sources, who declined to be identified because the negotiations are ongoing.

Today, the Federal Reserve, the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore are announcing the establishment of temporary reciprocal currency arrangements (swap lines). These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies.

Federal Reserve Actions
In response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies, the Federal Reserve has authorized the establishment of temporary liquidity swap facilities with the central banks of these four large and systemically important economies. These new facilities will support the provision of U.S. dollar liquidity in amounts of up to $30 billion each by the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore.

These reciprocal currency arrangements have been authorized through April 30, 2009.

The FOMC previously authorized temporary reciprocal currency arrangements with ten other central banks: the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank.

IMF Announcement
Separately, the Federal Reserve welcomes the announcement today by the International Monetary Fund of the establishment of the Short-Term Liquidity Facility, which is designed to help member countries that are facing temporary liquidity problems in the global capital markets. The Federal Reserve is supportive of the IMF's role in helping countries address and resolve their ongoing economic and financial difficulties.

LOL

I don't think this shocked anyone. I thought they might opt to only cut 25 bps to leave more wiggle room in case things kept getting worse. Not much more room to lower if things keep getting bad.

I'm not sure I know what comes next, dood.  Bernanke did mention doing a second round of stimulus as being something that should be looked at.  I assume that would come some time after the election or shortly thereafter.

The actions described in this article might be part of it as well:

Officials with the Treasury and the Federal Deposit Insurance Corp. are crafting a plan under which the government would guarantee the mortgages of as many as 3 million homeowners now struggling to avoid foreclosure, according to three sources familiar with the discussions.

Under the program being discussed, the lender would agree to reduce borrowers’ monthly payments, for example by lowering the interest rate or principal of a mortgage loan, based on the homeowner’s ability to pay. These reconfigured loans could help homeowners avert foreclosure.

To attract financial institutions to the program, the government would then guarantee to repay the lender for a portion of its loss if the borrower defaulted on the reconfigured loan.

The mortgage guarantee program would vastly expand the role of the Treasury Department in helping homeowners, while at the same time ensuring some return for lenders.

It would cost between $40 billion and $50 billion, sources said.
The program is being discussed as members of Congress are voicing frustrations that the $700 billion rescue program thusfar has been aimed at helping banks, but not homeowners.

While Treasury and FDIC officials have reached an agreement on the principles of the program, the White House is resisting, according to the sources, who declined to be identified because the negotiations are ongoing.

http://voices.washingtonpost.com/economy-watch/2008/10/treasury_fdic_crafting_plan_to.html

That would be an immediate loss to the tax payer, as we would be paying lenders an inflated price for their loan, while reducing the homeowner's principal to a more realistic level. 

eric - re: falling home prices....


would you agree that the value, of anything in the world for that matter from doornails to 100 foot yachts, is determined by the amount a buyer is willing to spend at that given time?