Buffetted
Here’s what they’re saying about Oracle of Omaha’s most rueful accounting yet of he and his companies’ financial performance.
Click image for CNBC's coverage of Berkshire Hathaway's financial performance.
Here’s a link to Warren Buffett’s annual letter to shareholders.
Calculated Risk points out the critical references to housing in Mr. Buffett’s remarks. CR highlights this excerpt from the letter.
Homeowners who have made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they can’t make the monthly payments.
…
The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income
should be carefully verified.Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.
A Nick with the Nack and a Trillion Dollar Bill
Nicholas Retsinas, director of the Harvard Joint Center for Housing Studies, weighs in on President Obama’s $75 billion Homeowner Affordability and Stability Plan, in a posting on the JCHS Web site, as noted in The New York Times yesterday afternoon.
Here’s the Q&A:
I think the plan is balanced and innovative. At the same time one should not overestimate the impact of the plan on the most serious housing crisis this country has faced since the Great Depression.
Click on photo for background on Nicolas Retsinas
1. What is your assessment of the president’s plan?
Retsinas was interviewed on February 26, 2009.
The plan attacks the root of the problem in our economy which is the depressed housing market. This would have been a much better plan had it been put into place a year ago. It does however balance the appropriate role of the government in guiding, motivating and rewarding the private sector to make the right decisions to keep responsible borrowers in their homes. It replaces a flawed policy where government was at worst a spectator, at best a cheerleader, in encouraging loan modifications. This plan gives the government a seat at the table.
2. Will the plan assist only those homeowners who are currently in trouble, or could it also help those facing financial challenges in the future?The plan has several components. One part enables homeowners who are current on their mortgage today to refinance and take advantage of lower interest rates. This makes it less likely that they would become delinquent and default on their mortgage in the future and has the added benefit of providing more income for families that they could spend to help bolster our economy.
The other part of the plan, the interest rate subsidy portion, is more directly aimed at borrowers who are having trouble today. In this part of the plan, the government allocates subsidy dollars to make mortgages more affordable. It is predicated on the premise that the borrower will pay their mortgage if they can afford to pay their mortgage, even if they owed more than the house is worth.
3. What other moves could/should be made to help stabilize the housing market?The most important factor in the housing market is the state of the economy, and in particular, whether people are working. This plan can only succeed if the government stimulus package puts people back to work and stops the widespread job losses we have seen in recent months. In many ways, the housing recovery plan is only a part of the solution. The other part is the intervention in the broader economy.
Again, while I am supportive of the plan, one of the missing ingredients was a way to actively simulate demand. This is a difficult challenge given the state of the economy, but one that I think has to be addressed.
4. Is this a good time for savvy buyers to enter the market? How long in your estimation before the housing market rebounds?That depends. Certainly prices are as low as they have been in most markets for the last five or six years. I think a key question a prospective buyer must address is whether or not they are buying a home they intend to live in for an extended period of time. If they are buying a home primarily for investment purposes, this is a very risky market to participate in.
When the market will rebound will in large measure be a function of when the economy rebounds. So to the extent that we are able to put people back to work and are able to stop the job losses, and if this housing recovery plan begins to slow down the number of foreclosures, the housing market will recover. In those markets where there has not been substantial overbuilding, in the northeast for example, it is plausible (subject to an overall economic recovery) that the bottom could be reached at the end of this year or sometime next year. In those markets like the southwest and south Florida, where there was extensive overbuilding, the recovery will be substantially delayed.
Now, no knock on Nick, whose biggest lament about the Obama plan is that it doesn’t pack a more powerful wallop to stoke home buying demand — a la Fix Housing First’s plan. Still, Big Builder Maine-based sage Trillion-Dollar Bill [William F.] Gloede, who writes the “Wall Street and Maine” column, has a need to vent that sounds like a rant about how Obama’s plan would help the wrong people in the wrong places, … which it is.
So the Obama plan is not a housing market plan at all. It is a $275 billion spending program that will help keep some homes in typical new-home communities from foreclosure but will probably keep as many or more foreclosures from occurring in poor and working class neighborhoods in and right around the big cities. The latter will do nothing for the housing market because home prices there typically have little effect on values elsewhere.
The plan, though, will help to keep urban neighborhoods from the instability caused by vacant foreclosed properties. Which is probably what the Administration intended in the first place. Which is probably why they called it the Homeowner Affordability and Stability Plan.
Some people are born with insight, and some people sweat to find it. Bill’s insights tend to possess him like demons, which makes him a pleasure to work with.
Another Play to Stabilize Home Prices: Uncle Sam Buys 2 Million
The scary part about this idea is that it’s one of the more heavy-handed policy intervention notions one can imagine–the government buys 2 million existing for-sale homes at a mean national pricetag of $170K per, or a total of $340 billion. Only its author claims that it is a free-market plan, because the U.S. Treasury makes its money back from the resale of homes into a putatively stronger selling market.
Here’s the gist:
The US commits to purchase up to two million homes (beginning with the 770,000 currently foreclosed) at the current market price.
This purchase will reduce the inventory of homes on the market to just 1.7 million, which is the correct number for a healthy market (3-4 month supply). Ending the supply glut and removing foreclosed homes from the market will restore the balance between supply and demand, and so restore real estate values and mortgage security, permitting refinancing or sale of homes as necessary. The current median home price nationally is about $170,000, which is a healthy price when measured by both historic trends and median household income. So now is the right time to correct inventory. Purchasing two million homes will cost about $340 billion at the median price, but the homes could be sold again into a healthy market over several years at a likely profit that covers management, maintenance, and policing. Correcting the inventory will also put builders back to work answering renewed demand. Meanwhile, having a reserve of up to two million homes will forestall another round of speculation while we enjoy record-low interest rates.
The theory intrigues one and its designer –Kevin Parcell, who pasted his idea in as a comment to NY Times’ columnist, Princeton economist and Nobel prize winnter Paul Krugman’s “Stress Test This“ blog post yesterday–has a data-rich position that makes this straightforward plan seem almost too simple. Which it is.
It doesn’t count for the stampede of foreclosures that would erupt the moment Uncle Sam started trolling the real estate landscape looking to buy up the deeds, first of foreclosed homes, then of buyers bent on getting out of their obligations.
Our problem is that we need ground-up positive psychology to counter negative sentiment due to worsening economic conditions. What’s coming into focus is that the “if we don’t do something now” line has lost its urgency and bailout fatigue is broad-brushing every initiative that comes along. People can’t keep track of all the programs, and they know that what they’re adding up to is tax Armageddon at some point sooner than later.
Still, ideas shared, and, hopefully, competent execution of one or more of them may begin to ping against the ediface of doubt and uncerainty about a free-falling house price environment. However, it should be noted that Paul Krugman sounds as if all he’s seeing from the new Administration is rearranging deck chairs on the Titanic. Buying 2 million homes, he’d probably say, is one of those deck chairs.
Foreclosure Flip and Win: “The 40 Thieves” Ride Again
CNBC’s Diana Olick reports on what we’ve been hearing will be a burgeoning investment practice once bargain hunters get convinced they’ll be able to move their bargains up the purchase foodchain.
This CNBC report — 40 Thieves & Your Home – first takes a look back to a California housing crash in the 1970s at an investor vigilante group that would outbid banks by a nose on some foreclosure auctions, and subsequently sell the property below market but for a profit after a quick fix up.
We Ask Why Not?
RGE Monitor, an economics intelligence piece led by New York University econ guru Nouriel Roubini, maps out the math of mortgage stop-loss modification. The piece is entitled “The Housing Crisis and Bankruptcy Reform: The Prepackaged Chapter 13 Approach.”
Since about 10% of the $10 trillion mortgages are currently delinquent or in the foreclosure process, the expected deadweight loss for the delinquency started so far will be at least $300 billion or $1,000 per American. Avoiding this loss should be a top legislative priority. A major puzzle is why the market does not avoid these losses. Lenders can do better if they renegotiate loans rather than foreclose on them. To see why, suppose that the outstanding debt on a house is $200,000, the market value of the house is now $150,000, and the foreclosure value of the house is $100,000. If the lender forecloses, it obtains $100,000 at best. Alternatively, it could renegotiate the loan with the homeowner for, say, $140,000. The homeowner now owns a house worth $150,000, and the bank owns a loan worth $140,000. The homeowner could resell the house and obtain a profit for $10,000, or keep the house—in either case, the foreclosure inefficiency of $50,000 is avoided, as are the negative effects on neighboring houses. With millions of houses currently in foreclosure or close to it, the cost savings from loan renegotiations could be enormous. However, if loan renegotiation is desirable from an ex post perspective, it can nonetheless create problems for banks, which must take into account the effect of loan renegotiations for future credit transactions. If borrowers with outstanding mortgages observe that other borrowers benefit from loan renegotiations, then they will realize that they, too, may be able to renegotiate their mortgage if otherwise they would default. If homeowners anticipate the possibility of renegotiation, they might deliberately maintain thin equity margins so that they can credibly bargain for a loan renegotiation if the value of the house declines. As a result, many banks appear to have a policy of either not renegotiating loans or doing so only in unusual circumstances.
What would become of the Stress Test if a bank adopts this approach? It’s certainly worth exploring. Rescue policy fatigue is setting in big time.
GSE’s Not Having a Whole Lot of Fund Out There
From HOUSINGFINANCE.COM, By Jerry Ascierto: Distinguishing one government sponsored enterprise from another these days is getting more difficult. They’re both in government conservatorship; both still hemorrhaging money; and both still trying to offset mountains of bad investments with some good ones.
Housingfinance.com senior editor Jerry Ascierto tackles the issue of GSE parity on rates, and what it might ultimately mean for those who’re trying to get access to their capital for affordable housing community projects in a credit-crunched environment.
Immediate funding deals for tax credit properties were quoting in the mid- to upper 6 percent range in late February.
But rates on forward commitments from the government-sponsored enterprises remain high. Interest rates for funded forward commitments are in the high 7 percent range, and prices are above 8 percent for unfunded forward commitments.
“They’re pricing in a significant amount of risk premium into forward pricing at the moment,” said Phil Melton, senior vice president of Grandbridge Real Estate Capital. “That’s driven by the fact that there is a significant amount of forwards that are not converting at the time that they’re supposed to.”
Forward commitments are loans on 9 percent tax credit deals undergoing new construction or substantial rehabilitation. In a funded forward, Fannie Mae agrees to purchase the permanent loan and also provides funds to the deal’s construction lender; an unfunded forward commitment provides a rate-lock and commitment to fund the permanent mortgage once construction is complete.
Meanwhile, ahem, we call them results these days because there are so few earnings, and here’s what they amounted to in Fannie’s latest financial period, thanks mostly in part to a 3-year insanity spree into risky home mortgages. The Wall Street Journal reports:
Graphic: Courtesy of the Wall Street Journal
The deepening financial problems at the companies set up some tough choices for the Obama administration, which will have to decide whether to continue pumping taxpayer money into the firms to keep them operating or break them into pieces and strip them of their government support. Another unsettled question is how long to retain as their regulator Mr. Lockhart, a friend of former President George W. Bush since their high school days.
Fannie and Freddie were battered by the worst wave of mortgage defaults since the 1930s and recorded combined losses of nearly $60 billion for the first three quarters of 2008. The government seized management control in September under a legal process known as conservatorship, and has since agreed to make as much as $400 billion of capital available to them. Under conservatorship, the regulator is charged with “conserving” the companies’ operations and nursing them back to financial health.
The conservatorship hasn’t produced all the results the government sought. Thus far, the two companies have rewritten just a tiny fraction of the 31 million mortgages they own or guarantee.
Multifamily is where the GSEs actually still have viability, but that scarcely appears to matter, since they’re on a different performance scorecard.
In an interview [with the WSJ's James B. Hagerty and Damian Paletta], Fannie’s government-appointed CEO, Herbert Allison, said: “It’s not about maximizing returns on equity or profits. It’s really about being of use to the country during this very difficult period.”
Robert Shiller: We’re Not there Yet
Yale’s Robert Shiller stops by with Yahoo Finance’s Henry Blodget for a discussion on you-know-what.
This is the Stress Test financial institutions need to endure, plus the collateral impact of home price deflation on credit cards, and eventually commercial real estate.
Bair and Bair Alike
This week CNBC caught up with Federal Deposit Insurance Corp. chairman Sheila Bair. Her to-do list these days locks her in the eye of the financial storm from every which direction–namely, bank stress tests, bank failures, and home foreclosures and the policy aimed at each.
CNBC has broken up its one-on-one interview into three separate segments.
Here’s the segment that focuses on the new Obama program aimed to mitigate home foreclosures.
For greater detail into Sheila Bair’s strategy to fix banks and slow foreclosures, see Big Builder senior editor Lynn Norusis’s “Bair on a Hot Tin Roof” analyisis.
Mortgage Interest Deduction on the Ropes
Once upon a time, it was common to aspire to being healthy, wealthy, and wise.
Welcome to the Trillions Economy, where now it seems the best anyone can hope for is two out of three, which we guess is not bad in light of the moment that it is.
President Obama’s priority is health [care]. It’s what he believes he was voted into office to do, to figure out, and to transform, and he’s putting big, big money where his mouth is, parlaying heaps of his political currency in exchange for making the wealthy less so so that the less healthy can be more so.
Consequently, the income tax benefit homeowners and home buyers have been getting vs. their mortgage interest and real estate taxes is about as vulnerable right now as an ingenue at a casting call.
The Orange County Register’s real estate columnist Jon Lansner vents:
In what would be another blow to the California housing market, the Obama administration’s new fiscal year 2010 budget proposes to cap the mortgage deductions on “higher income” households — well, if you consider making $208,850 extremely high income!
Here’s what the budget — it’s HERE — says, in part: “The Administration’s Budget includes a proposal to limit the tax rate at which high-income taxpayers can take itemized deductions to 28 percent — and the initial reserve fund would be funded in part through this provision This provision would raise $318 billion over 10 years.” (more)
The National Association of Home Builders and the National Association of Realtors both object. Here’s part of the NAHB statement.
“With the housing market still reeling from its worst downturn since the Great Depression, this is not the time to talk about raising taxes on home buyers and home owners. This proposal will increase the cost of housing for many middle-class families, particularly in high-cost areas such as California and the Northeast, which will only further undercut the housing market, exert more downward pressure on home values and work against the President’s efforts to stabilize housing and turn this economy around.
“The proposed budget would also tax a ‘carried interest’ as ordinary income, which could significantly impact the multifamily and commercial real estate sectors at a time when they are already experiencing a severe downswing. At this critical point in the recession, we should be doing everything we can to stimulate demand in housing and avoid proposals that would reduce housing affordability and further destabilize prices….
The trade-offs get rougher by the moment. As Calculated Risk points out, “the mortgage interests deduction is capped to $1 million in mortgage debt.”
Trade association rhetoric aside, it’s clear that the President’s plan is to put health care above wealth care on the national agenda. Stay tuned for a rocking battle on this part of the President’s proposed budget.
Our own Bill Gloede, who writes a Big Builder online blog called Wall Street and Maine, has a typically strong opinion about this:
The Obama budget proposal, as well as much of the Administration’s action during the month that it has been in office, reveals that one of its guiding principles is a false notion of equality that exists neither in nature nor in the U.S. Constitution. There is no right, specified or even intimated, to economic equality, or even the gauzy concept of “fairness” invoked by those bent leftward.
The NAHB and its allies ought to express themselves through their PACs by withholding contributions from any politico who supports this package (and others like it sure to come from this Administration). Builders should quietly “educate” the employees they still have that a vote for anyone who supports this budget is a vote for future joblessness.
And all the rest of us would best be reminded that what happened in November was an election, not a coup d’etat.
We’d guess that a fair majority of HousingCrisis.com’s audiences might share this opinion. No?
Or Else–”The Two Documents You Must See to Get the Crisis”
At some point, hyperbole is just not enough.
Huffington Post has set up a “Housing Crisis” page on its site with this headline:
The Two Documents Everyone Should Read to Better Understand the Crisis
Read it. Weep, and get back to us on whether you feel they’re the two documents you had to see.