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Housing Woes Bring New Cry: Let Market Fall - Ny Times

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http://www.nytimes.com/2010/09/06/business/economy/06housing.html?_r=1&ref=business

The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.

Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.

The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.

Caught in the middle is an administration that gambled on a recovery that is not happening.

“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”

That was clear last week, when the secretary of housing and urban development, Shaun Donovan, appeared to side with current homeowners, telling CNN the administration would “go everywhere we can” to make sure the slumping market recovers.

Mr. Donovan even opened the door to another housing tax credit like the one that expired last spring, which paid first-time buyers as much as $8,000 and buyers who were moving up $6,500. The cost to taxpayers was in the neighborhood of $30 billion, much of which went to people who would have bought anyway.

Administration press officers quickly backpedaled from Mr. Donovan’s comment, saying a revived credit was either highly unlikely or flat-out impossible. Mr. Donovan declined to be interviewed for this article. In a statement, a White House spokeswoman responded to questions about possible new stimulus measures by pointing to those already in the works.

“In the weeks ahead, we will focus on successfully getting off the ground programs we have recently announced,” the spokeswoman, Amy Brundage, said.

Among those initiatives are $3 billion to keep the unemployed from losing their homes and a refinancing program that will try to cut the mortgage balances of owners who owe more than their property is worth. A previous program with similar goals had limited success.

More at the link.

Are the "experts" finally catching up with reality?

Is heresy taking hold, let prices fall?

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http://market-ticker.org/akcs-www?post=166004

Three years late, but better late than never, I guess....

The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.

There was never a way to do that. I've been documenting this for the last three years.

The so-called "price appreciation" of the 2000s was false. That is, it was not predicated on actual value, it was not predicated on a reasonable amount of leverage, and it was not predicated on rapidly rising wages.

It was a scam predicated on ever-increasing leverage - a Ponzi scheme that was impossible to continue forward with in perpetuity.

In the early part of 2008 I wrote a white paper on this and distributed it to all 535 members of Congress and all major political campaigns for President, including John McCain, Hilliary Clinton and Senator (at the time) Obama. I said at the time:

The unfortunate reality is that home prices cannot appreciate, over long periods of time, at a rate that exceeds the growth in income among the population. That this is axiomatic should be obvious to everyone; attempting to “ramp” home prices by any mechanism is always a short term phenomena, and leads to a highly-destructive housing crash when the limit of debt carrying is exceeded among the population.

....

This housing bubble was created through intentional manipulation of appraisal values, dangerous and even fraudulent mortgage practices and willful blindness and tolerance among regulators that enabled the creation of “off balance sheet” vehicles (SIVs). Dishonest accounting and outright manipulation of credit markets also played a role.

Now the bubble has burst and we are faced with the aftermath.

It is critical that the government address these issues in a prudent and thoughtful fashion. There is a tremendous desire to “bail people out”, especially taxpayers who are howling in protest to the government in one form or another.

But doing so, whether those howling are banks, investors (bond or stock), homeowners, builders or anyone else would be a serious – perhaps critical – mistake.

Yep.

More than two years ago.

The Administration was stupid, as was the Bush Administration:

“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”

It was literally impossible for this to have worked on a mathematical basis.

The problem is that even with a rising economy at four or five times incomes, or more, houses are not affordable. Nothing can be done to fix this, other than to dramatically increase wages. That can't happen with the global wage arbitrage that is in place, and even if the government was to decide to fix this (and they should) they can't fix it quickly - it will take many years, perhaps a decade or more.

Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and seven other states, also advocates letting the market fall. “Prices are still artificially high,” he said. “The government is discriminating against the renters who are able to buy at $200,000 but can’t at $250,000.”

Note that this is a lender.

Note what he's not saying.

At historical lows interest rates only have one direction to go for mortgages: UPWARD.

Yet it was those historical, ridiculous lows that led to the bubble in the first place. It was 1 and 2% "teaser rates" and Option ARMs that caused the price explosion. Since the rate environment has been artificially suppressed, the price correction necessary to fix the problem has not been able to occur.

We are going to see a huge further decline folks. It is inevitable.

Take the current 4.5% rate available on 30 year money for "well-qualified" buyers. Now move that to a more-normal 7% long rate - not an unreasonable rate at all.

That gives you a payment on a $200,000 loan of $1009.58. If the home has a down payment applied of 20%, the selling price is $250,000.

Now let's assume the payment is what the buyer can afford, but rates go to 7%. What happens?

The borrowed amount decreases to $152,633. Again, with a 20% down payment the house sells for about $190,000.

That's about a 25% drop simply from rates normalizing.

Now add to that the excessive valuation predicated on income levels, and in those places where the bubble was it's most extreme the problem is, quite clearly, nowhere near fixed.

"Let it crash" was the right decision in 2007, it was the right decision in 2008, it was the right decision in 2009, and it is the right, and inevitable, decision today.

If you want the housing market to "recover", it must first adjust out the distortions from the previous decade. It cannot be otherwise. In addition, rates must normalize so that a durable bottom can be found and formed.

When will President Obama and his administration come to grips with reality?

Denniger's take on it.

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A lot of arguments that have been made by people on forums like this for years.. like it is mathematically impossible for houses to go up in price by 7% a year forever while incomes are stagnant.. are finally entering the mainstream.

The sad part is the mainstream had to learn the hard way and after the fact. Sort of like you try to explain why someone wants to drive more slowly when there is puddles on the ground. After they saw their friend's head get smashed going through the windshield it is easier to explain. Sort of like the Irish housing market.

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"Started in America". Yes indeed, it won't finish there however. Looking increasingly apparent that the U.S administration will have to 'grasp the nettle' and let this one sort itself out.

;)

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This article misses the point:

"The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent."

Homeowners care about property values, but they're not the ones pushing policies to prevent a market correction, because they're not the ones on the hook for the debt. They can all walk away from their mortgages and turn the keys over to the bank. It's the banks and the bondholders who are the ones that don't want prices to adjust to market levels, because they can't just walk away. Policies trying to increase house prices in the US are nothing but a give away to the bankers.

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This article misses the point:

snip

It's the banks and the bondholders who are the ones that don't want prices to adjust to market levels, because they can't just walk away.

snip

oh, but they have. well, the chosen ones have.

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This article misses the point:

"The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent."

Homeowners care about property values, but they're not the ones pushing policies to prevent a market correction, because they're not the ones on the hook for the debt. They can all walk away from their mortgages and turn the keys over to the bank. It's the banks and the bondholders who are the ones that don't want prices to adjust to market levels, because they can't just walk away. Policies trying to increase house prices in the US are nothing but a give away to the bankers.

Exactly, it's about saving the banks.

However, if mass defaults occur, they will have to print to cover savings accounts too; the assets (the mortgages) which were covering the deposit liabilities ('savings' ie. those in credit) will have to take a haircut. Printing to replace promises of productivity is inflationary.

EDIT: Unless they let the deposits take a haircut too or keep to their word of only covering the guaranteed amount. That could lead to panic too though, as people withdraw money to safety.

With such high levels of leverage in the banking sector, I doubt that the shareholders could cover the deficit... how about the treasury holders? What would the likes of the Chinese do then?

Edited by Traktion

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snip

EDIT: Unless they let the deposits take a haircut too or keep to their word of only covering the guaranteed amount. That could lead to panic too though, as people withdraw money to safety.

snip

and the cash would come from where?

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and the cash would come from where?

If even the guaranteed amounts are at risk, after all the non-guaranteed deposits have been taken out, then the printing press is the only place it could come from.

If they don't print for the guaranteed deposits, then you're going to get epic bank runs, with people at the back of the queue left to dine at soup kitchens.

There seems to be plenty of pain yet to come, no matter what the governments do. All they can do is choose who gets the brunt of it.

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Will historians look back at this period of desperately trying to keep the HPI plates spinning with the same degree of incomprehension as we look back at the Easter Islanders deforesting the land in order to erect more statues in honour of their deities, or the Mayans bloodletting frenzy to appease the rain gods?

i.e. what the feck did they think they were doing?

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EDIT: Unless they let the deposits take a haircut too or keep to their word of only covering the guaranteed amount. That could lead to panic too though, as people withdraw money to safety.

They don't and indeed in 2007-8 didn't care about the little individual savers. They care about the Corporates. All those lovely ( and in this case non-banking) friends of theirs that have business deposits etc in the banks.

And, to be fair to them, for once, I'd be happier if my water company and electricity company were able to operate too.

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They don't and indeed in 2007-8 didn't care about the little individual savers. They care about the Corporates. All those lovely ( and in this case non-banking) friends of theirs that have business deposits etc in the banks.

And, to be fair to them, for once, I'd be happier if my water company and electricity company were able to operate too.

So where will the money come from to cover the bank deposit liabilities of said companies, if house prices fall and people default? Obviously, more of a problem with 'jingle mail' in the states, but people can still be unable to pay here too.

Someone has to take the pain, somewhere, unless the cash rich start spending and the debt suffocated start being able to repay.

EDIT: P.S. What is to stop the corporates running on the banks too, to protect their businesses?

Edited by Traktion

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A lot of arguments that have been made by people on forums like this for years.. like it is mathematically impossible for houses to go up in price by 7% a year forever while incomes are stagnant.. are finally entering the mainstream.

The sad part is the mainstream had to learn the hard way and after the fact. Sort of like you try to explain why someone wants to drive more slowly when there is puddles on the ground. After they saw their friend's head get smashed going through the windshield it is easier to explain. Sort of like the Irish housing market.

I agree over a lengthy timeframe but clearly the "London market" distorts everything and has nothing at all to do with "wages" as in actual UK wages. You could argue that for for a host of other markets around the world that are probably never governed by local conditions at all. I realise that "the city" contributes to the taxation base of the UK but am I alone in thinking that the overall crap that the square mile has brought to this country canno event begin to be measured?? In terms of the banking crisis itself and the "upward pull" on house prices in general (for the rest of the country), with the resultant misery inflicted on UK society in general, Sodom had more going for it in terms of overall benefit to society.

Edited by tomwatkins

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Are the "experts" finally catching up with reality?

Is heresy taking hold, let prices fall?

Let the free market have its way in the good ol' USA? Who would have thought it would come to that? I guess that would mean giving up on stimuli as they don't work on the scale they were used recently.

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Will historians look back at this period of desperately trying to keep the HPI plates spinning with the same degree of incomprehension as we look back at the Easter Islanders deforesting the land in order to erect more statues in honour of their deities, or the Mayans bloodletting frenzy to appease the rain gods?

i.e. what the feck did they think they were doing?

Haha, very nicely put

If we look back at 1929 I reckon they've tried to do the equivilent of pausing us on October 28, the day before the big crash. We been living that "October 29" over and over again for 2 years now.

Time to hit the 'Play' button and be done with it.

edit: got me dates mixed up

Edited by needsleep

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  • 140 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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