Real Estate - Latest real estate developments, mortgage and lending watch

NYT: Existing-Home Sales Drop More Than Forecast, Jan. 25, 2010

Home sales plunged in December even faster than predicted, deepening questions about whether the housing market can function without ample government assistance.

Sales of existing homes in December fell 16.7 percent from November to a seasonally adjusted annual rate of 5.45 million units, the National Association of Realtors said Monday. read more

FT Alphaville: China tells banks to halt loans, Jan. 21, 2010

"Chinese regulators have told some banks temporarily to halt lending amid growing fears of asset bubbles and inflation. The push to curb credit growth follows frenetic lending activity by Chinese banks that raised concerns about overheating in the economy. The crackdown prompted stock market falls around the world as investors worried about the impact of China’s tightening on its growth. Traders said such concerns added to fears over the outlook for Greece, which is struggling to fund the eurozone’s biggest deficit. See also FT Alphaville on China’s property bubble."

The Economist published great interactive house price charts for various countries. Click here to go to the charts on The Economist website.

NYT: This Year’s Housing Crisis, Jan. 4, 2010

The US housing crisis is far from being over. There is the danger of a second slump once rates are rising:

"Figures released last week show that after four months of gains, home prices flattened in October. At that time, low mortgage rates (courtesy of the Federal Reserve) and a home buyer’s tax credit (courtesy of Congress) were fueling sales. That should have propped up prices. But it was not enough to overcome the drag created by a glut of 3.2 million new and existing unsold single-family homes — about a seven-month supply.

The situation, we fear, will only get worse in months to come. Rates already are starting to rise as lenders brace for the Fed to curtail support for mortgage lending as early as the end of March. The home buyer’s tax credit is scheduled to expire at the end of April. And a new flood of foreclosed homes is ready to hit the market."

Source: Excerpt from article linked to above

I found this a quite progressive subject for a study by the IMF.

A Fistful of Dollars: Lobbying and the Financial Crisis, Deniz Igan, Prachi Mishra, Thierry Tressel, International Monetary Fund, Nov. 2009

The paper studies the relationship between lobbying by financial institutions and mortgage lending. It has a focus on the question of how lobbying could have contributed to the accumulation of risk. The authors researched loan characteristics and lobbying expenditures on laws and regulation related to mortgage lending and securitization.

It seems that lobbying lead to less supervision and consequently more agressive behavior. The authors of the study conclude:

"We show that lenders that lobby more intensively on these specific issues have (i) more lax lending standards measured by loan-to-income ratio, (ii) greater tendency to securitize, and (iii) faster growing mortgage loan portfolios. Ex post, delinquency rates are higher in areas in which lobbying lenders’ mortgage lending grew faster, and, during key events of the crisis, these lenders experienced negative abnormal stock returns. These findings seem to be consistent with a moral hazard interpretation whereby financial intermediaries lobby to obtain private benefits, making loans under less stringent terms. Moral hazard could emerge because they expect to be bailed out when losses amount during a financial crisis or because they privilege short-term gains over long-term profits. With the caveat that overoptimism might also be consistent with some of the findings, our analysis suggests that the political influence of the financial industry can be a source of systemic risk. Therefore, it provides some support to the view that the prevention of future crises might require weakening political influence of the financial industry."

Source: Excerpt from the paper linked to above

Comment on Calculated Risk

Related:

Robert Shiller in an interview today:

Time: Fed Removes Cap for Fannie, Freddie Aid, Dec. 24, 2009

The government has handed its ATM card to beleaguered mortgage giants Fannie Mae and Freddie Mac.

The Treasury Department said Thursday it removed the $400 billion financial cap it will provide to keep the companies from failing. Already, taxpayers have shelled out $111 billion to the pair.

Treasury Department officials said the $400 billion limit would be replaced with a flexible formula to ensure the two agencies can stand behind the billions of dollars in mortgage-backed securities they sell to investors. read more

It is now more than 2.5 years since the outbreak of the subprime crisis, which consequently ended in a global financial crisis and recession.

I took the time to look back and collected some of the insightful posts and links which relate to subprime and its consequences. The richness of information which can be found on this weblog is impressive:

The subprime mess started to show slowly:

MarketObservation: Volatile situation in the US real estate market, March 16, 2007

MarketObservation: Subprime loans - star economist's view, July 7, 2007

MarketObservation: First subprime banking victim outside the US?, Aug. 27, 2007

MarketObservation: Mortgage backed securities: "lemons" in the portfolio, Sept. 13, 2007

MarketObservation: Subprime valuation puzzle, Dec. 9, 2007

MarketObservation: Further major subprime write-downs expected by Standard & Poors, Feb. 1, 2008

MarketObservation: Subprime - some latest write-off estimates, March 16, 2008

MarketObservation: Defaults on commercial mortgage-backed securities issued at the height of the credit bubble are expected to more than quadruple from their current levels, Aug. 1, 2008

MarketObservation: US Government takes over Freddie Mac and Fannie Mae, Sept. 7, 2008

People started to understand and the opinion of early warners was suddenly relevant:

MarketObservation: Subprime foreclosures - lessons to learn, Aug. 29, 2007

MarketObservation: Impact of mortgage secondary markets on risk behavior, Sept. 2, 2007

MarketObservation: Subprime home mortgage securitization structure, Sept. 23, 2007

MarketObservation: Testimony of R.J. Shiller; submitted to the congress of the United States, Nov. 1, 2007

MarketObservation: All wrapped, Nov. 2, 2007

MarketObservation: "The rise and fall of subprime mortgages", Nov. 17, 2007

MarketObservation: Understanding the subprime crisis, Nov. 18, 2007

MarketObservation: Standard & Poor's views , Nov. 21, 2007

MarketObservation: "Understanding the subprime mortgage crisis", Dec. 17, 2007

MarketObservation: Understanding securitization of subprime mortgage credit, Jan. 3, 2008

MarketObservation: "Lessons from 2007 financial crisis", Jan. 12, 2008

MarketObservation: Historical comparison of subprime crisis, Feb. 8, 2008

MarketObservation: Subprime: classical lending boom-bust scenario, Feb. 9, 2008

MarketObservation: Subprime: "Housing and monetary policy", Feb. 15, 2008

MarketObservation: Subprime: "Thirteen questions about the subprime crisis", Feb. 20, 2008

MarketObservation: Subprime: "Subprime crisis could have been predicted" (Stiglitz), Feb. 29, 2008

MarketObservation: A "Young Thought Leader" from India about the subprime crisis, March 5, 2008

MarketObservation: How probable was the current situation of the financial system on the outcome tree?, March 16, 2008

Should analysts have anticipated the subprime crisis?, Feb. 16, 2009

The mess has deeper roots:

MarketObservation: Why masses hardly learn, Aug. 6, 2007

MarketObservation: Trends in the housing market - psychological factors play an important role, Nov. 28, 2007

MarketObservation: Warning voices have been dramatically ignored, Jan. 16, 2008

MarketObservation: The cosiness of a group of peers, Feb. 15, 2008

MarketObservation: Investment mistakes, May 30, 2007

MarketObservation: Information cascades, Aug. 10, 2007

MarketObservation: Rational herding and the subprime crisis - find the basic principles!, Nov. 6, 2007

MarketObservation: Asset price bubbles, Dec. 6, 2007

MarketObservation: Fannie and Freddie - a political product , July 13, 2008

MarketObservation: Vernon Smith and Steven Gjerstad about characteristics of bubbles, April 6, 2009

MarketObservation: Janet Yellen at the annual Minsky conference, April 17, 2009

Regulation and politics became an issue:

MarketObservation: The residential mortgage market - Mortgage Bankers Association says that government should be careful with policy interaction, Aug. 23, 2007

MarketObservation: Implications of subprime bail outs - What should government do about the subprime mortgage market?, Dec. 7, 2007

MarketObservation: Fed plans to tighten mortgage rules, Dec. 24, 2007

MarketObservation: VOX on financial rescue and financial regulation, Feb. 4, 2009

Crises and consequences are researched in depth:

Reinhart and Rogoff:

MO: This time is not very different, April 19, 2008
MO: The economy after financial crises, Jan. 29, 2009

Michael D. Bordo:

MO: Same old story, only players have changed, Nov. 8, 2007

The Economist: Commercial-property blues; Lenders' dilemma, Dec. 3, 2009

This is a great chart from The Economist.

According to The Economist, a huge overhang of loans needs refinancing:

£35 billion next year alone,

and up to £120 billion more by 2013.

The Economist mentions that things could get worse next year, once we start to leave the low interest period:

"Few of the usual equity investors, such as real-estate investment trusts and private-equity funds, will come in at today’s prices, given how little is on offer and how hard it is to get credit. So the banks are hanging on, able to do so only because low interest rates mean their funding cost is low. Meanwhile, other parts of the economy, especially cash-strapped firms, are being starved of the loans they need. Next year, things could get worse."

It is great that markets help distressed homeowners out of their mess. The fact that bankers allegedly can make profits at the cost of the taxpayer is disturbing and would need further consideration.

NYT: Wall St. Finds Profits Again, Now by Reducing Mortgages, by Louise Story, November 21, 2009

As millions of Americans struggle to hold on to their homes, Wall Street has found a way to make money from the mortgage mess.

Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.

But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.

While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers — at a time when Americans are falling behind on their mortgage payments in record numbers. read more

Guardian.co.uk: Property market hasn't collapsed because banks can't face the truth, by Ruth Sutherland, Lenders are still extending credit to commercial developers because they simply can't afford to crystallise their losses, Nov. 22, 2009

"Commercial property is the dog that didn't bark in this recession. There were widespread expectations of carnage in the market; although there were sharp falls in values earlier on, this has so far not materialised. Quite the contrary in London prime property, which shows every sign of blowing up into a new bubble. But it doesn't take the deductive powers of Sherlock Holmes to work out what is going on – and the banks, inevitably, hold the key to the mystery.

The first thing to say is that the boom in prime London real estate gives a misleading picture of the market as a whole, as does the strong recovery in the shares of big listed companies like British Land, Hammerson and Land Securities.

Activity in the capital is being driven by overseas buyers taking advantage of the weak pound and financing transactions with equity capital, not debt. It is being stoked by a shortage of supply, with an estimated £7bn of capital chasing half a billion's worth of desirable property for sale." read more

The prime property market in London is a market segment per se. Even though the rest of the market has not recovered yet, the price appreciation of prime property does not necessarily have to lead to a new bubble. Prime property is scarce and it can be an attractive investment in the longer term.

In contrary to US residential property where we do not see a shortage of supply in many regional markets. Consequently, prices and rents are still under pressure:

Macroblog of the Atlanta Fed: Housing back in the news, Nov. 20, 2009

This is a worrisome development. Should it turn out that China has a lot of wasteful investment, growth of the country could be substantially effected. We pointed at this danger on MarketObservation already years ago.

FT: Fears of China property bubble, Nov. 18, 2009

A large bubble is forming in China’s property market as a result of Beijing’s crdit-driven stimulus programme, one of the country’s most prominent real estate developers warned.

Zhang Xin, chief executive of Soho China, one of the country’s most successful privately owned property developers, told the Financial Times the asset bubble was leading to rampant wasteful investment in the sector, undermining the country’s long-term growth prospects. read more

Barry Ritholtz has found some interesting material about rational and irrational excuberance in property markets:

The Big Picture: Rational and Irrational Exuberance in Property Markets, Nov. 14th

Reuters: Obama "too big to fail" plan blasted in Congress, Oct. 29, 2009

The Obama administration's new proposal for tackling financial risk in the U.S. economy, unveiled just two days ago, came under attack on Thursday from Congress and regulators, with questions raised about its funding and scope.

U.S. Treasury Secretary Timothy Geithner scrambled in a congressional hearing to defend the plan against critics who said it would give too much power to regulators and enshrine government bailouts for troubled financial firms in law. read more

Here is a video released on Nov. 2, 2009, on youtube:

WSJ: Uncle Sam Adds 5% to Prices of Homes, Goldman Says, Oct. 24, 2009

Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday. read more

Related:

Calculated Risk: Case Shiller Home Price Index increases in August, Aug. 27, 2009

Great stuff about the delinquency likelihood of securitized loans:

Ritholtz: Securitized Loans Are 5X More Likely to Be Delinquent, October 19, 2009