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.
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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.