Rescue Logic
The question of the moment: Who to save and from what?
This week, we’ve had hardly needed confirmation that the economy’s in recession, consumer confidence is at an all-time low, housing prices are still plummeting, and rescue and stimulus plans are proliferating. Volatility is so engrained now in equity and commodities markets that keeping track of where everything is has become “like watching a National Basketball Association game,” says one housing and financial services industry observer. “It doesn’t matter what happens for most of the four quarters,” he says. “The part you have to see always happens in the last two minutes. It’s getting that way with the stock market.”
In the 11th Hour, as U.S. Treasury Secretary Henry Paulson begins to map a transition plan for over $1 trillion in rescue monies the U.S. will borrow vs. the $52 trillion in total U.S. wealth and as voters take their final moment to consider who to put into the Oval Office for the next four years, an issue at the crux of trying to prioritize focus is as simple as this: The American Dream. The global economy’s listing now relates more to those who have in the past five years joined the ranks of America’s 76-million-plus homeowers than many of us would like to admit.
There are hugely significant decisions and initiatives to make around what can and should be done about growing numbers of housing units in financial distress, and the real families dwelling in many of them. Here’s two critical facts to remember as healthy debate about plans takes place. One is that of almost 130 million households and 76 million-plus homeowners, one in three of the homeowner group does not even have a mortgage (51 million homeowners do have a mortgage, according to U.S. Census 2007 American Community Survey data). The other is that an all-time high of 14% of housing units are counted as vacant. That’s 7 empty places for every 100 housing units. It’s a lot of those places that are among the 10 million “homes” apparently underwater on mortage loans, and among the 3 million “homes” counted as either in or headed for foreclosure.
It’s important to realize this because a goodly number of so-called homeowners in distress are actually investors who bought and don’t live in their now-vacant housing units. So we should not imagine a family put out on the street for each and every one of the homebuyers in trouble on their distressed deeds. New Strategist editorial director Cheryl Russell analyzes the data to try to pry apart myth and reality in looking at the mortgage mess.
- A Wall Street Journal analysis sums up the latest GDP reading, and the political traction news of a deep downturn may offer the respective presidential campaigns leading into Tuesday’s election.
- CNBC reports on consumer spending declines in September 2008, the first in two years.
- Barry Ritholtz’s “The Big Picture” takes on the issue of moral hazard amid the dueling homeowner rescue packages circulating in and around The Hill.
- Builder editor Boyce Thompson reports on efforts among leading home building companies to get the new home construction industry’s interests–a sizeable tax credit and a mortgage buy-down–reflected in rescue and stimulus packages that get consideration in Congress.
In fact, a question that may need to be asked and answered is how much the increase in homeownership rates from 63% or 64% in the mid-1990s to almost 70% in 2005 is worth. Expanding the sphere of American Dream was going to have its price as well as its value. How do we look in a realistic way at the risks and liabilities involved as well as the benefits and opportunities of bringing America’s homeownership rate closer to many nations of the world?
A necessary vantage point on this issue for all those in residential real estate and construction is one Multifamily Executive editor Shabnam Mogharabi raises in her essay, “Which One are You?,” about the need to count people in rented homes as equally critical parts of housing’s equation.
Her assertion?
Unfortunately, renting gets a bad rap—one that it doesn’t deserve. In an age where high density and anti-sprawl are the drivers, proximity to transit and walkability the amenities, and sustainability the ultimate goal, the multifamily industry has a responsibility to educate consumers about the benefits of renting in live/work/play hubs throughout the country. Homeownership may be the fastest way to wealth creation for many families in the country, but homeownership is not for everyone.
Among the most important factors in how the correction will ultimately sort out may not be who’s model works best in a spreadsheet. Human behavior and psychology weigh too heavily in the balance for even the most excellent econometric solution to fully apply. The important thing is to make a plan that will keep its head as the 800-pound gorilla of misplaced trust tosses its weight around in the middle of things.
People want their homes, and the logic of building trillions of dollars of global business upon the premise that the loss of one’s home would be too devastating for people to let that occur is showing its flaws in all their glory. Too many variables came into play with that bet.
What people also want now is not so tangible as a home, its safety, security, and protectiveness. They want revenge and they want justice, big motivators in who’ll support which rescue plan in the last two minutes of the game.
Props and Sources:
The Wall Street Journal, Data Stoke Campaign Battle Over Economy, October 31, 2008, http://online.wsj.com/article/SB122536898235884019.html?mod=testMod
CNBC, Consumers Cut Spending For First Time in Two Years, October 31, 2008, http://www.cnbc.com/id/27470443
The Big Picture, Barry Ritholtz, Moral Hazard of the Coming Mortgage Bailout, October 31, 2008, http://bigpicture.typepad.com/comments/2008/10/moral-hazard-of.html
American Consumers Newsletter, Cheryl Russel, October 14, 2008, Hot Trends: DON’T BLAME MAIN STREET http://www.newstrategist.com/store/index.cfm/feature/35_15/dont-blame-main-street.cfm
Multifamily Executive, Shabnam Mogharabi, Which One are You?, October 1, 2008, http://www.multifamilyexecutive.com/industry-news.asp?sectionID=537&articleID=782831&refresh=true
Image source: Bloke’s Blog, What Do you Call an 800 Lb. Gorilla? http://www.strategicmarketingmontreal.ca/otherbb/2005/09/what-do-you-call-800-lb-gorilla.html
Wait and Hurry Up
From CONSTRUCTION PULSE, by John McManus: On the ground at this week’s Urban Land Institute fall conference in Miami, the 40,000-foot takeaways are two-fold. One is about powerful inertial forces that are making a majority of attempts to transact on land mere silliness. The other is about powerful people forces that will do what has to be done to adapt and survive in a time of unprecedented challenge: Consolidate.
Chronic and acute financial storms have joined into a single raging tempest. As Centex Corp. CEO Tim Eller said in his intro to a Q3 earnings call yesterday, “It’s now clear that this cycle will test the best and eliminate the rest.”
The first issue more or less mirrors in real estate the sudden broadbased lock-up of global business as credit markets sunk into a deep freeze. The seize-up that occurred–sending equity markets into 1000-point-ranges of volatility and creating a generalized aversion to putting cash into making more business–has a direct consequence thanks to how finance and real estate have woven themselves together. The lead-up to the September-October climax of credit disfunction has at the same time stalled one of the real estate market’s most basic processes: getting to a valuation model for a residential lot.
Hovering in rescue plan limbo, banks won’t price nor mark pieces of their real estate paper to market because they’re not motivated to and they don’t know if they can afford to. They don’t know what they’re on the hook for as far as liability in what got packaged up and resold, and they do know that they’re on the hook for both mortgage side exposure and construction, acquisition, & development side exposure.
Marking their land-based commercial paper to market to do deals with opportunity funds would generate cash, and recover capital, but at too great an expense. So banks are putting these deals “on the shelf” until there’s resolution about whether they can transact on select parts of their portfolios without throwing the entirety of them into the pricing toilet.
So the “ask” won’t budge even as bidders begin to show interest in parts of a massive pipeline of lots that has a stranglehold of debt and carrying costs for owners who’d be delighted to be free of the weight.
Just as prospective home buyers have been paralyzed by the double-whammy of falling prices and tougher, more expensive credit, the commercial sphere that would see land transactions begin to correct the market is similarly a ghost town. Save for tax-carry back motivated land deals, nothing much is occuring to reset the cost of the land base.
One player in the trenches describes limbo this way:
”There’s the ‘financial system,’ and there’s a real estate and housing problem as regards banking. The government needed to step in and try to stabilize the financial system first, and once they get a handle on that, which won’t be easy, they’ll then get around to the real estate issues. Who knows when that’ll be, but meanwhile, there’s almost nothing you can do because the banks can’t afford to price their land assets at what it would sell for today.”
So, even as home prices themselves have given up as much as 25% of their peak value to date, and may be headed for a 36% total decline if you heed Case-Shiller, a key factor in housing’s correction and eventual recovery is stuck in neutral: the resetting of land prices.
“If you pencil land in at a price where you can sell a new home today, you still can’t buy land for that low in most places,” said our friend at ULI. “Something’s going to have to occur to force the banks to transact, and they’re only going to do it if they won’t go bankrupt doing it,” he said. That’s a tough nut for the TARP people to work on in the U.S. Treasury.
- Have a look at Multifamily Executive/Developer magazine senior editor Les Shaver’s analysis of the issue’s impact on municipal and regional flexibility on re-zoning. As local governments take a hit to their tax coffers amid the crisis, they’re now willing to bend significantly on their NIMBY mode behavior.
The single-family housing market has come to a grinding halt, with land now being sold for 10 percent or 20 percent of what it was once worth. Left with the choice of either accepting the lower price or holding the land indefinitely, many developers are drawn by the appeal of converting lots or selling them for some other use, particularly in light of the fact that the commercial and industrial sectors are foundering far less than their residential counterparts.
“In today’s market, if it’s close-in industrial, there’s absolutely an exit strategy,” says Richard Gollis, principal for The Concord Group, a land advisory firm based in Boston. “There is no homes market. It’s a move toward the highest value, if you can change the zoning.”
What may be more dynamic an arena to look at, but related nevertheless to how difficult it is to attach meaningful value to land is this. While public builders mostly have been able to turn their prior year (2006 and 2007) backlogs of sales into treasure troves of cash that would enable them to weather continued travails, private builders normally don’t have that luxury. Many of them need to keep inventory turns, home sales, etc. going in order to pay back what they’ve borrowed to buy land, and build out communities.
“The distress has gotten so deep that guys are dropping like flies,” said a home building industry consultant who lists a number of small to medium-sized regional home builders among clients. “A few of our guys are interested in talking with each other about merging two or three small companies together in the same market. That would make them strong enough to make it through to the other side.”
Consolidation is wrenching, but none can doubt this will be a way for some of those who are not “the best” in Eller’s terms to at least adapt enough to survive. Partnering in a market to create a stronger foothold, a smarter operation, and a more efficient company, will be the way some of the names in the business who have been multi-generational stalwarts in home building stay in the game. This way, the “smaller, less well-capitalized players” can stick around to give the big guys a run for their money.
House Price Declines? What House Price Declines?
Something is happening and you don’t know what it is, do you, Mr. Jones? — Bob Dylan
Zillow surveys homeowners
- CNBC’s Diana Olick says “Wake up, America!” If the house price is right and reasonable, the recovery–painful though it may be, will begin.
- Blogger Tim Iacono drills into the whys and wherefores of Americans’ views on home prices.
Fact is, Americans vote with their feet on this issue, and surveys and polls will never reflect what’s accurate. People value their homes with an American Dream factor in there, and so calculating their sense of resale values right now is probably a red herring.
Go Figure — Updated with Hat Tips
Here’s the way HousingCrisis.com thinks about what’s going on. (Sorry, we rushed and published this post without proper image sourcing yesterday… it was an accident. We regret this error.)
Apologies… in a rush to post, we neglected appropriate attribution of this work. Thanks for pointing out our negligence.
This Indexed is one of our favorite sources of social, business, and human insight.
Then there’s this.
Architects under duress
Source for the data: Courtesy of the AIA.
The plunging financial markets this month, followed by unprecedented responses from the federal government, have left many Americans bracing for a deep recession. In the architecture profession, however, the downturn has already arrived, according to a key measure of the market for architectural services.
And finally this.
Home prices on parade
Source: S&P/Case-Shiller data.
We might be smart, but here’s the way to look at what’s going on and what we need to reckon with as we sculpt plans for survival. “Things are not normal,” is the way an observer we regard highly has put our plight right now. If there’s anyone left who’s thinking is that assumptions will play according to prior plotlines, get over it. We’ll remember October 2008 as one that was different for many, many years. Still, there are lots of us that would rather we would wake up and have all our models play out according to plan. No.
Case Open–It’s a Chiller
Case Shiller and all the other home price indices don’t tell people in the home building business what they don’t know. Yale professor and economist Robert Shiller’s estimate is that the descent in prices will continue to about 64% of where they were when they peaked in 2006. If the damage winds up being about 36% in house declines when prices finally normalize in the next 12 to 18 months, how will sellers work through their new-home inventory even as foreclosures teem into the market?
There are several ways into discussing the issue of how home builders will deal with the glut of houses that weigh heavily on the market right now.
- Dial into the issue of home prices’ implications on excess inventory with a debriefing from Big Builder on Case Shiller’s latest data.
Here’s some commentary from Zelman & Associates CEO Ivy Zelman on the data.
While the data is lagging, it is widely viewed as the most accurate measure of existing home prices. However, we underscore that the index is not seasonally adjusted, so while year-over-year measures are highly useful, we caution against extrapolating a one-month trend.
Specifically, the absence of a seasonal adjustment is the primary reason that the rates of decline in the index from March through June were slower, and similarly why the index has begun to decline at a faster rate over the last two months. In addition, foreclosure sales that began to accelerate during 2Q08 are beginning to represent a larger share of volume, which is also pressuring the index. We believe both of these dynamics will likely lead to increasing sequential rates of decline in the coming months.
Ø Based on the composite-20 index, home prices in August decreased 1.0% sequentially, larger than the sequential declines of 0.9% in July. We had forecasted a 1.2% sequential decrease.
Ø On a year-over-year basis, the composite-20 index was down 16.6% year over year, continuing a decelerating trend that is now in its 33rd month.
Ø We estimate that the composite-20 markets overlap 43% of our group’s communities, ranging from 57% for MDC to 29% for MHO.
Ø Each of the 20 metro markets declined on a year-over-year basis led by Phoenix (down 31%), Las Vegas (down 31%) and Miami (down 28%).
Ø Investors anticipate an additional 8.6% decrease in existing home prices over the next 12 months; although we highlight that futures have been a poor predictor of the index.
Speaking of Zelman, her candor contrasted mightily with the overly optimistic predictions of her NAHB hosts at last week’s housing forecast conference in Washington, DC.
About the most positive thing in Zelman’s outlook for housing was that the decline in home sales should bottom in 2009. However, she anticipated that real home price declines would persist through 2010, delaying a return to more normal housing conditions until sometime between 2012 and 2013.
When it came to sales in the new-home market, she said, “Current trends are pretty frightening.”
Zelman has been one of the industry’s most accurate prognosticators, but what many builders who respect her read on the trends feel when they take stock of the bleak outlook is, ‘what do I do?’
What to do is to work it through. Home builders’ biggest enemy right now is assets that have lost value and but continue to carry cost. Letting go at heart-rendingly low prices is one of the hardest things to do, and it’s not necessarily going to do more than to buy time, but that might be what’s necessary to get through the months of stagnation ahead.
Among a proud community of home building company patriarchs whose free-market beliefs come in their genetic coding, it’s a moment of truth. Many of them, particularly the largest tier of publicly traded companies, want government to do something to stop foreclosures and kickstart home sales.
A flintier bunch wants to see the market just ride itself out. No help from anyone. Anything the government does to step into the act will either make matters worse or delay what must come inevitably. The issue of rescues and intervention doesn’t go away, not even when it comes to the Feds’ huge moves to ease credit. So we should keep listening to you on what you really think should happen. Maybe it’s along the lines of this comment to a Big Builder blog post yesterday.
Poster was a frequent commentor named Buzzsaw.
Prices need to fall. Supply needs to shrink. This is all that will start the housing market again. Tax credits won’t do it as long as people think prices are still falling. How long do prices need to stay low before the market is convinced they are at the bottom and starts buying? That’s the real question. We’d all be best served to let them fall as fast as possible, in order to get them back growing again. Congress can do best by stepping back and letting it occur via market forces. As for existing homeowners facing foreclosure; they placed a bet on rising prices, and lost. Why shouldn’t losses be borne by those who would have profited had prices kept climbing?
A Week that Will Be and The Week that Was
One HousingCrisis.com correspondent has an in-law who’s shared an issue you might find familiar.
“We’ve got a guy in the office who’s got about $250 invested in stocks, who all day, every half hour, says, ’the market’s down another 300, the market’s up a thousand, the market’s down 450,’” the in-law says. “It’s infuriating! You just want to tape up his mouth, so you can put your head down an do your job without the distraction. I can’t control this stuff, so I just want to forget about it for a while and work.” This in-law’s livelihood is about as far afield of the machinations of Wall Street financial services companies as you can get, but the noise level from the Asia Pacific to the European financial markets, to the U.S. futures gets deafening just about the time people on East Coast time are having their first cup of coffee.
With Halloween ahead this week, there’s macro, micro, and scarecrow in the days and nights to come. On tap for release: new home sales, Case-Shiller home prices, homeownership rates and vacancies, FOMC, GDP, unemployment numbers will feed into the system, confirming that the global economy is not about to wake up pn Nov. 1 from 40% paper losses from year-ago peaks, as if it were a bad dream. The Fed can lower rates another notch to 1% before money’s free; the U.S. economy can show negative GDP and not surprise a whole hell of a lot of people, and unemployment can continue to reflect that companies’ scorecard these days measure how well they can shrink vs. what they can do to produce better. Shiller’s price readings may be gravity bound toward his own forecast 35% or 36% ultimate decline, and Q3 vacancies of for-sale and for-rent housing stock might blip over their current 1 in 50 level.
None of these metrics’ resets will surprise investor pros betting on their direction. Those pros have already acted, with prompts from what U.S. consumers were doing more than a year ago, and what was happening in housing starting almost three years ago. Those pros are not part of the furor we’re seeing in the broader stock markets and futures. Still they’re chastened and mystified, and wondering, like the rest of us, what can be next. But they do have cash, and once they’re happy that “the real economy” expectations and the big discounts on stock prices fall into harmony, they’ll come back in. Until then, about all that we can say for sure will be next is November.
On a micro basis for housing, we’ll hear from Centex, MDC, Meritage, M/I, Standard Pacific, among home builders and Masco, Owens Corning, and USG among public building materials companies as to their performance and expectations. Shrinking fast, preserving cash, and identifying a fresh capital base for even leaner times ahead will be the common thread in corporate earnings pronouncement. Strength in lower numbers is the virtue of the moment.
What’s happening in financials–consolidation–can be expected among the pantheon of names we know as the big builder community within the next 12 months. If Goldman Sachs and Morgan Stanley and Citigroup and every financial institution save, perhaps JP Morgan, needs to be talking with one another about possibly merging, HousingCrisis.com believes similar forces will drive home builders to step up and pare down.
A look at where cash flow from new-home closings will come in over the next 12 to 24 months will show there’s not enough of it expected to support overheads and operations and service debt for the 20 or so public home builders left in the universe. Needs to get access to a greater capital base, and capitulation on land assets will fuel more and more earnest M&A talk among home builders as 2009 wears on.
Picking two or three out of five of the strongest is not an easy drill, but it’ll likely characterize the magnitude of the correction underway.
That’s at least part of what’s on the docket for HousingCrisis.com for coverage in the week ahead.
But we’d be remiss if we didn’t revisit a couple of moments from last week in light of their significance, present and future.
One is this… if you haven’t seen former Fed chief Alan Greenspan’s remarks in Senate Committee from last week, have a look. This particular perspective, offered by Calculated Risk, is not to be missed.
Secondly, HousingCrisis.com has been meaning to ask someone who’d attended last week’s National Association of Home Builders forecast meeting in Washington, D.C…. Chief economist David Seiders’ forecast? Give us a break. Talking about how home prices have come down far enough now to begin driving sales strikes me as disingenuous, if not reckless.
The conclusion of economic forecasts that responsibly extract insight from the data would be simply, get ready for another brutal year in 2009, and a barely better year later.
Two home builder CEOs’ assertions last week reflect a more realistic appraisal and action plan to slog it out in 2009.
One is Ryland Homes CEO Chad Dreier’s wrap up on Q3 earnings last week:
I look forward to the day when the majority of our operational highlights no longer consist of our effectiveness in shrinking the company.
The other is Pulte Homes CEO Richard Dugas’ assertion that nothing Congress has done to date, including the $7500 tax credit program signed into law in July that the NAHB leadership told builders would be an effective catalyst, has done a lick to help home buyers get closer to their dream. A major league new home buyer tax credit is now going to make its way back onto Congressional agendas. Maybe this one will brighten the horizon just a little bit.
What’s Good at the Wood
At this past week’s National Association of Home Builders’ forecast conference in Washington, D.C., HousingCrisis.com heard the plight of new home builders described this way. “It is possible to get a loan,” said a senior level executive from a sizable privately held home building firm with operations in the D.C. metro market. “It’s just that people can’t sell their homes. ” People who can’t sell their homes mostly can’t buy a new one, nor can they buy a new “used” home.
Freddie Mac chief economist Frank Nothaft confirmed the sentiment during the daylong confab at NAHB HQ in DC. Builder senior editor Ethan Butterfield was there to report:
The bad news, according to Nothaft, is that those are the only people who can get loans, and they can only get certain kinds of loans (traditional 30-year, fixed-rate mortgages), and that while mortgage rates are still well below historical norms, they have inched up since the boom.
And even these prime loans, as credit conditions remain bleak, are getting tougher to acquire, Nothaft said.
Jumbo loans, traditionally loans for more than $417,000, are also more difficult to secure because banks are charging higher interest rates on them. During the peak of the housing boom in December 2005, 33% of all prime loans were jumbos. In March 2008, jumbos had fallen to just 8% of all prime loans, Nothaft said.
Seems that easy money and high prices trump hard to get money and plummeting prices as motivation to buy, sell, or do anything else but sit back and try to ride out the worst of it.
The reason it’s so hard to sell a home–new, used, or anything in between? Because it’s hard to get a loan for the amount a buyer needs to pay the seller’s price, which is overpriced with paper profit and of practically unknown value today. No comps, no bottom. Even worse, when comps are short sales and foreclosure deals, squeamishness becomes outright nausea. Bank executives, like the rest of us, are afraid to pay their part for something when the price structure of that something is so shaky.
So, on the surface, while the assertion that it’s possible to get a home loan even today may be technically correct, the number of conditions, contingencies, and stars that need to align for that to be the case is mind-boggling. Who it is that can qualify for a loan today, and for how much of the purchase price of a home someone can get a loan, has shrunken.
Not only that, the drama around a $700 billion economic emergency rescue plan and the $250 million bank recapitalization measure carried out by the Treasury a couple of weeks ago, appears, as it works out, to have done little to improve the outlook for banks to lend more money for home mortgages in the near future.
This fact–one of the focal points of the housing crisis–is laid out in the clearest way by New York Times business columnist Joe Nocera. This issue and its time sensitivities amount to a smoking gun, an agenda being pursued by the U.S. Treasury that is not the one it has said it would pursue as it gained authority to spend money in efforts to ease credit, calm the system, and address housing, where to trace the genesis of today’s economic paroxysms.
When you’ve read that piece have a look at some of the stronger housing-related reporting and analytics from around and about Hanley Wood’s residential and mixed use development titles.
There are a number of pieces that will help you see around the next corner, if not quite across the dark abyss toward a rebound in 2010. First up, a slew of reports from Builderonline.com that focus on the macro data releases, and zone in on a isolated blow-ups on a more local level.
- A topline piece on the first blip up in existing home sales for more than two years.
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Bigbuilderonline.com provides analysis on the data that warns players not to get overjoyed about the National Association of Realtors figures quite yet, as there’s plenty of pain and downside left before the good times will roll.
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In “Bloody Thursday,” Big Builder senior online editor Bill Gloede deciphers where the public home builders are in stock valuation trends, …. and where they may be headed.
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Builder Group editorial director Boyce Thompson offers a sum up of the collective sentiment of economists brought in for their housing forecasts by the NAHB. A flicker of light at the end of the tunnel, he surmises, may mean good news as it almost always has. But who knows?
Street Whys
When the Wall Street Journal has a single headline that stretches across its three-column online format, it now means it’s been an especially long day.
For moment, an absurdist kind of moment, former Federal Reserve Chairman Alan Greenspan provided the quotes of the week, even as worldwide sloshes and crashes lent percussive affirmation. Link to Greenspan’s testimony before the Senate Committee of Government Oversight and Reform, on Thursday, Oct. 24.
In an echo of the Watergate hearings 35 years ago, Mr. Greenspan was asked when he knew there was a housing bubble and when he told the public about it. He answered that he never anticipated home prices could fall so much. “I did not forecast a significant decline because we had never had a significant decline in prices,” he said.Mr. Greenspan’s confidence in the resilience of home prices — shared by most in the industry at the time — became a critical forecasting error. The belief spurred more mortgage underwriting because lenders assumed that borrowers living on the edge could always refinance or sell their homes for a profit if they ran into trouble. Instead, with home prices now falling, hundreds of thousands of homeowners are facing foreclosure. Prices nationwide have fallen nearly 20% since their 2006 peak, and many economists foresee a further decline of 10% or more in the next year.
The difficulties of forecasting served as a key defense for Mr. Greenspan. The Federal Reserve, with its legions of Ph.D. economists, has a better forecasting record than the private sector, he said, but that’s still not enough to prevent every problem. “We were wrong quite a good deal of the time,” he said. Forecasting “never gets to the point where it’s 100% accurate.”
Subprime mortgages led to a global economic crisis in considerable part because of securitization, in which the home loans were sliced up, packaged into securities and sold off to investors all around the world. Anticipating such a crisis is “more than anybody is capable of judging,” Mr. Greenspan said.
If the best experts were not able to foresee the development, “I think we have to ask ourselves, ‘Why is that?’” Mr. Greenspan said. “And the answer is that we’re not smart enough as people. We just cannot see events that far in advance.”
He continued, “There are always a lot of people raising issues, and half the time they’re wrong. The question is what do you do?”
- Barry Ritholtz’s “The Big Picture” salutes “Easy Al’s” self-implicating candor even as he takes another whack at the former Fed chief’s policies in Greenspan: Securitization, Not Fannie/Freddie, to Blame, a Saturday morning reflection.
Since Black Monday and Bloody Tuesday seem already to have been taken in this and other Octobers, we’re going to have to coin appropriate epithets for each day of the trading week, and probably, in this 24/7 time, some nights as well. No doubt, September and October 2008 will be ones for the books, and ones we’ll probably bending our grandchildren’s ear about someday.
The wrap on Fretful Friday seems to be that it could have been worse, and stay tuned to next week.
- Read the WSJ take today, and hope that Barron’s comes out with Part II of how things won’t get as bad as they could for more relaxed reading tomorrow… but then let it go.
Foreclosures: The Cause Effect and the Effect Cause
Intensifying federal government focus on liquidity and easing credit so that lending and borrowing might possibly re-emerge as a viable business–whatever analogy suits you–are treatments of symptoms. Treatment of symptoms can be life-saving. It also may be necessary to take care of the symptoms before you can even see the root cause of the problems clearly.
And sometimes symptoms–home foreclosures for instance–become their own new primary root cause, potent enough to wreck all salutory effects and efforts of treating the other acute conditions that are whipsawing the world economy like a garden hose on full blast and nobody holding the nozzle.
Can we map the US increase in homeownership by 5 or 6 percentage points during the 1995 to 2005 period, quantify the dollar risk in light of diametrically opposite trends in easier money and higher home prices, put an ultimate price tag on that dollar risk and figure out how to pay up? If the gravity of home prices returns them–albeit after an overshoot to the lowside–to a 50-year trend, how does that map into what assets, paper or real, amount to in cents on a dollar? Where does the government and at least two administrations’ belief system that homeownership at any cost was a compelling goal meet with accountability?
It must be these questions that command focus among influencers of public policy of the moment.
We’re going to see a lot of Federal Deposit Insurance Corp. Chairman Sheila Bair, and Neel Kashkari, the US Treasury’s interim assistant for financial stability [that's quite a title for one's business card], as they attempt to accelerate action and flow of dollars into a fluid swirl of causes and effects.
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Bair and Kashkari
The Wall Street Journal reports on Bair’s and Kashkari’s discussion in a US Senate Banking Committee hearing of plans to zap currently inert programs to stop mounting foreclosures.
The latest plan being developed by Ms. Bair and Treasury officials would try to untangle the mess by offering a government guarantee of repayment for some part of the rewritten loan. That might demonstrate that struggling homeowners would be able to repay the new loan, experts say.
“If you throw a Treasury guarantee in, then the net present value [of the new loan] becomes luminously clear,” said Karen Petrou, managing partner of Federal Financial Analytics, a consulting firm. “Then it’s far easier to refinance.”
Here’s a report from HousingWire.com on the effectiveness some localities have in slowing the rate of foreclosures.- Here’s Builderonline.com’s topline on recent Federal Housing Finance Agency data on declining home prices.
- Here’s Realtytrac’s site for their data on foreclosures on a state-by-state basis.
- Have a look at fairly thoughtful musings from blogger Eric Ames on how this issue of troubled homeowners has people chasing their tails on what to do.
- Comments from readers bolted to more politic remarks from usual suspect housing analysts make this Wall Street Journal forum on the blip up in existing home sales announced today by the National Association of Realtors worth catching.
What’s the cause? What are the effects? What do you need to fix first, if anything? Or do you fix anything–causes or effects–at all?
Get an Edge
From CUSTOM HOME, by Leslie Ensor: To see much of anything good right now, it helps to see around the corner. There are ways to do that, it’s just that it can take counterintuitive problem-solving to perfect the skill. Here’s how Custom Home magazine editor Leslie Ensor does it.
I have a theory about where trends in house design first show up–the furniture store. That’s where consumers see what’s new and exciting and where their ideas about how their homes could look take shape. I first noticed the 80s trend of French and Italian country style in a furniture store, and soon that look swept the housing industry….
For a look around the corner circa HousingCrisis 2008-2009, the rest of Leslie’s “theory” provides more than a glimpse. Check it out.