This is excerpts from an op ed piece written by Steve Hodgkins. I’ll throw some comments in to explain/clarify what he’s saying and why I don’t agree with a large portion of it.
The decline in single-family home values is the predominate reason for the current economic collapse……
Tom here – which came first, the chicken or the egg? Did the subprime mortgage lending boom send housing prices way too high because credit was too easy? Or did housing prices fall because those loans went bad? Or both?
Falling values have decimated the single-family construction industry, which normally supplies roughly 16% of the gross national product of the United States……
At the height of the housing boom, developers and home builders were buying land, developing lots and building houses based on an economy fueled by subprime mortgages.
They neither asked for nor were even aware of this giant social experiment conceived by our political leaders and the heads of mortgage giants Fannie Mae and Freddie Mac.
Tom here – so they didn’t ask for increased lending? They weren’t even aware of the fact that lending was significantly more lenient than it was before? They are saying that they never lobbied for easier lending? I’m sorry I’m not buying it….
As entrepreneurs and job creators, home builders were simply responding to perceived market conditions. Likewise, their banks and financial partners were making decisions based on historical market data.
Tom here – “making decisions based on historical market data?” So he’s saying that the sudden relaxation of mortgage guidelines was based on historical data? How does he figure that? I’m absolutely positive that I’m not the only mortgage lender who said, “Wow, I can’t believe that Fannie and Freddie will buy this loan…..”
After the subprime loans were pulled out of the marketplace, builders were left with large inventories of land, lots and houses and far fewer buyers who were able to qualify…..
Tom here – I’m not sure that it’s quite an accurate description of the market dynamics. Did the subprime mortgages get pulled or did buyers stop buying a new home because prices have gotten too high and the increase in prices caused payment problems which then sent subprime into a downward spiral…..?
……..Bank bailouts are simply Band-Aids and will only delay the inevitable unless the decline of home values is curtailed.
Loss of value has also hugely affected the confidence of the American consumer, whose home equity typically represents the family’s largest financial asset. The deterioration of home values and resulting loss of net worth have made the consumer reluctant to commit to large purchases…..
Tom here – it’s not just a loss of net worth, it’s the closing of the Home ATM that has hurt the economy. Consumers were living well beyond their means and were doing so by means of borrowing against their homes. That era is over.
……The question, then, is how do we halt the decline in home values?
Tom here – is that the question or is the question – Can we halt the decline in home values? Or “Should we stop the decline in home values? Or “Does attempting to halt the decline in home values merely make things drawn out over a longer time frame?
……..Although it is commonly held that location, location, location is what determines value, there is nothing more important than financing, financing, financing.
Tom here – nothing is more important than financing? I don’t think so. I’d argue that financing is an important part of the transaction, but that it’s not the only thing. Many people feel that car dealers have a bad reputation because they want to break everything down to ‘How much is my payment?’ Housing is different than that.
More than 98% of all real estate transactions involve some type of financing, and it is the loss of long-term financing that has caused the recent downturn in values.
Tom here – reading that last part would make you think that NO ONE can get a residential mortgage. That’s not true! I just wrote an e-book called Straight Talk About Mortgages – How to Survive and Thrive in Today’s New Mortgage World which was written to help people realize that they can get a mortgage in today’s market.
……This is the first economic downturn in the last 30 years in which long-term interest rates have not dropped significantly. In the usual cycle, sales slow and then rates drop, encouraging buyers back into the market to purchase homes with more affordable monthly payments. In this downturn, Treasury yields have fallen significantly while mortgage rates have not followed suit…….
Tom here – that’s because this is a different economic downturn than last time. There’s a retrenchment of consumer sentiment going on and it’s going to take different things to get through and out of this to the other side than strictly lower rates. That’s why I wrote that Lower Rates aren’t the Silver Bullet.
……There is no doubt that lower mortgage rates would bring buyers back into the market.
Tom here – I’ve asked a lot of people this question: “On an average priced house, a 1% drop in mortgage rates would drop payments approximately $100 per month. Would that be enough to get people to decide to buy a house?” The overwhelming answer was, “Maybe for a few, but not enough to make a difference in the housing market.”
……..The problem is: how do we get mortgage rates down and how do we get potential buyers qualified?
Tom here – that’s not the question we should be asking. The question we should be asking is, “What can the government do to make people feel more safe and secure in their financial position so that they feel comfortable buying a new home?”
The following is a list of recommendations to get buyers into houses that will also help those people who are saddled with punitive adjustable-rate mortgages stay in their homes:…….
In conclusion, the erosion in the value of single-family homes must be stopped for the economy to begin to recover. Decisive and dramatic action must be taken for this to happen. The above ideas are realistic and will work if they are implemented.
Steve Hodgkins is the president-elect of the Memphis Area Home Builders Association and the founder of Oaktree Homes, LLC.
Okay, a couple of additional thoughts:
- The housing market and the mortgage mess is the spark that ignited the credit bomb that blew up/is blowing up on us.
- The issue now has become much bigger than that. Consumers are feeling way over extended.
- The markets (housing, banking, stock, etc.) won’t turn around until consumers start feeling better about their financial position.
- Any government stimulus packages that aren’t focused on resolving the consumer’s financial struggles are misguided and won’t work.
What do you think?
Thomas Johnson says:
“Consumers are feeling way over extended.”
Tom, as the song goes, it’s more than a feeling.
When the bank reduces your credit limit and that was the the last little bit of room you had on your Visa card, all you have now is a wallet full of maxed out plastic, it is more than a feeling. By whacking all the excess availability of the credit lines, the banks are unilaterally and massively lowering FICO scores without any change in borrower behavior by increasing the balance vs the available line. Any borrower that has had this happen and has paid his bills on time now has a lower FICO by playing by the rules. Any wonder there is rage against the system?
December 9, 2008 — 9:49 am
Tom Vanderwell says:
Tom,
Good point. I’m running into both – consumers who are over extended and consumers who really aren’t over extended but feel like they are…..
You’re not going to see me defending the way that banks are unilaterally hacking credit lines. That’s a problem we’re going to end up dealing with later…..
Tom
December 9, 2008 — 10:05 am
Bob says:
The problem isn’t credit, but cash.
An insider at Wells told me they are seeing a significant number of loans bounced back to them by Fannie and Freddie. The word is that Fannie and Freddie dont have the ability to buy all the loans sent to them, so they have raised the bar yet again. As a result, Wells Fargo’s underwriting criteria is going up accordingly. More buyers will not qualify.
They expect another round of banks going down over the next 3 months as these guys cant sell the loans they want to fund.
What we have here is not a credit freeze, but a real lack of cash to lend. the losses are so enormous that TARP is a mere band aid on a gut shot wound.
We are bankrupt, but no one is saying it.
December 9, 2008 — 1:02 pm
David Shafer says:
Tom,
The question we should be asking is, “What can the government do to make people feel more safe and secure in their financial position so that they feel comfortable buying a new home?”
You hit this on the head. Prices in many areas have come down to the point homes are affordable again. But people aren’t buying because they are fearful. Fearful people make really poor financial decisions.
As to the builders, they did their usual business which is build until there is a serious over supply. This of course crashes the market. Here in Florida we see this cycle often.
Finally, credit is available for those that pay their bills on time, have some reserves, and have enough income to cover their home ownership expenses. And the rates are low, going even lower if the government has anything to do with it.
However, I believe this bit about overextended credit (cards, mortgages, etc.) is very overblown. All the data points out that this is a media creation based on a few folks who never should have been given credit.
What we are seeing in the housing market is the double whammy of folks who never should have been in homes at the price they got in, combined with a serious recession and jobs lost.
The investment banks and some commercial banks speculated on mortgage backed securities and other derivatives and lost. Some banks forgot about that little underwriting issue! In all this mess you know what the forclosure rate is for fixed rate prime loans? .34% For prime variable rate loans it is 1.77%. Hardly earth shattering!
In short, some of the commerical banks lack of underwriting standards combined with the investment banks creation of mortgage backed derivatives allowed people to purchase multiple homes when they could not afford them, which created a bubble in prices; when the bubble burst it took out all these banks and froze credit. The only thing that is going to help is for the builders to stop building more houses in areas with an oversupply, for the banks to unfreeze credit lines and go back to what they do best which is to lend money to people, and for this part of the business cycle to get behind us.
Obama, hopefully, will not give away the farm while this process works it way through. Fear is the enemy.
December 9, 2008 — 2:02 pm
Tom Vanderwell says:
David,
Well said. I’m curious, where did you get your statistics in terms of prime mortgages that are delinquent? I thought I had heard a substantially higher number? But maybe the number I had heard was delinquent and the number you are using is foreclosed on?
Tom
December 9, 2008 — 2:08 pm
David Shafer says:
Tom,
http://www.mbaa.org/NewsandMedia/PressCenter/66626.htm
Yes, forclosure starts.
December 9, 2008 — 2:56 pm
Sean Carr says:
The elephant in the room that no one seems to talk about is the coming reset wave of Alt A and Option Adjustable Rate products peaking mid 2011. Credit Suisse has estimated new foreclosures at the end of 2012 to be approximately 60% higher than year end 2008. Below are the link(s).
http://3.bp.blogspot.com/_pMscxxELHEg/ST2uU7rQBEI/AAAAAAAAD8o/u9DpxN4YHYs/s1600-h/CreditSuisseForeclosureForecast.jpg
and
http://www.marketwatch.com/news/story/More-8-million-homes-face/story.aspx?guid=%7B93DE5904-2ED2-4A76-8ACB-8E91439F841B%7D
Note that the increase is not from subprime. Add this with unemployment stats, Case Shiller stats, etc. and we indeed have justified fear from prime borrowers and investors. In my opinion a much less opaque solution than TARP is going to be required to alleviate these fears. It seems our financial system is in debt deleveraging mode; and we know there is more fuel left to throw on the fire. Hopefully a timely solution can be reached to prevent a second act of the reset show but until there’s at least a whisper of logical proposal it’s not a difficult choice to continue to exercise extreme caution in RE investments.
December 9, 2008 — 5:42 pm
Scott says:
It is a chicken and egg story. Subprime made access to inventory possible by allowing people on fixed incomes of less than 50k to buy as many investment properties as they wanted. Should have been noticed a long long time ago.
December 9, 2008 — 6:33 pm
Bob says:
“It seems our financial system is in debt deleveraging mode; and we know there is more fuel left to throw on the fire.”
My contacts at Lehman say that based on what they see now that the next 18 months are downright scary.
December 9, 2008 — 7:24 pm
Tom Vanderwell says:
Bob,
I don’t have any contacts at Lehman but what you say doesn’t surprise me. There’s a lot of nasty stuff brewing beneath the surface that most of us don’t see and aren’t prepared for.
Tom
December 9, 2008 — 7:38 pm
Bob says:
Tom, too many in this industry want to believe that if they only think happy thoughts, then everything will be all right.
Even the NFL laid off employees this week.
December 9, 2008 — 8:06 pm
David Shafer says:
Sean, saw this too, but doesn’t really make sense to me. Are they talking about 5-1 option arms that they started to sell around 2005-06? If so most of them are tied to LIBOR which is currently lower than when they were sold so if they adjust they would go down.
No way someone makes the minimum payment for 5 years. It would trigger the 110% maximum well before that. So if they go bad because of that, it would be around 2009.
Just don’t get their logic. Also, how many of those loans were made at 100% that couldn’t refinance under the lower rates?
December 9, 2008 — 8:10 pm
Tom Vanderwell says:
Bob – Happy thoughts won’t do it. Hard facts and tough choices will.
David – I was just looking and I can’t find the sources, but I’m hearing more and more rumblings about significant increases in delinquencies in prime loans. The cancer is spreading and as the cancer spreads, it’s going to be harder to deal with.
The interest rate their ARM adjusts to doesn’t matter that much if they don’t have a job or their hours got cut by 30% or their wife’s job got cut to 10 hours a week.
It’s all going to come back to jobs. If we can’t get the jobs situation turned around, it’s not going to be pretty.
At one point, on my blog, I equated the situation (about a month ago) to a serious injury like a badly broken arm with the bone sticking out. I got “called out” on it and told that it was more like a cardiac arrest in need of 8 bypass surgeries…..
And that was told to me by someone who knows his way around the financial world.
Tom
December 9, 2008 — 8:18 pm
David Shafer says:
Bob, where was all this sober analysis when Lehman was trading mortgage backed securities?
Forgive me if I am not all gloom and doom. Real estate in my area has basically flatlined over the last 6 months (down 1.8%), which is not great but sure beats the 12 months before that (down 30%). Lots of forclosures adding to the supply, but pricing down enough so that average income folks can afford again. Stock market in a bear market, but the P/E ratio’s are down to around 12. Some great companies out there with p/e’s in the six or seven range which means they are real cheap. Some of the REITs are paying dividends in the 7-9% range at current pricing. And the recession is a year old which means the economy is well into the down cycle. Just as when folks where buying tech stocks and real estate at unreal prices and people said this time is different, when people say this crisis is different I find it hard to believe. I have lived just long enough to see this play before!
Are people scared? Yes, but I agree with Warren Buffett, we will come out of this. When? Can’t give you an exact date, but most people believe end 2009 or 2010 we will be in a better place economically.
December 9, 2008 — 8:27 pm
David Shafer says:
Tom, you are absolutely right about jobs. Every recession sees an increase in foreclosures. This one is made much more difficult by the problem with selling homes that might be underwater. Layoffs have been coming fast and furious for about 6 months now. My guess is we will see another spike in forclosures coming the first three months of 09 as people have a hard time finding work. The forclosure rate for prime variable rate loans actually dropped in the last report with the fixed rate steady. That’s hard data that says something different than what the whispers are. Some companies are actually reporting decent profits (Google, HP, Apple, and even Hasbro, etc.). Again hard data that contradicts the media “all is lost” fantasy.
Again you were right with the fear is pushing asset pricing lower statement.
December 9, 2008 — 8:59 pm
Tom Vanderwell says:
David,
I’m glad that you aren’t all gloom and doom. It’s always good to have someone to test your theories and ideas against. So don’t ever stop speaking up.
I do also agree with you that we will come out of this eventually. However I believe that we are in the early stages of a massive credit hangover. People are waking up and saying, “Man this hurts.” They are suddenly rethinking their priorities.
Once the dust settles, will they revert to the easy credit ways? I don’t know, some of them will, but a lot of them won’t.
I’ve said many times, the only ones who can spend more than they make forever is the government (and they are trying to test that theory too).
I don’t think we’ve seen the full reality of what the adjustment to consumer sentiment is going to mean, and I think those who can pick up on that change and adjust their business model to meet it will be light years ahead of the rest.
Tom
P.S. I would love to say that the end of 2009 to 2010 is a good “improvement” date and I think that there will be spots (like Bawld Guys’ Paradise?) that are looking better then. However nationally, I think it will take longer to pay down the debt and rebuild things and the rust belt will be significantly longer than that.
December 9, 2008 — 9:13 pm
Leon Belenky-One Bal Harbour Condo Expert says:
I have to agree that the problem is more snowballed than it needs to be. I am hopeful Obama is able to instill some confidence in the economy once he takes office here shortly. I truly thing that once things get worked out, and the loans that should have never been made in the first place are settled out, we will see a turn in the housing market, and perhaps in this recession as well.
December 10, 2008 — 10:50 pm
Ned from Baltimore says:
>The decline in single-family home values is the predominate reason for the current economic collapse…
Yea right, 100% financing wasn’t a factor? Liberal underwriting that allowed buyers to get mortgages that there was no way they could afford wasn’t a factor?
Tom Wrote:
>Did the subprime mortgages get pulled or did buyers stop buying a new home because prices have gotten too high
People forget that the market started slowing a year and a half before the subprime meltdown.
December 11, 2008 — 1:06 am