Housing’s Treacherous Path: From 44 Percent Homeownership to 70 Percent. The Levittown Dream and Nothing Down Madness. How a Nation lost its way with Homeownership.
It is a fascinating case study in the perceived power of homeownership that even after our economy was brought to its economic knees by a massive housing bubble that the government, Wall Street, home buyers, and sellers somehow view homeownership as our ticket to getting out of the financial mess. That is, the housing poison is also the cure. In our current culture long term memory is more of a burden when it comes to economic calamity. People seem to forget that only in March of this year the entire global economy was melting down before our very eyes because of toxic loans. Instead of questioning decades of assumptions that proved wrong we jumped on the same beat up bandwagon and here we are repeating the same song.
The cookie cutter planned community madness started with Levittown after World War II. These towns were built in communities in New York, Pennsylvania, New Jersey, and Puerto Rico. The communities were built with speed and efficiency. It is interesting that the communities started out as rental units and within two days 2,000 units had been rented. With demand surging the properties were then sold as purchase units with the help of the Federal Housing Administration (more on them later).
Levittown is now used in a derogatory sense to highlight massive cookie cutter suburbia. Many people in these communities actually enjoyed their towns but critics were everywhere. Yet we went from Levittowns to McMansion Villages with the twist that homes were bigger for ever smaller families. Once the credit markets were freed from any shackles by deregulation banks pushed the limits on the borrowing population. That is how places like California saw home prices triple in less than a decade.
The problem with believing that homeownership is part of the American Dream is that it misses the fundamental economic question. By labeling something a dream it makes it harder to confront with factual data. This reminds me of the parents that let their kids audition for American Idol even though they sound like a cat in heat. Many people should not be homeowners and that is okay. Yet politically this must be like kryptonite because who in the world is going to want to pop that dream? Can you imagine being labeled the anti-homeownership candidate?
This insistence on allowing the homeownership dream to permeate the country has pushed the homeownership rate to unsupportable levels:
Now during the Great Depression homeownership dropped to 44 percent. It is also the case that during this time many loans were also based on 5 year balloons which made it hard for many to borrow, especially in the bank failing environment of the depression. Yet after that bump, homeownership increased from 1941 all the way to our housing peak in 2005 reaching a peak near 70 percent. Yet very few even bothered to ask if this was even good for our economy? Clearly it wasn’t.
The perversion of mortgage products during the recent bubble is enough to make anyone ill. Products like option ARMs, mutant mortgages that have no place in any market, suddenly became commonplace and allowed a monthly payment obsessed culture to purchase homes they could never sensibly afford. A $500,000 home became a $1,500 minimum payment and a $50,000 leased car became a $500 monthly payment. Banks knew that these loans were never going to be paid back. They just hoped that by the time the owner sells the home, the loan would be off their books if it wasn’t already in some mortgage backed security pool.
This housing obsession has now led us into a very tight corner. Mortgage rates have nowhere to go but up and everything is being done to keep rates at historical lows:
The only reason rates are this low is because the Federal Reserve is keeping the Fed funds rate hovering at zero. As you can see from the chart above, our current rate environment is a total anomaly. The average mortgage rate over 40 years is 9 percent (match that to today’s 5.5 percent rate). Yet even if rates went up to historical averages this will destroy the monthly payment mentality. Let us run the numbers for two mortgages:
5.5% – $200,000
9% – $200,000
PI: $1,609 (41% higher)
Now the above is significant. In our current troubled economy monthly payments matter for budget constrained Americans. Assuming the $1,135 is all the homeowner can afford and rates go up to 9%, the mortgage will need to come down by $60,000. You can see how this becomes problematic. If there is a dollar shock or if inflation starts picking up the Fed is going to be stuck and the housing market is done. The current environment is completely artificial.
The problem with the homeownership propaganda is that it doesn’t produce a balanced forum of discussion. The NAR and NAHB have major lobbying arms in Congress. What is the renter lobbying arm? In many cases renting is a better option for people yet you rarely hear this side of the coin. Renting is typically cheaper and in some communities in California nearly half as cheap. The analysis isn’t so cut and dry. Yet again, you run into that American Dream propaganda pushed by the banks that actually caused much of this mess. Do you really think it was George Washington who said, “yes, let us fight a revolutionary war so people can purchase McMansions they can’t afford and drive around gas guzzling cars with lease payments the size of a mortgage.” Somewhere along the line something got really messed up.
I put a big blame on the down payment, or lack of it. Back in the 1980s it was the rage to see on infomercials these nothing down pitches. They had to talk about nothing down because mortgage rates were up to 17.5 percent! So people just wanted a bone thrown their way and the majority didn’t believe in this pipe dream. But this was only a tiny part of the market. Most of the money wasn’t made on the nothing down side but by pitchmen that sold the sizzle. Many who plunked down hundreds for this dream ended up getting a stale steak. But over the next 20 years as regulation was chomped away by the corporatocracy we suddenly had a way to make loans to any living being so long as they had the wrist power to sign a document. Zero down in California became the new booming market. And with the removal of income verification, suddenly 100 percent of the citizenry was primed for the American Dream of owning a home. So prices got pushed up to ridiculous levels. What was once a late night infomercial joke had become standard practice. California became Levittown in state form. And not only California, but the entire country.
So where do we go from here? Remember how Levittown grew because of the FHA? The FHA now makes 4 out of 10 loans in California and backs similar numbers nationwide. The problem? They only require 3.5 percent down and with the tax credit, depending on your purchase price, you might be able to buy a home with nothing down. Is it any wonder that default rates on FHA loans are now spiking?
At a certain point the homeownership dream is nothing more than a mirage. If you can’t afford the payment and put your monthly budget at risk, then why buy? Many, unlike the corporate banking cronies, do not have access to unlimited bailouts. And with nearly 4 million foreclosure filings in 2009 many are realizing the homeownership nightmare.
San Francisco Shadow Inventory Larger than Regular MLS Data: How the Real Housing Inventory is Hidden from the Public.
Once upon a time in California, housing prices aligned with national prices. You don’t need to go back into the legends of the state because this was a time in the 1960s and early 1970s. At this point, housing in California started to disconnect from economic fundamentals. Many people forget that California had a housing bubble in the late 1980s only to bust in the 1990s. This mini crash was merely a prelude to the epic implosion of the California housing market that we are now contending with. Many areas are now finding some sort of stability. Sales have increased, we have heard this over and over, yet the aggregate data shows that sales are increasing in lower priced areas like the Central Valley and Inland Empire.
We already know that prices have crashed. Yet the myth being pushed onto the public is the notion that some areas have already hit their bottom. Today I want to look at a county that is still massively overpriced and has a glut of shadow inventory. That county is San Francisco. To understand shadow inventory we first need to define it. Shadow inventory is data that isn’t making its way for whatever reason to the public MLS. This includes bank owned homes (REOs), homes scheduled for auction, and notice of defaults. Much of the early “good news” of 2009 revolves around a big jump in home sales and a supposed stabilization in prices. Yet as we have discussed, much of this was spurred by lower end home sales. Let us look at San Francisco County:
I pulled data from a few sources for the above. The first three columns are pulled from the MLS data. If we look at this, you might think that short sales and foreclosures are only a tiny portion of the market. To the public, this is how it appears. Yet if we pull in other data sources like REOs, auction sales, and notice of defaults we will find that San Francisco County actually has more shadow inventory than the entire MLS data viewable by the public. This pattern holds for virtually every county of California given that we are on pace to having 476,000 notice of defaults in 2009.
Now why is the above important? The above is important because it tells us two different stories. In October 553 homes sold in San Francisco. With current MLS data, that means we have some 2.5 months of inventory. This is a very low number. Yet if we include shadow inventory that number jumps up to 5.5 months. That is a big difference.
The median price for San Francisco County is:
San Francisco: $690,824
This number is off the charts. If we break up the area and look at specific zip codes we find even more revealing data:
Let us examine the two above zip codes more closely since they had the most sales:
Shadow Inventory: 301
Shadow Inventory: 43
And here is where you see the real story. As we pull up data on 94112 you will see that the shadow inventory is nearly 5 times the actual MLS data. This is the zip code with the second most home sales. 94105 has a shadow inventory that is nearly the same amount as the MLS data. Do you think this will have an impact on future prices? I would venture to say yes.
And as we are now seeing trickles of the HAMP data very little is being produced. California has the most HAMP mods but we know very few are becoming permanent. So banks are left with either working with market prices or holding onto an ever growing flood of homes. Keep in mind we aren’t even including homes that banks fail to put a notice of default. There are cases of people in California with no payment for 6, 7, or even 8 months and still no notice of default is filed. Clearly something is going to need to happen to fix this and those betting on 2010 as a good year for California housing fail to examine the data fully.
California Notice of Defaults hit Record in 2009: Approximately 476,000 Notice of Defaults but Foreclosures Fell. HAMP Most Active in California. Approximately 5,900 Permanent HAMP Mods in California.
California is at the center of the foreclosure wave. Of the 306,000 foreclosure filings in November 23 percent hit in California. You cannot talk about housing distress without looking at the state of California. The California housing market will be in a slump for many years and there are a variety of reasons why California housing will see no recovery in 2010. One of the most important leading indicators of housing distress is notice of defaults. With so much talk about housing recovering the data is showing that 2009 will set a record in terms of NODs filed in California. 476,000 notice of defaults will be filed by the end of the year setting a pace of over 1,300 NODs filed per day in 2009.
Let us put the data into perspective:
The above chart might as well be an inverse of housing values. In 2005 and 2006 as prices reached their apex, NODs were at low rates. But starting in 2007, the numbers ramped up as many toxic mortgages including option ARMs started defaulting in mass and entering the first stages of foreclosure. The above data is extremely important because the foreclosure process has been extended to a stunning 18 months to 2 years given all the current moratoriums. So a notice of default filed today might not become a foreclosure until the middle to late 2010. It is a building pipeline. Until NODs drop, there is little reason to believe things will improve.
Many have argued that HAMP will help many of these loans. California is the largest HAMP state:
Yet the above number is a misnomer. In fact, nationwide only a handful of modifications have become permanent:
Of the 759,000 HAMP trials started only 4 percent have become permanent. This number is abysmal. In fact, if we take the 148,000 trial mods in California we can assume that only 5,920 have made it to the permanent stage. We had 476,000 notice of defaults filed in 2009! The HAMP is merely a delay of reality. We are only making an assumption here but it is based on a wealth of data. It might very well be that California has an even lower rate than the 4 percent since many more mortgages in California are underwater and we have a higher percentage of people strategically defaulting.
What this tells us is a couple of things. If HAMP continues at the current rate we are going to see a flood of foreclosures hitting the market in the next year. Where else will they go? Sure banks can hold on to homes with no payments or convert loans to interest only loans like Wells Fargo is doing but will homeowners continue to pay?
Actual foreclosures will drop a bit this year but this is because of temporary data shifting programs like HAMP:
The fact that so few loans are being permanently modified tells us we will see this number increase again in 2010 for California. This will happen right in line with option ARM recasts that predominantly are targeted in one state.
One aspect of consideration when it comes to foreclosures, is the value of the home. And while a foreclosure may be completely unavoidable, for those who are able to sidestep the matter, might be able to increase the value of the home by adding a few improvements. -
Why are loan mods failing so much? There are a variety of reasons. For one, initial trial periods were done with low documentation. Now that documentation needs to be provided, many people simply do not qualify. That is a major issue. Another issue is many people are not responding. Many people underwater don’t want a modification. And finally, the HAMP program is really targeted at protecting the bottom line of banks and not homeowners. Borrowers are now highly suspicious of the banking system and they have a right to feel this way.
Overall 2010 is going to be another dismal year for housing. HAMP is proving to be a drop in the bucket and once this is realized, more foreclosures will be flooding the market especially in California.