Housing Prices
Miscellaneous Articles

Housing Prices

I’m sure there is nothing original here,
but I don’t know where to find something that says exactly what I want to say,
clearly distinguishing governmental influences on home prices
from general factors.

This is not of much value on its own,
but is provided for future reference from other blog posts,
where the need for stating such points and distinctions may be more evident.

I am no expert on what determines housing prices,
but to begin with it is surely affected by supply and demand.

Here are some fairly obvious factors which drive demand.
Factors which are directly affected by U.S. government policies
are labeled GOVT.

First are those which determine
how much a home buyer is willing to spend on monthly payments:
  1. What is his income, both current and anticipated?

  2. How much does he value a house as his residence?

  3. How much does he value it as an investment,
    anticipating future price rises?

  4. The mortgage income tax deduction,
    whose value depends on his tax bracket.

Second are those which determine
how much house his monthly payments will buy:
  1. What are the financial factors
    (interest rate, term of mortgage, etc.)
    prevailing at the time that banks will offer?

Miscellaneous Articles

Only Half a Bailout
New York Times Editorial, 2008-10-22

Gambling Capital Is Flush With Empty Houses
By Joel Achenbach
Washington Post, 2008-10-30

[An excerpt; emphasis is added.]

There are 6 million empty homes in the United States.
Or 6.2 million, to be slightly more precise.
Empty houses are normal to some extent --
part of the usual friction of building, selling, renting.
But ask the people who study the numbers,
and who understand the “overhang” in housing inventory,
and they’ll tell you:
This country has about a million homes too many.


The entire country has been affected by the housing crunch,
but there has been particular carnage
in the once-scorching real estate markets of
South Florida, Southern California, Phoenix and here in Las Vegas.
And of all these places, Vegas may be the one where the disaster is most visible.

In 2006, with prices peaking,
builders plastered together a startling 36,000 new homes.
Speculators waved cash and bought several houses at a time,
figuring they could flip them just months later.
It was a can’t-miss game, like playing craps on the Strip with loaded dice.

The joke was that every valet parker and stripper in Vegas
had a real estate license.
About 20,000 people were trying to sell property.
Buyers swarmed the valley, many of them from California or overseas.

“These people
weren’t required to have any significant money down,
were not required to verify their income,
they were allowed to buy four or five at a time,”
said [Kipp Cooper, government affairs director
of the Greater Las Vegas Association of Realtors].

He said he knew the market had gotten out of whack when,
one day at an off-Strip casino catering to local residents,
a valet told him he was selling one of his houses -- just one of them --
for $1.2 million.

The boom sucked in a lot of ordinary people
who normally may have been more cautious with their money.
Las Vegas had always been a place with cheap housing,
a town where a construction worker or a hairstylist could afford a decent home.
But as the prices soared,
people worried that the market would leave them behind forever.
Some people of modest means took out whopper loans, 100 percent interest,
with a “teaser rate” of, say, 3.9 percent
that would adjust upward in a couple of years.
Surely, they figured,
they’d be able to refinance as the value of their house rose.

In 2004, housing prices rocketed 52 percent in just 12 months,
and builders couldn’t slap houses together fast enough.

“We couldn’t get a sign in the ground before these properties were sold,”
Cooper said.

Banking Regulator Played Advocate Over Enforcer
Agency Let Lenders Grow Out of Control, Then Fail
By Binyamin Appelbaum and Ellen Nakashima
Washington Post, 2008-11-23

[A long, exhaustive, account of how
the OTS (Office of Thrift Supervision),
in conjunction with some big home mortgage lenders,
failed in their regulatory function
and to exercise prudent fiduciary responsibility.
It seems to me that if the facts are
as stated or implied in this and similar articles,
what we have is not just a case of misjudgment,
but absolutely clearcut negligence,
perhaps not according to the law, but according to any reasonable standard.]

Debt Watchdogs: Tamed or Caught Napping?
New York Times, 2008-12-07

“These errors make us look either incompetent at credit analysis
or like we sold our soul to the devil for revenue,
or a little bit of both.”

— A Moody’s managing director
responding anonymously to an internal management survey,
September 2007.

Internal Warnings Sounded on Loans At Fannie, Freddie
Executives Were Told of Subprime Risk
By Zachary A. Goldfarb
Washington Post, 2008-12-09

[An excerpt; emphasis is added.]

As Mudd’s and Syron’s decisions have been called into question,
they have described their push into these new areas of the mortgage business
as an inevitable consequence of dueling mandates to
support affordable housing and
maximize profit for shareholders.
And they’ve said that
the collapse of the housing market was unforeseeable
and the primary reason behind the company’s fall.

[What manifest bullshit.
How could median home prices keep diverging from median family income?
The causes of the collapse in home prices,
which can no longer be avoided,
were long evident.]

By Jill Drew
Washington Post, 2008-12-16

When the housing market began to tank in 2005,
Wall Street ran through the yellow light of caution
and created even riskier investments --
and Washington had no mechanism for finding out what was going on.

[This is a long (5,000 word), fairly thorough, tutorial
on the shenanigans Wall Street engaged in
as it kept funding bad housing investments.]

White House Philosophy Stoked Mortgage Bonfire
New York Times, 2008-12-21

[Another of the Times’ long “The Reckoning” series.]


Stakes are high as government plans exit from mortgage markets
By David Cho, Neil Irwin and Dina ElBoghdady
Washington Post, 2010-01-25

For more than a year,
the government pulled out the stops to revive home buying
by driving down mortgage rates.

Now, whether the housing market is ready or not,
the government is pulling out.

The wind-down of federal support for mortgage rates, set to end in two months,
is a momentous test
of whether the Obama administration and the Federal Reserve
have succeeded in jump-starting the housing market
and ensuring it can hold its own.

[Both the government and the media seem to be colluding in deception here.
While psychology
(“House prices are sure to rise!” “House prices are sure to decline!”)
can play a role in setting house prices, fundamentals play a role too.
By any number of fundamental measures
(such as the ratio of house prices to either median income
or median monthly apartment rental rates),
house prices are still way above the historical norm.
“Jump-starting” the housing market might be effective
if housing prices were low by fundamental standards,
but when they are high, it can only make a temporary dent
(and throw away the money the government has put into it)
in preventing a return of house prices to what the free market will determine,
based on fundamentals.]

The stakes for the economy are massive:
If the market again falls into a tailspin,
homeowners could face another wave of trouble,
and it would deal a body blow to
President Obama‘s efforts to get the economy on track.

Keeping the mortgage rates at historic lows,
which required a commitment of more than $1 trillion,
was viewed within the administration
as a central plank of the economic strategy last year [2009],
senior officials said.
Though the policy did not attract as much attention
as rescue efforts to bail out banks,
it helped revitalize home buying in some parts of the country
and put money in the pockets of millions of homeowners
who were able to refinance into lower monthly payments,
the officials added.

“We did what we thought was necessary to stabilize the market,
but we don’t think the government should continue special efforts forever,”
said Michael S. Barr, an assistant secretary at the Treasury Department.
“As you bring stability, private participants come back in.
We do expect this now that the market has stabilized.
I’m not going to say there will be no effect on rates,
but we do think you are seeing market signs and market signals
that there should be an orderly transition.”

A few federal officials and many industry advocates disagree,
saying the government is exiting too soon.
They offer dire warnings of higher rates and a slowdown in home sales.
Fed leaders say
they will end a marquee program supporting the mortgage markets in March.
Obama’s economic team, led by Treasury Secretary Timothy F. Geithner,
has decided not to replace it
and has been shutting down its own related initiatives.

Over the past year,
these programs have enabled prospective home buyers to get cheap loans,
helping those buying and selling property
as well as those eager to refinance existing mortgages.
If the end of the initiative drives up interest rates,
say from 5 percent to 5.5 percent,
homeowners could be deterred from refinancing, industry officials say.
A sharper increase in rates could make homes too expensive for many buyers,
forcing them from the market
and causing the recent pickup in home sales to stall.



Banks typically create giant pools of home loans
and turn them into securities that can be traded on the open market.
When the system is working,
many investors buy these mortgage-backed securities,
providing a stream of money for lenders
so they can make loans at relatively cheap rates.
But the trading of these securities seized up
when the financial crisis struck and panicked investors.
Government officials feared that the mortgage market would collapse.

The Fed and the Treasury stepped into the breach,
becoming the only major buyers of these mortgage-related securities,
and they kept the mortgage market flush with cash.
The Treasury spent about $220 billion,
and the Fed pledged $1.25 trillion,
the single largest foray the central bank has made into the markets
since the onset of the crisis.
In essence,

the Fed has been printing money
and funneling it to people looking to buy a house
or refinance an existing mortgage.

At the same time, the federal government stood behind
mortgage-finance companies Fannie Mae and Freddie Mac
by taking them over and pledging to cover their losses.
That helped the firms lower borrowing costs,
since lenders know they can’t fail,
and the companies passed on their savings to mortgage borrowers
in the form of low rates.

Combined, these federal efforts
helped push down the rates ordinary Americans pay for a mortgage.
The 30-year fixed-rate mortgage declined from 6.04 percent in November 2008,
according to Freddie Mac data,
and hit an all-time low of 4.71 percent about a year later.


[The conclusion of the article:]

“I believe they do want to end it in March,
but it’s like all new year’s resolutions,”
said Mark Vitner, a senior economist at Wells Fargo Securities.
“The Fed’s New Year resolution is
to go on a diet, go to the gym, give up drinking and clean the garage.
They might be able to do one of those things, but to do all four is tricky.

They have to drain all the liquidity they added to the financial market
so we don’t see a resurgence in inflation,
but do it in a way so that the economy does not slip into recession.”

[Note that Vitner doesn’t say whether he thinks
it is possible to achieve both goals.
I am not an economist, and have hardly an academic training in the subject.
But I will claim, just based on general knowledge,
that it is impossible to achieve both goals.
Anyone care to go on record and claim that it is?]

Cloudy Future for Fannie and Freddie
New York Times, 2010-02-02

The Great Bailout is mostly over for the banks.
But for those troubled behemoths of the nation’s housing bust,
Fannie Mae and Freddie Mac,
the lifeline from Washington just keeps getting longer.

Fifteen months after Fannie and Freddie were effectively nationalized,
neither the Obama administration nor Congressional leaders
see a quick solution to
one of the thorniest problems in American finance:
how to fix the twin mortgage giants
without choking the flow of credit to homeowners
and dealing a blow to a still-fragile housing market.


The White House, already under attack for mounting debts,
has so far disregarded advice from the Congressional Budget Office
to fold the costs associated with Fannie and Freddie into the budget.
In Monday’s statement, the administration emphasized that
because Fannie and Freddie
may one day come out from under government control,
they should stay off the books.

Meantime, everyone is waiting for the big fix.

“No one has come up with a new model that can both maintain liquidity
and eliminate all the bad or conflicting incentives
that caused the crisis in the first place,”

said Thomas A. Lawler,
an economist who worked at Fannie Mae for more than two decades
before leaving in 2006 to become a consultant.
“And the longer the government relies on entities like Fannie and Freddie
to implement the recovery, the harder it is to get rid of them.
This is a really, really hard problem,
and it’s going to take a long time to figure out the right solution.”

Ignoring the Elephant in the Bailout
New York Times Sunday Business -- “Fair Game”, 2010-05-09

IF you blinked, you might have missed the ugly first-quarter report last week from Freddie Mac, the mortgage finance giant that, along with its sister Fannie Mae, soldiers on as one of the financial world’s biggest wards of the state.

Freddie — already propped up with $52 billion in taxpayer funds used to rescue the company from its own mistakes — recorded a loss of $6.7 billion and said it would require an additional $10.6 billion from taxpayers to shore up its financial position.

The news caused nary a ripple in the placid Washington scene. Perhaps that’s because many lawmakers, especially those who once assured us that Fannie and Freddie would never cost taxpayers a dime, hope that their constituents don’t notice the burgeoning money pit these mortgage monsters represent. Some $130 billion in federal money had already been larded on both companies before Freddie’s latest request.

But taxpayers should examine Freddie’s first-quarter numbers not only because the losses are our responsibility. Since they also include details on Freddie’s delinquent mortgages, the company’s sales of foreclosed properties and losses on those sales, the results provide a telling snapshot of the current state of the housing market.

That picture isn’t pretty. Serious delinquencies in Freddie’s single-family conventional loan portfolio — those more than 90 days late — came in at 4.13 percent, up from 2.41 percent for the period a year earlier. Delinquencies in the company’s Alt-A book, one step up from subprime loans, totaled 12.84 percent, while delinquencies on interest-only mortgages were 18.5 percent. Delinquencies on its small portfolio of option-adjustable rate loans totaled 19.8 percent.

The company’s inventory of foreclosed properties rose from 29,145 units at the end of March 2009 to almost 54,000 units this year. Perhaps most troubling, Freddie’s nonperforming assets almost doubled, rising to $115 billion from $62 billion.


To some,
the current silence on what to do about Freddie and Fannie is deafening —
as is the lack of chatter about Freddie’s disastrous report last week.

“I don’t understand why people are not talking about it,”
said Dean Baker,
co-director of the Center for Economic and Policy Research in Washington,
referring to Freddie’s losses.
“It seems to me the most fundamental question is,
have they on an ongoing basis
been paying too much for loans
even since they went into conservatorship?”

Michael L. Cosgrove, a Freddie spokesman,
declined to discuss what the company pays for the mortgages it buys.
“We are supporting the market by providing liquidity,” he said.
“And we have longstanding relationships
with all the major mortgage lenders across the country.
We’re in the business of buying loans,
we are one of the few sources of liquidity available.”

[In other words:
They’re paying too much for their loans,
more than anyone else would,
more than the market thinks those loans are worth.]

But Mr. Baker’s question gets to the heart of
the conflicting roles that Freddie and Fannie are being asked to play today.
On the one hand,
the companies are charged with supporting the mortgage market
by buying loans from banks and other lenders.
At the same time,
they must work to minimize credit losses
to make sure the billions that taxpayers have poured into the firms
don’t disappear.

You can’t be both a dispenser of subsidies and a solvency-retaining business
at the same time.]


Wake-Up Time for a Dream
by Joe Nocera
New York Times, 2010-06-14

Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation,
began her week with a bit of honest heresy,
the kind that only she, among all the bank regulators,
seems willing to utter in the wake of the financial crisis.

Deep in a speech she delivered Monday before the Housing Association of Nonprofit Developers —
a speech that got surprisingly little attention —
Ms. Bair listed her three main recommendations to
“put the mortgage industry on a sounder footing.”
The first two were the usual suspects:
better consumer education and protection, and
a reformed securitization market.
Her third proposal, however, was a shocker,
taking dead aim at one of the most sacrosanct tenets of American politics:
the lofty goal of homeownership.

“For 25 years federal policy has been primarily focused on
promoting homeownership and
promoting the availability of credit to home buyers,”

Ms. Bair said.
She mentioned some of the many subsidies home buyers get,
including the home mortgage interest deduction and
the ability to deduct property taxes.

She tossed in Fannie Mae and Freddie Mac,
the two “G.S.E.’s” (government-sponsored entities)
whose role as a guarantor and securitizer of mortgages
greatly expanded the ability of mortgage originators
to make loans to home buyers —
and which are now, of course, in federal conservatorship,
with taxpayers holding the bag for their gargantuan losses.

She also pointed out that during the bubble,
when anyone with a pulse could get a mortgage,
the percentage of Americans owning homes rose to an unprecedented 69 percent,
a number that was greeted with bipartisan hurrahs,
but which turned out to be “unsustainable,” Ms. Bair said.

She concluded:
“Sustainable homeownership is a worthy national goal.
But it should not be pursued to excess
when there are other, equally worthy solutions
that help meet the needs of people
for whom homeownership may not be the right answer.”
Like, you know, renting.

The point is:
the financial crisis might well have been avoided
if we as a culture hadn’t invested so much political and psychological capital
in the idea of owning a home.
After all, the subprime mortgage business’s supposed raison d’être
was making homeownership possible for people who lacked the means —
or the credit scores —
to get a traditional mortgage.
It’s also why
bank regulators and politicians were so willing to avert their eyes from
the predations and excesses of the subprime companies.

[That is a flat-out lie.
Without the slightest doubt Nocera knows that is not true.
There were many reasons, documented in many articles and books,
other than the one Nocera just asserted
“bank regulators and politicians were so willing to avert their eyes from
the predations and excesses of the subprime companies”.]

Yet even now, it is difficult for the body politic to face this truth squarely,
so intertwined is homeownership with the American Dream.
Which is why Ms. Bair’s comments were so heretical.
Maybe, she seemed to be suggesting, it’s time to break that link,
painful though it would be.
Maybe she’s right.


Housing Policy’s Third Rail
New York Times, 2010-08-08

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