patrick.net

Make that: sane rhetoric. :)

Now that Obama is president, will Freddie and Fannie be made GSE again?
Will housing bubble come back?

"Will the housing bubble come back?"

I'm watching that VERY, VERY closely. We will see it coming this time. Fool me once... yadda, yadda, yadda.

Nov 5, 2008

THE BEAR'S LAIR
A repeat lesson for voters
By Martin Hutchinson

The number of economically damaging policy ideas imposed on the United States has greatly increased in the past few months. However, from the statements of the presidential candidates, the next few years may turn this storm of bad ideas into a blizzard. Those with an emotional attachment to the US economy should brace themselves for trauma.

The new salience of bad economic ideas is not particularly surprising. The US economy is heading into an economic downturn that promises to be at least as severe as those of 1974 and 1980-82, whose memory is already fading a generation into the past. Additionally, the 2000-07 period was one in which US voters made very small if any income gains, with such gains arising only through refinancing of ever more gigantic home

mortgages. Meanwhile, the distant and dislikable titans of Wall Street apparently scooped up all the money generated by the economy.

Now the housing bubble has burst, the average jaundiced voter naturally sees the free market system and the George W Bush administration as responsible for the recent not-particularly-pleasant years and the economic horror that has followed. Claims by Republican politicians that the debacle was all the fault of the housing finance agencies Fannie Mae and Freddie Mac, while partly true, are wholly unconvincing.

With voters miserable and facing a disastrous economic position that they believe was caused by free market excesses, it is not surprising that they are looking favorably on statist nostrums. Both political candidates have propounded bad ideas, Democratic Party candidate Senator Barack Obama more than Republican John McCain, largely because he has more ideas in general. In addition, there are a few bad ideas that have embedded themselves into the system, accepted by both political candidates and the political class as a whole.

McCain's bad economic ideas are few in number, but in terms of economic ineptitude they're doozies. Typical of them was the proposal for a gas tax holiday over the summer, which since supplies were tight would have driven up consumption, transferring wealth from the US government to the Saudis. In his urge to connect with populist-minded voters, McCain appears either not to have consulted any economists on this bizarre scheme or to have ignored their advice when presented.

Then there's his proposed US$300 billion bailout of subprime mortgage borrowers who cannot make their payments. Like the Troubled Assets Relief Program of Treasury Secretary Henry Paulson, this appears principally to be a vehicle for relieving taxpayers of their money. By providing benefits only to those mortgage payers who are not paying their mortgages on time, it rewards the most over-optimistic borrowers and the most feckless lenders at the expense of those who restricted themselves to more manageable mortgages or who maintained careful credit standards over their mortgage lending (not that there appear to have been many of the latter.)

Even if the $300 billion was dropped from helicopters (no thanks, Mr Bernanke, we'll call you if we need you) it would reduce the value of mortgage loans outstanding, probably by more than its nominal amount, by increasing the chance that borrowers would fall into arrears in order to qualify for a bailout.

McCain's third major bad idea is the design of his "cap and trade" carbon emissions program. Global warming may or may not be real. It seems likely that the most effective approach to combating it would combine programs of population control (to reduce the number of future carbon emitters) with mitigation efforts, such as higher seawalls and heat-resistant crops. Even if restricting carbon emissions were attractive, a carbon tax would be a more efficient way to achieve it than a "cap and trade" system.

Finally, at the fourth layer of economic inefficiency (although to be fair, the first three layers seem to be common to almost all politicians), McCain adds an additional nonsense by giving away emission permits. That turns a more or less market-oriented system for achieving something probably pointless into a government handout system. Permits under McCain's system would be allocated by bureaucrats, either according to some faceless and doubtless erroneous formula or according to the amount of campaign contributions they had given. The arena of government favoritism would thus be considerably enlarged, that of the free market correspondingly diminished.

Turning now to Obama, some of his proposals are well designed and appear likely to achieve their objectives without creating gross economic distortion. It is for example likely that a capital gains tax increase from 15% to 20% will indeed yield additional revenue over the long term, although a further increase beyond 20% might not - wherever the Laffer optimum for capital gains taxes lies, it is almost certainly above a 20% marginal rate. Likewise, Obama's healthcare proposals mix increased government subsidy with considerable reliance on free-market cost reduction measures; they appear well designed if you like that sort of thing.

The principal problem with Obama is his deliberate failure to define himself. The moderate Obama, with a University of Chicago economic advisor and a keen brain attuned to the free-market system, would probably be a pretty good president, at least in the economic sphere. However, there is also another Obama, possessor of the most liberal voting record in the US Senate and supporter of many of the more damaging schemes beloved by House Speaker Nancy Pelosi and the barons of the Congressional Democrat left. Finally there is the shadow of a third Obama, born and bred a street radical, friend of ex-Weatherman terrorist William Ayres and supportive parishioner of the highly anti-capitalist parson Jeremiah Wright.

It is an interesting question whether Ayres-Obama or Pelosi-Obama would be more economically damaging - their prescriptions would clearly be very different - but there is no doubt that by relying on moderate-Obama being fully in control throughout, we are taking a considerable chance.

Obama's tax proposals come in several versions, reflecting his multi-facetedness. One version would simply reverse most of the Bush tax cuts, plus add a moderate social security surcharge for high incomes, taking the top marginal rate of Federal tax up from 35% to 42% or so. The other, produced by Pelosi-Obama, would sock top incomes with the full social security charge and add a further tax increase, taking the top marginal Federal rate well up into the mid-50s (and adding state tax on top of that.) Pelosi-Obama's tax proposal would be highly economically damaging; moderate-Obama's would not.

On trade there is a similar dichotomy. Renegotiating the North American Free Trade Agreement and using trade agreements to enforce labor and environmental standards is a Pelosi-Obama approach that could potentially have the same effect on world trade as the infamous 1930 Smoot-Hawley tariff. Moderate-Obama's advisors say he doesn't really mean it. We'll have to see.

On housing, moderate-Obama opposed a three-month foreclosure moratorium. Pelosi-Obama favors it and appears to be dominant here. Moderate-Obama was right; such a moratorium, like McCain's foreclosure subsidy, would be highly damaging to the value of outstanding mortgage debt, worsening the banking system's balance sheet problems.

On Wall Street, Pelosi-Obama is largely dominant, denouncing greed and calling for much tighter regulation. (Of course, the crisis also brought out a hitherto unexpected streak of Pelosi-McCain.) Pelosi-Obama also governs Obama's co-sponsorship of "card check" legislation, by which the unions would no longer have to win a secret ballot to gain representation at a workplace but would only need to strong-arm the weaker members of the workforce into signing a representation card. While failing to address the problems of the poor, who generally do not have unionizable jobs, that legislation would drive the US workspace sharply back towards the French model of union dominance of key industries, with consequent decrease in US economic efficiency and competitiveness.

Some of Obama's other economic ideas seem to derive from Ayres-Obama. His attempt to tie student funding to hours of community service worked derives less from the unionized Pelosi Democrats than from a street-radical's urge to make snotty middle-class kids experience the "real world" of the streets.

Likewise, his 2001 regret that the Supreme Court "never ventured into the issues of redistribution of wealth" and "didn't break free from the essential constraints that were placed by the Founding Fathers in the Constitution" was pure Ayres-Obama. Lovers of the rule of law and well-established property rights must hope that at least on this front Ayres-Obama will remain dormant through an Obama administration.

Finally, there is Obama's Clean Technologies Venture Capital Fund, deploying $50 billion of taxpayer money over five years. The nature of this venture depends on whether Pelosi-Obama or Ayres-Obama is dominant in its creation and design.

A Pelosi-Obama fund would promote unprofitable ventures by large unionized companies with proven but uneconomic technologies in politically important regions - similar to the Bush administration's ethanol boondoggle. An Ayres-Obama fund would promote street-environmentalism, devoting its resources to wholly unproven back-of-an-envelope ideas with no obvious profit motivation that were promoted by urban hustler groups. Neither would be economically or environmentally useful - a carbon tax, tilting the playing field towards environmental technologies, would be much more likely to produce useful enviro-tech advances.

In many ways more frightening than the bad ideas supported by one or other candidate are those for which there is a consensus.

For example, both parties now appear to believe in larger government. The Democrats welcome it explicitly, whereas according to Organization for Economic Co-operation and Development (OECD) statistics US public expenditure bottomed out in 2000 at 34.2% of gross domestic product and has now increased under Republican government to 38.3% of GDP in 2008. Given the enthusiasm of both parties for increasing it further, this trend is likely to continue.

As I have discussed previously, OECD data since 1960 shows that high levels of public expenditure and rises therein have markedly depressing effects on economic growth, being together responsible for over 50% of the differences between countries and periods in growth rates. Little wonder therefore that US growth over the past few years has been sluggish; it is likely to get more so.

A second idea on which there has been general consensus between presidential candidates, although a modest rebellion in Congress, has been the TARP. The original idea of devoting $700 billion of taxpayers' money to buying the economy's least valuable assets, surplus securitized mortgage bonds, has now apparently been abandoned. At least one can hope so - by diverting scarce capital from more productive uses it would have depressed economic growth markedly.

However, instead of breathing a sigh of relief and letting taxpayers off the hook, Treasury Secretary Paulson has taken to using the TARP as an all-purpose slush fund, bailing out the banks and apparently in future providing subsidies to the automobile industry, local governments and anyone else with political connections who needs it. The result is that Treasury borrowing in the year to September 2009 is now estimated to be $2 trillion, around double last year's level. Needless to say that too will damage the economy. TARP was a terrible and poorly implemented idea; no doubt that is why it is so popular with the political class.

However the bad economic idea for which support in the political class is most whole-hearted is that of excessively low interest rates, far below the rate of inflation. The financial crisis has been caused not by high interest rates but by excessive leverage. The three-month interbank dollar LIBOR peaked at 4.82% and overnight LIBOR (London Interbank Offered Rate) at 6.87%, neither representing "tight money" in a currency whose inflation is still running at more than 5%. Even those who decry over-loose monetary policy as responsible for the 2002-06 housing bubble fail to identify its responsibility for the stock bubble that preceded it in 1995-2000.

As for former Federal Reserve chairmen Alan Greenspan and the present incumbent Ben Bernanke, they are wholly unrepentant of their monetary profligacy and to a large extent remain the heroes of the political class, in spite of the devastation they have caused.
It is this item of public education that must be stressed repeatedly by those who seek the welfare of the US economy. Deregulation was only a minor cause of the housing bubble and subsequent debacle; the true cause was excessive money supply creation by the Fed, which is not a private sector free-market entity but an agency of government.

It is these lessons, that over-easy money will bring long-term disaster and that government has been primarily responsible for this as for so many previous crises, which must be taught to the American people. Only when voters have learned their lessons can we hope that politicians will no longer find political traction for cockamamie and damaging economic nostrums.

The campaign against Greenspan and Bernanke, to get Bernanke fired and Greenspan de-deified is not an optional meddling in ancient history. It is the most crucial economic struggle of our time.

Will housing bubble come back?

IMO, a minor Spring bounce is in the cards.

Not investment advice

Looking at Yen, the credit market appears to be readily unfreezing.

Not investment advice

I do not think there will be a spring bounce. Except for REO, prices are still too high. And as Patrick has pasted permanently to this site, mortgage rates do matter and ever our 1% FFR is not making a difference. For the time being, securitzation is dead. Lay-offs are here and they are picking up speed. The GDP contraction is expected to be as bad as 2% for the Q4 2008 alone - which is as deep as any recessions ever get over their entire duration.
I think people are still not getting how bad this will be.
CA is looking at a minimum of $10b budget shortfall.
National debt now at $10.5t,going to $11t and once they move fannie and freddie onto the feds books (s they should) we are over $15t is debt.
By spring, the New, New Deal should be taking shape. Promised jobs so far are: green and teaching and I am sure some kind of infrastrucutre is coming. In fact, power grid comes to mind.
So, no, I think by Spring fear will be the strongest emotion and it will be hard to sell the $1.4million dollar BA homes, now discounted to $1.1, when job loss and budget crisis are the lead headlines.

Duke,

you are right. Any optimism I hear out there seems to be assuming that the housing drop is over.

Perhaps our government has staved off a disaster that was a consequence of housing dropping 15% nationwide. BUT, they had to prop up the ENTIRE financial system to do it.

What will they do after the next 10% decline in housing I wonder? They are out of bullets. They will be staring at stimulous/default OR direct pain for pretty much everyone. That choice will be coming sometime over the next year.

I'm trying to find anything in the economy to be optimistic about, but the negatives are just too pervasive. A month ago, you could fool yourself by saying the crisis is a financial one, but the economy is on strong feet. That hope has been confirmed a whopping FALSITY.

Personally, I don't think home prices will stop dropping in this environment until the monthly payment on a 20% down 30 year fixed loan at current rates is LESS than the monthly payment of renting the same property.

Too many people are getting burned... and they won't forget it any time soon.

I think people are still not getting how bad this will be.

This is why a minor Spring bounce is still a possibility. ;)

But if the stock market gets hit earlier than Spring...

I'm afraid everyone is right that the economy will get worse, maybe MUCH worse before it gets better.

I think we just saw an election (pre-)bounce in the stock market, but I suspect it will not last.

I do not think there will be an election bounce in housing. Spring seems too distant. even to think about.

Not that I'm wishing for a bounce, I would like prices to revert to the mean, like everyone else here.

The 5 Trillion dollar question is how to allocate (or assign) the losses from the housing market. Spread it out on everyone through generic inflation, or let those who deserve the responsibility take their punishment. In the end, I expect there will be a mix of the two. I'm all for 100% punishment here, but it may not be politically nor practically possible.

I'm in a happy but somber Obama mood. He is a great man, but he cannot perform miracles in short order. It will take time to fix all of this. Give him a chance, and I think many will be surprised what this man can accomplish.

John McCain gave a gracious concession speech, but I admit I am not sure I believe what he said. I hope all will give Obama the chance to get us back on track.

I still find myself (sadly) eager for some show trials. There was so much fraud that prosecuting a few thousand people would be cathartic. Especially people who: lied about income, lied about primary residence, lied on appraisal, max HELOCed on a 0% down and walked away, etc.
I would love to see some of the recourse loans get psuhed so that banks do go after other assets.
In the end there is a ton of money sitting in the poockets of: CEOs like Mozilla, lying apprasers, lying realtors, lying mortgage brokers, fraudulent specuvestors, lying bond rating companies, lying IBs.
That money could go a fair way to relieving some of the harm going on.

Yet there were millions and millions of dollars to turn school kids into political footballs over gay marriage.

Duke,

"Especially people who: lied about income, lied about primary residence, lied on appraisal, max HELOCed on a 0% down and walked away"

I'm not sure maxing HELOCs and walking away constitutes fraud. The others sure do.

A glaring omission I find in your list is the banks themselves. As well as the rating companies.

They should definitely go after those who have committed fraud for profit. I doubt they have the political will to prosecute small guys who just wanted a home.

The best way to educate the public is to let them lose their shirt. But again I doubt this is going to happen.

Moral hazard begets moral hazard.

Duke, yeah. Maybe we could create a special mark on people's credit report that designate them as convicted financial felons. That ought to put the fear of god into the small-time crooks that were part of the bubble.

I wonder about the cost of prosecution, though.

I wonder about the cost of prosecution, though.

Too much.

They should compound the duration of foreclosure marks on the credit report though.

If a single foreclosure stays on for 7 years, two foreclosures should stay on for 14 years.

If the FB has 10 foreclosed houses, the marks should stay with him practically for the rest of his life.

People should first look at managements who made away with millions of dollars and still doing it now( ex: Major Banks have set aside something like 120B for year end bonuses. Govt. Investment about 150B).

Let's get this fixed first. Let's fix the bigger hole here, then we can look at smaller ones.

sa,

I think that is right. Go after the big crooks first. More fair, and better return on the investment in prosecutorial effort.

...but they need to go after some big-wigs in ALLl of the related industries. For example, do not let NAR and David Lereah off the hook, even if it is not practical to go after individual realtors.

I agree, we need to go after all crooks. Initially they need to go after few people and send a strong message for the rest.

I think a highly publicized campaign by the IRS could do wonders for morale. Start with the $250k capital gain fraudsters who did not actually qualify for the expemption, and then move on to flippers who walked away (with cash in hand) from a property that was not a "qualified principal residence" as defined in the Mortgage Forgiveness Debt Relief Act of 2007.

I just know that some of you will appreciate this:

Message from the President-Elect to Mr. Market

Hat tip to JimPortlandOR, over at Calculated Risk Blog

OMG, I sent that picture to everyone I know who isn't sensitive to the F-bomb.

Prop 1A passed!

99.5% ( 25,318 of 25,423 ) precincts partially
or fully reporting as of Nov. 5, 2008, at 3:34 p.m.
State Ballot Measures

A - Safe, Reliable High-Speed Train Bond Act
YES: 5,053,442 52.2%
NO: 4,641,088 47.8%

http://vote.sos.ca.gov/props/index.html

Looks like high speed passenger train travel WILL become part of the USA experience, at least in a decade or two.

http://www.cahighspeedrail.ca.gov/

http://tinyurl.com/69n7mw

Prop 1A passed!

My other post in moderation for the excessive dual links!

@Bap33
all the way back to the philipines... not a hunch, I know of several people that bought various houses as investments and would talk crap about not buying and how housing always goes up. One lady has or had 10 houses... I just giggle every time I see her.... Another older guy took his money from housing and moved back home to the philipines just in the nick of time, he was the only person I know that made any money off of it.

Congratulations, patricket.netters, at least in Ca. The champers must be flowing, schadenfreude freuding, etc. It remains to be seen what the new administration is going to do about the whole mess:

http://www.mybudget360.com/california-housing-prices-down-41-examining-the-summer-selling-season-and-future-trends/

What a difference a year makes. In May of 2007 the median price for a California home was $595,000. Today the median price stands at $350,140, a drop of 41% from the peak. The drop in itself is stunning but what is more amazing is the speed in which this correction has occurred. The previous bubble which was seen in Southern California saw prices drop over a period of 6 years following a gradual trajectory. This time, that is not the case. There are many reasons why this correction has happened so quickly and in contrast to the other one, is very different even though it occurred in the same location.

Oh my goodness, I can't believe this story. Everyone knows that fine art only goes up in price.

www.nytimes.com/2008/11/06/arts/design/06auction.html?hp

"In a hushed salesroom at Christie’s on Wednesday night, works by a wide range of artists, from Manet, Cézanne and Renoir to Rothko and de Kooning, failed to sell, and prices for things that did find buyers often went for far less than what they would have a year ago. "

Peter P Says:
a minor Spring bounce is in the cards.

There is that little thing called "winter" to get through before you get to spring. :-)

What should we call this winter?
"The Underwater Winter"?
"The Winter of Dunk?"
"The Winter of Nowhere to Hide"?

I am wary of the claim that median prices are down 41%. With 50% + of home sales in CA coming from REO we are seeing desperate banks get what they can in the face of future losses.
Hmm, this article has forced me to look much more closely at the Case Shiller methodology. I can see problems. By not excluding REO and looking for resale pairs, we are specificially picking the most distresssed part of the current market. Notably, specuvesting homes that did not pan out.
I guess that leaves me back with the notion of:
1) down payment availability
2) interest rate
3) Multiple of household income
4) rent equivalency

Sorry to ramble here, but we may be seeing an intersting secular shft. Recent home price decline in CA may have been a pure function of RE as investmet smf the failure of exotic finance. Now we may be seeing the other inherent risk part of RE - job loss. People lose homes in recession and depressions for the simple reason that they have no income to make their payments. It is scary to think that part of the downturn is only starting.
This could get really ugly.

COULD get ugly? Dude, where have you been?!

It already is ugly. The data just hasn't fully captured how ugly it already is.

CA is teetering on the cliff. Another 5% drop in home prices will send it over. There is a good amount of people that will tolerate a "correction". But almost no one is going to tolerate a crash. Not when you have the next 20-30 years of your earnings tied up in that asset.

That next 5% will break almost all of the people that were willing to ride it out.

The good part about this is that I think it will happen fast. I believe CA will see the bottom before the end of 2009. That is of course assuming that our economy has not also fallen off a cliff.

Different Sean, that was a rare person to see lately. Welcome back, stick around for a while :-).

Duke,

Right observation. Including distressed sales could skew the data to downside. We might see the steepest decline when layoffs start.

SP:
What should we call this winter?
“The Underwater Winter”?
“The Winter of Dunk?”
“The Winter of Nowhere to Hide”?

The Winter of Their Discontent

What should we call this winter?
Nuclear Winter: the fallout from ARMageddon

LOL!!! Much better. :)

Fuzzy,
I coentend it is not that bad yet. We know a great many homes going to REO were failed flips, 0% down walk-aways, extract-the-cash-and-walk-aways, etc. The hurt wa real, but mostly the banks and thus by extension the pensions funds, foreign investors, etc.
But good 'ol misery is comin when it isn't that new $600k spec home in Sac or Los Banos. Bad is when Mtn' View drops from $1.1m to $500k and people lose that $400k of actual, real equity made out of 10 years of dual inome pumping dollars into mortgages.
Misery is when: AMD, EBAY, Yahoo, startups, etc employees lose their jobs, cannot find another, cannot meet their debts and slowly watch their home slide away.
I guess what I am saying is, bad is when resonsible people who understood risk lose their home because of a really bad economy. As opposed to people who lost their mad money on second homes becuase RE was the can't miss investment of the early 21st century.

I guess what I am saying is, bad is when resonsible people who understood risk lose their home because of a really bad economy.

Well said.

Over the past few years, people who understood risks were not reasonable people, judging by societal standards.

Bad is when Mtn’ View drops from $1.1m to $500k and people lose that $400k of actual, real equity made out of 10 years of dual inome pumping dollars into mortgages.

You predict that Mtn View prices will fall to 1998 levels? I presume you means a $900k mortgage started in 1998 that has been paid on for ten years. In that case, only about $156k in "real" equity would be paid off (at 6%).

Or did you mean a $500k house in 1998, rising to $1.1 million, "ought" to be $900k (your $500k + $400k), that will fall back to $500k?

Interesting. Fortune magazine now describes deflation as the "new" threat: http://money.cnn.com/2008/11/06/news/deflation.fortune/index.htm

New to whom?