Housing Still a Problem, and a Warning to the New Age Speculator
By now you have read the headlines that the newest (what iteration is this now?) mortgage modification plan of the US Administration is looking to deliver up to 500,000 loan mods to help housing. Others have parsed the number, and real mods number less than 50,000 in all cases, or 1/10th the advertised amount. Still, advertising is all about packaging and a number like 500,000 is pretty big.
So what is the problem? You, the reader, are well aware of the major ones, but let's review just one that surely should have been thought about before the process got started (via OC Register):
No Income, No Loan ModificationNow I know this kind of out of the box reasoning is very difficult to understand, but indeed having no income and no job will limit any possible loan workout. Of course these things made no difference when the loans where made, but that was so yesterday.
Here’s a quote from John Courson, president of the Mortgage Bankers Association:
“You can’t modify someone if they don’t have income or a job. We have to be realistic going forward. If we are going to play a numbers game, we are going to see a smaller percentage of borrowers in default able to be modified. It’s an unfortunate and difficult fact we are going to have to face.”
Of course, some are trying to squeeze anything they can out of bad loans (why would they need to do this, being well capitalized and all?) and are looking to the past for a new future. Consider this item from Bloomberg:
JPMorgan Pitches Interest-Only Mortgages to Boost Obama PlanThese games are getting old, but with the future holding so much promise, why not?
Oct. 13 (Bloomberg) -- Banks will push the Obama administration to expand its mortgage-modification program to allow interest-only periods on reworked loans, seeking to bring more homeowners into the initiative while recognizing concern that it may only postpone defaults, according to JPMorgan Chase & Co...
...The benefit of allowing interest-only periods as well would be “a significant pickup in terms of mods being done,” because the current methods often fail to allow loans to pass required tests on whether modifications serve lenders better than foreclosures, said JPMorgan’s Potolsky. The New York-based bank uses interest-only periods in many of the modifications it’s doing outside of the U.S. program, he said.
Promise in the housing market? Indeed there is, but here is my word of caution for the future (via Calculated Risk):
House Buying FrenzyPlease note the bold face section.
The real estate market has gone crazy. At the low end we've been seeing many offers per house for some time, and recently agents have been telling me there is almost no inventory. Jim the Realtor has been reporting on this in San Diego, see: Hot All Over and The “Euphoria Express”
And from Diana Olick at CNBC today: Lunacy in Las Vegas Housing (ht Larry)
Olick include an email from a real estate agent to a client "Katie":
- This market is crazy and many things are just not going to make any sense.
- Properties are selling in the blink of an eye.
- Properties are getting multiple offers within a few days of being on the market, the most offers I’ve heard a house had recently was 44 offers (I know, crazy).
- 40% of all transactions are cash purchases, which makes it harder for the buyers who are financing to get their offers accepted.
- We have 1/2 the inventory we had a year ago and 4 times as many buyers as we did a year ago.
Investors with real means are buying these homes with cash. Can they rent them out on a cash flow positive basis? I have no idea, and really I could not care less. These investors are taking a monster chance here though:
-By buying with cash they are not going to hurt anyone (read banks) but themselves, so there will be no help forthcoming should this go bad.
When it is the banks with their behinds on the line, the taxpayer is there to help. If aggressive personal investors lose their shirts, well helping them would be a moral hazard. Vegas is the gambling capital of the US, so this is indeed fitting.
Have no fear fellow taxpayer, we will all still pay for plenty of this, from later in the CNBC Diana Olick article:
Oh, and by the way, a fun factoid on Katie's Realtor: She bought her brand new home in 2005 for $240,000. According to the comps she runs daily, she says it's now worth between $90-110,000. So in January she decided to stop paying her mortgage. No financial hardship, she just figured she was throwing money away. The bank hasn't gotten to her yet, so she's just been living there for free. At some point, she knows, her bank will foreclose, but she's fine with that. She says she'll do far better financially renting for a while.Love it!
By know the readers know that I am daily reader of The Automatic Earth which really offers insight and perspective that I feel is unique in all the blogosphere. It is with rare occasion that I have a fundamental difference of opinion with the author Ilargi, but I find myself there tonight.
To start, to consider my question you will need to review the latest article "Chris Martenson, Stoneleigh, and Mish Shedlock" because there is plenty of material there which needs to be reviewed.
My question that I submitted to Ilargi follows (as in the comments section over there):
Ilargi,So my question boils down to this:
very thoughtful post. I had one question which I did not really find a clear answer to in Stoneleighs writings. You had written:
"My initial reaction was that Martenson is better at gathering data than at drawing conclusions from them. And that stands. Then Mike Mish Shedlock tackled the one hand issue (see below), and concluded: "Pretending that defaulted debts do not exist is itself the "Sound of one hand clapping". Which is what I said: assuming that a central bank and Treasury, of any country, can keep losses hidden forever, means not understanding the dynamics at play."
I have to admit, I guess I do not understand the dynamics at play. The banks have indeed covered over losses and still refuse to recognize them, one better, they are writing UP the value of these instruments as of late. For over a year they have hidden them, why not 2 years? Why not 3? With a fully compliant government admitting this is policy prescription number one, I think the dare would have been called by now. What would be the trigger event?
Sorry for the question, but this gamesmanship by the Banks/Government is really starting to wear me thin.
-The banks have covered up losses, refused to write down loans, and have explicit backing of the US government to do so
-This has been ongoing for over 1 year
-What would change this a year from now? 2 Years from now? 5 years from now?
I am sure I am missing something here, but I cannot pin down what it is. I will return to this item if there is follow up.
Golden Conspiracies, and Metal Out performance
Last night I had written a small link about possible gold bullion problems with physical delivery. Loyal reader Stagflationary Mark had plenty to say, much of which I agree with. Of course there was some I did not.
Mark argues, and I think correctly, that gold price conspiracy is a pretty weak line of argument. I would submit that suppression of gold overall is no conspiracy, but governmental policy. There are many instances of FED minutes where Alan Greenspan clearly is concerned with gold prices and what that means for fiat currencies. IMF and central bank gold sales (except for the UK) are often used to lower gold prices. If the only use for gold was high end electronic contacts and jewelry for India, why on earth would the FED be even the least bit interested in gold prices?
Mark offers this as well about inflationary hedges:
Once again, aluminum is the SAME price it was 5 years ago. If hyperinflation was just around the corner (as implied by the movement in gold's price), then why aren't more people willing to hoard aluminum? I certainly don't have a problem hoarding aluminum foil. I don't see much harm in locking in the price. In fact, the higher the price of gold goes, the better aluminum looks to me and the worse gold looks to me. I'm a cheapskate.Here I think we are talking about very different things.
Aluminum was certainly a good thing to hoard in the 1970s. So why isn't it now? Why isn't aluminum pricing confirming the gold story? Why isn't toilet paper pricing confirming the gold story? Seriously. I'd really like to know. Aluminum is a VERY useful metal. While it is true that aluminum is VERY common (roughly 8% of the earth's crust), this was also true in the 1970s. The same can also be said of toilet paper. The stuff practically grows on trees. ;)
In Marks comments he cites Mish many times, and thus I am sure he is aware of the times that gold had done well during inflation, and poorly during inflation. Gold has done well during deflation, and poorly during deflation. Mish has laid this all out before.
Surely Aluminum and toilet paper are not corroborating the gold price rise in terms of a framed idea of hyperinflation. I would add that neither is platinum, or corn, or soybeans.
I have written extensively about the repudiation of US financial engineering. When I started buying gold related assets in the early 2000's, it was due to an inflationary stance. After watching a cooked CPI basically kill off any real way to catch inflation via gold, I was a bit disenchanted. Then the credit bubble came. The housing bubble as well and the stock market blow off top in 2007. All through this I watched the gold (and silver) related buys rise higher, even as inflation was low or low historically.
Surely the rise in price of gold from 2002 until now is not based on inflationary expectations. If it is, then yes, things are wrong. Gold to me is a rock against which to hold against the massive issuance of money and credit. When it became clear the house flippers the world over would never be paying back any of their loans should house prices fall (I figured they had to) then the very meaning of money would fall into question. We saw that at the height of the crisis of late last year and into March this year, the very underpinnings of the banking system were called into question. In a twist, gold and silver were hammered in price during this time! Shows you what I know!
I think the questions still remain, and now that operators can be calm, gold becomes very appealing. We have been and are in deflation right now, and yet the dollar is lower and gold is higher. Another panic may be in the works and I think investment demand for gold serves this need for real assets. If money is not money (Think QE2), gold is always money and a great way to store portable value which will be accepted all over the world.
Of course you could do this with toilet paper, but getting 2 metric tons of toilet paper over a border may be an issue, while a few ounces of gold can fit in your wallet.
As always I could be wrong (very likely) and non of this is personal investment advice. Just my 2 cents as usual.
Have a good night.