Matrix Blog

Migration, Psychology, Demographics

Real Estate Mass Delusion Necessitates Consumer Protection

June 30, 2009 | 10:51 am |

Two interesting articles for Matrix readers to take a look at…

In the current issue of the New Yorker, there’s a terrific article by James Surowiecki called Caveat Mortgagor who discusses the potential legislation to create a consumer protection agency for financial products comparing it to the birth of the FDA.

Bankers and Wall Street won;t like it because it hampers their ability to be innovative. Of course some innovation got us where we are here today. However, innovation is not bad per se and I’m realistic in that such regulation will not eliminate financial collapse, but rather, I see it as a way to reduce the odds of such a collapse.

I do worry that consumers will develop a false sense of security with investing since many can’t figure out a simple interest rate.

In finance, third parties—like debt-management services and mortgage brokers—are often conflicted at best and corrupt at worst. And buying a house is far more complex, and confusing, than picking out a refrigerator. This doesn’t mean that a consumer-protection agency could have averted the current crisis—given the widespread conviction that house prices would rise forever, disaster was probably inevitable—but it might have saved some from the financial equivalent of Elixir Sulfanilamide.

More important, negative-amortization loans, prepayment-penalty mortgages, and option ARMs all made it easier for people with low incomes and poor credit to buy houses, and for people to buy bigger houses than they otherwise could have. Serious regulation will mean that fewer people can buy homes.

He concludes with “a simple lesson: if you don’t understand the deal you’re making, don’t make it.”

Alyssa Katz, author of “Our Lot: How Real Estate Came to Own Us” is interviewed in today in a piece called Who’s to blame for the housing crash? …good intentions and mass delusion that led to the real estate boom.

Here’s the first two questions of the interview:

Isn’t homeownership actually good for you? I thought it was the panacea for almost all social ills, it drove the crime rate down, educational achievement up, and so on.

Yes, well, homeownership is only as good as the amount of home you actually own, and I think the big problem in the last generation or so is that Americans have turned to more and more and more debt to reach for the American dream…

Does this mean that we shouldn’t actively encourage homeownership, using government money or government policy?

I think there’s nothing wrong with using government money, policy, pressure, all those tools to make homeownership more of a possibility than it would otherwise be in the marketplace, simply because the market left to its own devices discriminates aggressively. It rewards people who already have wealth, who have already had a leg up economically, and it’s great to give other people the opportunity as well.

The problem is that homeownership is the only housing policy that this country has ever shown any commitment to. Renters are treated miserably.

[Contract Contingency Quagmire] A Seller Decides To Keep A Buyer’s Life Savings

June 16, 2009 | 8:41 pm | Public |

Tonight the well-known consumer reporter Tappy Phillips of WABC’s 7 On Your Side covered the story of a couple who entered into a purchase agreement on a co-op with a mortgage contingency clause that made the deal subject to the lender providing a commitment letter. I was interviewed briefly saying that most contracts in our market are being signed with mortgage contingencies.

The buyers got a commitment letter from the lender but at some point the lender changed their mind after discovering the co-op was subject to a ground lease.

The seller decided to keep the downpayment because the buyers did get a commitment letter and the down payment would help defer the loss of value on the property during the time the property was under question. The seller did not appear in the segment.

Several thoughts come to mind after hearing this segment:

  • Based on this presentation, the seller focused on their technical interpretation of the contract – morality and empathy took a back seat to money.
  • The buyers can’t afford to fight to get the money back.
  • Never underestimate the need for a good attorney – contract boilerplate sounds impressive to us laymen but it may be not protective, especially now in a weak market.
  • Why isn’t the lender culpable in some way? In other words, aren’t we playing with semantics by calling a “commitment letter” a “commitment letter”, when in fact, they aren’t “committed” to lending if they find something wrong later on? They don’t have any skin in the game.

If the commitment letter was called a “a huge bag of donuts list” instead, would this situation still exist? Or is it more complex than that?

We are starting to hear about funding contingencies to protect the buyer if the lender doesn’t show up at closing.

There will be more of these types of situations going forward in weaker market. It shouldn’t make anyone scared to buy property – they simply need to upgrade their appreciation for the quality of professional advice.

I hope this story has a happy ending.

[Promoting The Homeownership Cycle] Obsessive Housing Disorder

May 17, 2009 | 11:06 pm | |

The City Journal, a quarterly must-read urban affairs journal published a terrific article on the cycle of Washington’s efforts to encourage homeownership called Obsessive Housing Disorder by Steven Malanga.

The author suggests our troubles began in the 1922 with Herbert Hoover’s Own Your Own Home Campaign and was seen in nearly all of the following decades.

The author suggests it’s based on an unsubstantiated political premise without empirical data – a “cliche of political discourse” that:

Homeowners make better citizens.

As a result, homeownership continues to be pushed and the view is myopic:

In December, the New York Times published a 5,100-word article charging that the Bush administration’s housing policies had “stoked” the foreclosure crisis—and thus the financial meltdown. By pushing for lax lending standards, encouraging government enterprises to make mortgages more available, and leaning on private lenders to come up with innovative ways to lend to ever more Americans—using “the mighty muscle of the federal government,” as the president himself put it—Bush had lured millions of people into bad mortgages that they ultimately couldn’t afford, the Times said.

When I think back to our recent housing boom and the mantra of Fannie Mae and the former administration, we paid a significant price for a 5% boost in homeownership from 64% to 69% in a decade. The resulting economic damage render moot the effort – we got the ownership numbers boosted through artificial financial means.

Although I tend to believe that owner occupied housing is better cared for by its occupants (speaking as a former renter), I had never considered the idea of history repeating itself in this economic sector, in such a specific way.

A good read.

UPDATE: Another excellent article in the same publication: Spendthrift Sunbelt States
Arizona, Florida, and Nevada have run through the riches of their boom and are starting to look more like cash-strapped New York.

Galluping To Thinking About Buying A New House

April 20, 2009 | 7:09 am | |

I’m not a big fan of confidence type surveys but because there is a dearth of activity and sentiment seems to be all there is to look at, I’ll digress from usual practice.

With affordability high because of mortgage rate drops and housing prices lower than in recent years, Americans are thinking it is a good time to buy a house according to a recent Gallup Poll:

Plunging housing prices combined with historically low interest rates have persuaded 71% of Americans that now is a “good time” to buy a house — up 18 percentage points from a year ago and the highest level of housing-purchase optimism in four years.

This seems like a bit of a disconnect or the fact that people think it’s a better time to buy doesn’t equate into actually doing it.

The last time this poll reached 71% it was circa 2005, at the height of the housing market fever , yet sales activity is about half the amount it was last year. The Treasury department reported in February that there was a 35% increase in mortgage lending, but mainly due to to a surge in refinance and home equity loans.

However, other types of lending has dropped off sharply in February:

Loan origination for other consumer lending products, including auto, student and other consumer loans, decreased by 47% from January to February.

Even builders are feeling better.

It seems like this better news on housing related attitudes is more of a warm and fuzzy sign for the distant future than a tangible improvement right now. Still, thats not a bad thing.

[Pretty Vacant] Shoots of Green Are Blossoming In The Metaphor Business

April 13, 2009 | 12:57 am | |

The weather is improving and I’m feeling the “this time of year optimism” where we get out of our log cabins after a long cold winter and admire the greenery around us.

The first thing you notice is that 1 in 9 houses in the US are currently pretty vacant:

According to an article today in USAToday, census numbers show:

  • More than 14 million housing units are vacant. That number does not include an estimated 4.8 million seasonal or vacation homes, most of which are occupied part of the year. The combined vacancy rate of almost 15% is higher than during previous recessions: 11% in 1991 and 9.4% in 1984.
  • About 3% of owned homes are vacant. In normal times, “maybe 1% should be vacant,” Myers says.
  • More than 9% of homes built since 2000 are vacant compared with about 2% for older homes.
  • Homes priced at $500,000 or more are just as likely to be empty as homes that cost less than $100,000.

But the spring metaphor favorite is Shoots of Green or simply Green Shoots.

Here are some warnings about its use:

Caroline Baum at Bloomberg, one of my favorite economic columnists said in her Wall Street Swaps Zegna for Denim, Tool Belts piece:

Like crocuses poking their heads through the soil, straining toward the sun, the U.S. economy is sending out the slenderest of shoots.

Justin Lahart at WSJ, in his Fed Chairman Chauncey Gardiner: You Must Believe In Spring

The combination of signs that the economy may have begun to recover and the arrival of spring has led to the overuse of a metaphor that could use a little pruning. We’re talking about those “green shoots” (sometimes “shoots of green”) that keep showing up in policymakers’ speeches, economists’ notes and, unfortunately, reporters’ stories.

But more mundane, weed-like uses on the presentation of economic news are more like these (no offense meant to the authors):

Manufacturing, Retail Reports May Disappoint:

As economy-watchers everywhere continue their desperate search for green shoots — little signs that the recession won’t last too much longer — this week could bring some sobering news.

The shoots of recovery look pale green at best:

We have former Tory Chancellor Norman Lamont to thank for the term “green shoots” to describe the first signs of a post-recession return to growth. In the depths of the last downturn, in December 1991, he told a Tory party conference: “The green shoots of economic recovery are appearing once again” – only to be greeted with ridicule and contempt.

Dallas Fed chief points to ‘green shoots’: A few signs of life are sprouting in the U.S. economy, but it’s too soon to say whether these “green shoots” will lead to a sustained recovery, said Richard W. Fisher, president and chief executive of the Federal Reserve Bank of Dallas.

Green shoots and tea leaves

One is that even in the Great Depression, things didn’t head down all the time. The chart above, from Eichengreen and O’Rourke, shows world industrial production in months from the previous peak, in the Depression and in the current crisis. Notice that there were several upturns along the way; each of those could have been — and was! — heralded as the beginning of recovery.

I’m thinking a Green Jacket is even better than a Green Shoot – or shooting on the Green is better than being green with a regular jacket on.


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[Framing Without Studs] The Great Compression of High-Net-Worth

April 7, 2009 | 12:45 am | |

The rich have lost 1/4 of their wealth or 10 trillion dollars. Thats more than the stimulus plans, backstops and bailouts combined ($8T).

The current issue of the economist addresses the issue of the poor rich. In other words, times are tough.

Still, I am always wary of the growing sentiment that the rich will never be as they were. I recall the same thinking was expressed during the 1990-91 recession, especially towards the high end housing market.

Cycles. One reason not to gloat is that the services the wealthy require will be scaled back. This applies to housing especially.

There are some economists who say we might be headed back to the post-war period known as the “great compression,” when the rich weren’t so different, numerous or richer than everyone else.

My best guess is that this will be more of a cycle, but a long one. Financial markets, leverage and asset values–the big drivers of wealth in the past decade–have dried up. Globalization, which created bigger gains for economic winners and allowed the rich to quickly and freely move their money around, is under fire from protectionist-leaning governments. And taxes for the rich are going up.

And remember productivity?

According to one study by Robert Gordon of Northwestern University and Ian Dew-Becker of Harvard, the top 10% of earners received the vast majority of the benefits of the “productivity miracle” of 1996-2005.

Going forward, I suspect housing markets in the near term are going to be defined by the mortgages they require: conventional versus jumbo (20% down vs. 50% down). In the New York region, you can add rising unemployment and falling compensation disproportionately weighted towards high wager earners and we are clearly looking at a major restructure of supply/demand for the high end housing market.

B of A Goes Jumbo Just In Time, Hides Countrywide, Wants Identity (Mine)

March 24, 2009 | 12:05 am |

One of the biggest issues facing higher priced housing markets as of late, has been the absolute lack of jumbo mortgage financing. The TARP, TALF (and BARF – Bank Asset Relief Fund) only address mortgages within the parameters of Fannie Mae, ie conventional and jumbo conventional financing. In Manhattan that’s about $729k and with an average sales price just under $1.6M, a lot of homeowners are having great difficulty in obtaining mortgages with more than a 50% LTV.

This Bank of America announcement is great news for this sector of the housing market and may spark other interest in the sector.

Kenneth R. Harney’s must-read WaPo column “The Nation’s Housing” covers this announcement this week in his article: A Big Boost for Buyers Seeking Jumbo Loans:

Bank of America, the country’s largest mortgage lender, is rolling out a large program to finance jumbo loans between roughly $730,000 and $1.5 million, with fixed 30-year rates starting in the upper 5 percent range. The loans will be available through the bank’s retail network and also through its Countrywide Home Loans subsidiary. After April 27, Countrywide will be rebranded — shedding the name it has had since 1969 — and morph into Bank of America Home Loans. Bank of America acquired Countrywide, once one of the biggest subprime lenders, last year.

So Countrywide becomes Bank of America Home Loans.

Last week, Landsafe, the appraisal management company arm of Countrywide approached us to be approved as an appraiser. Their quality people have met with us many times but for some reason, the sales function didn’t allow our type of firm to connect because you had to rub elbows with loan reps at each of their offices. Crazy bad.

I believe that has all been changed or is being changed for the better.

However, although we are state certified and likely because of all their problems with appraisal quality, their efforts to right the wrongs effective screen out qualified appraisers. They wanted among other things:

  • our social security numbers
  • credit card numbers?
  • driver’s license #’s
  • date of birth
  • consumer reports containing illness records and medical information

Seemed pretty aggressive to us. What about identity theft concerns?

The irony of this sort of scrutiny is pretty powerful given past practices. Hopefully once things begin to run more smoothly and one hand knows what the other is doing, they’ll reconsider trying to attract qualified appraisers. We’ll wait patiently.

Good grief.

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[Bracket This] Optimism Gains A Foothold Against Skepticism, But Not Against Madness

March 19, 2009 | 2:52 pm | |

One of the most useless housing metrics ever debated has been new home sales released by the Commerce Department. The data doesn’t consider contract recisions and has a wildly high margin of error.

Privately-owned housing starts in February were at a seasonally adjusted annual rate of 583,000. This is 22.2 percent (±13.8%) above the revised January estimate of 477,000, but is 47.3 percent (±5.3%) below the revised February 2008 rate of 1,107,000.

Housing starts were up 22% over the prior month plus or minus 13%. Crazy. Yet it’s widely covered.

Every year at this time the metric is always discussed in the context of its prior month change rather than the prior year result. It’s March and this metric is based on February data. Housing starts nearly always rise starting at the beginning of the year. In all the press coverage, little or no attention was placed on the fact that starts are 47% below last year at this time, providing an illusion to the uninformed that construction is booming.

So my initial takeaway from this announcement and the ensuing buzz was, predictably, skeptical.

Last week the Dow jumped, and even though it has no direct correlation with the housing market, people were noticeably upbeat about the improvement in the stock market. This week – more of the same.

My initial takeaway was again, predictably, skeptical.

Madoff pleads guilty and goes to jail.

This provided some closure (not to the victims) on this horrendous financial situation. Nothing to be skeptical about.

The AIG $165M bonus debacle became the next event to focus on. It certainly appears that these bonus payments were enabled by Congress and Treasury from the beginning and feeble attempts were made to say “gee, contracts were signed and therefore we need to honor them.”

The public isn’t that stupid and responded in outrage and now suddenly every government servant from the president on down now suffers from a case of righteous indignation. The AIG audacity of paying these bonuses, along with Thain’s bathroom renovation, is clearly the symptom of a larger reality distortion and one of the reasons we are in this mess. Yet if this is a crisis of confidence and the $165M represents peanuts relative to the trillions at play, its symbolism is far more important – at least for now. Merrill Lynch bonuses are next on the radar.

Bernanke announces that he sees the recession over by the end of this year and recovery beginning in 2010. By now, skepticism reigns with the Fed chief’s intentions since the Fed was so slow in reacting to the crises in 2007 and 2008, chimed in with Paulson’s panic message last summer and Ben has clearly radiated optimism in between bleak assessments.

It seems to me that the majority of economist do not believe the recovery will begin in 2010 so I’m skeptical.

The Federal Reserve is directing $1T at credit to alleviate the log jam which is met with euphoria (financially speaking of course). Now there are signs that liquidity is starting to return to the credit markets.

But I must say I am skeptical of the President with the confidence in his decisions on the Madness. I am picking UConn to beat North Carolina in the final and he is going with the Tar Heels.

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[Missing Baggage] First Time Buyers Start To Get Real

March 16, 2009 | 1:22 pm | |

Ok, so buyers are more scarce than they were before. Credit availability, rising unemployment and compensation are the primary concerns.

But those who will lead us out of this market are likely going to be the ones who were never in it – first time buyers because they have little baggage to carry with them.

  • First time buyers don’t have to sell a property to afford to purchase
  • First time buyers will likely use conventional financing (sub-$729k mortgages in Manhattan) and jumbo (non-conventional/non-jumbo conventional) was not addressed in the stimulus plans)
  • First time buyers have no preconceived expectations about previous high water marks – see the current market as a deal.
  • Sellers have been softened up since last summer suggesting more negotiability.

The New York Times has run two fairly strong pieces on this topic in recent weeks:

A Windfall for (Some) Buyers [NYT 1-16-09]
Door Opens for First-Time Buyers [NYT 3-13-09]

First time buyers are starting to be a factor in the current market, which is something we saw in the mid-90’s after a down market.

A First-Time Buyer’s Primer and Road Map [NYT 3-3-96] About Real Estate; First-Time Buyers Lift Sagging Market [NYT 8-11-95]

And of course, at the tail end of the 1990-91 recession…

First-Time Home Buyers Now Leading The Market [NYT 6-23-91]

Bank Failure Is An Option

March 8, 2009 | 11:30 pm |

Watch CBS Videos Online

60 Minutes had a good segment this Sunday called Your Bank Has Failed: What Happens Next? which was perfect timing because a number of people seem to be worried about their own banks failing.

I bank at one of the national firms in the headlines and, while the thought has crossed my mind, I still place a lot of faith in FDIC’s handling of the problem. Of course, the fact that FDIC could run out of money is a growing concern. Let’s hope our the message from elected officials doesn’t weaken confidence at a time of growing bank failures.

The clip discusses the too big to fail concept. In most cases, the failure of a small bank has limited if any impact on the depositors in those institutions, but it can wipe out investors in those institutions. Sheila Bair, FDIC chairman and one of the consistent voices of competency in Washington, suggested that lawmakers may consider some sort of cap on size – giving some definitions toward the “too big to fail” concept.

The larger exposure to mortgages over the past decade by most lenders in search of larger profits is a key factor here aside from the recessionary environment.

UPDATE – something I shared last week but thought I’d insert again because it was so good. Think banking, bailouts and “loser mortgagees.” Good grief.

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[Real Estate Quant] The Formula That Killed Wall Street + Housing

February 25, 2009 | 6:53 pm | |

One of the most perplexing things I have not been able to get my arms around in the aftermath of the mortgage securitization/CDO collapse is: how did some many smart people get it so wrong?

Felix Salmon, one of my favorite econ writers and prolific blogger at Portfolio writes an amaziningly clear piece on this subject in Wired Magazine (I’m a long-time fan, but how many years can they go before they make money on it?) called Recipe for Disaster: The Formula That Killed Wall Street. It’s worth a thorough reading. I’d even consider reading it more than once.

It talks about the increased reliance on “brainy financial engineers” called quants and how they were focused on modeling risk without paying attention to historical trends as it relates to mortgage securitization (and we now understand the ultimate impact on housing markets).

In 2000, while working at JPMorgan Chase, Li published a paper in The Journal of Fixed Income titled “On Default Correlation: A Copula Function Approach.” (In statistics, a copula is used to couple the behavior of two or more variables.) Using some relatively simple math—by Wall Street standards, anyway—Li came up with an ingenious way to model default correlation without even looking at historical default data. Instead, he used market data about the prices of instruments known as credit default swaps.

The phrase “don’t kill the messenger” (probably used by many ethical appraisers commiserating about delivering bad news to a lender who didn’t want to hear it) applies here. This engineer profiled created a formula and the masses loved for its simplicity and were blinded by high profits, never looked deep enough to understand its misapplication.

Nassim Nicholas Taleb, hedge fund manager and author of The Black Swan, is particularly harsh when it comes to the copula. “People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked,” he says. “Co-association between securities is not measurable using correlation,” because past history can never prepare you for that one day when everything goes south. “Anything that relies on correlation is charlatanism.”

It seems that smart people do not have all the answers. Here’s a nobel laureate in economics on Wall Street whose firm just filed for bankruptcy.

CNBC Original – House of Cards

February 11, 2009 | 3:54 pm |

CNBC is premiering a special documentary tomorrow night that explores the relationship between risk and reward in real estate.

There have been a number of specials on this topic but it is always good to review what is happening on the ground right now and reflect on how we got here. I watched the trailer and it is compelling.

CNBC sent me the announcement about the special tomorrow:

Was reading your blog and thought the upcoming documentary on CNBC might interest you and your readers…

Tomorrow (Thurs Feb 12), the CNBC Original “House of Cards” will premiere at 8p ET / 9p PT on CNBC. “House of Cards” explains how we got into today’s economic mess – with inside accounts from key players from home buyers to mortgage sellers to Alan Greenspan.

The documentary launch page.

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