Housing Doom

“The injunction of Jesus to love others as ourselves is an endorsement of self-interest,” Goldman’s Griffiths said Oct. 20, his voice echoing around the gold-mosaic walls of St. Paul’s Cathedral, whose 365-feet-high dome towers over the City, London’s financial district. “We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all.”  Bloomberg¹

Thank goodness for Tatjana’s 17th Century English Lit course.  The last few months would have made no sense at all if I hadn’t decided to make a close study of Donne’s sermons and Laud’s adventures in Xtreme Interior Decoration.

As it stands, I can just sort of work my way through the section on  "The Growth of Individualism" in Tawney’s 1922 Religion and the Rise of Capitalism and treat the whole affair as a kind of cosmic joke.

When the banking lobbyists marched up the Hill on September 18, 2008 and seized control of the economy it was the perfectly symmetrical event to the fall of Soviet Communism.  We’re now enjoying (on a compressed time frame) the same post-collapse rise of oligarchs that Russia experienced in the late ’90s.  Perhaps if Putin’s not too busy pulling the strings back home, Larry could sign him on as a consultant.  Obama’s got a serious problem if he lets these guys strut around unhindered.

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Fraud might be rampant in the program, but that didn’t stop the Senate from voting 85-2 in favor of extending the home buyer tax credit.  Why is it that the Senate is so willing to extend this expensive program?  Here’s an example from Savannah, GA as to how the credit is affecting the market:

The housing credit’s impact is particularly pronounced in the Savannah area.

The number of first-time buyers locally is unavailable, but pricing and loan trends indicate they could make up more than 40 percent of the market.

Homes priced under $200,000 have outsold those priced above that number by almost a 2-to-1 margin this year, with homes sold for $100,000 to $149,999 - "starter homes" - outpacing all others.

And almost half of the houses financed locally this year were done with loans backed by the Federal Housing Administration or the Veterans Administration, which cater to first-time buyers.

And how would allowing the credit to expire affect the market?

A drop in local building permit applications in September offered a glimpse of what a creditless future could look like. Permits tripled in Chatham County during the summer months as builders began construction on homes that could be completed in time to be bought and occupied ahead of the Nov. 30 tax credit deadline.

Permit numbers dropped drastically in August and September, a trend the head of the local homebuilders association, Matthew Young, said reflected the industry’s wait-and-see approach to the post-tax credit market.

"If they don’t extend" the credit, Young said, "they will wait and see what sales are like after that."

Here’s a great chart from Business Insider that shows how this credit has skewed the market in favor of first time homebuyers:

 So how critical is the home buyer tax credit?

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It’s election day, and I’ve decided to try being a poll worker this year.  I’ll be at the polls until closing, so if anything looks interesting, please leave a comment and let us know.  Consider this an open thread.

So, you know, there’s nothing for safety and soundness like a comfortable oligopoly. We might think about that and … we’re planning, for those of you who are interested, a conference, coming up in a few months, contrasting the Canadian house finance and financial system with the American system. So there’s a little advert — little preview.

Doom Transcripts: Index & Guide

Well, that certainly got my attention

Housing Doom is pleased to present a seventh selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

Most of AEI’s "team bear" participated in a brief but lively discussion after the presentations.

Alex Pollock: [1:21:56] Thank-you, Desmond.  Having heard five really interesting presentations, let me give the panelists, if they want, a chance to add something, or react to the others.  Nouriel?

Nouriel Roubini: Just a comment on the last point that Desmond made. In this crisis, regulated banks got in trouble, but also a lot of non-regulated financial institutions — were broker/dealers like Bear and when bust. And so in some sense, suppose we go back to Glass-Steagall and not against it? What does it rule out? And then you’re going to have a bunch of broker/dealers or non-bank Shadow Banks that are going to become too big to fail. They’re going to do crazy things and eventually we’ll have to bail them out.

So do we need to really go back to Glass-Steagall? Or we need to break up every financial institution and make it so small that it can fail and who cares? And we don’t have to bail them out. What’s the appropriate policy choice on that? And I think that’s an open question for everybody else on the panel.

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Clorox Co.’s earnings rose 23% for its fiscal first quarter on improved profit margins and increased sales of disinfecting products caused in part by concerns over the H1N1 flu virus. - WSJ¹

Talk about creative destruction, looks like these guys are gonna lead us on to permanent prosperity

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This tongue-in-cheek solution for reviving housing sounds as likely as any of the other schemes out there:

Now that we have a new (and improved) tax credit of $6500 rolling through Congress to the "move up" buyers we’ll see if government can incentivize that class to start daytrading homes as well.  The only issue is so many of them are underwater on their homes, it is sort of difficult to buy a new house (even with government handing free money out) when you still have to deal with that unfortunate investment you made in your old one.  

Unless, a new national fraud is institutionalized - that is (1) buy the new house with the taxpayer’s money & "super cool FHA mortgages", and (2) then walk away from the old house / mortgage, once the new one is secured.  You take a hit on your credit report but oh well - you have a new house, at a much cheaper price, and the taxpayer can deal with the mess.  In about 5 years you are good to go as the default moves to the bottom of your credit report, and within 7 years…. all gone.  Let’s see if we start hearing of rampant examples of this "strategy" by next spring.

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Doom Transcripts: Index & Guide

Housing Doom is pleased to present a sixth selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

This is the presentation by AEI’s Desmond Lachman.

Desmond Lachman: [1:08:20] Alex, thank-you very much again for organizing this conference at a 6-monthly interval.

I think one’s got to go through life counting one’s blessings, and one of the blessings that I’ve realized that I’ve got to count on now is that my name isn’t Tom Zimmerman, and that I come at the end of the presentation.

Because much of what is said, I really agree with. So I can walk through a presentation. I’ve entitled it "A False Dawn for the Housing Market?" [slide 1²]

In the interests of being optimistic I’ve put a question mark whereas I really meant putting an exclamation mark. [laughter]

Let me start just with the lessons that one can draw from this crisis, and I think that there are a whole bunch of lessons. We’re going to be writing books about this for many years to come, much like The Great Depression we’ll be looking through this crisis. And I very much agree with what both Nouriel and John have said, that one really needs to be paying attention to bubbles, that we’re just creating another bubble that is going to be bursting. But I think that there are just a whole bunch of other lessons to be learned.

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With the notable exception of Lehman Brothers, it has seemed that there wasn’t much that the Fed wasn’t willing to bailout, backstop or guarantee.  Friday however, the Federal Reserve released a Policy Statement On Prudent Commercial Real Estate Loan Workouts.  Tyler Derden of Zero Hedge had an interesting read of this statement.  He said of one section:

[This] seems to imply that the Fed is now encouraging active loan workouts as a matter of policy. The other implication is that firms with CRE exposure can no longer rely on the Fed as a perpetual guarantor of risky exposure. Not only that, but in adopting a new policy strategy, the Fed is acknowledging the major problem that CRE writedowns will represent for banks, yet is telling banks to resolve problems on their own, while subsequently they will "not be subject to criticism for engaging in these efforts."

The implications of this Fed action for the economy could be staggering as the $3.5 b,quadr,trillion CRE market will likely not receive the same largesse that residential real estate has been the recipient of ever since the conservatorship of the GSEs. And the biggest loser in all of this will be banks that still have not used the massive risk rally to offload whole loan and CMBS CRE holdings, and moreover, still have these marked at par or close thereby.

Treasury Secretary Timothy Geithner discounted the potential problems in CRE:

U.S. Treasury Secretary Timothy Geithner expressed confidence Thursday that the woes of the commercial real-estate sector would not drag the economy back down.

Geithner acknowledged that it was difficult for policymakers to tackle the problem of sliding asset values and write-downs.

However, he said, "I think the economy can handle it" when asked if commercial property could reverse a domestic recovery.

"I think you can say with confidence that the financial system is stable [and that] the economy has stabilized," he told an audience of the Economic Club of Chicago.

Not everyone share’s his confidence however:

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I think almost by definition we’re … I mean I would say W, because I think in the US anyway we’ll still see a 3 1/2 percent growth number in the 3rd quarter, which will be reported next week, and maybe a 3 percent number in the 4th quarter …

Doom Transcripts: Index & Guide

I do believe we have a winner.¹

Housing Doom is pleased to present a fifth selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".²

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

This is the presentation by AEI Visiting Scholar John Makin

John Makin: [0:54:19] So I’m going to say that so far what we’ve heard is, it’s the lessons of the — having deflated and about to reflate bubble. And that’s a little different than the idea that the bubbles burst and it’s past us.

But, you know, I’ve taken the charge here quite literally — What are the lessons of the bubble? And I think we’ve heard that it may not be the only bubble that we’re getting, but I … The main lesson of the bubble in the US in a sentence is "You’ve got to be Too Big to Fail," because then you get bailed out.

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Final risk. The increasing asset prices we’ve seen since March for everything: global equities; in US, equities; EM [emerging market] asset classes; commodity; credit; everything around the world is driven by one factor.

Doom Transcripts: Index & Guide

The penultimate risk was merely the prospect of World War III breaking out.  Fortunately Nouriel was running overtime so Alex had to cut him short just before he got to the scary bit

Housing Doom is pleased to present a fourth selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

Dr. Doom was batting cleanup …

Nouriel Roubini: [0:37:03] OK. Tom spoke about housing and mortgages. What Chris spoke about — the banks. So I’ll try to speak about the economy and what’s going to happen to the economy looking ahead.

We’ve had the most severe recession and financial crisis since the Great Depression. Given the monetary and fiscal stimulus and the backstopping of the financial system now we’re close to the bottom, at least on a temporary basis.

And now the debate is, of course, on what’s going to happen — the shape of the recovery. Given what has happened in the markets I would say the markets are pricing now a V-shaped recovery with rapid return to potential growth, and that’s even what the macro forecasters’ consensus is.

There is a second view, which is the one I share, is that this recovery is going to be at best an anaemic, subpar, below trend, with growth well below trend for the next couple of years, much as in the US, but also in advanced economies. So more like a U-shaped recovery. That’s also the view of the IMF and the one of those folks at PIMCO who are talking about A New Normal.

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