Posts
Like many things going on our economy today, discussions about the housing market and home prices are focused on the wrong issues. Housing prices are declining because people who want to buy a home for shelyer cannot get a mortgage. This condition was not caused by “over-priced” homes. It was caused by over-leveraging securitized mortgages on Wall Street. This led to massive losses for investors who, otherwise, would be buying “appropriately leveraged” mortgage backed securities today. As these massive losses were encountered, banks that usually provide the warehouse lines for mortgage companies have withdrawn from the market or failed altogether.
There are many in the country who want to buy a home for shelter. If these buyers could get a mortgage, then, when a family loses the breadwinner’s job, that family could sell the home to these qualified buyers, at an appropriate price, and move to a location where there are jobs. The number of foreclosures would fall, the excess inventory in the market would be absorbed and construction of new homes for shelter could begin anew.
The bottom line is that the over-leveraging on Wall Street has suppressed demand, by eliminating the availability of mortgages. The way to support the value of homes is to make it possible for those who want to buy a home for shelter to get a mortgage.
The second problem, that remains un-addressed, is the issue of why people buy homes as an investment. Whether they are “flippers” or investors buying rental properties for future sale, their activity in the market distorted the supply and artificially created the pricing bubble. However, the housing issues are not their fault. They were merely responding to rapidly rising prices and the “insane” mortgage products that were made available to them (investors) in order to satisfy the appetite of the MBS market’s “over-leveraging” on Wall Street.
It is no coincidence that the most extreme problems have occurred in California. State and local government in California have created tremendous barriers to the development of residential subdivisions and the construction of new homes. The consequence of these barriers is a built in housing shortage in California. This government induced housing shortage leads to constantly rising home prices to a point way above the actual value of the home. Once the availability of mortgages (read: Demand) is eliminated, these inflated prices collapse. The best way to avoid this problem is to remove the artificial barriers to the production of new homes. If this is not done in California, home prices will be above recent extreme highs in less that four years.
The best example of balanced supply is the Houston, Texas market. With no local zoning, and with large land parcels available at reasonable prices, the elasticity of supply (Houston is the closest example of “perfect elasticity”) prevents dramatic fluctuations of prices and allows the market to remain relatively stable during this downturn. Houston has less decline in home prices, fewer foreclosures and lower levels of inventory. All of these factors contribute to a more stable housing market and real estate values.
The bottom line is that we need to have more reasonably priced mortgage money available for families that want to buy a home for shelter, and we need to eliminate the artificial barriers to the development of subdivisions and the construction of homes in the tightly constrained markets, particularly California, Virginia, Maryland. Forcing housing prices higher through restriction of supply is a very expensive form of taxation without representation.
Monday, September 14, 2009
Wednesday, August 12, 2009
Employment and Unemployment numbers may be dead wrong
I have some difficulty with Government Data (which, indeed, may be an oxymoron). So, when the Employment/Unemployment news release came out from the Department of Labor, Bureau of LAbor Statistics (BLS) last week, two things bothered me.
First, that the Total Non-AG Employment dropped “only” -247,000. The news media picked up on this, as did the talking head economists on TV, even going so far as to say that the new numbers clearly show that “The recession is officially over.” Now, before I go on, let me assure you that I believe that any GOOD news can have a positive impact on the consumer, which could be good for the economy. However, GOOD NEWS, that can be misleading, carries with it the responsibility to point out risks associated with the news. In this case, the Bureau of Labor Statistics (Department of Labor) failed to tell the public of the problem they have with their own data in the news release.
So, I called the BLS and got information on their methodology and the margin of error. Sure enough, when you read the small print, the margin of error for the Non-Ag Total Employment number is +- 430,000.
So the BLS is 90% certain that job growth was -677,000 or + 183,000 or somewhere in between, and, of course, since the margin of error includes ZERO, the news release states that they do not know whether there was an increase or decrease. Not withstanding their conclusion that they cannot determine whether the number went up or down, the governmental agency issued a news release that stated that there was a job loss, and the loss was specifically, 247,000 jobs, which is about ½ of the previous loss rate. It is mind-boggling to me that an agency of the federal government would make up a number and release that number as fact. Now is a time in our economic history when these numbers are more critical than ever, and making investment decisions, based on these numbers is extremely risky. Why would they do that?
The second thing that bothered me was the fact that, even though the annualized, estimated job loss rate (-247,000 X 12) is about -3,000,000 jobs per year (if the data were accurate), the BLS release said the Unemployment Rate went DOWN from 9.5% to 9.4%. The talking heads jumped all over that number and the stock market went UP. That just does not make any sense. In the summer, the Unemployment Rate usually goes UP, even in good times. When we are losing 3 million jobs a year, how does the Unemployment Rate go DOWN?
The same accuracy issue applies to the Unemployment Rate news release. The reported change was -0.1%, as they announced that the Unemployment Rate dropped from 9.5% to 9.4%. The margin of error, however, is +- 0.19%, so the 90% certainty range, from +0.9% to -2.9%, once again, includes ZERO. So the reported change of -.1% is statistically insignificant, and they do not know whether there was an increase or decrease. Even so, they issue a news release that states specifically that they know that the Unemployment Rate went DOWN.
So, the news release comes out, the talking heads talk and move on, the RECESSION IS OVER, and everything is just FINE, and no one says, “Wait a minute, that’s not right!.” No one issues a warning that the numbers could be misleading and that making investment or business decisions based on these numbers could lead to financial disaster. Are we so numb and so brain dead that we just sit there and let the Federal Government tell us what they want and we don’t care?
I have included a link to the BLS News Release, below. Once on the BLS page, click the .pdf version of the news release.
http://www.bls.gov/news.release/empsit.nr0.htm
I direct your attention to page one (1) for the news and page eight (8) under the heading "Reliability of the estimates" for the discussion of the error factor.
First, that the Total Non-AG Employment dropped “only” -247,000. The news media picked up on this, as did the talking head economists on TV, even going so far as to say that the new numbers clearly show that “The recession is officially over.” Now, before I go on, let me assure you that I believe that any GOOD news can have a positive impact on the consumer, which could be good for the economy. However, GOOD NEWS, that can be misleading, carries with it the responsibility to point out risks associated with the news. In this case, the Bureau of Labor Statistics (Department of Labor) failed to tell the public of the problem they have with their own data in the news release.
So, I called the BLS and got information on their methodology and the margin of error. Sure enough, when you read the small print, the margin of error for the Non-Ag Total Employment number is +- 430,000.
So the BLS is 90% certain that job growth was -677,000 or + 183,000 or somewhere in between, and, of course, since the margin of error includes ZERO, the news release states that they do not know whether there was an increase or decrease. Not withstanding their conclusion that they cannot determine whether the number went up or down, the governmental agency issued a news release that stated that there was a job loss, and the loss was specifically, 247,000 jobs, which is about ½ of the previous loss rate. It is mind-boggling to me that an agency of the federal government would make up a number and release that number as fact. Now is a time in our economic history when these numbers are more critical than ever, and making investment decisions, based on these numbers is extremely risky. Why would they do that?
The second thing that bothered me was the fact that, even though the annualized, estimated job loss rate (-247,000 X 12) is about -3,000,000 jobs per year (if the data were accurate), the BLS release said the Unemployment Rate went DOWN from 9.5% to 9.4%. The talking heads jumped all over that number and the stock market went UP. That just does not make any sense. In the summer, the Unemployment Rate usually goes UP, even in good times. When we are losing 3 million jobs a year, how does the Unemployment Rate go DOWN?
The same accuracy issue applies to the Unemployment Rate news release. The reported change was -0.1%, as they announced that the Unemployment Rate dropped from 9.5% to 9.4%. The margin of error, however, is +- 0.19%, so the 90% certainty range, from +0.9% to -2.9%, once again, includes ZERO. So the reported change of -.1% is statistically insignificant, and they do not know whether there was an increase or decrease. Even so, they issue a news release that states specifically that they know that the Unemployment Rate went DOWN.
So, the news release comes out, the talking heads talk and move on, the RECESSION IS OVER, and everything is just FINE, and no one says, “Wait a minute, that’s not right!.” No one issues a warning that the numbers could be misleading and that making investment or business decisions based on these numbers could lead to financial disaster. Are we so numb and so brain dead that we just sit there and let the Federal Government tell us what they want and we don’t care?
I have included a link to the BLS News Release, below. Once on the BLS page, click the .pdf version of the news release.
http://www.bls.gov/news.release/empsit.nr0.htm
I direct your attention to page one (1) for the news and page eight (8) under the heading "Reliability of the estimates" for the discussion of the error factor.
Thursday, May 21, 2009
The Most ‘Affordable Cities’ Missing Something: Jobs*
The above article on the housing market appeared in the Wall Street Journal, May 21, 2009. In response, I posted the following comments in the Journal, which I have copied here.
Wall Street Journal 10:43 am May 21, 2009
Mike Castleman wrote:
I think the NAHB would tell the truth if they were better at analyzing the problem. The article has the cart before the horse. The markets described in the article are not affordable markets with no jobs. They are jobless markets. In jobless markets, most people cannot afford to buy homes, at any price, so the supply of available homes far exceeds the demand. This causes prices to decline; thus, affordable homes.
If you want to know what is going to happen to the national housing market, all you need to do id look at the Ohio and Michigan markets. As the national economy continues to lose a million jobs per month, the number of people who can buy a home, in any city, at any price, will decline. As the number of buyers declines (DEMAND) the prices of the homes on the market (SUPPLY) will fall. What does mean for the economy? Is it a good thing, because some folks will get a really good deal on a home? Most likely not.
As home prices fall, the home building industry will continue to contract, see my blog: http://housingmarketinsights.blogspot.com/As the production of homes falls, more jobs are lost. As the values of homes fall, tax revenues are lost to the cities, counties, schools, etc., and the liquidity of banks continues to contract. As the number of homes sold drops, jobs are lost in the mortgage industry, the construction lending industry, furniture manufacturing, building product manufacturing… you get the idea.
The most serious issue facing the US economy today is that congress doesn’t get it. No one, and I mean no one is doing anything about restoring housing demand. I believe these people are not stupid (with a few exceptions). If they are not stupid, then there is some other reason why nothing is being done. While both sides of the isle are at fault, at present, the denocrats won, and they are firmly in control. therefore, if the democrats want something to happen, they can make something happen; and if they don’t, it won’t. So the problem becomes a political one, and that is very dangerous for the economy.
As I point out in my blog, the housing industry is the largest domestic industry in our economy, and for decades it has been used by the FED as the throttle for speeding up and slowing down the economy. The problem today is that most of the people involved in the production of housing are self employed, independent, entrepreneurial business people. This is code for CONSERVATIVE. The administration and the Democratic Party have made it very clear that they have no interest in doing anything for their political opponents, the conservatives. If this political stand-off does not change, this economy will reach DEPRESSION levels, with 15%+ unemployment, minus-10% GDP growth, social and civil unrest and all of the other socio/political/economic ills that go with it
The above article on the housing market appeared in the Wall Street Journal, May 21, 2009. In response, I posted the following comments in the Journal, which I have copied here.
Wall Street Journal 10:43 am May 21, 2009
Mike Castleman wrote:
I think the NAHB would tell the truth if they were better at analyzing the problem. The article has the cart before the horse. The markets described in the article are not affordable markets with no jobs. They are jobless markets. In jobless markets, most people cannot afford to buy homes, at any price, so the supply of available homes far exceeds the demand. This causes prices to decline; thus, affordable homes.
If you want to know what is going to happen to the national housing market, all you need to do id look at the Ohio and Michigan markets. As the national economy continues to lose a million jobs per month, the number of people who can buy a home, in any city, at any price, will decline. As the number of buyers declines (DEMAND) the prices of the homes on the market (SUPPLY) will fall. What does mean for the economy? Is it a good thing, because some folks will get a really good deal on a home? Most likely not.
As home prices fall, the home building industry will continue to contract, see my blog: http://housingmarketinsights.blogspot.com/As the production of homes falls, more jobs are lost. As the values of homes fall, tax revenues are lost to the cities, counties, schools, etc., and the liquidity of banks continues to contract. As the number of homes sold drops, jobs are lost in the mortgage industry, the construction lending industry, furniture manufacturing, building product manufacturing… you get the idea.
The most serious issue facing the US economy today is that congress doesn’t get it. No one, and I mean no one is doing anything about restoring housing demand. I believe these people are not stupid (with a few exceptions). If they are not stupid, then there is some other reason why nothing is being done. While both sides of the isle are at fault, at present, the denocrats won, and they are firmly in control. therefore, if the democrats want something to happen, they can make something happen; and if they don’t, it won’t. So the problem becomes a political one, and that is very dangerous for the economy.
As I point out in my blog, the housing industry is the largest domestic industry in our economy, and for decades it has been used by the FED as the throttle for speeding up and slowing down the economy. The problem today is that most of the people involved in the production of housing are self employed, independent, entrepreneurial business people. This is code for CONSERVATIVE. The administration and the Democratic Party have made it very clear that they have no interest in doing anything for their political opponents, the conservatives. If this political stand-off does not change, this economy will reach DEPRESSION levels, with 15%+ unemployment, minus-10% GDP growth, social and civil unrest and all of the other socio/political/economic ills that go with it
Friday, March 20, 2009
The House has passed the bill to retrieve the AIG bonuses through the IRS. What's wrong with this picture? It is my judgment that there are several things wrong.
First, the government has defined someone who received a bonus as an enemy of the people, who deserves the worst punishment that any American Citizen can imagine... the wrath of the IRS. Should we (our political representatives) not be focusing our energy on the people who PAID (or authorized payment) the bonuses? Is not the criminal the person who pulls the trigger, not the person who gets hit by the bullet?
What happens if a company borrows money from a bank, and the loan is insured by the Small Business Administration. The company is borrowing government guaranteed funds, right? But then the company, through its employment contracts, pays bonuses to its employees. Does this government action set a precedent for the IRS to go after any employee who receives a bonus that is in any way connected to "government guarantees"? Perhaps the government (our elected representatives) will decide that the best way to prevent these criminals from receiving bonuses is simply to raise every one's taxes to eliminate 90% of all income over the W-2 income.
That would actually help solve the deficit problem that we are going to face in the future. But, I digress.
What about the people who pay, or authorize the payment of these bonuses? Someone has to write the check. And, what about the calendar? Or, what does the calendar have to do with it? What about bonuses that were paid in 2008? What about Merrill? Did JP Morgan or CITI or Goldman pay bonuses? Did anyone at GM or Chrysler get a bonus? Don't even talk to me about Freddie and Fanny. If any company receives "bailout" money, and PAYS unconscionable bonuses, then all such companies should return the bonus money to the government. AIG has $190MM in the bank. The government should simply require that AIG write a check and return the bonus money. When the government resorts to the IRS attack dog tactic, then our system is in serious trouble.
This, pointing the finger at the employee, the recipient of the bonus, the person who is just part of the process, is not new. The new administration has repeatedly pointed to the irresponsible behavior of those who, hoping to finally own a home for the first time in their lives, "got in over their heads" borrowing to buy that home. The administration has stated that it is this irresponsible behavior that has caused the foreclosure crisis, and so severely damaged the banking system.
Second, our elected representatives are so focused on the political issues, they are ignoring the reality of the economic issues we all face. This is truly rearranging the deck furniture on the Titanic. It is very likely that many on capitol hill are incapable of anything else. They are so petty and so self centered that they will never change, and they will continue to allow the free enterprise system to be consumed by the fires of political greed. However, I believe that there are people who have been elected, who can step up and deliver some leadership at this time of need. I do not know who there persons are. I know many of those who will not and cannot.
So far, this does not look good. At the end of the day, Consumer Confidence, which drives consumer spending that is 66% of GDP, will lead the economy back. This charade that we are watching on Capitol Hill is shaking the confidence of the consumer/taxpayer/voter to the core.
First, the government has defined someone who received a bonus as an enemy of the people, who deserves the worst punishment that any American Citizen can imagine... the wrath of the IRS. Should we (our political representatives) not be focusing our energy on the people who PAID (or authorized payment) the bonuses? Is not the criminal the person who pulls the trigger, not the person who gets hit by the bullet?
What happens if a company borrows money from a bank, and the loan is insured by the Small Business Administration. The company is borrowing government guaranteed funds, right? But then the company, through its employment contracts, pays bonuses to its employees. Does this government action set a precedent for the IRS to go after any employee who receives a bonus that is in any way connected to "government guarantees"? Perhaps the government (our elected representatives) will decide that the best way to prevent these criminals from receiving bonuses is simply to raise every one's taxes to eliminate 90% of all income over the W-2 income.
That would actually help solve the deficit problem that we are going to face in the future. But, I digress.
What about the people who pay, or authorize the payment of these bonuses? Someone has to write the check. And, what about the calendar? Or, what does the calendar have to do with it? What about bonuses that were paid in 2008? What about Merrill? Did JP Morgan or CITI or Goldman pay bonuses? Did anyone at GM or Chrysler get a bonus? Don't even talk to me about Freddie and Fanny. If any company receives "bailout" money, and PAYS unconscionable bonuses, then all such companies should return the bonus money to the government. AIG has $190MM in the bank. The government should simply require that AIG write a check and return the bonus money. When the government resorts to the IRS attack dog tactic, then our system is in serious trouble.
This, pointing the finger at the employee, the recipient of the bonus, the person who is just part of the process, is not new. The new administration has repeatedly pointed to the irresponsible behavior of those who, hoping to finally own a home for the first time in their lives, "got in over their heads" borrowing to buy that home. The administration has stated that it is this irresponsible behavior that has caused the foreclosure crisis, and so severely damaged the banking system.
Second, our elected representatives are so focused on the political issues, they are ignoring the reality of the economic issues we all face. This is truly rearranging the deck furniture on the Titanic. It is very likely that many on capitol hill are incapable of anything else. They are so petty and so self centered that they will never change, and they will continue to allow the free enterprise system to be consumed by the fires of political greed. However, I believe that there are people who have been elected, who can step up and deliver some leadership at this time of need. I do not know who there persons are. I know many of those who will not and cannot.
So far, this does not look good. At the end of the day, Consumer Confidence, which drives consumer spending that is 66% of GDP, will lead the economy back. This charade that we are watching on Capitol Hill is shaking the confidence of the consumer/taxpayer/voter to the core.
Monday, March 16, 2009
As the government (read: Obama Administration) continues to work on the economy, the most recent pronouncement is that they are going to begin buying "securities" backed by small business loans. Presumably, this is going to enable the Small Business Administration to make (or guarantee) more small business loans... except, the Small Business Administration really doesn't do what they say they do, make or guarantee small business loans.
Here's the way it works. A small business goes to a bank to borrow money. The bank says that if the small business provides collateral and personal guarantees, in excess of the amount of the loan, the bank will make the small business an SBA Loan. There is lots of paperwork, and when the loan is approved, the small business pays a fee to the SBA to "guarantee" the loan. In my experience, the loan was for a company I was an investor in, the loan was $135,000, and the fee was about $4,000.
Now, one would believe that, when one party pays another party (sometimes called a "counter party", a fee for insurance (is this a credit default swap?) on a loan, one would thing that, if the company defaulted, the insurance would step in. Nooooooooo. First the bank goes after the collateral, and then the bank goes after the guarantors, and then there is a lawsuit, or threat thereof, against everybody (officers, guarantors, investors), and then, if everyone is wiped out, the "guarantor" pays the bank. SO, this is another bank bailout deal. This has nothing to do with helping small businesses borrowing money. The bottom line is that the investors could have simply guaranteed the loan for the company without the SBA, and saved the $4,000 "insurance premium". It is just another tax on small business (read: $4,000 fee), it is more bureaucracy, and, as far as the small business is concerned, it is a scam. The small business gets nothing for its money.
So, another month goes by, and nothing is being done about the significant loss of jobs (about 1 million a month) and nothing is being done about the plummeting value of real estate, in general, and homes, in particular. Why is that? Well, the people who are losing their jobs are, for the most part, not members of labor unions, so there are no negative political ramifications for the administration or congress for the job loss, and (it is my guess) most small business owners and operators are nose-to-the-grindstone moderates or conservatives who are trying to build wealth, and these folks just don't fit the profile of people deserving to benefit from the "stimulus".
Unemployment is now above 8%. By July 4, it will be above 10%. However, being INDEPENDENT from a job is not much to celebrate. Chairman Bernanke stated the other day that the recession could end in 2009. There are two ways that can happen. One is for the economy to begin growing to a level above a recession. The other id for the economy to drop to a level below a recession to a D....
Here's the way it works. A small business goes to a bank to borrow money. The bank says that if the small business provides collateral and personal guarantees, in excess of the amount of the loan, the bank will make the small business an SBA Loan. There is lots of paperwork, and when the loan is approved, the small business pays a fee to the SBA to "guarantee" the loan. In my experience, the loan was for a company I was an investor in, the loan was $135,000, and the fee was about $4,000.
Now, one would believe that, when one party pays another party (sometimes called a "counter party", a fee for insurance (is this a credit default swap?) on a loan, one would thing that, if the company defaulted, the insurance would step in. Nooooooooo. First the bank goes after the collateral, and then the bank goes after the guarantors, and then there is a lawsuit, or threat thereof, against everybody (officers, guarantors, investors), and then, if everyone is wiped out, the "guarantor" pays the bank. SO, this is another bank bailout deal. This has nothing to do with helping small businesses borrowing money. The bottom line is that the investors could have simply guaranteed the loan for the company without the SBA, and saved the $4,000 "insurance premium". It is just another tax on small business (read: $4,000 fee), it is more bureaucracy, and, as far as the small business is concerned, it is a scam. The small business gets nothing for its money.
So, another month goes by, and nothing is being done about the significant loss of jobs (about 1 million a month) and nothing is being done about the plummeting value of real estate, in general, and homes, in particular. Why is that? Well, the people who are losing their jobs are, for the most part, not members of labor unions, so there are no negative political ramifications for the administration or congress for the job loss, and (it is my guess) most small business owners and operators are nose-to-the-grindstone moderates or conservatives who are trying to build wealth, and these folks just don't fit the profile of people deserving to benefit from the "stimulus".
Unemployment is now above 8%. By July 4, it will be above 10%. However, being INDEPENDENT from a job is not much to celebrate. Chairman Bernanke stated the other day that the recession could end in 2009. There are two ways that can happen. One is for the economy to begin growing to a level above a recession. The other id for the economy to drop to a level below a recession to a D....
Tuesday, March 10, 2009
The reality of the change in administration and the consequential change in political philosophy is revealed in the news of the day. Congress is considering (has already considered) the desire of the labor unions to eliminate the privacy of a secret ballot, so that those voting for or against unionization of a company will be exposed to significant pressure (intimidation, coercion, physical threat).
This is more frightening than the looming possibility of a world wide financial meltdown and depression. This is a "Human Rights" issue. The very idea that some union goon can walk up to a non-union voter and demand to know his vote, on the spot, is, well, "un-American".
Nevertheless, Congress and the Administration are firmly behind this political promise that was purchased with $65Million in campaign donations, not to mention the "review" of member voting behavior by union bosses.
So, while we vent our anger at the corporate executives who have ridden the "Big Three" auto makers into the ground, let us not forget the fact that they had a lot of help from the unions which have effectively driven their own jobs from the market. Now, the government is going to pass a law that is going to allow them to do this more effectively.
This is more frightening than the looming possibility of a world wide financial meltdown and depression. This is a "Human Rights" issue. The very idea that some union goon can walk up to a non-union voter and demand to know his vote, on the spot, is, well, "un-American".
Nevertheless, Congress and the Administration are firmly behind this political promise that was purchased with $65Million in campaign donations, not to mention the "review" of member voting behavior by union bosses.
So, while we vent our anger at the corporate executives who have ridden the "Big Three" auto makers into the ground, let us not forget the fact that they had a lot of help from the unions which have effectively driven their own jobs from the market. Now, the government is going to pass a law that is going to allow them to do this more effectively.
Wednesday, February 18, 2009
Today we have received the Obama housing rescue plan. Let us look back for a moment. The collapse in the housing market was caused by a number of issues such as supply constraints, the mortgage backed securities market, easy money for investors and sub-prime borrowers (to feed the mortgage backed securities market). In later postings, I will address these issues one-by-one. However, today, it is important to focus on the solutions.
Solutions should be addressed to specific problems. Over the last few months, the talking heads on TV, spokespersons for government, politicians and economists have consistently stated that the most important issue is the plunging value of real estate. With respect to President Obama's rescue plan, that real estate is focused on single family homes. The decline in real estate values is causing a dramatic erosion of capital in the banking industry, it has annihilated the value of all of the various fundamental and/or gimmicky mortgage backed securities (SIV's, CDO's, MBS's, Derivatives, etc.) sold by Wall Street, and it has stimulated the possibility of families opting to "mail the keys" back to their mortgage holder in lieu of paying on a mortgage that far exceeds the value of the home.
This specific problem was caused by the elimination of more than 50% of the demand for new and resale homes. The lost demand included: (1) The sub-prime borrower (depending on the market, this buyer represented 20% to 40% of the home buyers); (2) The investor buyer (depending on the market, this buyer represented 5% to 60% of the home buyers); (3) The qualified "Jumbo" buyer (as much as 15% of these buyers) and (4) The Conforming Conventional Buyer (as much as 25% of these buyers).
In tandem with the elimination of demand, we also encountered some rather severe supply problems. The first of these supply issues is the shortage of available housing that persisted from 1999 through 2005. It was this shortage problem that stimulated massive price increases (in selected markets). The price increases further stimulated demand, particularly from investors, and the investor activity further constrained supply. Hence, we entered a vicious cycle of shortage/price increase/demand increase/further shortage/further price increase.
Beginning in 2006, the housing industry production capacity reached a level that produced a sufficient number of new homes to meet the existing exaggerated demand. The resale market also added to its inventory (listings) as homeowners attempted to cash in on the exceedingly high values of their homes. These two conditions successfully increased the supply of new and resale homes to meet the identifiable demand in the market. By themselves, these two conditions were sufficient to bring home prices back in line with reality and induce a mild (10% to 20% decline in housing production) housing cycle for the first time since the early 1990's.
Little did we know that the folks on Wall Street had managed to leverage the huge amount of mortgages generated by this "bubble" from 30 to 100 times, so that, when the market cools (not to mention collapses) the value of the investments they sold would go down to the degree they were leveraged, which generated TRILLIONS of dollars in investment losses, worldwide. Consequently, instead of a "normal housing cycle" required to bring supply and demand back in balance, we find that the entire mortgage market has been compromised, and the "sub-prime meltdown" gets the blame. The implication being that Joe Six Pack overextended himself with a greedy purchase of a new home, and he is the cause of the problem. In response to this definition of the problem, the Administration has crafted a housing rescue plan that forces banks to take more losses, the taxpayers to pay more money, and focuses on the person who owns an home and who is at risk of foreclosure.
While this may be an admirable goal, it does nothing to remove excess inventory from the market or to restore demand for the purchase of new and resale homes, or restore the millions of construction industry trade jobs that have been lost, due to the 70% decline in housing production, nor does it provide any help in restoring liquidity to the economy. Even the most aggressive foreclosure mitigation cannot prevent the millions of foreclosures that will result from job losses. If a home owner has no income, there is no reasonable subsidy that bring that home owner's debt service down to 35% of their income, short of giving them the home.
By the end of 2006, the housing market began to pull back from the extremely high production rates as buyers found that their existing home was not as easy to sell as expected and that there were actually several homes to choose from in the market in which they were interested. Production began to slow and absorption of existing inventory also weakened. The outcome of this condition was an aggressive upward move in inventory. However, at this point in the calendar, based on what we knew about the economy, the economic growth throughout the country would allow for this excess inventory to be absorbed over the coming year.
By the end of 2007, Wall Street began to hit the fan as investment banks and banks and hedge funds began giving the rest of the world a peek at the extent of the mortal (self inflicted) wound they had received from the hyper-leverage they had used to amass huge profits, bonuses and dividends. As the extent of the damage became better known (this process took more than nine months), the mortgage market for the lower income buyer evaporated, the investors bailed out and the conventional and Jumbo buyers found themselves faced with huge documentation requirements, very large down payment requirements, and, in some cases, no mortgage money availability at all. Lenders cancelled mortgage commitments at the close, and the absorption of new and resale homes plummeted, home prices collapsed, the derivatives market collapsed and all liquidity in the housing market evaporated.
So, the search for a solution leads to the two problems, too much supply and not enough demand. These can actually be boiled down into a single problem, not enough demand, because any increase in demand will automatically reduce the relative supply to a more normal level. So, let's concentrate on demand.
The primary throttle that can successfully impact housing demand is the availability of reasonably priced mortgage money. The more available, the greater the chance of housing demand going up. The more reasonably priced, the greater the likelihood of housing demand going up. The good thing about mortgage money is that it is a loan, not a gift. When a mortgage is made, there is no cost to the taxpayer. When the payments are made, the lender receives interest income. The role of the government in a mortgage availability program would be twofold; first, to insure the mortgages that are made (HUD/FHA) and, second, to provide the liquidity necessary to fund the mortgages at a low interest rate (Fannie Mae/Ginny Mae).
The governmental infrastructure is in place at HUD/FHA and at Fannie Mae and Ginny Mae. There is precedent for both government insured mortgages and direct lending, particularly after the 1974 crash when we had the Ginny Mae Tandem Plan with direct, below market loans for new housing construction. therefore, we do not have to make government any bigger. The loans can be made by banks, mortgage companies, savings banks and Fannie/Ginny. The term of the mortgages should be 30 to 40 years, and the interest rate should be in the range of 1.5% to 2.5%. Down payments should range from 0%, with the rate improving with greater down payments. It would be reasonable for the interest rate to adjust to market (at some graduated pace) after 5 to 10 years.
How do we implement such a program? First, Congress would DIRECT HUD/FHA to insure $1 TRILLION in new mortgages. Every time FHA insures a mortgage, the government will collect a fee. Cost to the taxpayer = $0. When a bank funds the mortgage, the paper is government insured, so the bank can sell the mortgage and recapture its liquidity. Based on a $200,000 average home price, this program will provide for 5 million new mortgages. Because the program would apply to reseal and new homes, the initial thrust of the program would go a long way toward removing the 2 million excess resale homes and 500,000 excess new, unsold inventory from the market. By quickly removing this excess inventory from the market, the primary problem of falling real estate (home) prices will STOP.
By arresting the free fall of home prices, the erosion of bank capital will also stop and further bank real estate losses will be mitigated.
As the excess inventory begins to experience accelerated absorption, the housing market will return to inventory equilibrium. As this occurs, buyers will find that to get the house they want, they will have to get a builder to build them a home. While this part of the program helps restore equilibrium to housing inventory and stabilizes home process, we have yet to address the 500,000 to 1 million jobs the national economy is losing each month, and will continue to do so for the rest of 2009. This program would provide mortgages for construction of 500,000 new homes per year for the next five years (5 million mortgages minus 2 million resale inventory minus 500,000 new home inventory leaves 2.5 million new home mortgages over five years equals 500,000 per year. So, we do another round of math.
If we estimate that there are 50,000 home builders left in the economy, today; down from 100,000, and if we further estimate that each home builder works with 10 sub-contractors (roofers, framers, masons, electricians, plumbers, HVAC dealers, flooring companies, foundation companies, excavators, and carpenters), then, as inventory drops and it becomes necessary for the housing market to build a new home to meet demand, all of these companies (550,000) are going to have to hire back the employees they have laid off in the last 18 months. If they hire one employee per company per month, we will create 6.6 million new jobs over the next 12 to 18 months. this job formation will be in addition to the jobs created by building highways, bridges, schools and infrastructure as planned in the Stimulus Plan passed by Congress.
So, with this program, bank capital is protected and restored, consumer confidence in the economy is restored, lost construction jobs are restored, lost building product manufacturing jobs (not counted above) are restored, banking and mortgage industry jobs are restored, bank confidence in taking lending risks in the US economy are restored. All at ZERO cost to the taxpayer. Not a bad program. However, there are some glitches in the way of implementation. The primary glitch is credit, or more specifically, credit scores.
Just using the more than 4 million jobs lost so far, and the slowdown in the economy, there are millions of people who have made their mortgage or credit card payments late. It is very likely that the credit scores of millions of families have dropped (although, we have no idea how these scores are actually calculated). Nevertheless, there are three credit reporting companies that control the purse strings of the US economy. Having mortgage money and low interest rates if the underwriting to obtain those mortgages prevents the working class buyer from qualifying. It is going to be very, very important that the buyers be qualified on a percent of their income, and not some calculation that is rife with penalties for being on a new job, being divorced, late payments and the like. It is necessary to broaden the access to these mortgages, not limit access.
Well, if we lower underwriting, and increase the percent of income that can be committed to the mortgage payment (say, 30% to 50%), then a lot of people are going to default, after all, this is sub-prime buying at its best. That's right, there will be defaults, and this is going to cost the taxpayers (here we go, more load in the taxpayer). So, let's assume that over the five years of this program, 40% of the $1 TRILLION in mortgages default; that's $400 Billion. That's a lot of money. However, HUD/FHA is going to foreclose on those mortgages, because they are the guarantor. then, HUD/FHA is going to sell these homes in an improving housing market. They are still going to suffer a loss, so, let's assume that these foreclosures, over five years, are sold for $0.60 on the dollar. This will result in a $160 Billion loss to HUD/FHA (code for taxpayer). So, the question is, does a $160 Billion loss, over 5 years ($32 Billion per year), when more than 6 million jobs are created and hundreds of billions of bank capital is saved or restored, make sense? In the Spring of 2008, the government mailed $600 checks to citizens nationwide at a cost of $180 Billion, with no justification for such an action, and no visible results. The program described herein makes a lot more sense than that. Our Congress and just passed the largest spending bill in the history of the PLANET, without even reading the document. This proposal makes a lot more sense than that.
Well, then, what's the problem? This program has no constituency, other than the American people. There is no banking lobby for the congress to turn to and say, "See what I did for you?", there is no United Auto Workers' Union for the congress to turn to and say, "See what I have done for you?" there are no political cronies that anyone can turn to and say, "See what I have done for you?" It will, however, give President Obama the platform to turn to the American people and say, "See what I have done for you?"
The second rub is that many home builders and sub-contractors are self employed entrepreneurs. This can be code for Conservative - Republican. Certainly, in the interest of good old partisan politics, it would be better to let the economy go into depression before doing anything that might help a Conservative Republican.
Right now, our economy is losing somewhere between 500,000 and 1,000,000 jobs per MONTH. The economy is going to go into a DEPRESSION, with 15% to 20% unemployment and all of the collateral social and economic ills that go with it. Building bridges, highways and slowing foreclosures does not reverse the trend. Stimulating 500,000 to 600,000 employers to hire one person per month over a year will quickly reverse the trend. Remember that the economy needs about a year (12 months) for the positive stimuli to show up on the street. We need to act now.
Solutions should be addressed to specific problems. Over the last few months, the talking heads on TV, spokespersons for government, politicians and economists have consistently stated that the most important issue is the plunging value of real estate. With respect to President Obama's rescue plan, that real estate is focused on single family homes. The decline in real estate values is causing a dramatic erosion of capital in the banking industry, it has annihilated the value of all of the various fundamental and/or gimmicky mortgage backed securities (SIV's, CDO's, MBS's, Derivatives, etc.) sold by Wall Street, and it has stimulated the possibility of families opting to "mail the keys" back to their mortgage holder in lieu of paying on a mortgage that far exceeds the value of the home.
This specific problem was caused by the elimination of more than 50% of the demand for new and resale homes. The lost demand included: (1) The sub-prime borrower (depending on the market, this buyer represented 20% to 40% of the home buyers); (2) The investor buyer (depending on the market, this buyer represented 5% to 60% of the home buyers); (3) The qualified "Jumbo" buyer (as much as 15% of these buyers) and (4) The Conforming Conventional Buyer (as much as 25% of these buyers).
In tandem with the elimination of demand, we also encountered some rather severe supply problems. The first of these supply issues is the shortage of available housing that persisted from 1999 through 2005. It was this shortage problem that stimulated massive price increases (in selected markets). The price increases further stimulated demand, particularly from investors, and the investor activity further constrained supply. Hence, we entered a vicious cycle of shortage/price increase/demand increase/further shortage/further price increase.
Beginning in 2006, the housing industry production capacity reached a level that produced a sufficient number of new homes to meet the existing exaggerated demand. The resale market also added to its inventory (listings) as homeowners attempted to cash in on the exceedingly high values of their homes. These two conditions successfully increased the supply of new and resale homes to meet the identifiable demand in the market. By themselves, these two conditions were sufficient to bring home prices back in line with reality and induce a mild (10% to 20% decline in housing production) housing cycle for the first time since the early 1990's.
Little did we know that the folks on Wall Street had managed to leverage the huge amount of mortgages generated by this "bubble" from 30 to 100 times, so that, when the market cools (not to mention collapses) the value of the investments they sold would go down to the degree they were leveraged, which generated TRILLIONS of dollars in investment losses, worldwide. Consequently, instead of a "normal housing cycle" required to bring supply and demand back in balance, we find that the entire mortgage market has been compromised, and the "sub-prime meltdown" gets the blame. The implication being that Joe Six Pack overextended himself with a greedy purchase of a new home, and he is the cause of the problem. In response to this definition of the problem, the Administration has crafted a housing rescue plan that forces banks to take more losses, the taxpayers to pay more money, and focuses on the person who owns an home and who is at risk of foreclosure.
While this may be an admirable goal, it does nothing to remove excess inventory from the market or to restore demand for the purchase of new and resale homes, or restore the millions of construction industry trade jobs that have been lost, due to the 70% decline in housing production, nor does it provide any help in restoring liquidity to the economy. Even the most aggressive foreclosure mitigation cannot prevent the millions of foreclosures that will result from job losses. If a home owner has no income, there is no reasonable subsidy that bring that home owner's debt service down to 35% of their income, short of giving them the home.
By the end of 2006, the housing market began to pull back from the extremely high production rates as buyers found that their existing home was not as easy to sell as expected and that there were actually several homes to choose from in the market in which they were interested. Production began to slow and absorption of existing inventory also weakened. The outcome of this condition was an aggressive upward move in inventory. However, at this point in the calendar, based on what we knew about the economy, the economic growth throughout the country would allow for this excess inventory to be absorbed over the coming year.
By the end of 2007, Wall Street began to hit the fan as investment banks and banks and hedge funds began giving the rest of the world a peek at the extent of the mortal (self inflicted) wound they had received from the hyper-leverage they had used to amass huge profits, bonuses and dividends. As the extent of the damage became better known (this process took more than nine months), the mortgage market for the lower income buyer evaporated, the investors bailed out and the conventional and Jumbo buyers found themselves faced with huge documentation requirements, very large down payment requirements, and, in some cases, no mortgage money availability at all. Lenders cancelled mortgage commitments at the close, and the absorption of new and resale homes plummeted, home prices collapsed, the derivatives market collapsed and all liquidity in the housing market evaporated.
So, the search for a solution leads to the two problems, too much supply and not enough demand. These can actually be boiled down into a single problem, not enough demand, because any increase in demand will automatically reduce the relative supply to a more normal level. So, let's concentrate on demand.
The primary throttle that can successfully impact housing demand is the availability of reasonably priced mortgage money. The more available, the greater the chance of housing demand going up. The more reasonably priced, the greater the likelihood of housing demand going up. The good thing about mortgage money is that it is a loan, not a gift. When a mortgage is made, there is no cost to the taxpayer. When the payments are made, the lender receives interest income. The role of the government in a mortgage availability program would be twofold; first, to insure the mortgages that are made (HUD/FHA) and, second, to provide the liquidity necessary to fund the mortgages at a low interest rate (Fannie Mae/Ginny Mae).
The governmental infrastructure is in place at HUD/FHA and at Fannie Mae and Ginny Mae. There is precedent for both government insured mortgages and direct lending, particularly after the 1974 crash when we had the Ginny Mae Tandem Plan with direct, below market loans for new housing construction. therefore, we do not have to make government any bigger. The loans can be made by banks, mortgage companies, savings banks and Fannie/Ginny. The term of the mortgages should be 30 to 40 years, and the interest rate should be in the range of 1.5% to 2.5%. Down payments should range from 0%, with the rate improving with greater down payments. It would be reasonable for the interest rate to adjust to market (at some graduated pace) after 5 to 10 years.
How do we implement such a program? First, Congress would DIRECT HUD/FHA to insure $1 TRILLION in new mortgages. Every time FHA insures a mortgage, the government will collect a fee. Cost to the taxpayer = $0. When a bank funds the mortgage, the paper is government insured, so the bank can sell the mortgage and recapture its liquidity. Based on a $200,000 average home price, this program will provide for 5 million new mortgages. Because the program would apply to reseal and new homes, the initial thrust of the program would go a long way toward removing the 2 million excess resale homes and 500,000 excess new, unsold inventory from the market. By quickly removing this excess inventory from the market, the primary problem of falling real estate (home) prices will STOP.
By arresting the free fall of home prices, the erosion of bank capital will also stop and further bank real estate losses will be mitigated.
As the excess inventory begins to experience accelerated absorption, the housing market will return to inventory equilibrium. As this occurs, buyers will find that to get the house they want, they will have to get a builder to build them a home. While this part of the program helps restore equilibrium to housing inventory and stabilizes home process, we have yet to address the 500,000 to 1 million jobs the national economy is losing each month, and will continue to do so for the rest of 2009. This program would provide mortgages for construction of 500,000 new homes per year for the next five years (5 million mortgages minus 2 million resale inventory minus 500,000 new home inventory leaves 2.5 million new home mortgages over five years equals 500,000 per year. So, we do another round of math.
If we estimate that there are 50,000 home builders left in the economy, today; down from 100,000, and if we further estimate that each home builder works with 10 sub-contractors (roofers, framers, masons, electricians, plumbers, HVAC dealers, flooring companies, foundation companies, excavators, and carpenters), then, as inventory drops and it becomes necessary for the housing market to build a new home to meet demand, all of these companies (550,000) are going to have to hire back the employees they have laid off in the last 18 months. If they hire one employee per company per month, we will create 6.6 million new jobs over the next 12 to 18 months. this job formation will be in addition to the jobs created by building highways, bridges, schools and infrastructure as planned in the Stimulus Plan passed by Congress.
So, with this program, bank capital is protected and restored, consumer confidence in the economy is restored, lost construction jobs are restored, lost building product manufacturing jobs (not counted above) are restored, banking and mortgage industry jobs are restored, bank confidence in taking lending risks in the US economy are restored. All at ZERO cost to the taxpayer. Not a bad program. However, there are some glitches in the way of implementation. The primary glitch is credit, or more specifically, credit scores.
Just using the more than 4 million jobs lost so far, and the slowdown in the economy, there are millions of people who have made their mortgage or credit card payments late. It is very likely that the credit scores of millions of families have dropped (although, we have no idea how these scores are actually calculated). Nevertheless, there are three credit reporting companies that control the purse strings of the US economy. Having mortgage money and low interest rates if the underwriting to obtain those mortgages prevents the working class buyer from qualifying. It is going to be very, very important that the buyers be qualified on a percent of their income, and not some calculation that is rife with penalties for being on a new job, being divorced, late payments and the like. It is necessary to broaden the access to these mortgages, not limit access.
Well, if we lower underwriting, and increase the percent of income that can be committed to the mortgage payment (say, 30% to 50%), then a lot of people are going to default, after all, this is sub-prime buying at its best. That's right, there will be defaults, and this is going to cost the taxpayers (here we go, more load in the taxpayer). So, let's assume that over the five years of this program, 40% of the $1 TRILLION in mortgages default; that's $400 Billion. That's a lot of money. However, HUD/FHA is going to foreclose on those mortgages, because they are the guarantor. then, HUD/FHA is going to sell these homes in an improving housing market. They are still going to suffer a loss, so, let's assume that these foreclosures, over five years, are sold for $0.60 on the dollar. This will result in a $160 Billion loss to HUD/FHA (code for taxpayer). So, the question is, does a $160 Billion loss, over 5 years ($32 Billion per year), when more than 6 million jobs are created and hundreds of billions of bank capital is saved or restored, make sense? In the Spring of 2008, the government mailed $600 checks to citizens nationwide at a cost of $180 Billion, with no justification for such an action, and no visible results. The program described herein makes a lot more sense than that. Our Congress and just passed the largest spending bill in the history of the PLANET, without even reading the document. This proposal makes a lot more sense than that.
Well, then, what's the problem? This program has no constituency, other than the American people. There is no banking lobby for the congress to turn to and say, "See what I did for you?", there is no United Auto Workers' Union for the congress to turn to and say, "See what I have done for you?" there are no political cronies that anyone can turn to and say, "See what I have done for you?" It will, however, give President Obama the platform to turn to the American people and say, "See what I have done for you?"
The second rub is that many home builders and sub-contractors are self employed entrepreneurs. This can be code for Conservative - Republican. Certainly, in the interest of good old partisan politics, it would be better to let the economy go into depression before doing anything that might help a Conservative Republican.
Right now, our economy is losing somewhere between 500,000 and 1,000,000 jobs per MONTH. The economy is going to go into a DEPRESSION, with 15% to 20% unemployment and all of the collateral social and economic ills that go with it. Building bridges, highways and slowing foreclosures does not reverse the trend. Stimulating 500,000 to 600,000 employers to hire one person per month over a year will quickly reverse the trend. Remember that the economy needs about a year (12 months) for the positive stimuli to show up on the street. We need to act now.
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