US Housing Crash Continues

Who disagrees that house prices will continue to fall?

Real estate businesses disagree, because they don't make money if buyers do not buy. These businesses have a large financial interest in misleading the public about the foolishness of buying a house now. The NAR has harmed America far more than terrorism did.

1. Buyers' agents get nothing if there is no sale, so they want their clients to buy no matter how bad the deal is, which is the exact opposite of the buyer's best interest. Agents take $100 billion each year in commissions from buyers. Agents claim the seller pays the commission, but always fail to mention that the seller gets that money from the buyer. Think about it: who brings the money to the table - the seller or the buyer? All money comes from buyers. No buyer, no money.

   If a stock broker were to charge 6% on the sale of stock, he would quickly go out of business. Real estate brokers don't do much more than stock brokers, so why should you give up nearly two years of your working life earning money to pay a realtor for the few hours they may put into helping you buy or sell a house? 6% of the 30 years it takes to pay off a house is 1.8 years of donating your working time to realtors.

   There are good buyer's agents who really believe they are helping the buyer, but they're in denial about their conflict of interests. Author Upton Sinclair had a great explanation for this: "It is difficult to get a man to understand something when his salary depends on his not understanding it."

2. Mortgage brokers take a percentage of the loan, so they want buyers to take out the biggest loan possible. Even worse - mortgage brokers get paid according to how bad the deal is for the buyer. The worse the deal is (higher interest rate, points, fees, etc) the more the mortgage broker gets!
3. Banks got origination fees and then sold most mortgages, so they did not care about the bankruptcy of borrowers. They would lend way beyond what buyers could afford because they thought they risked nothing if the buyer were to default. Banks sold most loans to the government agencies Fannie Mae or Freddie Mac. The conversion of low-quality housing debt into "high" quality Fannie Mae debt with the implicit backing of the federal government was the main support for the housing bubble. That is ending as Fannie Mae shrinks.

   The other way for banks to dump the risk of loan default has been the Wall Street market for mortgage-backed securities. Now that mass foreclosures have eliminated the subprime portion of the loan-resale market, banks are under pressure to increase loan quality.

4. Appraisers are hired by mortgage brokers and banks, so they are going to give the appraisals that mortgage brokers and banks want to see, not the truth. Appraisers that kill a deal by telling the truth do not get called back to do other appraisals.
5. Newspapers earn money from advertising placed by realtors, lenders, and mortgage brokers, so papers are pressured by that money to publish the real estate industry's unrealistic forecasts. Worse, realtors have a near-monopoly on sale price information, and newspaper reporters never ask realtors hard questions like "how do we know you're not lying about those prices?" The result is an endless stream of stories reporting that the National Association of Realtors (NAR) says it's a good time to buy. Asking the NAR about housing is like walking into a used car dealership and asking the salesman if today would be a good day to buy a car.
6. Owners themselves do not want to believe they are going to lose huge amounts of money.

What the expert estate agents, banking societies and economic boards have to say about the house price crash

Expert Predictions for 2009

Let's start with the mortgage approval numbers. Yes, they are up. But not much. The long-term average since the series began in 1993 is 94,000 a month. So 38,000, a number that is 40% down on last year, is not very encouraging. Much the same can be said of the number of products available: 3,091 might sound like a lot but it is still 80% fewer than this time last year and 30% fewer than even in December. It hardly suggests a return to the days of the easy credit, which drove the bubble in the first place.

Then look at the price data. Only days before the Nationwide numbers, we had the Land Registry numbers. These are the most authoritative we can get, and they showed the decline in house prices actually accelerating. They were down 2% in February – making the annual rate of decline now standing at 16.5%. Note, too, that if you examine the Nationwide quarterly numbers more closely, you see that prices fell 4.2% in the first three months of the year. Looked at like that, it's hard to get too excited, isn't it?

The truth is that all real bear markets tend to offer the unwary investor one last opportunity to lose money. The summer of 2009 is probably that opportunity this time round.

There may well be a quite a big pick up in inquiries, transactions and even prices over the next few months. This will be partly down to the fact that, for those who have cash and want to buy at some point, the housing bear market is getting boring – and partly because a lot of property looks cheap relative to its peak price.

But the basic market conditions are still all wrong for recovery. For starters, cheapness shouldn't be measured relative to peak prices, but relative to historical trend prices. And, on that basis, UK house prices are still totally out of whack: they've still got a long way to fall to get anywhere near the usual 3.5 times average earnings. Look at the Land Registry prices and ONS numbers on average earnings, and you will see that the ratio is still well over five times. A house that looks cheap compared with its 2006 price still looks very expensive compared with its historical average.

Still, even if you aren't fussed about long-term affordability ratios, consider this: for a real recovery to get going now, a very large number of people need to have five things: a job; a firm belief that they will still have a job in five years even as unemployment rises over 3m; a conviction that you can't lose in the long term with bricks and mortar; a good £20,000 as a deposit; and – most importantly of all – the ability to get a mortgage. Know many people like that? Nor do I.

It's Still A Terrible Time To Buy

Falling House Prices Are The Solution, Not The Problem

By Patrick Killelea

1. House prices will keep falling in most places because those prices are still dangerously high compared to incomes and rents. Banks say a safe mortgage is a maximum of 3 times the buyer's yearly income. Landlords say a safe price is a maximum of 15 times the tenant's yearly rent. Yet in coastal areas, both those safety rules are still being violated. Buyers are still borrowing 6 times their income, and sellers are still asking 30 times annual rent, even after recent price declines. Renting is a cash business that reflects what people can really pay, not how much they can borrow. Salaries and rents prove that prices will keep falling for a long time. Anyone who bought a "bargain" this time last year is already sitting on a very painful loss.
2. It's still much cheaper to rent than to own the same thing. On the coasts, yearly rents are less than 3% of purchase price and mortgage rates are 6%, so it costs twice as much to borrow money for a mortgage than it does to borrow (rent) the house itself. Worse, total owner costs including taxes, maintenance, and insurance come to about 9% of purchase price, which is three times the cost of renting. Buying a house is still a very bad deal for the buyer on the coasts, but it does make sense to buy in Michigan and some other places where prices have fallen into line with salaries and rents. Check whether you should rent or buy in your own area with this NY Times calculator.

   The bottom will be here when buying a house to rent out clearly makes money. At that point it's justified to buy because rent can cover the mortgage and all expenses if necessary, eliminating much of the risk.

3. It's a terrible time to buy when interest rates are low, like now. Realtors just lie without shame about this fundamental fact. Prices fall as interest rates rise, because a given monthly payment covers a smaller mortgage at a higher interest rate. Since interest rates have nowhere to go but up, prices have nowhere to go but down. The way to win the game is to have cash on hand to buy outright at a low price when others cannot borrow very much because of high interest rates. To buy at a time of very low interest rates is a mistake.

   Even if you get a long-term fixed rate mortgage, when rates go up the value of your property will go down. If it goes down enough that you're underwater, you will not be able to refinance, and won't be able to sell without a loss.

4. The US economy will not recover until house prices are allowed to fall to prices buyers can easily pay on a normal salary. The primary evil in the economy is housing "affordability" programs which encourage debt, makiing prices higher, not lower. True affordability is not more debt -- true affordability is lower prices. The government's false affordability programs have created more debt than can ever possibly be repaid. Credit rating agencies lied about the value of this debt, scaring off investors.

   When house prices finally fall to affordble levels, and foolish lenders and foolish borrowers are finally allowed to fail, then the economy will work again: there will be investment based on real production instead of on financial speculation, jobs will be created, and money will be earned and spent. Currently, we have no investment because the government is punishing savers and investors with policies that waste their honestly earned money to cover the foolish gambling losses of others.

5. Prices disconnected from Gross Domestic Product. The value of housing in the US depends a lot on the value of what the US actually produces. Not only is the GDP decreasing, jobs are being lost in large numbers. It does not make sense to buy when more jobs will be lost and the price people can pay will decrease. Unemployment drives housing prices down. It also does not make sense to buy when your own job is in danger.
6. Buyers borrowed too much money and cannot pay the interest. Now there are mass foreclosures, and Congress is taking a trillion dollars of your money to pay the mortgage investment losses for banks. The plan is to overpay the banks for bad mortgages, claiming that this will support the housing market. It will not work, since bank profits have nothing to do with housing prices.

   We also have legal contracts being modified to stop even well-justified foreclosures. No one was forced to borrow money. It was a choice -- a very bad choice, but completely voluntary. Grownups should be responsible for their own actions. To prevent a justified foreclosure is also to prevent a deserving family from buying that house at a low price, not to mention what this does to faith in contract law. No one in government or the press will even mention that everyone in foreclosure trouble got themselves into that spot by voluntarily borrowing too much money. Debt is the cause of massive evil.

   Should taxes be used to pay the debts of irresponsible borrowers, no matter how much they over-borrowed or overpaid for a house? Should savers be forced to pay the debts of people who cannot afford "their homes" no matter what price they paid or how far it is beyond their actual financial means? If so, go buy the most expensive house you can right now! Borrow as much as you possibly can and don't pay it back, knowing that Congress will force the real repayment obligation onto others, onto people who are living within their means.

   Banks happily loaned whatever amount borrowers wanted as long as the banks could then sell the loan, pushing the default risk onto Fannie Mae (taxpayers) or onto buyers of mortgage-backed bonds. Now that it has become clear that a trillion dollars in foolish mortgage loans will not be repaid, Fannie Mae is under pressure not to buy risky loans and investors do not want mortgage-backed bonds. This means that the money available for mortgages is falling, and house prices will keep falling, probably for another five years or more. This is not just a subprime problem. All mortgages will be harder to get.

   A return to traditional lending standards means a return to traditional prices, which are far below current prices.

7. Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or an interest rate hike, he's bankrupt in the real world.

   It's worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is 6% because of the realtor lobby's corruption of US legislators. On a $300,000 house, that's $18,000 lost even if prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.

8. Shortage of first-time buyers. High house prices have been very unfair to new families, especially those with children. It is literally impossible for them to buy at current prices, yet government leaders never talk about how lower house prices are good for pretty much everyone, instead preferring to sacrifice American families to make sure bankers have plenty of debt to earn interest on. If you own a house and ever want to upgrade, you benefit from falling prices because you'll save more on your next house than you'll lose in selling your current house. Every "affordability" program drives prices higher by pushing buyers deeper into debt. To really help Americans, Fannie Mae and Freddie Mac should be completely eliminated, along with the mortgage-interest deduction. Canada has no mortgage-interest deduction at all, and has a more affordable and stable housing market because of that.

   The government keeps house prices unaffordably high through programs that increase buyer debt, and then pretends to be interested in affordable housing. No one in government except Ron Paul ever talks about the obvious solution: less debt and lower house prices. The real result of every "affordability" program is to keep you in debt for the rest of your life so that you have to keep working. Lower house prices would liberate millions of people from decades of labor each. I never see anything in the press about the millions of people that were hurt and continue to be hurt by high house prices.

   The government pretends to be interested in affordable housing, but now that housing is becoming affordable, they want to stop it? Their actions speak louder than their words.

9. Surplus of speculators. Nationally, 25% of houses bought the last few years were pure speculation, not houses to live in, and the speculators are going into foreclosure in large numbers now. Even the National Association of House Builders admits that "Investor-driven price appreciation looms over some housing markets."
10. Deflation. There is fear of inflation, but it's not likely in the next few years. The actual amount of money created by the Fed lately is a trillion dollars, which sounds huge, but is small compared to the $10 trillion drop in housing "values" and another $10 trillion drop in stock market capitalization. The US government will not print extreme amounts of cash like Zimbabwe did, because significant inflation would mean that foreigners would no longer lend money to the US government unless interest rates were much higher to compensate them for inflation losses. Higher interest rates would push more people with adjustable mortgages over the edge. The most likely scenario is like Japan: low inflation and low interest rates, with falling house prices for years to come.
11. Fraud. It was common for speculators take out a loan for up to 50% more than the price of the house. The appraiser went along with the inflated price, or he did not ever get called back to do another appraisal. The speculator then paid the seller his asking price (much less than the loan amount), and used the extra money to make mortgage payments on the unreasonably large mortgage until he could find a buyer to take the house off his hands for more than he paid. Worked great during the boom. Now it doesn't work at all, unless the speculator simply skips town with the extra money.
12. Baby boomers retiring. There are 77 million Americans born between 1946-1964. One-third have zero retirement savings. The oldest are 62. The only money they have is equity in a house, so they must sell.
13. Huge glut of empty housing. Builders are being forced to drop prices even faster than owners. Builders have huge excess inventory that they cannot sell, and more houses are completed each day, making the housing slump worse.
14. The best summary explanation, from Business Week: "Today's housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low interest rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken."

The Real Estate Investment Gateway For Foreign Investors - www.globalreim.com

When Will the Housing Crash End?

People have been trying to call a bottom to the current housing and mortgage crisis for some time. Chartists, technical analysts, real estate gurus, even soothsayers and tea leaf readers have all seen false bottoms and have predicted upturns in the market in the very near future.

Unfortunately, the worst is yet to come. We are not even halfway into this housing price decline. In books published in 2003 and 2006, respectively, my predictions of 25% home price declines nationwide and 50% price declines in many cities on the coasts are rapidly coming true. You can see that we have a long way to go because most ARMS are just now resetting, most foreclosures to date have been 2006 and 2007 mortgages and the banks are not going to lend 10 times your combined income in the future, but rather something more like 5 times. Unless you are willing to put up 50% down payments, homes have to come down further in price.

The country and the global financial system came closer to a complete collapse this year than any time in our history with the possible exception of 1929. While we will all pay for it in much greater inflation, Bernanke and the world's central bankers have to be congratulated for printing and distributing to the world's banks and investment banks approximately $1.5 trillion. It was our hard-earned taxpayer money, but it was well spent as we would have faced a global bank run and depression without his intervention. The fact that it happened without many Americans even realizing it only assures that we have not learned our lesson and are doomed to repeat our mistakes until we understand their underlying cause.

They had no choice. We no longer live in a capitalist financial market in which banks compete and inefficient and poorly run institutions go bankrupt and exit the playing field. In the modern world, thanks to the $400 trillion derivatives market, no major bank or investment bank can be allowed to fail. They each in themselves are important nodes in an extremely complex web of derivative contracts such that the removal of any single major firm would cause a collapse of the entire system. The best analogy is to look what happens to our entire network of nationally scheduled air flights when a single major hub like Chicago is closed temporarily due to weather. Just as airplanes fly between any two cities, so derivative contracts are made between two counterparties, but the resulting interlocking and interdependent relationships are so complicated that no financial system could survive if a major hub dropped out.

Banks know that they are too big for the government to allow them to fail. The moral hazard that is created will be reflected in their continuing to take on high degrees of debt and financial leverage and invest in risky assets with no concern for the consequences. And much of the activity in the derivatives market is nothing more than mere speculation. When Bear Stearns was saved from bankruptcy it had $120 billion of debt outstanding, but for some crazy reason there were $2.8 trillion of credit derivative contracts written guaranteeing that comparatively small amount of Bear Stearns debt. If Bear had gone bankrupt and these counterparties had to actually pay, it would have caused massive bankruptcies of hedge funds and other financial institutions, not to mention the fact that Bear itself was also a counterparty to tens of trillions of derivative contracts and their prime brokerage business financed trillions more of derivative positions at their hedge fund clients.

When I wrote my books on housing I hinted at what I thought the real cause of the problem was. Yes, I said that the banks were acting crazy by extending such large amounts of money to homebuyers, but I also hinted at why we allowed this to occur. The reason is that the banks, the investment banks, the hedge funds, the mortgage companies and the private equity firms are some of the biggest political lobbyists in America and give more money to your President and Congressmen than any other industry. And what do they expect in return? Deregulation. They spent $400 million on lobbying to have Glass-Steagle overturned to allow commercial banks to get into the investment banking business. This opened the door for banks to arrange mortgages, but suffer little to no consequence as these mortgages were quickly packaged and sold to investors upstream.

Banks and corporations argued that regulation got in the way of free markets. Until the housing and mortgage collapse, few people understood that regulations and rules are the basis of any free market system. You cannot buy and sell anything unless you have a strong rule of law that enforces property rights and assures contracts will be honored and fraud exposed. The greatest injustice I see in America today is the ability of banks and corporations to bribe-yes, that's the right word-our elected officials in return for trillions of dollars of value creation to their shareholders in sleazy mortgage regulation, phony ethanol programs, high energy prices, costly pharmaceuticals and healthcare, and wars that only seem to profit the defense industry. I believe the housing crisis is just a symptom of a much bigger problem of trying to constrain lobbying, which will continue to fester until the American people conclude they have had enough and just won't take it anymore. Let's all do something positive to make sure this hijacking of our system of government is never allowed to occur in this country again.

John R. Talbott called the causes of the current housing and mortgage crisis spot-on in his 2003 book, The Coming Crash of the Housing Market and even nailed the peak of the market with his January 2006 book, Sell Now! The End of the Housing Bubble. His new book, Obamanomics: How Bottom-Up Economic Prosperity Will Replace Trickle Down Economics, will be published on August 1st.

The Real Estate Investment Gateway For Foreign Investors - www.globalreim.com

California Home Sales Increase 83% as Home Prices Fall by 41%

Home sales increased 83% in February in California compared with the same period a year ago, while the median price of an existing home declined 40.8% percent, the CALIFORNIA ASSOCIATION OF REALTORS (CAR) reported today (see chart above).

Sales of existing, single-family homes in California totaled 620,410 in February at a seasonally adjusted annualized rate, according to information collected by CAR from more than 90 local REALTOR associations statewide. Statewide home resale activity increased 83% from the revised 338,970 sales pace recorded in February 2008.

The median price of an existing, single-family detached home in California during February 2009 was $247,590, a 40.8% decrease from the revised $418,260 median for February 2008, CAR reported. The February 2009 median price fell 2.3% compared with January’s revised $253,330 median price.

CAR’s Unsold Inventory Index for existing, single-family detached homes in February 2009 was 6.5 months, compared with 15.3 months for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.

The median number of days it took to sell a single-family home was 51.5 days in February 2009, compared with 69.3 days for the same period a year ago.

Market forces and the Law of Demand are working in the California real estate market. Total real estate sales volume increased by 8.45% from $1.42 billion in February 2008 to $1.54 billion in February 2009, at an annualized rate.

The Real Estate Investment Gateway For Foreign Investors - www.globalreim.com

California February 2009 Home Sales/Median Prices

An estimated 29,225 new and resale houses and condos were sold statewide last month.

That was down 0.8 percent from 29,458 in January and up 42.5 percent from 20,513 for February 2008. Sales have increased on a year-over-year basis the last eight months. California sales for the month of February have varied from last year's low to a peak of 48,409 in 2004, while the average is 32,517.

The median price paid for a home last month was $224,000, unchanged from the month before, and down 39.9 percent from $373,000 for February a year ago. Around half of the drop in the median is due to price depreciation, while the other half is due to shifts in the types of homes selling, and how those homes are financed. Last month was the first without a month-to-month decline in the median since May 2007.

Of the existing homes sold last month, 58.4 percent were properties that had been foreclosed on. A year ago it was 33.3 percent.

The typical mortgage payment that home buyers committed themselves to paying last month was $976. That was down from $969 in January, and down from $1,774 for February a year ago. The typical mortgage payment has not been below $1,000 since May-99. Adjusted for inflation, last month's mortgage payment was the lowest in DataQuick's statistics, which go back to 1988. The payment was 53.4 percent below the spring 1989 peak of the prior real estate cycle. It was 62.2 percent below the current cycle's peak in June 2006.

Indicators of market distress continue to move in different directions. Foreclosure activity has been off its 2008 peaks but remains near record levels, while financing with adjustable-rate mortgages is at an all-time low, as is financing with multiple mortgages. Down payment sizes and flipping rates are stable, while non-owner occupied buying activity is above-average in some areas, MDA DataQuick reported.

Copyright MDA DataQuick Information Systems. All rights reserved.

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