Posted by
rycK on Saturday, October 24, 2009 9:09:36 AM
The Persistent Decline in Home
Prices, Current Facts and Options for the Distressed and Some Warnings and
Caution on New Bubbles
Today, I incorporate in my blog a
contribution from a reader who has extensive expertise in mortgages and
forecasting. Robert Schorell has contributed this piece for publication on this
blog and my comments are intercalated in blue for contrast. He supplies us with sound
financial advice and warns us of the improper use of credit to avoid another
housing bubble. The economic problem, as I see it, as do others, is that the
deflationary debt spiral
is not even yet reaching a minimum [asymptote] on the downward-sloping curve
and that our government might even be exacerbating the problem
by synthesizing false credit for political reasons. If the government acts
improperly, they might just force another housing bubble.
The article:
Title:
Continually Falling Home Prices
Home prices have yet
to hit bottom, despite a growing belief among some financial analysts that the
housing market was beginning to stabilize.
In fact, some sobering
figures are starting to chip away at the once-optimistic projections regarding
recovery and return. Some experts worry that another wave of bust and market
collapse is on the horizon.
This is a major worry
and one that we must avoid. The deflationary debt spiral we are fighting was
caused by wealth being lost in real estate prices and the concomitant collapse
of credit derived from equity loans and related factors. The abridged inability
to borrow is difficult enough for many Americans but when the spiral starts to
cut away jobs to the extent that mortgages cannot be maintained then spending
is reduced and the GDP falls. This creates a
nasty cycle. --rycK
Forecasters at
financial firm Fiserv expect home prices to fall
11.3 percent by next summer. In some parts of the country, like Florida and California, prices are expected
to fall upward of 30 percent by next June. In all, Fiserv experts predict that
all but 39 of the nation’s 381 housing markets will experience falling home
values.
This can only lead to
more unemployment. This also hampers the recovery and pushes us further into
deflation, a topic that is unpopular to think about even though, in my view, it
is happening. The proof for this bold statement is the zero government interest
rates, bank bailouts with federal balance sheet monies and massive government
spending.
Compounding the
situation is a dangerous return to the same lax lending standards that helped
create the subprime collapse. Foreclosures are surging nationwide, and there’s
a rapidly growing glut of homes in default nationwide that are likely headed
for foreclosure.
I must agree 100% with this comment. I blame, in part, the
government nostrum of ‘affordable housing’ as delineated in the CRA [Community Reinvestment
Act] that mandated that banks must loan money to the credit unworthy,
deadbeats, criminals and illegal aliens and that Fannie Mae was the final
resting place for the worse examples of
the resultant bad mortgage debt and toxic securitized asset bundles. Since the
problem is world wide and was observed in Japan 20 years ago [and
still is], and in Europe, this is just an icon for the improper use of
credit. We cannot repeat this.
Let us be very clear here: Those toxic assets [to be fixed by
TARP!?] are still in our banks and
other financial institutions and they grow more
toxic—not less—and we risk adding to this mess if we grant loans that will
again end in default and foreclosure. According to analyst Ambrose Evans-Prichard
of the Telegraph (London) subprime mortgages
are becoming even more toxic as time passes with even the AAA mortgages of 2007
are falling to 28 cents on the dollar and AA at only 4 cents. No wonder several big
banks are essentially zombie banks.
We are in big trouble
if our government tries to buy votes with printed mortgage monies.
About 8 percent of FHA
loans were either delinquent or in foreclosure at the end of June up from about
5 percent in 2006, according to the Mortgage Bankers Association. The agency’s
loan loss reserves are on the brink of falling below mandated levels. [Click here for some
information on FHA loans: http://fha.mortgageloanplace.com/FHA-Guide.html]
Government loans
continue to grab market share, with almost two-thirds of new homes now the
product of government-insured loans, according to a recent survey by a California real estate firm. But
many of these loans feature low down payments and higher debt-to-income ratios than most.
We have had government
FHA type loans for decades and they did not independently encourage a bubble
so, in principle, they are still an excellent place to get housing funding. The
difficulty and major threat is that our ‘government’ will try to replace the
absent fraction of our GDP by taxing or borrowing
money and just giving it to citizens [or not] as a wealth transfer to spend.
All this accomplishes is two fold if the recipients of these political gifts
are not creditworthy: [1] more national debt, currently at 12 trillions and [2]
a false demand stimulus to housing prices driven by the economic demand function.
Some buyers with
spotty credit are qualifying for loans that require half their net income to go
toward their mortgage payment.
This is dangerous as
the 50% level is too high to maintain a satisfactory living standard for those
in the $30,000 to 60,000 income bracket. They would be ‘house poor.’ What is
risked here is a mass disaffection with the very high relative cost of housing
and the propensity to sell or default.
ANY mortgage scheme that even approximates the disasters of zero-down or
subprime rates WILL launch another bubble and we cannot afford that.
I think we just have to
get back to the mandatory 10% down on all mortgages and that will [1] filter
out the dead beats and [2] give home owners some equity to work with. This works even though housing prices
continue to fall but we have no other choice.
The net result is a
recipe for continued disaster. Another housing bubble looms on the horizon. And
this one might prove more destructive than the last.
By Robert Schorell [robert@fharesearchcenter.com]
We have some serious
problems here, many of which are government instigated, and we need to journey
back to a stable economy, a somewhat balanced budget, spending reductions and
paying off some of our massive 12 trillion dollar debt. If we do not, we will
certainly crash in a blizzard of inflation and swarms of worthless dollars blowing
in the streets and major social unrest.
rycK
Comments
to: ryckki@gmail.com
Deflation, Deflation-Phobia and
Reality. The True Believers Want to Believe. The Liberals Need our Wealth.
“Bear
Stearns made the first public securitization of Community
Reinvestment Act (CRA) loans started in
1997.[6] Editorialists in some American
newspapers[7][8] and US Congressman Ron Paul[9] say the CRA loans were lent to
otherwise un-credit-worthy consumers in the name of ending discrimination,
although an analysis of actual lending patterns does not generally support this
conclusion.[10][11][12]
On June 22, 2007,
Bear Stearns pledged a collateralized loan of up to $3.2 billion to "bail
out" one of its funds, the Bear Stearns High-Grade Structured Credit Fund,
while negotiating with other banks to loan money against collateral to another
fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund.[13] The funds were invested in thinly
traded collateralized
debt obligations (CDOs)
found to be worth less than their mark-to-market value. Merrill Lynch seized $850 million worth of the
underlying collateral but only was able to auction $100 million of them. The
incident sparked concern of contagion as Bear Stearns might be forced to
liquidate its CDOs, prompting a mark-down of similar assets in other
portfolios.[14][15] Richard
A. Marin, a senior executive at Bear Stearns Asset Management
responsible for the two hedge funds, was replaced on June 29 by Jeffrey
B. Lane, a former Vice Chairman of rival investment bank, Lehman Brothers.[16]
During the
week of July 16, 2007,
Bear Stearns disclosed that the two subprime hedge funds had lost nearly all of
their value amid a rapid decline in the market for subprime mortgages.