Everyone thinks the housing market in the U.S. looks like it’s starting to bottom.
Famed economist Gary Shilling is not one of them—you could call him notably bearish on housing.
In fact, he expects prices to drop another 20 percent from here and doesn’t think we will see a bottom in the market for another several years.
The main reasons Shilling is so pessimistic: There is a huge supply of excess inventory not being accounted for, and prices still have not fallen to anywhere near long-term historical averages.
In his monthly INSIGHT client newsletter, Shilling outlined his bearish housing thesis and used several charts to illustrate why he thinks there is no bottom in sight for the U.S. housing market, and more pain is ahead for American homeowners.
Note: Thanks to Gary Shilling for giving us permission to feature his charts.
Continue reading/viewing charts at the Business Insider
I watched his partner Chip Case this AM on a financial news channel.
Same story.
How can the housing market hit bottom IF Obama, the Fed, others keep propping it up and preventing that?
And the volume of housing is still way too low.
I have seen newer owners here really upset about being upside-down, but since they LIVE here and are not planning on selling, I don’t understand their anger.
We bought so long ago that, even if we sold today, we would be plenty of money ahead.
But our situation is fairly rare.
While helicopter Ben continues to fatten his banker friends’ bonuses with free dollars, there is also government artificial support of the real estate market through the ‘easing’ of financial hardship endured by past borrowers.
ANY artificial involvement and interference in the market by the government with taxpayer money, only delays the inevitable – very temporarily. Taxpayer money cannot and will not bailout underwater mortgages – that is the very definition of ‘impossibility’. Only a few will win that lottery. The rest are awaiting reality which will be a long slog through years of depression.
Of course this is all assuming China doesn’t threaten to do what it is threatening with Japan. Then, the process would simply become accelerated.
Are we reading about this in the MSM? . . . Not much.
Shilling is right about the overwhelming, but unrecorded empty and available inventory – inventory which will not be sold for many years. Too many empty homes exist, even almost new ones, which are located where no jobs will be created.
The city of Maricopa had large numbers of homes not being offered because to do so would drive prices down further. Last I heard that is still the case.
Here’s what I don’t understand:
You buy a house.
Your payments are $500.00 a month.
You budget for that. You can afford it.
The value of your house drops. You now owe more than it’s worth.
Your payments are still $500.00 a month.
You’ve budgeted for that. You can afford it.
SO WHAT’S THE FREAKING PROBLEM?
Now, if you bought the house with one of those idiot interest-only-for-five-year loans because you thought that you could sell it for a nice profit before the payments tripled, well, you’ve got a problem.
You gambled on home prices continuing to rise until you sold.
You lost.
You gambled. You lost. Why should my tax dollars cover your gambling losses?
@Petercat, it all depends upon if the purchaser used an ARM loan product… i.e. adjustable rate mortgage. These are a fixed, or slightly increasing rate from the beginning of the loan issuance, starting at a low rate, and then when reaching the end of that stated period, then fluxuate based on prime rates within a certain ratio.
i.e. a 1/7 ARM loan may start out at a 2%, increase an “x” percent annually until the end of the 7 years when it then fluctuates within an agreed upon amount based on prime.
Savvy buyers know that the rates at the end of the period are not what they are at the beginning. Lenders disclose they are going up, but they can’t predict an exact payment in the future because no one knows what prime would be seven years from the loan issuance.
ARM loans, as well as other specialty packages… interest only, stated income, etc… are merely financial tools for particular borrowers. Investors like to use the interest only when they are flipping properties. Self employed often used the stated income because documenting their income is more difficult. ARM loans were used when someone would be relocating/selling that home prior to the resetting of the ARM stated term.
The problem with all financial tools is that they can be abused by both lenders and borrowers alike. With ARMs, they need to qualify at at least the current top rates, not the starting rate. Stated income should revolve around at least what documentation the lender saw as an average, if not necessarily consistent. Interest only are always a risk because the principle is never reduced and depends completely on a home appreciating in value for resale.
It’s absolute loan fraud to inflate income… whether it was a stated income or otherwise. That is something both lenders and borrowers did. Not necessarily the majority, but certainly a good amount of them.
Something else that borrowers did was take out cash equity from their homes by refinancing, and spending that cash on anything but improving their home asset. They just assumed that, even with no maintenance or improvements, homes would continue to appreciate in double digits annually. Never been true in history, and shouldn’t have happened over the housing bubble.
There is ample room for blame for Congress, regulators, lenders and borrowers alike. What makes me angry is seeing everyone defend uneducated borrowers as victims, who got themselves into subprime loans when they could have qualified for prime. This is as asinine as calling a person, who overpaid for a car because they didn’t shop around, a victim.
When someone is about to obligate themselves to this size of debt, they should shop around and educate themselves on what they are doing. It’s not like there isn’t a plethora of information out there, or professional assistance. If someone is so irresponsible, or downright stupid, as to buy every salesman’s line, then they are too stupid to own a home and take on that debt.
I think that anyone with common sense knows about how much they can pay monthly on a mortgage, just as they would know how much they could afford in rent. Many just thought they could refinance into ARM after ARM loan and keep false low rate loan packages going, playing the system to buy a place they couldn’t afford. That is the sign of an uneducated property investor.
There were some states, like Texas, that did not see the unnatural appreciation in their property values during this time. That’s because Texas has some State laws that limited HELOCs (home equity line of credits) to LTV (loan to value) not more than 80%. This helped keep the homes from being over leveraged in that State. Also, because they had an abundance of land and properties available, their appreciation didn’t’ go up like other States did. Then add the fact that they had better employment numbers than most of the other States and Texas has come out better than many.
However even with those advantages, they fall about in the middle in the number in the nation for the number of foreclosures per homes. So everyone has a problem coming out of this bubble.
There is a huge backlog of inventory that is seeping out slowly, and likely deliberately. To flood the market would tank the prices, and put even more people underwater. On the flip side, holding back to keep the prices artificially high is also not wise. Somewhere in the middle is a healthy flow that slowly backs down the prices of homes to be where they should, as they are still too high for income. Especially since rates are so low. Raise the rates, and home prices will again come down. And the Feds have to be able to control rates to control inflation.
I’ve said for a long time this isn’t done, and it’s more likely we have yet another wave of short sales and foreclosures coming our way to correct the market. It will have it’s plateaus and false “bottoms” along the way, but we are not done by any means. And I also think we should get rid of sex ed and tolerance curricula, and replace it with some basic economic education for those in public schools.
Outstanding/informative thread and comments.
I do have a comment on this:
Shopping for a home loan is an order of magnitude more complicated than shopping for a car. Everyone knows how to do the latter; it’s something that most people have to do at least every few years. Shopping for a home is often a once in a lifetime proposition. And comparing costs and prices involves a lot more than reading the Auto Trader ads. Sure, you can find where people are advertising low rates. But you have to sit down with the mortgage broker, submit your financials, and then wait until he presents you with a “personalized” loan package.
Remember, these guys and gals were working on commissions. No loan/No commission. The best loan for most people would be a 30 or 15 year fixed, at the lowest interest rate. But, for lots and lots of people, the payments would have been much higher, at first, than in the case of adjustable rate mortgages, which were offered in a dizzying array of structures. Fixed teaser rates, followed by markedly increased rates, down the road. Or fixed teaser rates, followed by a balloon payment. But the mortgage brokers want to sell you these loans. So they say, “don’t worry, by then your property will have appreciated and you’ll easily be able to refinance, at a fixed rate loan, if you like, and you’ll probably be making more money at the time.”
The problem was the securitized mortgages. When we bought our home, in 1979, our original mortgage was sold, held, and serviced by the same entity, Security Pacific Bank. So there was an incentive for the loan officer to make certain that we were credit worthy, because the bank would be stuck with the bad loan, if we weren’t. Through the years, our mortgage did get sold, every few years, to some other entity. But the entire mortgage was sold, intact, and the mortgage seller was responsible to the mortgage buyer for selling good mortgages.
With securitized mortgages, a small piece of our loan is then held by a thousand different entities. Shared risk, but with shared risk comes diminished incentive for due diligence, when the mortgage broker is transformed from a gatekeeper, who weeds out unqualified borrowers, into a commissioned salesperson, who is rewarded for selling the most lucrative form of loan but who has no skin in the game, when the loan goes bad. The perfect storm came with the capital glut of the early 21st century. Too much money chasing too few attractive investment opportunities — which markedly increased the demand for securitized mortgages, leading to a situation where there was too much incentive to make the loan with the highest yield and too little incentive to make the loan with the highest degree of safety.
I do agree with you, however, that certain borrowers should have known better. Those were all the people who jumped into the buy-the-property-and-flip-it game and got in over their heads.
P.S. What do you think of the (improved) housing start situation? It would seem that these are the most sophisticated real estate market forecasters around (the builders and those who lend to the builders), and they are betting with their own money, and not just making armchair predictions.
– Larry Weisenthal/Huntington Beach CA
@Larry, I’ll need to request a modicum of consistency from you. You are on record stating that CRA has been around since Carter, yet with no problems.
Well, securitzation of mortgages, via secondary mortgage markets or general bundling of notes… and before even the GSEs… predates that – first from 1910 to the Great Depression (no, it wasn’t the cause…), and then started up again in the 1970s. Actually instances of it centuries ago, but I’m using the more modern version as the base. I’ve used this analogy before. There is no problem with baking cookies and selling them out wholesale for distribution. The problem comes when you introduce cookies laced with arsenic into the supply chain… i.e. toxic mortgages. Securitization is not the culprit, and without it there will be far fewer loans available since banks have to hold the notes long term, and cannot free up the cash to loan to others.
A borrowers naivety about lending, plus the fact it’s the largest investment most people make, should be the heads up that you don’t rush into it without learning what’s going on. When someone is buying a home, they are surrounded by professionals. Combine that with the Internet, which was filled with information for first time buyers during the 90’s to now. There is no excuse for not doing your due diligence, and being responsible when considering taking on this much debt. Help was available all over the place.
And it was more than the buy/flip. Most people that got in over their heads did not do so with their original purchase, but by refinancing and pulling out cash… then spending it on anything but the house. The ACORN lady, Donna Hanks, who I wrote about in Feb 2009, was the perfect example of a greedy and uninformed borrower. She purchased her home for $87K, refi’d for $270K which, after closing costs, gave her a rough estimate of $175K cash out. She declared bankruptcy and went into foreclosure a year or two later. ???
Multiply a Ms. Hanks by a lot of people and it’s not surprising that many are underwater. It was just too tempting to use your house as an ATM, especially with the low rates. What would have been smart was to refi for the same mortgage balance with a lower rate, and skip the robbery of equity that can vanish with the wind. However some basic education about a home as an investment would have cured that.
INRE the housing starts… I believe it will backfire on them badly. They may be buying into the “we’ve reached bottom” meme, Larry. But the problem is materials are at a premium with fuel prices, and the shadow inventory will not remain in the shadows for long. But all will depend upon what buyer market they are catering to with their new construction, and the location. Foreign cash and high dollar property, beachfront, will likely do well. Foreigners are snatching up Florida beachfront with cash like crazy. But they are also doing so pretty cheap. A new construction home, with a higher base cost, is going to be hard to recover when compared to purchasing existing homes with similar amenities.
Larry and Mata Excellent discussion. I was a mortgage banker/broker in Irvine (ground zero) from 98-07. Plenty of blame to go around.
Note It’s 7/1 arm.
Oh my… thanks for catching my dyslexic typo there! 1/7 ARM… LOL! Didn’t even notice that when I scanned thru on a fast type check. You know, it wasn’t all that long ago that FHA was offering 3/1, 5/1, 7/1 and 10/1 ARMs.
BTW, in case anyone has missed it, FHA is also in need of a bailout it seems…. HR 4264, the FHA Emergency Fiscal Solvency Act of 2012, was introduced Mar 27th, and just passed in the House on Sept 11th with a vote of 402-7. Needless to say, there is no partisan disagreement that FHA is in deep financial doo doo…
Haven’t read the text to see all of what’s in it yet, but no one seems to want to talk about FHA being in financial difficulties.
Hi Mata,
I think that I have been consistent, but I don’t want to squabble about that. The two of us have already wasted too much of our respective spare time going around and around and, in the end, going nowhere.
What I’d like to do, if you and Wheels are willing, is to use our combined insights and experience to do what academics and politicians have failed to do, which is to come up with a mutually agreed upon and cogent explanation for the financial crisis of 2008. The problem is that both the politicians and academics (who include key Federal Reserve economists — most specifically Greenspan) all have personal skin in this game — either partisan politics, previous economic statements which failed to anticipate the house of cards leading to the financial collapse, or, in the case of Greenspan and the politicians, direct culpability.
I’d ask if we can approach this from the point of collegiality — trying to come up with an essential “truth,” as opposed to starting out with the premise that we are lawyers for our respective political constituencies (“clients”), and we are digging for data or opinions that support our clients and attack the opposing side. This needn’t be as large of an exercise as it might appear.
I think that the essential facts are nicely summarized in a remarkably clear, cogent, and mercifully brief (well, 60 or so pages) retrospective analysis prepared by Greenspan himself:
I intentionally offer up this analysis/summary, from among the several good ones which are available, because many people (including me) put most of the blame on Greenspan, and because Greenspan’s analysis (linked above) is trying to lay out the conservative “case” that it was the political mandates and pressure to expand the affordable housing market which were the central cause of the financial meltdown (note that this doesn’t include the CRA, per se, which absolutely no one blames as having any sort of a meaningful role, saved for uninformed amateur web bloggers).
Anyway, Greenspan lays out the data, and Greenspan argues this from the conservative point of view; so I’ll present Greenspan’s document as the template for discussion.
In all the 60 some odd pages, the following passage is what I find most directly relevant. I’ll start out by simply quoting it, then, in a day or two, I’ll provide my own points of view regarding these data:
Below are Greenspan’s own words, from the above-linked document:
Again, I’ll provide my own interpretation of the same factual data in a day or so.
– Larry Weisenthal/Huntington Beach CA
I don’t think that’s possible, Larry. Because I honestly see this as a result of regulation, deregulation, lack of oversight, failures of the elected ones to recognize the impending result, Greenspan’s own policies contributing to the bubble inflation, abuse by both lenders and borrowers, lack of basic economic education when it comes to housing, plus the potential that this was exploited by a form of financial terrorism (i.e. oil price unnatural run up). With so many influences creating the perfect storm, what do you want to pick as “a cause”?
What may be more prudent is the solution to future housing bubbles. And there I suspect you and I will disagree at what level that should occur. I believe that is better handled at the State level… i.e. the examples of Texas State law that minimized the impact… than at the federal level. It is, after all, mostly absorbed at State levels when these bubbles burst, affecting their property tax revenues and values.
Speaking of Greenspan, and leaving aside his irresponsible decision to leave rates dangerously low for longer than needed and focusing on his comments about subprime. There is a vast difference between predatory lending and subprime. The former is illegal and can be policed.
Subprime, on the other hand, is just a category that includes less than prime borrowers, and the banks hedging their risk by imposing higher rates and criteria that is appropriate for a borrower with a past that doesn’t measure up to the prime loan standards.
Borrowers with high income/debt ratios, documented prior bankruptcy or foreclosures, or lower credit scores fall into a grey area bracket of being higher risk, but not a prohibitive risk. Therein lies the reason that subprime exists, and has existed for decades. However there is no denying that it’s rise in popularity predictably followed bank regulation demands made in 1996.
As Greenspan noted:
As I said, this has been a part of the problem. The lowering of standards, plus mandate for increased burden of riskier loans on the GSE’s books, happened in 1999. By 2004, Congressional hearings were conducted on the danger of these lowered standards, and the increased asset/balance accruing on the GSE’s books. The GSEs, of course, also engage in securitizing their assets for the same reason it’s done in the private financial world – to free up cash flow to enable more loans.
And now, as I mentioned above, FHA is in the same predictable boat. While these are not subprime or predatory lending, the criteria is lower than that of conventional loans for credit scores, income to debt ratios, and required down payment. They have also increased the FHA mortgage insurance costs twice in the past couple of years, and added mortgage insurance requirements (albeit considerably lower) to the USDA loans that did not require it before.
FHA’s fragile financial status was always going to happen because the day after an FHA loan closes, with just 3.5% borrower equity, is virtually upside down in value when you consider the costs of a resale piled on. Then there is the reality that homes were not going to be appreciating in the coming years, but declining in value. FHA loans have been the number one choice since the collapse of the bubble… ergo the increased holdings requiring the House to overwhelmingly vote to set up an emergency capital fund for what they know is coming.
This is also the reason that Congress has been kicking around the idea of changing the minimum 3.5% down to 5% down for FHA loans. USDA and VA still remain 100% government insured/guaranteed loans. However USDA has .3% mortgage insurance requirements where VA still has none. (and for our veterans, I’m good with that….)
The best hope for those who have purchased between 2008 and now, using FHA or low/no down loans, is that they are planning to be there for the long haul since appreciation, anticipated unemployment and economic conditions do not favor a rising value or rapidly recovery in the housing market in the near future.
But again, Greenspan’s criticism of securitization rests not on the practice of freeing up cash flow by bundling to increase the ability for new loans, but focused on the quality of loans and high risk of those being bundled. Again I remind you of the analogy of selling cookies, and the danger of introducing cookies laced with arsenic into the distribution chain.
The problem is not with the distribution chain. It is with the quality control of what is being distributed. Congress and the Feds had the power to oversee that quality and instead of doing so, both did the opposite – by contributing to the climate of allowing “arsenic cookes” to be baked and sold.