MACRO future foreclosure concern

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Submitted by HLS on July 9, 2013 - 10:14am

Realistic article from a month ago...
I'm not trying to make a point about 'west of I-5' OR Carmel Valley, but a rising tide lifts all boats.

http://www.washingtonguardian.com/anothe...

Submitted by bearishgurl on July 9, 2013 - 11:50am.

HLS, are you trying to say that "Carmel Valley" and "West of 5" residential property owners are immune from foreclosure? I'm not sure exactly what you mean, but I don't think boats getting lifted in La Jolla helps homeowners in Lemon Grove one iota.

I saw the article and agree with it but also realize it applies to residential markets where Fannie, Freddie and FHA/VA mortgages are utilized in the majority of closings AND there are enough current (last few years) resale comps which sold under the above terms.

How much is "enough" resales in a given micro-market? I think at least 10% per year of total parcels successfully being transferred at arm's length.

I don't believe neighborhoods situated in CA coastal counties which have had historically very little turnover are in danger of becoming distressed and it doesn't matter their median value. It could be $250K or $1M+.

Remember, we have Prop 13 and its progeny, Props 58 and 193 on the books of this wonderful state. Millions of people living in paid-for and nearly paid-for properties are NOT going to be selling anytime soon. Taking title to a property through an intrafamily transfer deed pursuant to Props 58 and 193 is not a "sale," per se.

Some well-established areas within CA (and often the best micro-areas within those areas) currently have hundreds, if not thousands of properties taking advantage of Props 58 and 193.

These affected properties aren't going anywhere, nor are their owners and/or their owners' heirs. The vast majority of these properties will never be in foreclosure and there are millions of them in CA.

Submitted by SK in CV on July 9, 2013 - 12:02pm.

Article seems a bit ill-timed. LPS reported last week that mortgage delinquencies in May were down more than 25% from a year earlier and at their lowest level in almost 5 years. The claim that "the bureaucracy risks being overwhelmed" is both accurate and horribly misleading. The "bureaucracy" is at its lowest risk since 2008.

Submitted by HLS on July 9, 2013 - 1:15pm.

SK in CV wrote:
Article seems a bit ill-timed. LPS reported last week that mortgage delinquencies in May were down more than 25% from a year earlier and at their lowest level in almost 5 years. The claim that "the bureaucracy risks being overwhelmed" is both accurate and horribly misleading. The "bureaucracy" is at its lowest risk since 2008.

The risk in 2008 was off the charts. Just because the patient only has 10 things seriously wrong with them rather than 30 things doesn't mean that they are healthy or are going to survive.
'Lowest risk since 2008' still means on life support to me.

I'm not saying that either the article OR LPS has the 'correct' perspective, but just to point out that there is so much information and misinformation to feed off, one should be aware and understand and realize all the propaganda and crap being thrown around gets used to issue reports, statistics & articles.

I do like your statement of "accurate & horribly misleading"

I totally disagree that the article is "ill-timed"
Do you base your comment one the premise that LPS is 100% correct therefore the article is flawed/incorrect ?
I know for a fact that the way information is reported gets twisted and skewed to meet someone's agenda.
a) The foreclosure numbers/filings reports are completely misleading and inaccurate.
b) Using the median home price as an important statistic is foolish.
c) Believing the govt released numbers for many things (such as unemployment & inflation) is simply idiotic; yet these last 3 things are relied upon heavily as though they are totally accurate and came from an ethical source without a hidden agenda.

Most people are 'trading' on the same inaccurate information. You can make a fortune by being right about how the 'inaccurate information' is going to be released & you can lose a fortune by being spot on with the truth/reality.
***********************
BG, you made my point for me. There are always people who want to point to Carmel Valley and west of I-5, because there are no price reductions or much inventory, blah,blah,blah.
My perspective is the overall national picture of the nonsense that is going on and the big problem that is looming, although the politicians will do almost anything to prevent what really needs to happen to fix the 'problem'

As the article states, there are different perspectives from the internal watchdogs & the politicians.

Submitted by flu on July 10, 2013 - 7:05am.

.

Submitted by SK in CV on July 10, 2013 - 7:25am.

HLS wrote:
I totally disagree that the article is "ill-timed"
Do you base your comment one the premise that LPS is 100% correct therefore the article is flawed/incorrect ?
I know for a fact that the way information is reported gets twisted and skewed to meet someone's agenda.
a) The foreclosure numbers/filings reports are completely misleading and inaccurate.
b) Using the median home price as an important statistic is foolish.
c) Believing the govt released numbers for many things (such as unemployment & inflation) is simply idiotic; yet these last 3 things are relied upon heavily as though they are totally accurate and came from an ethical source without a hidden agenda.

I don't think LPS numbers are 100% correct, but they're consistent with the CORE logic numbers, and I don't think either has an agenda other than getting their numbers as accurate as possible. Neither of them is precise, but the value of their reports is in identifying trends. And the trend in the number of delinquent loans is down.

Can you explain why or how either of those reports are misleading or inaccurate? Keep in mind, I'm looking at trends, not precise numbers.

Your comment about using median home prices is a complete non-sequitur. I haven't, and neither do either of those reports.

Neither have I used government numbers for unemployment or inflation, but similarly, their value doesn't lay in individual numbers, but in trends. And the unemployment rate is flat to falling, and inflation outside of housing is virtually non-existent.

The article implies we are at near crisis levels. Something horrible could happen if all of a sudden all these delinquent loans hit the market as foreclosures. But the risks of that happening have clearly fallen over the last 4 years, and most all indicators of future economic conditions would lead to a conclusion of future diminishing risks. The economy is always at risk created by black swan events. But excepting events like that, what substantiation exists for calling out this particular potential crisis now? Is there an agenda in doing so?

Submitted by The-Shoveler on July 10, 2013 - 7:28am.

Oh come on flu,
I was just going to say, that would probably not even cash flow:
235K financed at 6% (investor rate) would be about 1.4K a month add in Taxes and insurance + HOA and your getting close to 2K maybe 2.2K a month expense.

Submitted by HLS on July 10, 2013 - 9:38am.

[/quote]
Can you explain why or how either of those reports are misleading or inaccurate? Keep in mind, I'm looking at trends, not precise numbers.

Neither have I used government numbers for unemployment or inflation, but similarly, their value doesn't lay in individual numbers, but in trends. And the unemployment rate is flat to falling, and inflation outside of housing is virtually non-existent.

The article implies we are at near crisis levels. Something horrible could happen if all of a sudden all these delinquent loans hit the market as foreclosures. But the risks of that happening have clearly fallen over the last 4 years, and most all indicators of future economic conditions would lead to a conclusion of future diminishing risks. The economy is always at risk created by black swan events. But excepting events like that, what substantiation exists for calling out this particular potential crisis now? Is there an agenda in doing so?[/quote]

Statistics are manipulated which create the data needed to determine the 'trends' that you refer to.
I'm just as concerned with the precise numbers because people believe them as they are released.
I disagree that future economic risk has been diminished. I think that the risk is greater than ever.

1.The foreclosure COMPARISONS that are reported are a complete joke yet are used and analyzed by virtually everyone EXCEPT the people who really understand what is going on. It's easy to fool everyone when fools are in charge.
The entire process of selectively manipulating the process creates completely useless comparisons.
COMPLETELY MEANINGLESS. When'experts' repeat this blather, it becomes even clearer to me how clueless these 'experts' are.

2.Unemployment reports are another joke. the current U-6 is 14.3% far worse than the sub 8%
that the govt & media repeat like it was gospel.

Maybe black swan events aren't really black swan.
The govt interference & manipulation to keep a 'black swan' from becoming a recurring event is VERY real.
The 'potential crisis' is not just being called out now, it's been talked about for the last 8+ years by a tiny minority who just may realize the risks that 99.9% of others refuse to acknowledge, even if it is a remote risk.

For many, many people, their personal situation is far worse than it was at the end of 2008; yet according to the 'trends' that you are accepting one would believe that the horizon is rosy and 'we' have turned a corner.

I'm extremely skeptical of the reports and trends that are released when I know of many individual situations that are diametrical. I disagree that risks have clearly fallen over the last 4 years. For many people, it has never been worse, and about 10 million people have died in this period so their situations are no longer considered.

With any reports that get released using manipulated statistics, it's garbage in and garbage out.

It's always possible to view stats and trends with an alternate perspective if one wants to, rather than just blindly accept what ever gets released, reported and repeated without really understanding the content and how data was compiled.

Submitted by SK in CV on July 10, 2013 - 9:52am.

HLS wrote:

Statistics are manipulated which create the data needed to determine the 'trends' that you refer to.
I'm just as concerned with the precise numbers because people believe them as they are released.
I disagree that future economic risk has been diminished. I think that the risk is greater than ever.

1.The foreclosure COMPARISONS that are reported are a complete joke yet are used and analyzed by virtually everyone EXCEPT the people who really understand what is going on. It's easy to fool everyone when fools are in charge.
The entire process of selectively manipulating the process creates completely useless comparisons.
COMPLETELY MEANINGLESS. When'experts' repeat this blather, it becomes even clearer to me how clueless these 'experts' are.

2.Unemployment reports are another joke. the current U-6 is 14.3% far worse than the sub 8%
that the govt & media repeat like it was gospel.

Maybe black swan events aren't really black swan.
The govt interference & manipulation to keep a 'black swan' from becoming a recurring event is VERY real.
The 'potential crisis' is not just being called out now, it's been talked about for the last 8+ years by a tiny minority who just may realize the risks that 99.9% of others refuse to acknowledge, even if it is a remote risk.

For many, many people, their personal situation is far worse than it was at the end of 2008; yet according to the 'trends' that you are accepting one would believe that the horizon is rosy and 'we' have turned a corner.

I'm extremely skeptical of the reports and trends that are released when I know of many individual situations that are diametrical. I disagree that risks have clearly fallen over the last 4 years. For many people, it has never been worse, and about 10 million people have died in this period so their situations are no longer considered.

With any reports that get released using manipulated statistics, it's garbage in and garbage out.

It's always possible to view stats and trends with an alternate perspective if one wants to, rather than just blindly accept what ever gets released, reported and repeated without really understanding the content and how data was compiled.

Precisely how and why are the statistics selectively manipulated?

Why is the risk today greater than it was 5 years ago?

Why are the unemployment trends, whether the base number or the U-6 a joke? Both are on a downward trend (June U-6 being an exception).

It seems your whole premise is that you don't believe the data because you have nothing more than anecdotal evidence that is contrary to the data. I strongly suspect that the data sample used as the basis of these monthly numbers is substantially larger than your anecdotes. Larger the data sample, the more accurate the results. Do you think that is not true?

(And I do understand how to read data.)

Submitted by CA renter on July 11, 2013 - 12:51am.

Jumping in here...

The statistics on foreclosures are manipulated because many lenders have simply stopped foreclosing on many people who would have been foreclosed on in times past. Additionally, asset prices are artificially high because interest rates are artificially low, pushing more and more people further out on the risk curve than they would have been without all of the manipulations (repeating the same mistakes that caused the "financial crisis" in the first place). This has been keeping foreclosures off the market, too, either by enabling people to sell instead of being foreclosed on, or by enabling them to refinance to lower and lower rates (which I don't think is a bad thing, it's just not the norm, historically-speaking).

As for employment trends, most people I know are making less than they were in 2008, and many of their jobs are also less stable than they once were. More people who want to be employed full-time are being employed part time, and they are often under-employed, as well.

People have been watching their incomes go down or stagnate while the costs of basic goods and services have skyrocketed -- so many have lost a lot of purchasing power since 2008.

The unemployment numbers are skewed because the participation rate has declined rather dramatically...and these numbers still don't include those who are under-employed or who are employed part time, but want to work full time.

http://data.bls.gov/timeseries/LNS11300000

http://research.stlouisfed.org/fred2/ser...

------------

Once upon a time, people believed that "inflation" would make their earnings go up, but that lie has been largely put to rest. Instead, it will make the cost of living/asset prices go up while wages stagnate or decline, especially if we don't do anything to stop the race to the bottom in the "globalized" economy.

Just my 2 cents, but I have to agree with what HLS has been saying. I think that there are much larger risks out there than most people are willing to acknowledge.

Submitted by SK in CV on July 11, 2013 - 5:39am.

CA renter wrote:
Jumping in here...

The statistics on foreclosures are manipulated because many lenders have simply stopped foreclosing on many people who would have been foreclosed on in times past. Additionally, asset prices are artificially high because interest rates are artificially low, pushing more and more people further out on the risk curve than they would have been without all of the manipulations (repeating the same mistakes that caused the "financial crisis" in the first place). This has been keeping foreclosures off the market, too, either by enabling people to sell instead of being foreclosed on, or by enabling them to refinance to lower and lower rates (which I don't think is a bad thing, it's just not the norm, historically-speaking).

As for employment trends, most people I know are making less than they were in 2008, and many of their jobs are also less stable than they once were. More people who want to be employed full-time are being employed part time, and they are often under-employed, as well.

People have been watching their incomes go down or stagnate while the costs of basic goods and services have skyrocketed -- so many have lost a lot of purchasing power since 2008.

The unemployment numbers are skewed because the participation rate has declined rather dramatically...and these numbers still don't include those who are under-employed or who are employed part time, but want to work full time.

http://data.bls.gov/timeseries/LNS11300000

http://research.stlouisfed.org/fred2/ser...

------------

Once upon a time, people believed that "inflation" would make their earnings go up, but that lie has been largely put to rest. Instead, it will make the cost of living/asset prices go up while wages stagnate or decline, especially if we don't do anything to stop the race to the bottom in the "globalized" economy.

Just my 2 cents, but I have to agree with what HLS has been saying. I think that there are much larger risks out there than most people are willing to acknowledge.

CAR, as I said before, I haven't cited any foreclosure statistics, only delinquency statistics. Have they been manipulated?

I've also cited trends, not hard numbers. Is there any evidence that the number of houses that could be in foreclosure is higher now than it has been in the recent past? Beyond that, I would argue against the assertion that the numbers of foreclosures are being "manipulated". Lenders are horrible at dealing with distressed assets. That's not a new phenomena, it's been that way for decades.

As I also said before, the employment trends are also improving. There are not more unemployed people now than a few years ago, there are fewer. It still sucks, but that doesn't make it worse now than 4 years ago.

In agreeing with HLS, you're arguing that the housing market is at a higher risk of imploding today than 5 years ago. The fact is, the housing market DID implode 5 years ago. I'm not arguing that there is no risk of it happening again. Only that the statistics cited aren't evidence that we're at higher risk today than 5 years ago. They all point to lower risk.

Submitted by HLS on July 11, 2013 - 7:55am.

SK,
I'm sure that you know how to read data.
I'm not sure that you understand the meaning of the information gathered to provide you with this meaningful data and thus your contention that the trends are improving.

Lie 10 times, then 9, then 8, it certainly indicates that the trend is improving.

There is no point in discussing this with you, you are the final word.

You know how to read data. You stated that an article written about an official report issued in May 2013 from the highest level possible is ill-timed and you have drawn your own conclusions, therefore any other view is incorrect.

If I said that CAR was 1 in a million, it would mean that there are about 314 other people in this country that get what I am talking about. That might just be accurate.

Enjoy your govt manipulated, misleading statistics and charts. Continue on with the trends that you believe are accurate and I hope that this serves you well and continue on with your agenda of support to the propaganda.

Submitted by HLS on July 11, 2013 - 8:16am.

Here are some statistics that are about as useful to me as the foreclosure comparisons, draw your own conclusions.
I'm sorry that I don't have time to provide additional data for you to determine trends.

99.999% of people who died in the last 12 months were breathing before they died.

100% of people who turned 21 in the last year, were 20 on their previous birthday.

98% of people who died in the last 6 months either ate carrots, bananas or watched TV in the 30 days preceding their death.
********
The complacency about the economy and faith in 'the recovery' is a severe case of hypostatization.
It was only a mild case around 2006 when virtually everybody though that their house was really worth what it was selling for.

I will give the govt credit for creating the illusion that the economy has improved, we have turned a corner, and are well on the road to 'recovery' (WTH that means)

Most people are either brainwashed or delusional, complete ignorant and unaware of the risks ahead that someday cannot be avoided.

The current administration is doing an outstanding job of kicking the can down the road.
This has nothing to with the party, the previous administration was just as inept.

Commitments and unfunded liabilities have possibly never been greater. The cost to perpetuate this illusion has been many trillions of dollars, and is far from over.

There are far greater problems ahead for many than they faced in the past, regardless of the 'trends' being reported today.

Eventually the problems will cease to exist, however, eventually we will all be dead.

Submitted by SK in CV on July 11, 2013 - 8:31am.

HLS wrote:
SK,
I'm sure that you know how to read data.
I'm not sure that you understand the meaning of the information gathered to provide you with this meaningful data and thus your contention that the trends are improving.

Lie 10 times, then 9, then 8, it certainly indicates that the trend is improving.

There is no point in discussing this with you, you are the final word.

You know how to read data. You stated that an article written about an official report issued in May 2013 from the highest level possible is ill-timed and you have drawn your own conclusions, therefore any other view is incorrect.

If I said that CAR was 1 in a million, it would mean that there are about 314 other people in this country that get what I am talking about. That might just be accurate.

Enjoy your govt manipulated, misleading statistics and charts. Continue on with the trends that you believe are accurate and I hope that this serves you well and continue on with your agenda of support to the propaganda.

You realize the silliness of your argument? You call the numbers manipulated and then cite them as evidence of a crisis. The very "manipulated" numbers "from the highest level possible" come from the very same source that shows the improving trend. This feels much like those adorable AT&T commercials, asking the children which is better, more or less? There are "less" delinquent loans today than 4 years ago. Do you dispute this? If so, cite your evidence.

Submitted by SD Realtor on July 11, 2013 - 10:24am.

Some of those ATT commercials are pretty funny.

Submitted by FlyerInHi on July 11, 2013 - 10:25am.

HLS and CAR, you guys may not feel comfortable with the economy. But SK is right, relative to 2008, we are doing much better; and the stats supports that. There is more employment and productivity is now higher than the previous peak.

CAR, just because the people you know are making less and not feeling as secure doesn't mean that other groups aren't making money. There are winners and losers whenever there are economic transitions. That is the process of economic renewal at work.

http://research.stlouisfed.org/fred2/ser...

Stats can be manipulated once or twice, yes; but the truth catches up quickly.

Higher asset prices mean less foreclosures. . And as assets move higher still the foreclosures will drop.

Sustainable for how long. We will see. But will we seen another Great Recession soon? I don't think so. I believe we will see peak real estate prices again before we see another crash.

About risk, we live in a risky world. That actually is the normal. We just need to learn to assess the risks.

Submitted by sdduuuude on July 11, 2013 - 11:36am.

bearishgurl wrote:
... I don't think boats getting lifted in La Jolla helps homeowners in Lemon Grove one iota ...

You took the phrase "a rising tide lifts all boats" and twisted it to suggest the original poster was saying "anything that lifts one boat lifts all others"

Please think a bit before you embark on one of your endless posts.

Submitted by moneymaker on July 11, 2013 - 12:52pm.

What lifted my boat was a house 3 doors down selling for 10k less than I paid even though my place is 50% bigger house and a bigger lot, thanks to that I was able to refi out of PMI and can now see a comfortable retirement with no mortgage on the horizon. I think that falls under the realtor mantra of "location,location,location". I f the house had been more than a mile away it may not have had as big an effect on the appraisal.

Submitted by CA renter on July 11, 2013 - 11:11pm.

SK,

Delinquencies are down because prices are up. This has enabled people to sell or refinance at lower rates. Prices are up because interest rates have been kept at artificially low levels (for far too long!), and because investors have been chasing yield all around the globe...and have found U.S. housing to be one of the better bets in a world where yields do not match risks.

Inventory has been kept off the market for quite a few years now, and investors who've had access to "back-room foreclosure deals" have made agreements with lenders to keep properties off the market a specified period of time, giving the artificial impression that inventories are low/declining via "natural" means. These homes/statistics are not visible to the general public.

Various investors have been piling into the RE market for the past few years, many of them entering a market in which they have no experience, and in which there is a LOT of existing and future competition (all those other investors doing the same thing). In many areas, investor demand has made up 30-50% of the housing demand. More investors than ever have been getting into the "buy to rent" market, and they are over-estimating returns on these rentals for a variety of reasons. Just like I've warned in the past, those rosy returns are not coming in many cases. The smart money has already been moving to the sidelines.

http://www.bloomberg.com/news/2013-05-29...

So...if you remove ~20%++ of the demand from the market, and add to that the fact that many of these funds will be rushing to put homes on the market once the market turns down, (let's not forget that interest rates are still at/near historical lows, and more likely to go up than down over the long term), it would seem that the risks to housing prices would be greater than many are anticipating.
------

While this report only includes data through 2011, it shows that incomes and health insurance coverage have been declining since 2008, while poverty rates have been increasing. Yes, some segments of our society are doing better than they were in 2008, but they are few and far between.

http://www.census.gov/prod/2012pubs/p60-...

Again, the unemployment data doesn't tell the whole story because it does not include discouraged workers (see links in my post above), those who've dropped out via disability (an all-time high, I believe), and those who are under employed in various ways (part time vs. full time, or working in positions well below what they were doing in the past).

We are eyeball deep in an even larger credit/asset price bubble, and nobody seems to see it. Just because we've largely shifted it from private to public debt does not mean that we are in a better place today, IMHO. Of course, it just makes it easier to blame the public sector workers for the crisis created by the financial sector...but that's a whole 'nother issue.

http://research.stlouisfed.org/fred2/ser...

Submitted by SK in CV on July 12, 2013 - 8:07am.

CA renter wrote:
SK,

Delinquencies are down because prices are up. This has enabled people to sell or refinance at lower rates. Prices are up because interest rates have been kept at artificially low levels (for far too long!), and because investors have been chasing yield all around the globe...and have found U.S. housing to be one of the better bets in a world where yields do not match risks.

Inventory has been kept off the market for quite a few years now, and investors who've had access to "back-room foreclosure deals" have made agreements with lenders to keep properties off the market a specified period of time, giving the artificial impression that inventories are low/declining via "natural" means. These homes/statistics are not visible to the general public.

Various investors have been piling into the RE market for the past few years, many of them entering a market in which they have no experience, and in which there is a LOT of existing and future competition (all those other investors doing the same thing). In many areas, investor demand has made up 30-50% of the housing demand. More investors than ever have been getting into the "buy to rent" market, and they are over-estimating returns on these rentals for a variety of reasons. Just like I've warned in the past, those rosy returns are not coming in many cases. The smart money has already been moving to the sidelines.

http://www.bloomberg.com/news/2013-05-29...

So...if you remove ~20%++ of the demand from the market, and add to that the fact that many of these funds will be rushing to put homes on the market once the market turns down, (let's not forget that interest rates are still at/near historical lows, and more likely to go up than down over the long term), it would seem that the risks to housing prices would be greater than many are anticipating.
------

I only read the part of your comment that I've quoted, because the rest didn't seem to be the least bit pertinent to the discussion. (I'll get to it later.)

The point of discussion is whether the market is at higher risk today than it was 4 or 5 years ago. Some of the things you describe are pretty accurate, though I'd take exception to your assertion that interest rates have been kept artificially low, and that's somehow done something bad to the market.

Other parts of this comment are nothing more than conspiracy theory. Investors making back-room deals with lenders to keep inventory off the market and paying less than market prices would be a federal crime if the loans were owned by the GSE's or federally chartered banks. A close friend did prison time for something similar in a deal with an RTC asset manager in the early 90's. If you have any hard evidence it's happened, I suspect the US attorney's office would be interested in hearing about it.

And you kind of make your own two-sided argument with regards to investor influence. First they conspire keep properties off the market and buy at artificially low prices, and then they buy up all the properties on the market driving prices up. Either way, they have supplied capital to remove distressed assets from the equation.

If there ever was this "phantom inventory" you describe, eventually it would show up in the numbers of properties transferred. It hasn't. It never existed. We've heard about it over and over again the last 5 years. Along with dire predictions that various dates will bring tidal waves of foreclosures as variable rate loans are reset.

Your description of the overall investor influence on the market sounds about right. But I don't think it's been a bad thing. As I said, it's removed high risk capital from lenders and moved it to the private sector. And as much as I despise the economic influence of big banks, particularly of the TBTF variety, we need a healthy banking system. I think your predictions about what those investors will do with the properties remains to be seen. Most will not get the predicted returns, though I don't suspect that any wholesale dumping of properties back on the market will occur. I would rather propose there will be both little incentive and too illiquid and inefficient a market for that to happen. (I expect more likely, the PE RE funds to develop a secondary market, where another round of smart money following less smart money will buy partnership interests at even deeper discounts.) I guess the key to the whole claim of higher risk today is centered on your prediction of mass dumping. Why and how do you think this will happen? And precisely what effect will it have on the market. Please show your work if it's beyond speculation.

Interest rates that are charged on mortgages are real. My mortgage says right in the loan documents that my interest rate is below 4%. And that's what I will pay until the loan is paid off. There is nothing artificial about that. You can argue that the market rates are manipulated. And you'd be right. Just as they've been manipulated at least since the mid-70's, and somewhat similarly to how they've been manipulated since the Fed was established over 100 years ago. That's part of the Fed's job.

That's not to say that all risk has been removed, it hasn't. The general economic condition is still fragile at best, the recovery has been primarily for those at the top, and those at the bottom continue to be left behind. Monetary policy to stimulate improvement has all but been exhausted, and I doubt there will be much help from fiscal policy, as it's frozen, both in the US and abroad, and "do less harm" is about as good as gets. Hopefully we're at the end of the delta in public spending being a continued impediment to growth.

And back to the main discussion point, even if we disagree about some of the details on how the RE market got to where it is today, I'm still unclear on what evidence there is that the market is less healthy today that it was 4 or 5 years ago.

Submitted by FlyerInHi on July 12, 2013 - 8:55am.

SK, good point on interest rates.

I have to admit that my understanding of the Fed was lacking but has much improved through reading. It's their job to set interest rates as they have always done.

Therefore interest rates are neither artificial nor natural. In a fiat currency and a floating exchange rate environment, interest rates could be zero forever.

Mortgage rates may be historically low, but they are not artificially low.

Submitted by livinincali on July 12, 2013 - 11:38am.

FlyerInHi wrote:
SK, good point on interest rates.

I have to admit that my understanding of the Fed was lacking but has much improved through reading. It's their job to set interest rates as they have always done.

Therefore interest rates are neither artificial nor natural. In a fiat currency and a floating exchange rate environment, interest rates could be zero forever.

Mortgage rates may be historically low, but they are not artificially low.

The fed primarily set the Federal Funds rate which is the overnight borrowing rate for big banks. They do not have the power to arbitrarily set us treasuries or MBS bonds rates although QE has been an attempt to bend the supply demand curve so that the price of those bonds goes up and the interest rates go down. The big bank business model is to borrow short and lend long and use the spread to pay their costs and make profits. You are somewhat limited in how low mortgage rates can go. 2-2.5% is probably as low as you could see a 30 year mortgage, although who knows what would happen if there was a severe supply constraint (nobody wanting to borrow anymore).

The biggest risk in my eyes is what really happens if we've hit the secular low in mortgage rates and are faced with a long term trend change where rates will generally rise rather than generally fall. We've had 30 years of down trend in rates and often we experienced severe economic problems when the rates have moved counter to that downward trend for any length of time. The logic in me says if we are faced with a world of generally rising rates all leveraged assets that are being purchased based on the carrying cost will fall in value over time. That would include houses, stocks, bonds, etc. because all assets experience some degree of leveraged speculation. Now we can obviously defy that logic for awhile and build a speculative bubble, but the math tends to win in the end.

If you haven't lived in the world of rising rate and most of us haven't then we might be in for a rude awakening when we take our previous experiences about how asset prices should function in our leveraged world and apply them to the future. In the 1930's the debt bubble blew up and reset itself. We still haven't seen that happen here yet. Japan hasn't seen the debt bubble blow up but they have seen have 0 bound interest rates for a long time and asset prices in Japan have been flat at best. Why should we expect something different, although most of us probably need 5+% asset price inflation to make our retirement goals.

Submitted by CA renter on July 13, 2013 - 2:20am.

SK,

See here for off-market FHFA dispositions (including limitations on sales, holding durations, etc.):

http://www.fhfa.gov/Default.aspx?Page=360

And the "National Stabilization Program" and the "National Foreclosure Prevention and Foreclosure Task Force Response" info is here:

http://www.nw.org/network/aboutUs/policy...

And Bank of America is not foreclosing on many homes:

"A disproportionate share of BofA mortgages in the 90+ days delinquent bucket — 62% — are there for more than three years. That's biggest among Too Big to Fails."

http://www.housingwire.com/news/2012/09/...

-----------------

This article pretty much sums up some of my concerns regarding all of the "investors" who've been entering the market in the past few years.

http://truth-out.org/news/item/15546-who...

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The problem with the Fed keeping interest rates so low is that investors/speculators are forced to get into riskier and riskier assets in order to chase yield. This pushes the prices of these assets up well beyond what would be "reasonable" if the Fed were not engaging in ZIRP and QE. I would argue that risks are not being appropriately priced in...not by a long shot.

And I'm NOT saying that this housing "crash" will be worse than the last (not saying that it won't be, either). Everything is connected, and the damage from this credit bubble might have even more dire consequences in areas other than housing.

Submitted by SK in CV on July 13, 2013 - 7:55am.

CA renter wrote:

The problem with the Fed keeping interest rates so low is that investors/speculators are forced to get into riskier and riskier assets in order to chase yield. This pushes the prices of these assets up well beyond what would be "reasonable" if the Fed were not engaging in ZIRP and QE. I would argue that risks are not being appropriately priced in...not by a long shot.

And I'm NOT saying that this housing "crash" will be worse than the last (not saying that it won't be, either). Everything is connected, and the damage from this credit bubble might have even more dire consequences in areas other than housing.

At least now we're past the faulty conclusion that there is not more risk in the market today than 4 or 5 years ago. But you're still implying that there is a pending crash, which I don't see happening with current conditions.

If I understand correctly, you think the cause for the looming crash is the investors suddenly dumping their properties on the market. Barring a life changing event (worse than the credit crisis of 2008) I don't see a real world scenario where this is likely to happen. Let's go through a few examples of the type of investors turned landlord that we have out there that might cause this crash:

Example 1: I'll call this guy the Pig investor. He's 30-45 years old, has a good paying job, maybe in tech, his family has owned rental properties before and he has a few extra bucks, so he scours the market to get a good deal that gives him a 7-8% cash on cash return with a 20% down payment. He dreams that it will be much higher, but he's never been a landlord himself so he doesn't really understand that shit happens. AC units break. There are uninsured water leaks. And his expenses are much higher than anticipated, but he got a good low interest rate so he can handle it, and unit is rented. He maintains a positive cash flow but nowhere near what he expected. As a result of market conditions, property values drop by 10-20%, but he still has equity because he bought below market. His unit is still rented at the expected rate, so his return on market equity is now in range he only dreamed of, just on a much lower equity. Barring a personal financial crisis, what is his incentive to dump the property?

Example 2: This is a real world example, a guy I met a few months ago. Very experienced RE investor, though mostly in the multi-unit residential and commercial markets. Net worth of about $250 million. He buys 400 homes for cash in 2011 and 2012 at prices 10-20% below today's prices. Mostly SFH, but also bought the last 25 units in a new 150 unit condo complex for 1/3 of the 2008 asking price (coincidentally eliminating any chance of existing or new resident owners getting traditional financing with more than 50% of the units non-owner occupied). Takes him longer than expected to reach full occupancy, and now more than a year after he bought his last unit, his vacancy rate is still 10%. But since he has no debt, his cash flow is still huge, because on average, he only needs 2 months of market rent per year to pay all his expenses. If market prices fall even 40%, what other market conditions could change that would motivate him to dump his properties on the market?

Example 3: Private equity investor that's bought thousands of homes across the country for cash. The money has been provided by investors who have invested based on prospectuses projecting 7-10% returns on their money. 100% of management responsibilities and control is maintained by the PE sponsor (think Black Rock). They're lousy property managers compared to the first two examples, without the infrastructure in place, and their vacancy rate is as high as 30% for units owned more than 90 days. Cash flow doesn't develop as projected, but it is still positive since there is no debt. Investors aren't happy, but they have zero control. What are the market conditions that could develop that would motivate the mass sale of the units under management?

Maybe you have some other scenarios where there would be a mass liquidation by investors. Maybe you can identify some market condition in these examples that would lead to a mass liquidation by landlords. If so, I'd really like to know what they are.

Submitted by FlyerInHi on July 13, 2013 - 8:31am.

Livin, what s scenario do you see rates doing up enough that would cause home prices to crash back to the 2009/2010 bottom?

Submitted by bearishgurl on July 13, 2013 - 11:57am.

I think SK makes some good points here.

A 4th scenario he didn't include are >59.5 yo "boomers" seeking yield on their spare cash lying around. Some are still working and others are semi-retired or fully retired and they often have access to one or more pensions. This cohort is attracted to "bread-and-butter" properties in neighborhoods they are already intimately familiar with which they can fix up to rent out and manage themselves. This buying cohort (male AND female) aren't afraid of the hard work involved in readying a property to rent out, vetting an assortment of prospective tenants with wildly differing qualifications, possibly readying their propertie(s) to qualify for the Section 8 program and dealing with tenants on a weekly/monthly basis. Many in this group would prefer a tangible investment (housing) that everyone needs and that they have full control over as opposed to losing sleep over having too much exposure to the stock market lottery with zero time to recover from substantial losses. Even if this group of LL's have 3-4 months vacancy per year (only likely if mismanaged or eviction becomes necessary, IMHO), they are still netting far more annual rental income than they could make from the same amount of money invested in safe CD's and MM's, for example. And they're not paying PM companies for mgmt duties or paying for most repairs because they perform as much of these services as they can, themselves.

A "down market" or "crash" resulting from excess inventory can't happen unless owners are forced to sell en masse. This only happens when would-be sellers are "distressed" and an all-cash buyer will never be in a position of distress unless they later take "cash out" in some way and cannot pay it back. In all four scenarios described here (SK's 3 and my 4th), there is no emergency to sell, regardless of the direction mortgage interest rates take. These groups of recent investment RE owners have a commodity that everyone needs ... housing ... and from that commodity can derive income ... even SOME income is better than that which current safe, passive investments offer. This income can be used to live off of, to reinvest or be used to pay dividends and earn a profit.

If "Black Rock" hasn't yet gotten their PM process fine-tuned enough (totally expected) to not suffer from eviction costs or to successfully target and obtain appropriate tenants for their (wildly scattered) housing inventory and their investors aren't happy with currently making just 3-6% on their investment (instead of ~7%), then so be it. They can't make that in passive investments that they won't lose sleep over.

Submitted by flyer on July 13, 2013 - 4:04pm.

Interesting analysis.

As some of you, I don't see the "crash" scenario playing out under current conditions in the near future either. There are, perhaps, more inherent risks in real estate for those who are new to the game, vs. the risks for those of us who have been involved in commercial and residential investments for many years.

I have no doubt that there are extreme economic challenges coming our way as a country--"when" is the question. IMO, prudent positioning will be key to financial survival, if and when it all hits the fan. In the meantime--enjoy!

Submitted by CA renter on July 14, 2013 - 5:30pm.

SK,

First, I want to make clear that I did not say that the housing portion of the coming crash/recession/depression would be worse than 2008. I do think that some other factors will make things worse for people and markets outside of housing...and housing will also become distressed, IMHO. This is more of a long-term issue, though; possibly happening over decades.

It is not the over-supply of housing that will cause the future house price decline, IMHO, but the reduced demand -- particularly of those who are willing to pay current prices. If investors/speculators begin to think that the housing market isn't really all they thought it would be, you could see a pullback in demand between 20-50%+ in some markets. And if traditional buyers see the slowdown, they will also not feel as compelled to pay the same prices that are seen today because of the incredibly hot market (thanks, in large part, to the Federal Reserve's interest rate policies and price-setting mechanisms which affect prices/yields of all asset classes over time...and are being coordinated with central banks around the world).

Now, in addition to this possible (likely?) reduced demand, most funds who are investing in SFH real estate have disposition plans for these assets in 5-7 years. Not only that, but many of the current RE investment funds have multi-year lock-up periods. What happens when investors in these funds decide to redeem their funds? What if this coincides with time that the funds plan to sell off these properties? What happens if interest rates are higher and investment returns on lower than had been anticipated with these funds (which is what I've been saying for some time)? What if the economy *still* hasn't picked up for Joe Sixpack when all of this comes about?

And then you have the "mom and pop" investors (your example #1, and BG's example, for instance) who might be able to earn a decent/comparable yield on Treasuries or other "safe" investments, without all the hassles of managing rentals. What if their expenses are higher than anticipated (as often happens) and rents flatten or decline? How long do you think they will want to hold onto these homes if they are losing money every month, or if they could just cut their losses and invest in easier, safer assets instead?

Another article stating that the smart money is getting out, and that returns aren't what they thought they would be:

http://www.cnbc.com/id/100700117

Submitted by SK in CV on July 14, 2013 - 6:22pm.

CA renter wrote:
Now, in addition to this possible (likely?) reduced demand, most funds who are investing in SFH real estate have disposition plans for these assets in 5-7 years. Not only that, but many of the current RE investment funds have multi-year lock-up periods. What happens when investors in these funds decide to redeem their funds? What if this coincides with time that the funds plan to sell off these properties? What happens if interest rates are higher and investment returns on lower than had been anticipated with these funds (which is what I've been saying for some time)? What if the economy *still* hasn't picked up for Joe Sixpack when all of this comes about?

Investors in these funds have no option to redeem their interests. They are at the mercy of the sponsors. If their returns are lower, then their returns are lower, there are no guaranteed returns. (At least not in any of the 1/2 a dozen prospectuses that I've seen.) If the economy hasn't picked up in 5-7 years, then the investors probably made lousy investments. They'll sell at market value, but they're not fools. If they have sufficient inventory to materially affect any local market, then they'll put them on the market slowly so that they get market prices without reducing the market prices. They have absolutely no incentive to do anything else.

Submitted by SK in CV on July 14, 2013 - 6:31pm.

CA renter wrote:

It is not the over-supply of housing that will cause the future house price decline, IMHO, but the reduced demand -- particularly of those who are willing to pay current prices. If investors/speculators begin to think that the housing market isn't really all they thought it would be, you could see a pullback in demand between 20-50%+ in some markets. And if traditional buyers see the slowdown, they will also not feel as compelled to pay the same prices that are seen today because of the incredibly hot market (thanks, in large part, to the Federal Reserve's interest rate policies and price-setting mechanisms which affect prices/yields of all asset classes over time...and are being coordinated with central banks around the world).

The big investors are already out of most markets, and they have been for a few months. More in some markets. So far, resale numbers nationwide haven't dropped significantly. June existing home sales is likely to be slightly lower than May and inventories only slightly higher. As I said here late last year, this summer is likely to show some moderation in the price gains over the last 18-24 months, and possibly even slight drops in some markets. Higher interest rates (which are likely to drop back 20-50% of the recent increases) are likely to put similar and additional downward pressure on prices. That said, demand will remain sufficient to support prices in most markets.

Submitted by livinincali on July 15, 2013 - 12:56pm.

FlyerInHi wrote:
Livin, what s scenario do you see rates doing up enough that would cause home prices to crash back to the 2009/2010 bottom?

I didn't necessarily say prices would crash. A crash would be caused by a forced investor liquidation and/or a lending crisis which most seem to think are currently off the table. That may be true but I'm not sure the risk is as small of some here seem to think.

I said if the interest rate trend change is secular and rates tend to move up then prices would decline over time as I don't expect income gains to make up for the interest rate changes. That's what's happened in Japan even though interest rates have remained low for a very long time. Japanese home prices and stock prices have been bouncing along the bottom for 15-20 years after their crash.

The scenario for rising rates is pretty simple. Just look at most of the countries in the Euro zone. Their interest have gone up not because of an improving economy and rising inflation expectations. It's been the complete opposite. They are facing deleveraging and the rates are going up because people are fearful that they won't get paid back.

I'll say it again, most of us haven't lived through a period of deleveraging so we don't understand what it's going to mean. We've gone 30+ years of increasing leverage in a declining rate environment. The average has been a 3.5%/year increase in nominal incomes and a 40-50 basis point decline in the interest rate. That environment has allowed people to expand debt at a rate of about 6.5-7% per year and still maintain the debt to income ratio. When that trend changes things are going to be different and assumptions that it worked like that before are going to be wrong in that environment.

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