5 housing and financial stories showing profound weakness in the economy: new home sales break past record low dating back to 1963, prisoners using home buyer tax credit, SoCal inventory spiking, U.S. dollar multi-decade slide, and Fannie Mae cracking down on strategic default.
Unfortunately the storyline regarding housing is all too predictable. For California, once the vice grips tightened around the option ARM and Alt-A universe in 2007 and 2008, the housing market in the state collapsed like a piñata in the subsequent years. Now, all the mainstream analysts are “shocked†that new home sales have fallen into the abyss. Thing are so bad, that new home sales on a seasonally adjusted basis fell to a record low level and Census data goes back to 1963. When we chart this as you will see, this is a historic fall. Yet this is all expected. The removal of the federal tax credit and pent up demand moved forward caused a bear market bounce for housing. All it took was one month worth of data to crush the entire idea that the housing market was somehow supporting itself.
To do the story justice, let us first examine the new home sales data:
Source:Â Census
This merely reflects the underlying weakness with housing but more importantly, the fragility of the overall economy. Keep in mind that this tax credit in combination with FHA insured loans allowed many recent home buyers to jump into homes with practically zero down. For this reason, there is now a new inventory of home owners that are walking on a razor’s edge of financial peril. FHA defaults have been skyrocketing due to the weakness in underwriting but also because the overall economy has not been fixed. Too much time and money has focused on bailing out housing (what good did that do) and enriching the banking sector (which has “miraculously†done well in this crisis). The housing market has merely been a charade for the public while banks setup protective barriers and funnel taxpayer money into their balance sheet to fix the gaping financial holes that they created.
Housing should be healthy because the economy is healthy. Right now the government and Wall Street have it twisted. They want housing to be healthy so the economy can be healthy. And in more surprising news, it turns out that the tax credit has been abused:
“(USA Today) Despite efforts by the IRS to combat scams, thousands of individuals — including nearly 1,300 prison inmates — have defrauded the government of millions of dollars in home buyer credits, Treasury’s inspector general reported Wednesday.
The home buyer credit provided a federal tax credit of up to $8,000 for first-time home buyers for tax year 2008, the subject of the report. The credit, created to revive the housing market, was later extended to repeat home buyers. The latest credit expired with sale contracts signed as of April 30.
•1,295 prisoners, including 241 serving life sentences, received $9.1 million in credits, even though they were incarcerated at the time they reported that they purchased their home. These prisoners didn’t file joint returns, so their claims could not have been the result of purchases made with or by their spouses, the report said.
•2,555 taxpayers received $17.6 million in credits for homes purchased before the dates allowed by law.
•10,282 taxpayers received credits for homes that were also used by other taxpayers to claim the credit. In one case, 67 taxpayers used the same home to claim the credit.â€
And what success do we have to show for it? A record low amount of new home sales and foreclosures at peak levels (not exactly records you want to tout). These are your tax dollars at work here. If we look at the Southern California market we’ll see that MLS inventory continues to spike upwards in the peak spring and summer selling season:
In more wasted money to failed policies, $1.5 billion (a pittance to the trillions stolen by the Wall Street crooks) is now being given to the kings of foreclosure states with California receiving the lion’s share:
“(AP) According to the proposals from state housing finance agencies, the largest recipient of the funding is California, which will get nearly $700 million to assist about 46,000 borrowers.
California officials are asking for matching contributions from lenders for its programs, which provide subsidies to unemployed borrowers and those who have missed mortgage payments, and for reductions in borrowers’ principal balances.â€
This is more nonsense. Why not give money to unemployed renters? Or what about helping to reduce debt for those who don’t own but have debt in other forms? What makes housing debt so sacrosanct? If we are giving away money we don’t have why stop there? It isn’t that the public really desires this, the banking PR machines want this to line their pockets and saddle taxpayers with more junk. This game has been going on for decades. And then you wonder why the U.S dollar has done this over the years:
Sure we’ve seen the dollar spike up recently but this is only because the second largest reserve currency in the Euro is actually looking worse with their shenanigans. Is that something to be proud about? Over this time the amount of debt we have taken on and the amount we are taking on is putting more and more at risk for our future. The Federal Reserve is concerned with preserving the security of a handful of banks even if this means keeping many people indentured to debt. Now, government sponsored mortgage failure Fannie Mae is going to penalize those that walk away:
“Seven-Year Lockout Policy for Strategic Defaulters
WASHINGTON, DC — Fannie Mae (FNM/NYSE) announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe.
“We’re taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, executive vice president for credit portfolio management. “Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time.”
In other words, keep paying your mortgage on an overpriced asset or else you won’t be able to purchase another overpriced asset in a 7 year time frame. There is little reason to believe the housing market will stand on its own two feet. So when we get additional data in the next few weeks expect more “stunning†news that home sales are falling and indicators turn weak again.
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33 Responses to “5 housing and financial stories showing profound weakness in the economy: new home sales break past record low dating back to 1963, prisoners using home buyer tax credit, SoCal inventory spiking, U.S. dollar multi-decade slide, and Fannie Mae cracking down on strategic default.”
Sales were up in Los Angeles last month, but down for the country.
A total of 22,270 new and resale houses and condos closed escrow in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was up 9.7 percent from 20,299 in April, and up 7.2 percent from 20,775 in May 2009, according to MDA DataQuick of San Diego.
May sales were the highest for that month since May 2006, but they still fell 15.0 percent short of the average number sold in May since 1988, when DataQuick’s statistics begin. The 9.7 percent increase in sales between April and May compares with an average change of 6 percent since 1988.
Many of the good jobs are never coming back.Living in Detroit, you used to be able to drop out of high school at 17, start working in the auto plants the next day, and enjoy a very nice middle class life. Obama appointed friends of Wall Street to key posts, so it is no surprise that they bailed out their friends. The only good thing right now, is that Obama will now loose FLA. becasuse of his bungling the oil mess. If he looses Calif., also, he will loose the electoral college vote.
We need REAL change.
The Fannie Mae locking policy for 7 yrs for walkouts is rather funny. I have a few friends who did the strategic default route. Some in the same neighbourhood. A big chunk bought in the boom for 600-900 k and since these are new neighbourhoods, almost nobody was fully paid-so they were hit hard. Prices are 250-350k. So some just bought a neighbour’s house or a few blocks away and defaulted on their own loans. I guess they thought a shot to their credit was ok when you get to own a 300k mortgage instead of a 700k mortgage for essentially the same house/location.
The people I know who did this, bought their new home first and then walked away-so Fannie’s rules really won’t have any effect on them-unless they decide to walk away from their second house too!!
Economists have used the word “unexpected” more times in the past three months than I’ve heard it in my entire life. If these guys can’t see what’s happening, what the hell are they good for and why is anyone listening to these fools? I read five papers a day and I haven’t read one that has gotten it right except the good Dr.. I have new word for these economist. “Incompetent”.
Regarding the Doc’s last paragraph, that’s one of the best things that could happen. It wouldn’t take a huge leap to convince me that those who have the financial prudence to recognize a sinking ship would be more ready and willing to hop back in the game when the situation improves. Locking them out for an extended period of time seems like it might help hold prices down. While I’m sure this is and unintended consequence among Freddie and Fannie and their handlers, it is a turn of events I would gladly welcome.
John – Aren’t these numbers you’re quoting due to April escrows closing in May? We may see some April escrows close in June as well with the double-dippers trying to gain the federal and state tax credits.
Re: Dave in Detroit
The change we need is for people to know the difference between “loose” and “lose”.
Regarding the Dataquick SoCal/Cali sales numbers, of course they were up for May, due to people looking to double dip on the federal and state credits! Note that I’m sure most if not all of these May sales (counted as when they closed escrow) were signed in April in order to double dip.
If we hadn’t had this BS state new homebuyer/new home tax credit, then Cali wouldn’t have been the only state in the union to buck the trend, and new home sales would have probably been down 50% instead of 33% for May versus April. Regular home sales would have probably been down 10% or more instead of the 2.2% dip.
“The change we need is for people to know the difference between “loose†and “loseâ€.”
No that is not the change we need, ideas are more important than spelling. Use your criticisms to make a real argument.
Yeah, Chubbuni 13- you would make a great librarian, or petty little book critic-
Always easier to put down people who are trying, rather than put up your own
ideas.
I’m not sure the new lockout policy is really all that useful, DHB. I would hope that after ANYONE forecloses on a property, whether they strategically defaulted or over-extended and lost the home, that they cannot get government support to buy another house within 7 years. That is, until that foreclosure is off their credit.
If this was not the case, and this lockout policy is actually new, then shame on us for not closing this loophole before.
@Dave I don’t think Obama can “loose” California or Florida — lending standards were quite loose enough already, thank you very much. This isn’t something for Obama to lose sleep over.
It’s certainly true that these bailouts are upsetting, and largely counter-productive. I just don’t think we’ll find salvation in the loose orthography (and logic) of Ms. “Drill Baby Drill” and the rest of the crowd that parties with bags of tea. Plus ça change…
Of course i agree with the good doctor. This is the best Housing Market website i’ve ever found.
As to the commenting going on here….i just love how every blog gets reduced down to a b*tch fight that has nothing to do with the topic at hand.
Focus people!
Loosen up Chubs.
The truth is that the United States has massively mis allocated resources to the housing sector. Until someone has the courage to pull the plug and let this corrupt zombie industry walk the subsidy plank, we will not have a recovery.
I just managed to escape with most of my skin and business intact from the clutches of the housing industry in 2009, January. I didn’t do it because of any particular foresight. I did it because I could no longer stomach the ravenous wolf way this industry treated its customers and fellow members. I had never experienced such cold-blooded, ruthless and predatory bending over the gullible public and and its own associates, and jamming it in. This is an industry that is curiously amoral. It is based on lies and brass knuckled bullying.
I am hoping there will NEVER be a “recovery” of this industry as it once existed.
Grecko and Jonny:
While it is always good to see peoples ideas it is also disconcerting and hard to take seriously the idea of someone who does not know the difference between loose (as in screw) and lose as in to fail. It astounds me that this eludes so many people that post on the internet. My 3rd grade granddaughter knows the difference between these two words. My point is that ones grasp of language is an indicator of ones grasp of reason. Also neither one of you posted an idea just a criticism of someone actually offering a realistic bit of advice.
Now to add my idea. Dr HB spoke of many points I saw in the press this week. One he did not mention was interest rates. Mortgage rates were reported to be at rates not seen since 1951. That is right lady’s and gentlemen 1951. This slide in sales and growth in inventory is taking place in a climate of money rates from a time when there were only a handful of freeways in America and suburbs were just beginning to encroach the available land.
Plus there was an article echoing Dr HB’s position on rates remaining low for the long term. The fed held rates down and now talk is about no change until next year or perhaps 2012.
Agree, chubbuni13 – but would that be “loose” as in “goose” and “lose” as in “close?” No, wait… as in “rose?”
Untill I did that little exercise, I could never understand why people wrote “loose’ when they meant “lose” – as in “zoos.” 😉
The rest of the year and next two years are going to be very interesting. I hope to see lower asset prices. I think there is no doubt in my mind right now that this whole sad episode is a repeat of the Great Depression. Most history books, economic textbooks only point to October 1929. But that is when it began, the government “stimulated” the economy and then it was running on an artifical high and then the real crash occurred four years later.
We are doing the exact same script right now. Instead of allowing the excesses and malinvestments to correct, we are fighting a fight that ultimately we will lose. I look forward to the day when I will be able to buy a house, investment property, stocks and bonds for a “steal”.
I am definitely noticing the increase in inventory for the areas I track. I am also noticing that prices are inching down and houses are sitting much longer than they were one year ago. You can actually buy a detached SFR in Huntington Beach for mid 400K range now (1300 sq ft house on a 6000 sq ft lot). Sure the house will need some work and TLC, but this is progress.
I personally am waiting another 2 or 3 years to buy. There is no rush when distressed and shadow inventory will litter the landscape for years to come. Renting and saving abigger downpayment is just icing on the cake. Additionally, no one knows how bad the economy will really get. Patience will be rewarded this time.
All these comments are making me “loose” my mind!
1) People are prone to typing mistakes on conversational blogs. I’m relatively well educated with graduate degree + licenses/certs etc.. and have written papers and novels. Was an inch away from being an English major and going the writing route. Believe me, I know the difference between lose/loose and there/their/they’re – guess what? Never made the mistake in any other context but have seen myself do it on forums and blogs. Take a deep breadth, proof your own posts, and try not to be overly judgmental of others.
2) On topic, I’ve seen some signs of supposedly too big to fail and capital happy banks pulling back hard on resi lending especially second mortgages/lines and high end jumbo markets. These banks have their own portfolios to monitor and are not putting on any major risk (i.e. 50% max loan to value on jumbo seconds which means the first has to be 30% LTV to get 20% on the second and this is in a relatively “unaffected” real estate market). All signs in the market and actions at the banks point to another leg down with particular stress at the high end.
“Grandpa, I was told in school today that a long long time ago when a person put money in a bank, the Bank didn’t just keep your money safe from robbers or fires, but they also PAID people something called “”interest””. Is that true Grandpa?”
“Yes Mary, it is true the Banks once paid a person “”interest”” but over the years soooooo much money was created out of thin air that there was so much of it and everyone owed so much money they decided that only those who have to earn their money should pay anyone interest. It was decided that the Banks were doing enough in just keeping our money safe so it was decided that they no longer needed to pay interest to anyone, and a few years after that, because the Federal Deficit became so big, it was decided the Federal Government shouldn’t have to pay either. Of course there were some other companies that were “”too big to fail”” so it was decided they shouldn’t have to pay either. So, you see Mary, only your Mom and Dad, your GrandPa and GrandMa and everyone else you know, and even you someday, who works for a living, will have to worry about paying interest.”
@Larry
Spot on, my friend.
Of course, there isn’t really a private sector any more. Everything tinkles down from government. Finance, Insurance, Real Estate: nothing produced. Just propped up businesses milking the general population with weapons of financial mass destruction. We’re so far down the path that there is no getting off. We ride the fiat economy as far as it goes. Iran doesn’t want dollar-denomonated oil contracts? Looks like another war coming, but what if China says no…they might. They got a lot of business in Iran…
Looks like the scaffolding just fell out of housing this week and the next wave is coming ashore, dude, like a Tsunami. Housing gets washed out to sea.
The BP bomb is going to crush the US economy on so many fronts. Get your finances in order.
Heard about Chase and the others–even folks with worked out mortgage plans get a coin flip–do we make more money foreclosing or reworking the deal. I guess that is their perogative, but to get bailed out and show no mercy??? That was the decade from hell, this could be another horseman of the Apacolypse:
“The sea turned to blood, and all the living creatures in it died.â€
I have a few thoughts concerning the 7 year lockout-
Suppose the house was originally bought by a husband and his name is on the loan. He walks away and later his wife (who was not listed as the owner or borrower in any way) decides to buy a house four years later. Would she be denied the loan because of her husband?
Slightly different scenario, the husband is the only name listed on the loan, he walks away, the marriage ends, he remarries, the new wife chooses to buy in five years time, is she denied the loan?
Another detail to consider, many of the buyers were formerly renters who were content to rent before the housing market went crazy (buy now or be priced out forever, housing always goes up, you can always refi, etc.) Do you think these former renters will not walk away and go back to renting? The seven year lockout means nothing to them since they will have no plans to buy ever again.
Lastly, when it comes to government regulations, there are always loopholes to be found (Fannie Mae turns down a borrower, but maybe FHA or the VA will grant the loan. Government agencies do not always talk to each other.)
Strategic defaults are reaching new highs causing hysteria back in Washington. What impact is strategic defaults having on those carefully crafted risk models? Is the current national deflation in housing making years of data collection worthless?
RE markets local and national are always changing as national medium home cost going for 200K and Calif over 300K the norm and higher along the coast it becomes critical for families taking on these debt levels to be more and more wary that past performance is not an indicator of future trends.
Media is constantly reminding everyone that employment is temporary that technological changes will probably mean several career paths over one’s employment life and yet young families are taking on large mortgage debt based solely on the belief that they will have employment uninterrupted over the contract period and further that the home will appreciate in value based on recent RE financial history.
@Ron
Good points. As the doctor often points out, rates can only go up, and that means housing will become a less-liquid albatros, I mean investment. Any illiquid asset must have three things: Safety in principle, safety in ROI, acceptance to the investor as an illiquid, in that they won’t be force to dispose of the asset (that should be obvious, but apparently is not to many). Housing offers none of these.
>The principal is obviously subject to nearly certain depreciation.
>Owning a house you live in has no return on investment until sold, and if you can’t sell it at a profit…
>How many high-flyers stay in a house for a decade anymore?
As you state, these artificial high salaries often require one to move as the market and the entinty’s needs change (or the operators are imprisoned). And the 50% divorce rate has not improved in the last 50 years or so. Then, there is the Steinbeck-era unemployment/underemplyment. So what if you work third-shift at Taco Bell–you still can’t pay your mortgage, and for most, you can’t stay more than 2 years or so.
Fiat economies are all about faith. You can lock up Galileo for heresy, but that doesn’t make the sun revolve around the earth. Folks aren’t drinking the kool-aid anymore. Like R.E.M. we’re losing our religion.
The real test of the economy is coming up on us very soon. If the Fed doesnt bailout the various states that are underwater….there’ll be lay-offs galore and the real depression will be upon us and not this “great recession” nonsense pushed by the MSM.
A 10% downturn on the price of a house that costs $100000 is a lot different than one that costs $600000. In fact, lower cost homes are less sensitive to losses, if not immune to loss. A $100000 house bought 10 years ago is likely still salable for $150000. The $600000 home is not going to sell at that price …or even close.
I have been reading that there will be a “Double-Dip” in housing. I wonder what exactly is meant by that….Does anyone know if there is a double dip what percentage decline in housing would occur?
@CAE
I’m sure the other Depression looked like the end of the world: Fascism and Communism beggining to look favorable to crony capitalism. Farms turned to dust. I really don’t know anyone that is positive about the future. Agression everywhere, now and then. From seemingly healthy people dying all around me to the mother of all man-made disasters unfolding in the gulf, it truly feels like the collapse of civilization may be imminent.
Sorry for the late response but I think that wydeeyed got my point exactly. It might have sounded smarmy when I suggested that Dave in Detroit learn the difference between “lose” and “loose”. Still, it’s hard to take someone seriously when they don’t know the difference between the two, and the repeated misusage leads me to believe that this was not a typo. My comment was meant more as a joke than anything else, but I think it has set off a nerve with some people.
Grecko: it’s ironic that you call me petty for criticizing someone and not offering up any ideas, yet you’re criticizing the criticizer with personal attacks. I don’t care that you don’t like what I have to say, but I think it’d strengthen your position a little if you remained internally consistent.
Housing Bubble M.D. is a great resource for all of us trying to make a dollar out of fifteen cents in this crazy market. I woudn’t want to distract from that with stupid internet flame wars, so I’ll try to keep my snide comments to a minimum from now on.
I agree with torabora re: the difference in losses between a $100,000 house versus a $600,000 house. $100,000 won’t lose as much for a simple reason: That is about what people who work for a wage can actually afford, assuming that they believe in the ridiculous ideas like paying off your mortgage someday, rather than speculating.
If you think that a house nothing more a wooden box rotting away out in the weather, then a $100,000 house is approximately what most houses are actually “worth,” leaving aside intangible factors like speculation frenzy, lies such as “houses always go up in value,” vanity, mindless competitive consumption and so on.
Oh sure, I can add a second story to my house and maybe an add-on or two, but in reality, the next guy really can’t afford much more than the 100 grand I paid for the place to begin with. That is what his wages will support. I can spend $25,000 for a grand entryway, but he can’t afford that $25,000 extra to buy my house, provided of course he is a clear enough thinker to realize that he must choose between that useless and vain entryway and a bass boat.
During the housing porn frenzy/funny money era, we were told we could buy those granite counter tops and grand entryway, then take out a HELOC and buy that bass boat. The math never added up. It was a societal-wide fraud. We are now waking up from that dream, and discovering that it was in fact a nightmare.
Here’s a nice little discussion of the emptying out of the dollar’s value in the past century:
http://video.google.com/videoplay?docid=5352106773770802849#docid=-915028560645767288
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Might be useful for some folks in our-all’s circles who don’t understand that inflation = taxation without representation.
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rose
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