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Archive for January, 2008

[FOMC Deja Vu] Playing Halveseys For Credit (And Pancakes)

January 31, 2008 | 12:01 am | |

The Federal Open Market Committee cut the federal funds rate another 50 basis points to 3%. It was predictable and the markets were happy as a result of the move.

The WSJ’s always cool Parsing The Fed explains the meaning behind the words. Hint: Housing.

Yesterday investors were betting a 60% probability that the Fed would drop rates another 50 basis points. And the FOMC did not dissappoint.

The prior week’s rate cut seems to be influencing more refi activity. It’ll help affordability in some markets and temper some of the foreclosure activity, but its no panacea for the housing market.

I am wondering when and how the credit markets are going to get “de-spooked.” Is it just a matter of time? or is the economy in need of more action. Its an election year so look for stimulus plans II & III.

The economy is flat as a pancake.

[Getting Graphic] The Graphics Of Subprime

January 29, 2008 | 12:01 am |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

The BBC has an excellent pair of charts that show the flow of mortgage origination in the traditional way and the method of recent years.

The US sub-prime mortgage crisis has lead to plunging property prices, a slowdown in the US economy, and billions in losses by banks. It stems from a fundamental change in the way mortgages are funded.

Traditionally, banks have financed their mortgage lending through the deposits they receive from their customers. This has limited the amount of mortgage lending they could do.

In recent years, banks have moved to a new model where they sell on the mortgages to the bond markets. This has made it much easier to fund additional borrowing,

But it has also led to abuses as banks no longer have the incentive to check carefully the mortgages they issue.

All Is Well With Mortgages

All Is NOT Well With Mortgages

UPDATE: As I was posting this, I came across a modified version of this by Michael Shedlock in his Seeking Alpha post called: A Beautiful Model for Loan Fraud. It’s a brilliant modification because it illustrates how no parties really had a vested interest in whether the borrower kept paying.

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[List-o-links] 1-27-08 Subprime Cuts: Pets At Risk, Concedes Failures, Presidential, Greenspan

January 28, 2008 | 12:01 am | |

After consuming a 7 ounce steak during at a celebratory dinner with my wife on our 24th wedding anniversary, I was inspired to bring back this Subprime post series (I know, I lead a pretty pathetic life). Subprime, as a topic, has come back strong in recent weeks. Once rationalized just to be the smoking gun, its now clearly more than that.

And that steak was great…

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[CBS 60 Minutes] House Of Cards: The Mortgage Mess

January 27, 2008 | 11:06 pm |


Here’s a sobering CBS 60 Minutes story that ran on Sunday night covering the subprime mortgage situation. Its centered around the Stockton, CA housing market, which has one of the highest foreclosure rates in the country.

One of the best portions of the show was the narration of the process provided by Jim Grant of Grant’s Interest Rate Observer. For those who didn’t understand the problem, they should now. (I had the pleasure of a call by Mr. Grant a few weeks ago.)

“What do you mean by free money?” Kroft asks Jim Grant, the editor of “Grant’s Interest Rate Observer” and one the country’s foremost experts on credit markets.

“I mean free money. I mean you had to apply not to get a loan, almost. Sometimes you have to apply to get a loan, you almost had to apply not to get one,” Grant says.

The dot map created by Foreclosure Radar representing properties that were non-performing or in foreclosure was incredible.

My takeaways from the presentation were:

  • The foreclosure trend has a long way to go.
  • Because investors/owners found it so easy to finance these loans, there doesn’t seem to be a moral obligation to stick with the property and pay off the debt. Just walk away. Its a business decision.
  • Who really owns the property or is the actual creditor? Not clear.


No one is to blame for this problem, yet everyone is to blame:

  • borrowers for being naive
  • purchasers for being greedy
  • banks for loosening their lending standards
  • Wall Street for creating securitization so complicated even they could not understand them
  • real estate agents who fueled the flames
  • regulators who were no where to be found
  • appraisers who simply went along with the process
  • mortgage investors who bought paper without understanding what they were buying…

and so on and so on.

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[Straight From MacCrate] It Will Get Worse The Housing Mess

January 27, 2008 | 6:27 pm |

Jim MacCrate, MAI, CRE, ASA has his own firm, MacCrate Associates, but has worn many hats as a Director at PricewaterhouseCoopers in New York City and Chief Appraiser at European American Bank. He is a prolific writer on valuation issues and teaches a number of the real estate appraisal classes through the Appraisal Institute and New York University. I have had the pleasure of taking a number of courses taught by Jim. His wife Judy is an SRA and is an accomplished appraiser in her own right, having managed an appraisal panel for a large lending institution throughout its various mergers for a number of years. I can only imagine the riveting conversations at dinnertime.

In this post, Jim and his accomplished colleague George McCarthy get gloomy.
…Jonathan Miller

The chart indicates the long term trends in Nassau County’s housing market based on proprietary data maintained by George McCarthy, MAI at Real Property Advisors and James R. MacCrate at MacCrate Associates, which indicates the long upward trend in prices came to an end in 2005-2006 and the long downward trend has just started.

Trends in Westchester and Suffolk Counties are quite similar with Manhattan to follow Staten Island, Brooklyn and Queens downward. This will create a major dilemma for politicians who have relied on the baby boomers, new construction, increasing home values and mortgage applications to provide the cushion to maintain real property tax rates. New construction is slowing, mortgage applications are down and real property values will continue to decline which will impact real property transfer taxes, recording fees, mortgage taxes, and all associated municipal income generated from the “bubble” created by the Federal Reserve and the lax government regulation for the last five or six years.

The preceding chart does not clearly show the extent of the downturn in the early 1990’s. It is interesting to note that home prices declined between 10% and 25% during the last downturn in the early 1990’s and more than 15% during the mid-1970’s. The current downturn has just started and will escalate as massive layoffs at Citigroup & Merrill and other financial institutions continues into the future. Industry-wide reduction in revenue and bonuses and repercussions in related industries will affect the demand for housing and commercial real estate.

To compound the problem, sales tax revenue will fall as consumers feel the pain and lack the resources to live beyond their means. The baby boomers retiring will begin to flood the market with their homes and move out of high tax states and municipalities, such as New York, Nassau and Suffolk Counties to lower tax areas in the country that favor retirees. It’s usually the oldest & youngest who get pushed out when companies reduce staff, via early retirement and layoffs. There are insufficient high-income wage earners coming into the New York Metropolitan area to acquire the homes the baby boomers want to leave behind. The statistics tend to indicate that it will take many years for the housing market to recover from the scandalous activities of the financial industries, from the local bankers to Wall Street executives who knew quite will what they were doing and are getting off scot free with bonuses when they get fired or their firms collapse, while the little guy who has worked so hard sees their equity evaporate. Where were our political leaders in the State and Washington, D.C? These institutions are not done yet! Bond insurance anyone?

It would also be interesting to see what the Feds, state, city and surrounding counties have been spending their increased revenues on over the last seven years. Have they been necessary services, or beautification, gentrification and pilot projects? Do these projects support long term growth or short term gains for the local politicians? Based on what I see, we have had fraud and waste at all levels because no one was watching the “piggy bank”.

The leaders in our democracy better wake up, because the long term picture for real estate is not rosy to say the least! Only, Mayor Bloomberg has sounded the warning. Who is really going to hurt? Are politicians really going to raise property taxes or reduce police forces to maintain revenue on non-necessary services? In an election year? O and by the way, the recent lowering of interest rates will not help the housing industry in the short run.

Regulations existed to protect the innocent and punish the individuals that were responsible for this mess. But, they all but disappeared beginning in the 1970’s and 1980’s. We will all pay the price, I’m sorry to say. This will not end next year or the next…..we remember the five good years, forget the five bad years; and, now we will have at least four or five bad years for other reasons.

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A Market Still Shaken, Not Stirred, Except For The Talking Heads

January 26, 2008 | 11:39 pm | |

According to the Mortgage Bankers Association, there has been a surge in refi applications this week has resulted in a refi-boom. Mortgages rates are falling.

Its been a week since the Fed’s rate cut and we are already seeing reports that the market is stirring in some locations…although this strikes me as basically anecdotal-based reporting, no?

“Blood in the streets!” Ms. Gable said cheerfully. “That’s the best time to buy.”

This week, the average 30-year fixed rate was 5.48 percent; the rate was approaching 7 percent as recently as last summer.

…At what point will buyers be compelled to act, thinking they are getting a price they can live with and a rate they do not want to miss?

One indisputable effect of the Fed action is a rise in refinancing applications, continuing a trend that started late last year.

Talking head hoopla…

It’s hard to understand the world clearly without watching The Daily Show. Here’s the recent appearance by CNN real estate show host Gerri Willis with Jon Stewart on Comedy Central. The whole clip is entertaining, but if you don’t have time, fast forward to the 5 minute mark to catch the talking head chatter (Barbara Corcoran?). Wow.

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State Of New Jersey: Otteau December 2007 Contracts

January 26, 2008 | 2:29 pm |

This report is provided by Jeffrey Otteau of the Otteau Appraisal Group who also authors a series of widely followed quarterly market reports on the New Jersey real estate market. This information is collected from various sources including Boards of Realtors and Multiple Listing Systems in New Jersey.

I have known Jeff for many years and consider him one of the leaders in the real estate appraisal profession. He has taught me a lot about quantitative real estate market analysis.
…Jonathan Miller


The pace of home sales in New Jersey declined further in December providing compelling evidence that the housing market recession has not yet reached bottom. In December, Contract-Sales activity declined 24% below the November pace and was 31% less than in December 2006. When considered against the backdrop of high Unsold Inventory levels and a looming economic recession, it appears certain that existing-home prices will continue their decline into 2008. As a result, strategies of ‘waiting until Spring’ are ill conceived as overpricing inevitably leads to extended marketing times and lower prevailing market price levels. Best-Practices for a weakening housing market is to price ‘ahead of the decline curve’ to shorten marketing time and capture a higher selling price before prices drift even lower. From the new construction persepective however, many home builders have already embraced this strategy with Right Pricing! that reflects the current market realities. For the next segment on our Right Pricing! Strategy, register to attend our 2008 Spring Workshop Series next month.

Despite the ongoing market decline, some bright spots are emerging. Unsold Inventory declined for the fourth consecutive month and now stands 16% lower than in August, reflecting 12,000 fewer homes on the market. Also encouraging is that mortgage interest rates continue their descent providing a boost to home buyers’ purchasing power and helping to close the housing affordability gap in New Jersey. According to Freddie Mac’s latest Primary Mortgage Market Survey® (PMMS®), the 30-year fixed-rate mortgage averaged 5.48 percent for the week ending January 24, 2008, down from 5.69 percent the prior week and 6.25 percent last year at this time. The last time mortgage rates were lower was March 25, 2004, a time when home buying activity was at a frenzied pace. Another positive factor is yesterday’s announcement that President Bush and House leaders have agreed on an economic stimulus package that would allow Fannie Mae and Freddie Mac to raise the limit on the loans they purchase from $417,000 to $625,500. Similarly the FHA limit would be increased from $362,000 to $725,000. The effect of such increases would be to expand the pool of money for borrowers of so-called Jumbo Mortgages thus increasing liquidity and reducing interest rates for these loans in the process.

The take-away from all of these developments is that while the market has further to fall, the bottom point is getting closer. Home buyers should take notice of these developments as 2008 presents an unusual combination of being in the ‘driver’s seat’ of price negotiations at a time of record low interest rates. Those who wait too long will eventually find this opportunity window closed when higher interest rates and firmer pricing returns to the market.

UPDATE: Here’s more commentary on the New Jersey market.

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[In The Media] CNBC Power Lunch Clip for 1-25-08

January 25, 2008 | 10:12 pm | Public |

I got a last second call from CNBC to provide commentary on the stimulus plan, specifically how and increase in conforming loan limits for both the GSE’s and FHA helps housing, if at all.

To view the clip.

The key point with the expansion of the loan limits is the potential increase in availability of mortgage products in higher priced home markets. Right now the east and west coasts have less representation in conforming loan pools because their price points are much higher. For example, the cost of living, specifically to housing in San Jose, CA is 5x as much as Cleveland, OH. This proposal could spread the access around. However, it also has the effect of restricting access in lower priced markets because the portfolio caps the GSEs abide by aren’t on the agenda to be raised. That limits the effectiveness of the expansion of loan limits (if you believe Fannie Mae and Freddie Mac can be receive adequate oversight).

OFHEO raises legitimate concerns about oversight of the GSE’s and the higher potential for risk. However, OFHEO was asleep at the switch when FNMA had accounting issues a few years back so I am not convinced OFHEO would be able to understand what changes would be needed to better oversee GSE actions. Also, any stimulus plan form needs to be implemented quickly or not at all. Government is not known for being nimble.

Interestingly, Diane Olick, who was interviewed in the above clip, mentions (via Housing Doom) that the Fannie Mae home page has changed in the past 2 years to reflect a different mission. I wonder if OFHEO understands what that change means?

The rate actions by the Fed this week and this expansion of loan limits, if passed, seem to push us in the right direction (symbolically and politically), in finding a solution to the weakening economyt. Much of the solution is correction and letting time go by.

In reality, its all about credit. So far, the symbolism in these gestures would go toward restoring confidence, but I suspect there is a long way to go.

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Better Than Coffee: Stimulating Discussion About Stimulus

January 25, 2008 | 12:44 pm |

The White House and the House agreed to a $150B plan to reinvigorate the economy, which because of the housing market slide, may either be in a recession or about to enter one.

Democratic and Republican congressional leaders reached a tentative deal Thursday on tax rebates of $300 to $1,200 per family and business tax cuts to jolt the slumping economy.

Its not a done deal, however, since the Senate still has to approve the measure and Senate Democrats are talking about tacking on additional items which could slow down its approval, but the speed at which the House approved may influence the Senate’s speed to approve as well.

Actually, the speed at which this was approved was annointed as a new sign of bi-partisan cooperation. The rebate elements and newfound cooperation are because its an election year and people vote with their wallets. I had fleeting thoughts that they know something we don’t know which prompted the quick action. I’ll try to keep those feelings in check as this unfolds.

Yesterday I participated in a roundtable discussion that addressed the impact of the stimulus package. The take away was that the rebate component was an important gesture, albeit political, but won’t be enough to prevent recession or further weakness. After all, the total stimulus plan represents about 1% of the US economy. Since 70% of the economy is consumer generated, the rebates are seen as a way to prime the pump. Whether its spent or saved, its a plus but a very small one at best. For a sense of Deja Vu, go here.

The idea of a expanding the OFHEO size restriction on conforming loans from $417,000 to $625,000 is a good thing, I believe, as well as doubling FHA loan limits from $367,000 to $729,750.

The California Association of Realtors has been saying that the conforming loan limit restriction is an impediment to economic recovery and I probably agree with them with some caveats. The existing conforming loan limit set by OFHEO seems to be arbitrary, simply because it doesn’t float with the housing market. When housing prices slipped, OFHEO kept the loan limit unchanged. The coastal markets, where housing prices are significantly higher, is disproportionately penalized by OFHEO restrictions.

By expanding the loan limits to be more consistent with local housing markets in higher priced areas, the availability of credit, may be expanded and that would help with refi and sales activity which could temper foreclosure actions and temper the slow down in transactions.

My concern is that there would be more risk placed on the GSE’s (Fannie and Freddie) and thats OFHEO’s concern as well. Congress forced portfolio size restrictions on the GSE’s in light of their accounting problems and I have yet to find whether this issue was addressed in the package. In other words, will more loans actually fall under this change or would there simply be a reallocation of mortgage types.

Media Appearance: I’ll be on CNBC Power Lunch at about 12:30 today on a panel discussion covering this issue.

UPDATE: As far as I can tell, the portfolio caps on the GSE’s are not being expanded, which significantly mutes the benefit of expanding the loan limit because it will result in the spreading around of loans taking from lower priced markets and moving availability to higher priced markets. Hopefully the Senate version will expand them.

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Fed Rate Cut: Hoping To Making An Impression

January 25, 2008 | 12:04 pm | |

The Federal Open Market Committee held an unscheduled meeting on Tuesday. Thank goodness for the timing of MLK day this year, as a federal holiday. The Fed was able to see the Asian markets imploding on Monday and were able to pre-emptive take action, rather than being behind the curve.

The WSJ’s neat interpretation is called Parsing The Fed.

Investors are betting that the Fed will drop rates another 50 basis points at their next meeting next week.

We may see a mini-refi boom in the coming months, but I am skeptical we will see a surge in sales activity across the country as a result of lower rates. The problem still remains with the credit markets and its unlikely for housing to recover anytime soon unless the relationships or price/risk is fixed.

[Curbed] Three Cents Worth: Luxury Market Disconnect

January 24, 2008 | 10:37 pm | | Charts |

Its Thursday, and its already 2008, so its time to provide my Three Cents Worth as a post on Curbed. I lament the exaggerated mischaracterization of the Manhattan real estate market via luxury’s influence.

To view Three Cents Worth: Luxury Market Disconnect

Check out previous Three Cents Worth posts.

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Crain’s Economic Forecast Breakfast 1-31-08

January 23, 2008 | 10:29 am | | Public |

Editor Greg David invited me to participate in Crain’s New York Economic Forecast Breakfast on January 31, 2008. Crain’s New York Magazine is a great resource on the regional economy.

I participated in this function last January and thoroughly enjoyed it. I look forward to hearing what Greg and the other guests have to say (as well as enjoy a good breakfast).

To purchase tickets for the event.