We have read Mike Whitney's work with great interest for about six or seven years because this writer seems to do regularly what so few of the "official" economists are able to do: predict as well as anyone can what is going to happen economically. At first we were appalled by what we saw as his hard-edged, irritated cynicism. But we quickly came to see that Whitney has a very special message for Merced.
He still does. He is still accurately describing what is happening here and how and predicting likely outcomes from the behavior of bankers and plutocrats, with a special eye toward how increasingly unstable the overall economy is becoming.
Whitney's steady, courageous truth telling is a continual inspiration.
Badlands Journal editorial board
Housing Up, Home Ownership Down
The Mysterious New Housing Bubble
by MIKE WHITNEY
The rebound in housing is now in full swing. Housing starts are up, existing home sales are gaining pace, inventory is down, and prices are on the rise. According to a recent report by Corelogic “House prices are up 6.3% year-over-year in October, the largest increase since 2006 and the eighth consecutive increase in home prices nationally on a year-over-year basis.” Many experts are now predicting that 2013 will be even better, in fact, J.P. Morgan thinks that prices could gain another 10 percent in the next 12 months. Here’s the story from the Wall Street Journal:
“J.P. Morgan Chase Co. expects U.S. home prices to rise 3.4% in its base-case estimate and up to 9.7% in its most bullish scenario of economic growth. Standard and Poor’s, which rates private-issue mortgage bonds, on Friday said it expects a 5% rise in 2013.” (“Home Prices Could Jump 9.7% in 2013, J.P. Morgan Says”, Wall Street Journal)
And the housing boom is having an impact on Wall Street, too, where prescient investors who loaded up on mortgage-backed securities (MBS) are cashing in bigtime via the Fed’s new MBS-buying program dubbed QE3. Fed chairman Ben Bernanke is paying top-dollar for financial derivatives that, in real terms, are probably worth just pennies on the dollar.
Despite the increasingly positive signs of market strength, there are reasons to be skeptical, after all, this is the second time that prices and sales rallied since the bottom fell out in 2006. The first rebound took place in 2009, when President Barack Obama initiated his Firsttime Homebuyer program which provided lavish incentives for potential buyers to sign on the bottom line. The program sparked a frenzy of activity that reversed the direction of the market, but quickly petered out in a matter of months. Could today’s sudden surge in prices be another “false start” or is it the real deal? Only time will tell. But it’s worth noting that the market has never really cleared and that normal supply-demand dynamics have never been allowed to work as one would expect in a free market. In fact, housing is arguably the most maligned and manipulated market of all time. Mortgage rates are artificially low due to Fed intervention (QE3). Inventory is artificially low due to the banks withholding of distressed backlog. Down payments are so minuscule (FHA=3.5%) that homebuyers end up leveraged at a 30 to 1 ratio, the same as the big Wall Street investment banks prior to the Crash of ’08. And, finally, government-backed mortgage modifications (HAMP) provide generous refinancing to high-risk “underwater” applicants with LTV at 125%, a process that makes subprime mortgages look like a model of prudent lending. So much is fake about today’s housing market, that it’s a stretch to call it a market at all.
Even so, there are anomalies in the data that don’t support the media’s storyline that “Housing Is Back”. For example, did you know that the homeownership rate is still falling?
But how can that be, you ask? After all, if housing is recovering, then more people must be moving into homes, right?
Wrong. Check out this illuminating post from Sober Look:
“Some readers have been asking how one can reconcile positive signs in the housing market with declining rates of homeownership. Indeed, homeownership is falling at an even faster pace than during the 08-10 period….The explanation is that so far a great deal of net demand growth in housing has been in rental units. …This demand for rentals is in fact one of the factors supporting the housing market – for every renter there is a landlord who buys a home.
JPMorgan: – There is no contradiction between increased demand for housing and reduced homeownership rates. Demand for housing is mainly dependent on the increase in the number of households, whether these households choose to own or to rent the housing units they live in. Growth of household formation had been stifled during the expansion to date by high unemployment and subdued job growth.
The decline in homeownership rates implies that virtually all the increase in demand for housing units associated with increased household formation consists of increased demand for rental units. Indeed current estimates indicate that over the past year the number of occupied rental units increased 1.32 million and the number of owneroccupied housing units actually declined 175,000.” (“Falling homeownership rate and the housing market”, Sober Look)
Well, that changes things a bit, doesn’t it? So if the number of people who actually bought a home and moved in dropped by 175,000, then what we’re seeing is industrial-scale investment by Wall Street speculators who are getting lavish financing perks from the banks to buy distressed properties that, if they had been sold on the MLS or via bank auctions, would have driven prices down even further pushing bank balance sheets deeper into the red. In other words, the Obama administration, the banks, the Fed and the behemoth private equity firms are all in bed together to prevent firsttime homebuyers from getting a good deal on a foreclosure and to reward the people who blew up the financial system with another backdoor bailout.
Does that change your attitude about the so called housing rebound at all?
But there is an upside to all this speculative investment, that is, at least the banks are whittling down their gigantic stockpile of backlogged homes. That’s got to be a good thing, right?
Wrong, again. Because the people who are getting pushed out of the market, are the very people the who historically provide continuity and stability, that is, firsttime homebuyers. Here’s the scoop from CNBC:
“Current homeowners are finally moving up, and distressed sales are making up less of the overall market—all signs of much-needed improvement in housing….Unfortunately, first-time home buyers are seeing just the opposite, largely left out of this surge in sales and prices. Their share of the market, usually up in the 40 percent range historically, fell to 34.7 percent in October, the lowest in the Campbell/IMF survey’s three-year history.” (“Housing Recovery Is Leaving Behind First-Time Buyers”, CNBC)
So, more of the low-end homes are being bought up by the big private equity firms, which means fewer crumbs for the little guy at the bottom. Is that really a positive development?
And, how about this: You probably read that existing home sales have been picking up, which is true. In October, sales on existing homes rose 2.1 percent to a seasonally adjusted annual rate of 4.79 million. But there’s more to this story than meets the eye. Check this out at CNBC:
“The October numbers were driven entirely by multifamily apartment starts, up 10 percent month-to-month and up 63 percent year over year…..Younger Americans are in fact moving out of their parents’ basements, but many are moving into rental units, and that is also a formed household.” (“Yes, Housing Starts Surge, but Rentals Are the Drivers”, CNBC)
So this is the great housing recovery that everyone’s been crowing about; little Johnny and Janie finally leave the nest to live in a rental unit owned by some fatcat PE pirate from Manhattan? That doesn’t exactly sound like the America Dream, now does it? And here’s something else to mull over (from the same article):
“Housing starts at 894,000 is near where they were at the depths of the 1981 and 1991 recessions and 60 percent below the peak in January 2006,” pointed out Peter Boockvar at Miller Tabak.”
So let’s keep things in perspective. Housing is still in the doldrums despite the hype, despite the low rates, despite the unprecedented meddling and intervention by the Fed, the banks and the USG. Just look at the data. Naturally, if the banks withhold distressed inventory, the government lends money to underwater homeowners, and the Fed slashes rates to record lows and buys whatever MBS the banks produce, then there’s going to be a surge in activity. But how long will it last?
No one knows. But one thing is certain, the Fed’s loosy goosy policies never seem to work as planned. Case in point: Bernanke’s zero rates and QE4 have not revived interest in housing as much as they have touched off a surge of speculation which could generate another destabilizing asset-price bubble. Get a load of this from the SF Gate:
“There is a tsunami of money coming into the market, billions of dollars to buy distressed single-family homes,” said Jeff Lerman, a San Rafael real estate lawyer, speaking about the national landscape. “The window of opportunity is rapidly closing (as prices rise). Over the next 18 months, profit margins in single-family opportunistic buying will be compressed quite a bit.”
A Chronicle analysis of sales data compiled by San Diego research firm DataQuick showed that absentee buyers, who once bought about 10 percent of homes sold in the nine Bay Area counties, account for about a quarter of all purchases this year, more than doubling their share…..
“Right now the dominating force driving the rental market in California is foreclosed-upon former homeowners transitioning to renters,” Burke said. “That demographic is an important market segment for us.” (“Investors rushing into real estate deals”, SF Gate)
Repeat: “A tsunami of money coming into the market” from deep-pocket speculators. That’s your “recovery” in a nutshell.
Of course the article focuses on the Bay Area, but the same thing is going on in the hotter markets across the country, particularly Los Vegas, Phoenix, Atlanta and Miami. Investors are buying up all the cheap homes they can get their hands on . The flurry of activity has pushed prices higher, but can it last? Housing expert Mark Hanson doesn’t think so. Here’s a clip from a recent post at The Big Picture:
“For years I have proclaimed that “no housing recovery will ever occur — or no dead-cat-bounce will reach “escape velocity” or become “durable” — unless the repeat buyer is leading the way. This is because investors and first-timers are thin, volatile cohorts who have been known over history to leave the market literally, overnight….
The problem is that the mortgaged homeowner has always been the primary demand cohort. It’s not investors, first-timers or those who own their homes free and clear. Rather, the mortgage-levered homeowner who tends to move every 6 to 8 years who provides most of the historic underlying support for macro housing.
This is a problem. Put simply, there are more houses today then there were five years ago but a full HALF of the primary demand cohort — repeat buyers — died due to negative equity….. and able buyers have been cut in half.
Bottom line, WHERE IS THE “DURABLE”, INCREMENTAL DEMAND GOING TO COME FROM(?) (“Shadow” & “Ghost” Inventory / Negative & “Effective” Negative Equity…The Real Challenges for US Housing”, Mark Hanson, The Big Picture)
Hanson makes a good point. Traditionally, repeat “move up” buyers have driven the market, but that’s not happening now because so many people are underwater and can’t afford to move. So, yes, housing prices can go higher for a while, but the higher they go, the less profit investors will make, which will lead to a drop-off in sales and greater price erosion. That will put us back at Square 1.
So, what’s going to happen next?
That’s easy. The banks are going to try to reduce their stockpile of unwanted homes by increasing the number of foreclosures. The supply of distressed homes actually increased while the banks fiddled inventory to effect the fake rebound. ( No, the banks are not running out of distressed inventory as the dissembling media would have you believe.) So now the banks have to dump more homes on the market which will put pressure on prices. The banks don’t want prices to jump 6.5% per year. They want just enough upward movement in prices to lure people back into the market. This process is already underway, as this CNBC article reveals:
“The good news is that overall foreclosure activity continues to fall and a decline in new foreclosures are leading the drop. The bad news is that the huge backlog of homes already in the foreclosures process, but long delayed, are finally going back to the banks in big numbers.
Bank repossessions jumped 11% in November month-to-month and rose 5% from November of 2011, according to RealtyTrac. That marks the first annual jump in just over two years.” (“Housing’s Repo Man Is Back”, CNBC)
So tell me this, dear reader: Why did “bank repossessions (suddenly) jump 11% in November”? And why has foreclosure activity picked up for the first time “in over two years”?
Is it because the banks didn’t know that they were sitting on millions of distressed properties that they’d eventually have to sell or is it because the banks colluded with the Fed and Obama to control the flow of foreclosures in order to prop up prices and seduce more suckers back into the market?
That’s a no-brainer, right? It’s all manipulation.
So, how is this all going to play-out?
Well, we know that the Fed is going to continue to purchase mortgage-backed securities (MBS) to the tune of $45 billion per month “indefinitely”. But housing sales could still weaken as profit margins on investment properties shrink and more of the big players look for other places to put their money. That gives Bernanke about a 6-month window to settle on a strategy for inflating another housing bubble. He knows he cannot count on organic demand or move up buyers because unemployment is still too high and wages are not showing any sign of growth. So, his only hope is to change regulations so the banks can resume lending to mortgage applicants who’ll never be able to repay the debt. And that is precisely what the Fed chair is doing. Take a look at this in Bloomberg:
“Federal Reserve Chairman Ben S. Bernanke said the Fed will take action to speed growth and a rebound in a housing market facing obstacles ranging from too-tight lending rules to racial discrimination….Bernanke said while tighter credit standards after a collapse in the subprime mortgage market were appropriate, “it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.”…
Bernanke said housing-finance authorities have taken steps to “remove barriers to the flow of mortgage credit” and referred to efforts by the Federal Housing Finance Agency and by Fannie Mae and Freddie Mac to clarify rules surrounding mortgages that go into default.
These steps, the 58-year-old Fed chief said, should “increase the willingness of lenders to make new loans.” (“Bernanke Says Fed Will Do What It Can to Support Housing”, Bloomberg)
Did you catch that part about how “the Fed will take action (on) racial discrimination”?
In other words, African Americans are going to be in the crosshairs again like they were during the subprime fiasco. Take a look at this in Bloomberg:
“Lenders were 3½ times more likely to steer blacks to high-interest mortgages than whites with comparable credit scores, according to a Center for Responsible Lending study of 27 million loans originated from 2004 to 2008. In Memphis, where 63 percent of the 652,000 residents are black, officials say their city was targeted for such predatory lending — a practice that Marano says his company didn’t engage in….”(“Wall Street Kept Winning on Mortgages Upending Homeowners”, Bloomberg)
Does Bernanke really care if minorities get fleeced for a second time in less than a decade?
Don’t make me laugh. The Fed doesn’t give a rat’s ass who gets taken to the cleaners as long as his crooked Wall Street buddies get their pound of flesh.
So, here’s how it’s going to go down: Bernanke’s going to twist arms at the Consumer Financial Protection Bureau (CFPB) to define a “qualified mortgage” in a way that allows the banks to dump their garbage loans on Uncle Sam without any risk to themselves. Once the new regulations are in place and the banks get the “safe harbor” provision they want; they’ll start issuing mortgages to anyone who’s strong enough to sit upright and put a “X” on the dotted line, which is how we got into this mess to begin with.
MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at email@example.com.
Weekend Edition April 6-8, 2012
The Housing Doldrums
The Bottomless Pit
by MIKE WHITNEY
“There are many good reasons to believe that the 5.5 million foreclosures we have seen are barely halfway through their full course. The United States may end up with a total of 8-10 million foreclosures before we are finished.”
– Barry Ritholtz, The Big Picture
It all gets down to supply and demand. The banks have been keeping millions of homes off the market until a settlement was reached in the $25 billion robosigning scandal. Now that the 49-state deal has been finalized, the banks are preparing to put more of their of distressed homes up for sale. That will lead to lower prices and the next leg down in the 6-year long housing crisis.
According to Reuters, new foreclosures “begun by Deutsche Bank were up 47 percent from 2011. Those of Wells Fargo’s rose 68 percent and Bank of America’s, including BAC Home Loans Servicing, jumped nearly seven-fold — 251 starts versus 37 in the same period in 2011.”
So BofA, which unwisely purchased Countryside following the Crash of ’08, is scrambling to get its house in order by removing the deadwood from its balance sheet. Good luck with that.
In order to avoid a sudden plunge in prices–which would be devastating for bank balance sheets–the banks will continue to control the number of homes that are released onto the market. In 2011, existing home inventory shrunk by 20 percent year over year while the shadow backlog of distressed homes continued to grow in leaps and bounds. This shows that the banks are managing inventory to minimize their losses.
But even though “visible” inventory has shrunk by as much as 30 percent in some markets, housing prices have continued their downward trek, dropping roughly 4 percent in 2011. This reflects the truly dismal condition of the underlying economy that is wracked by high unemployment, flat wages, and soaring personal debt. Absent another round of fiscal stimulus, there’s little chance that housing sales
will rebound in 2012 despite historic low rates and myriad government loan modification programs.
The biggest problem facing housing now is that ordinary working people can’t make their monthly payments. An article in Reuters summed it up like this: “The subprime stuff is long gone,” said Michael Redman, founder of 4closurefraud.org. “Now the folks being affected are hardworking, everyday Americans struggling because of the economy.”
So what we’re seeing now is the knock-on effects from high unemployment, tight credit, shitty wages and deep protracted economic stagnation. This is a policy issue, but policymakers refuse to address it, so housing will bump along the bottom for years to come. Now take a look at this article in the Wall Street Journal:
“Delinquent mortgage borrowers, take note: Banks still aren’t moving very fast to kick you out of your homes. February’s foreclosure settlement between big U.S. banks and state attorneys general should have been bad news for mortgage deadbeats — and for house prices. Having resolved charges that they had filed bogus documents to speed up repossessions, the banks should have felt free to move ahead with millions of foreclosures. They should also have started selling more repossessed houses, an influx of cheap supply that would weigh on the market.
So far, though, that’s not happening. …. as a result, the average number of days since the last mortgage payment had been made on homes in the foreclosure process rose to 667, up from 660 the previous month and 253 in February 2008. In other words, the average delinquent borrower could live rent-free for nearly two years without getting evicted, assuming the borrower chose to stay in the house.” (“The Foreclosure Deal Spares the Housing Market (So Far)”, Bloomberg)
Just to be clear, we do not agree with the author that the people who were victims in this vast criminal mortgage laundering scam– that destroyed the financial system and pushed the global economy into a Depression–can be fairly characterized as “mortgage deadbeats”. Even so, the point he makes is important, because it illustrates how the banks are fiddling with supply to avoid the losses on non performing loans. Screwball accounting regulations allow the banks to keep mortgages on their books at fictitious prices (artificially high) until the house is sold. Only then, are they required to write down the difference. Considering that they still have millions of distressed homes on their books, this is no small matter. An accurate accounting of bank real estate inventory would show that most of the biggest banks in the country are technically insolvent.
So what does this mean for people who are thinking about buying a house in the near future? Should they hang on to their money and wait for another year or so or jump at that $450,000 McMansion with the Gothic parapets and custom Swedish sauna that’s been marked-down to a mere $185,000?
That’s hard to say. It depends on one’s own priorities. But one thing is certain, housing prices won’t be going up for a very long time. Maybe never. Moody’s ratings agency forecasts that we’ll see ”an 8% to 10% decline in housing prices” due to a 25 percent uptick in repossessed properties from 1 million in 2011. Unfortunately, Moody’s calculations are far too optimistic. In fact, “top housing analyst Laurie Goodman estimates the amount of shadow inventory at between 8 and 10 million homes, and Michael Olenick, using a different methodology, comes in at just under 9 million homes.” (“Moody’s Foresees 10% Drop in US Housing Prices“, naked capitalism)
Even if Goodman-Olenick’s predictions are wrong by half–which is unlikely–prices have a long way to go before they hit bottom.