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!
A Question
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.
9 comments:
Well, as far as the housing market goes, it depends on where you live.
Real estate is not a bubble. It's bubble wrap. Lots of little bubbles spread out over a large area, some inflated just right, some overinflated and some underinflated.
But there is a buying frenzy going on right now. I can't explain it, however I'm seeing it first hand.
We got this listing last month. Another realtor had had it on the market for three months, but received no offers. The mortgage company transfered it to us, listed it at a higher price, and we had multiple offers in two days.
I think it's because our company is known for dealing with repos. Other companies that deal mainly with owner-occupiers just don't understand the repo market, or they don't have the capital for cleaning, repairs, utilities, lawn maintenance, etc. Or maybe it's name recognition. I don't know. What I do know is that our houses sell.
I spent the day driving around to seven houses in six cities, taking after-cleaning pictures, putting up or taking down signs, what have you. When I got back to the office, two of the houses we just put on the market last week had multiple offers. It's insane.
We're seeing more cash deals recently also. Investors looking to fix up and flip a house, or investing in rental properties. The great thing about cash deals is that they close very quickly and are not subject to foreclosure. Well, except for taxes or home owners association fees.
I wonder about these guys, whether they really know what they're doing. Flipping houses is hard work. It takes time and money, and after all the expenses are paid, the profit margin is actually very small.
I can understand investing in rental properties, especially if you have the cash. But at the same time I know that the laws all favor the renter, not the landlord. So if someone doesn't pay rent, or worse trashes the house, you're basically screwed and out a whole lot of money.
This is about par for the course. Whether you're dealing real estate or precious metals or toilet paper, you have to know what you're doing to make money. Assuming there is such a thing.
Gawains,
Thanks for the great inside information. I am not a real estate type, so all I know is that id prices are depressed enough that rental make sens eon a cash flow basis, RE is a good investment. Looking ahead though, tons of rentals = lower rents so this thing is in flux.
As I said in the post, there will be NO HELP for these buyers if things get worse as the banks have zero exposure to the losses.
As per your question on what will be the trigger.
Beats the hell out of me.
But I do know as sure as I'm sitting here breathing that something is going to break, and when it breaks, it will break big. Life as we know it will cease to exist.
The way the Treasury Department and the Fed are slapping things together with chewing gum and duct tape to keep things from flying apart, it could be anything.
We are seeing the same irrational exuberance from the market and from the people as was shown just before the Great Depression. They shrug off and ignore the problems, and underneath the manufactured gains, the holes open up bigger and bigger. Eventually something will fall through the cracks.
The definition of insanity is doing the same stupid things over and over and expecting things to turn out differently. Apparently our financial experts and our government have decided that insanity is the way to go.
If we don't learn from our mistakes, we are doomed to repeat them.
Look for stupid little things to sink us, like having a value added tax without giving small businesses tax breaks and other tax help. Small businesses would go bankrupt right and left, and small businesses are the ones that do most of the hiring in this country.
C-T,
"As per your question on what will be the trigger.
Beats the hell out of me."
I am with you.
You make great points as well about the possoble dumb moves to come.
Of course all our problems could, in theory, be solved if the government:
-Had a one year 30% across the board payroll tax
-Confiscated 30% of the total value of the top 10% of the country
-Sold off US assets (like the UK is doing, I say sell San Francisco)
Of course, the stampede out of the country and the hoarding that would ensue would be nightmarish, but at least the books would get more square.
GYSC,
"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."
Mish's arguments are WAY too simplistic on this topic in my opinion. In fact, I think Mish REALLY missed the boat though on why gold did poorly during the inflation of the 1980s and 1990s. I have mentioned that in the past as well.
Gold's price was held constant for many decades. The government then released it like a coiled spring. It skyrocketed higher in order to find its corrrect market price. It overshot its target in the late 1970s and early 1980s. This was especially easy for it to do since inflation was really out of control at the time. That pushed gold's price into a massive bubble. Gold then spent the next few decades falling in price even as general prices were rising. It's just that simple to me. Further, the inflation in the 1980s and 1990s was FAR less than people expected. That means that the gold investors in the early 1980s priced in much more inflation than actually arrived. Is it really any wonder gold (the inflation hedge) then did poorly for two decades?
"When I started buying gold related assets in the early 2000's, it was due to an inflationary stance."
Your argument as to why you originally wanted to own gold as an inflation hedge is exactly why I wanted to own it. That's a very rational thing to do. You distrusted that your paper money would hold its value. That's an inflationary mindset.
You speak of distrust of the entire financial system. Owning gold is not a deflationary hedge against that. It is an inflationary hedge against it. You distrust burying paper dollars in your backyard because you distrust that their purchasing power will be maintained.
If you KNEW for sure that paper dollars would be worth more (during a deflation), then you could feel very safe simply burying the paper money. You don't need a deflation hedge at all. That's not why you bought gold though. You feared that you could not trust the paper dollars maintaining their value. You feared the monetary printing press being fired on all cylinders. Right?
Most individual investors buying gold are worried about long-term inflation. You were. I was. I have absolutely no need to buy gold if long-term deflation is coming. Buried cash would do just fine.
Note that I am not arguing that long-term deflation will come. I do have stagflationary in my name after all.
Get
Great post.
I think the move in gold is representative of a loss of confidence in all paper currencies.
I don't think it has much to do with inflation or deflation right now.
It has to do with investors having ZERO confidence in currencies. They are scared to death and its creating huge demand for gold.
I believe metals do well during unstable times versus inflation/deflation. People want something they can hold and trust and gold provides that.
Dollars do not when you create trillions of them.
J
Well, banks have zero exposure on the losses made by cash buyers. That is true. But as I've said before, you only lose money in real estate if you're forced to sell.
With no prinicpal and interest payments, the only expenses for an investment property are taxes and maintenance, which should be covered easily by rental income. However, as rents decline and more rentals are available, the profit margins decline as well.
Home buyers, that is people who buy a house to live in it, generally are willing to pay more than an invester. The reason why is because a home buyer has certain specifications--neighborhood, school district, square footage, number of bedrooms and baths, fence, access to employment, etc. These people are usually young couples looking for a starter home or growing families looking to move up. The investor, on the other hand, is trying to get the lowest price possible.
It's this buy low, sell high mentality that these guys think is the secret to getting rich. It's not. Oh, yeah, it works on occasion and depending on the situation, but more often than not, the market turns or some outside event occurs and these guys end up taking a bath. The real secret to getting rich is to invest in value.
An older, well-maintained home in a nice neighborhood with good schools is about the best investment there is. Because a house like that will always sell or can be rented with ease. Of course, these are the most desirable homes so they don't come cheap. And if one does go on the market, it sells quick.
The problem today is one of overbuilding and overcapacity. There was a lot of fad construction during the bubble, and there are a lot of subdivisions of cheaply built houses that won't ever be worth anything. I've been in hundreds of homes, everything from ten thousand dollar distrissed shacks to million dollar mansions, and I can attest that most houses built in say the last ten years are garbage. They simply cannot compare to older homes built when quality meant something.
Of the over 1,000 houses I've been in, I could count the number I would actually buy on one hand.
That said, you're right about the banks papering over their exposure. Dr. Housing Bubble has a fascinating article on the shadow inventory in California. It's larger than the number of MLS listings! So what the banks are doing is trying to push their losses into some future year in anticipation of a market recovery. That isn't going to happen anytime soon, and a loss is a loss no matter if it's taken today or tomorrow.
GYC,
I don't think it's possible to point out exactly what will trigger an end to our sojourn in la-la land. A bank run, bond market upset, stock market plunge, common sense setting in somewhere on the planet, lots of options.
But it's certainly important to realize that the situation doesn't stand still, and neither is it stable (from a systems point of view, the most crucial point of all).
Mind-gobbling amounts of money are spent, not to cure the sytem of its ills, but to keep the pretense going, and that will become more important as we go along, since there is no such thing as an endless pile of money, while the problems remain, and get worse. Take all the trillions spent so far, and imagine needing the same amount all over again to "keep the peace". Maintaining the illusion for years to come would simply be too expensive. And complicated. Just because you paid $100,000 for a car today doesn’t necessarily or automatically mean you can do it again tomorrow and each day thereafter.
In essence, I’d say it’s all a confidence game, not a matter of any goverment or central bank actually having the ability to control the situation at will. Though of course they like nothing more than having you believe that. They haven’t vacuum-sealed anything, they're 're just trying to hold down the lid on a pressure cooker, without having control over the fire underneath, which at some point must lift the toxic brew inside over the boiling point. It could be that the whole pan explodes, but my guess would be that the lid will be blown off.
To figure out how much longer those trillions can be mustered, you need to know how dire the situation is. And in our view, it's real bad. Record numbers of foreclosures despite all sorts of programs, losing 500,000 to 1 million jobs per month depending on the counting method, these are issues that will need the governemnt's full attention at some point, and we say that point will come soon.
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