One Sign That Markets Are At Bottom…

…is pundits who declare how far they really have left to fall, and calling for immediate government action. Like this NYT editorial:

The housing bust is feeding on itself: price declines provoke foreclosures, which provoke more price declines. And the problem is not limited to subprime mortgages. There is an entirely different category of risky loans whose impact has yet to be felt — loans made to creditworthy borrowers but with tricky terms and interest rates that will start climbing next year.

Yet the Senate Banking Committee goes on talking. It has failed as yet to produce a bill to aid borrowers at risk of foreclosure, with the panel’s ranking Republican, Richard Shelby of Alabama, raising objections. In the House, a foreclosure aid measure passed recently, but with the support of only 39 Republicans. The White House has yet to articulate a coherent way forward, sowing confusion and delay.

And then there is how people in the market react in reality (via Calculated Risk, an indispensable blog on the topic):

Southern California home sales surged last month to the highest level since August as bargain shoppers took advantage of price slashing. Although some higher-end costal markets also posted gains, the swell in transactions mainly reflects more sales of homes under $500,000 in inland areas where depreciation and foreclosures have been greatest, a real estate information service reported.

Ouch.

26 thoughts on “One Sign That Markets Are At Bottom…”

  1. I’m quite confused by this phrase: “loans made to creditworthy borrowers but with tricky terms and interest rates that will start climbing next year.” Borrowers who can’t manage “tricky terms” or climbing interest rates don’t appear to be worthy of the credit they received.

  2. I don’t know. It’s getting worse in North Carolina. I’m in an area that’s been growing steadily (ie on the beach) but I found a whole street of houses that have been on the market for 9 months… and every month a new house is suddenly abandoned.

    I have a friend who does foreclosures real estates for banks, and is constantly hiring new staff. He points out that the people who are buying the foreclosed house are also the same type of people who are going to foreclose on it later. It’s just repeating the same bankruptcy with a new group of people. That will not help anyone.

  3. PD,

    I might be able to help clear up your confusion. I believe that the term “creditworthy borrowers” was not intended to mean “worthy of the credit they received” but rather was used in the more traditional and commonplace sense, meaning that their credit ratings, under normal circumstances, would allow them qualify for traditional mortgage loans. What is being suggested here is that the credit terms they have received lie outside normal parameters and make the loans riskier than they appear on their face.

  4. On the flip side of the coin, a lot of the younger folks around the office, who owned starter homes out in the boonies, at the end of ridiculously long commutes.

    Now they are either buying starter homes closer in, or trading up to homes located much closer to the office than they used to be able to afford. Which is a double hit, as it also saves them a ton in transportation costs, given the high gas prices.

    I suppose the news is good or bad depending on whether or not you represent wealthy property owners or just starting young families. I think I can guess where the NYT is…

  5. AL, I’d advise some caution in using the situation in one area as a guide for a national trend. I’d be especially cautious if that one area were as anomalous as Southern Califorinia.

  6. mark, the Alt-A loans are sometimes called “liar loans”:http://www.bankrate.com/brm/story_content.asp?story_uid=22801&prodtype=mtg because the borrower did not have to document income or assets. (“Everyone knows the cheating occurs and no one asks too many questions . . .”) For this convenience and a higher interest rate, the borrower also did not have to make regular payments. I think the notion that these borrowers are credit-worthy is an exageration (see no evil, speak no evil), but worst I think its an actual example of pro-business bias on the part of the NY Times.

  7. The hard-money lending group I’m in is very active now, after being nearly dead for almost a year. (And we had no defaults or losses on a couple dozen mortgages)

    SoCal rose hard and fell hard, but still has significant population input, so it’ll stabilize.

    My feeling is that the housing market is “at bottom”, at least in my area, and is recovering. OTOH, high gas prices are causing secondary effects; areas far from work are not recovering, while areas near job centers didn’t fall much and are holding up well. My guess is that “exurban” areas with car-only access are not coming back for awhile, if ever. The days when people did 150 mile commutes to $30K jobs in pickup trucks are over.

  8. PD

    “I think the notion that these borrowers are credit-worthy is an exageration …”

    based upon what? Holden Lewis seems to assume the borrowers lie about their income (though not the other 2 criteria he lists, which are outside the borrower’s control) based not on any evidence but on his personal view of human nature. The NYT speaks of them as “generally” credit-worthy, which I would guess is a little more accurate than the expectation of wholesale lying. I suppose the question is how do you legitimately characterize such a large & diverse group. If 60% are not lying, but 40% are, which description is more helpful, given the context? The context here is not about making personal judgments about individual borrowers, but to what extent the Senate needs to act in order to prevent further declines of millions of people’s chief asset.

  9. mark: “liar loans” is an industry term, it doesn’t mean that everyone with an alt A loan is a liar. See “CNN”:http://money.cnn.com/2007/03/19/news/economy/next_subprime/index.htm?postversion=2007031917 “Forbes”:http://www.investopedia.com/terms/l/liar_loan.asp It means that the borrower paid extra for less due diligence. To say that alt a loans are “made to creditworthy borrowers” is an assertion of as much faith as fact. And here it reveals the NY Times bias.

  10. I am furious my tax dollars are used to bail out people who made bad loans, bought securities backed by bad loans, and took loans they could not pay. I have been restrained and cautious in my borrowing, stayed carefully within my income, driven older paid-off cars etc- now I am to pay the way for the greedy and profligate?
    Why should they be exempt from consequence, and the frugal be forced to bail them out?

    As far as pricing goes, folk have been complaining about the escalating cost to get a house, now the Government is talking about artificially maintaining the high prices, instead of letting the market correct.

  11. Hillary has a plan. She just tells the lenders they cant change their rates. What could possibly go wrong with that?

  12. Without being any kind of expert in the field, it seems to me that lenders are not in business to trick borrowers into defaulting, as if missed payments and foreclosures are a profits windfall.

    It sure does work that way in the movies, though. How many times have you seen the cliche: Evil Old Man Potter loans money to poor Mr. Humble Hat-in-hand, and then cruelly demands that he pay it back. I wonder if some people believe the stuff they see in movies?

  13. PD,

    I was referring to this (from your link):

    “With most Alt-A loans, the borrower lies about his or her income, inflating it to qualify for the mortgage.”

    Not sure that is any less a faith-based assumption than the NYT belief that most Alt-A loan borrowers are credit-worthy. If the difference between the two reveals any biases, it is biases about human nature. At least, so it seems to me.

    Raven,

    Not saying it is a correct one, but the theory behind the bailout is that the consequences of so many foreclosures would be economic damage to the general economy and would result in economic pain for all of us, i.e., a shallow recession or a slow-down is better for all than deeper recession. As much as you may hate to contribute to a bailout for risky lenders and borrowers, not doing so would be worse–or so the theory goes, I’m told.

    Should have listened to Polonius, I guess.

  14. Glen,

    I’m no expert either, but I think that so long as home prices go up Evil Old Man Potter ends up with a house that was worth more than the price Mr. Humble paid, plus all the interest Mr. Humble paid before he defaulted. Of course, Evil Potter wouldn’t be lending Mr. Humble money if he thought the price was going to be going down. I think that’s what collateral is all about.

    & the trick part is not about getting borrowers to default, it’s about getting them to pay more interest than they were aware of. The foreclosure is the safety net…again, assuming prices keep going up. Thus, the current crises.

  15. *Raven at 10*
    _Why should they be exempt from consequence, and the frugal be forced to bail them out?_
    Exempt from consequence, no – but as mark brought up, the problem isn’t with one person or even a hundred foreclosures. It’s the risk that these problems will spread. Dropping property taxes, inviting crime in where there are clusters of empty houses.
    If hundreds of thousands of people go into bankruptcy, their spending dries up. They stop buying things, and it sweeps through unrelated business even if you are otherwise frugal.

    *Glen at #12*
    _Without being any kind of expert in the field, it seems to me that lenders are not in business to trick borrowers into defaulting, as if missed payments and foreclosures are a profits windfall._
    That’s how it used to be, when the bank kept onto the paper. For the past 10 years (and especially the past 5), these loans no longer stayed local – they would be packaged up and sold off to anyone who wanted. Along the way, anywhere from 3 to 10 people would take their profit off it. You don’t care if they default or not from a financial perspective, since you already got your $5000.
    It’s only long term, when people start to regard you as a fake, when you have to worry.

    So, you ended up with the people who assumed the risk (large investors, especially foreign) have no relationship with the people who actually started it.
    And if a default does come – you end up with that loan being splintered off, and having anywhere from 1 to 20 owners of the title.

    I’ll tout it again – This American Life, ‘Giant Pool of Money’ podcast. An hour long, but great information.

  16. Glen at #12

    I was in the business for over a decade and saw banks make ridiculous loans all the time. Mortgage Brokers essentially told them what to do. It happens all the time at the end of a housing boom. This time it was more over the top than usual.

    My feeling is that the government should not be involved with this on any level. But I also believe that what is good for the goose is good for the gander. If the American people are dumb enough to be willing to underwrite the horrible business decisions made by those idiots at the large investment banks than they should be willing to take on the the problems of the idiots that made and took those loans.

    The difference between these two sets of idiots is that the Investment and commercial banks should know better, yet they are the ones that are getting the government guarantees.

    BTW, shouldn’t we change the honorifics at the Fed From Board of Governers to Commissars?

  17. Let me chime in with a comment along the lines of Dave and TOC. The situation is more serious than a foreclosure crisis because of the absurd creations (CDOs, etc.) that were created from the dangerous mortgages. Once again there was a perverse incentive at work, where various financial houses, rating agencies, etc. got huge fees up front for their work in devising these monstrosities. Unfortunately, the leverage that made such securities attractive at the beginning make them difficult to unwind once the bubble has burst. There was a lot that government could have done to prohibit these artificial creations or at least to discourage them (e.g., by realistic mark-to-market rules), but (once again) we’re all going to suffer from the fable that the market is perfect. In this case, it’s highly distorted by the ability to socialize losses while privatizing profits.

    As far as timing, volume of penny stocks is often huge. The fact that sales are high right now may mean the slide is over, but literally I wouldn’t bet on it. From preliminary data that I skimmed, it looks like the situation is better the closer to an urban area one is.

  18. _”I’m no expert either, but I think that so long as home prices go up Evil Old Man Potter ends up with a house that was worth more than the price Mr. Humble paid, plus all the interest Mr. Humble paid before he defaulted.”_

    Except that the value of the house has dropped now Old Man Potter is stuck with a house worth less than he advanced… while Mr Humble skips away into bankrupcy leaving the poor invalid banker holding the bag. A homeowner can hold onto a peice of property worth less than they owe (if they can afford it) until the market rights itself. Lenders probably can’t do that and will have to sell the property for what they can get and take the loss.

  19. Since raven seems to have been saving his money, I propose we tax raven’s savings, give it to Old Man Potter who promises that he’s learned his lesson.

  20. High gas prices are related to the problem; there was an article in the WSJ today that confirmed my local observation that prices are firm in city areas, but tanking the further away one gets from cities.

    If there’s a government “remedy” that may be tried, it would be to buy dead properties and demolish them in areas where houses don’t make sense due to low economic activity and car-only access. People who still want to live there and who are making payments would probably see their property values stabilize eventually as they’ll have nice “country homes”, and the lack of dead or abandoned properties means there won’t be a crime problem from squatters.

    (No: I’m not a fan of putting homeless people or subsidized people in such houses; that’ll invite crime and make the areas lose even more value – and since these places are far from work areas, wouldn’t help them.)

  21. That is only one data point –

    “Here is another”:http://bubbletracking.blogspot.com/2008/05/listening-to-realtors-is-risky-business.html

    _So great, in a single week there were 14 pendings. But there were 45 additional homeowners that needed to sell. With 11 that gave up, another 6 in distress didn’t even bother trying, that left us with just 28 new listings and a flat inventory volume. That’s a lot of Shadow/Phantom/Stealth Inventory out there in comparison to pendings._

    Now – who’s right?

    You need a much more rigorous analysis, I would think.

    Your obvious error here, is overgeneralizing from a very small sample.

  22. PD, #20- well, that would be the favored method of our Government!

    Can’t tell how many times I have heard older folk tell people to “spend it all”, don’t save- because if you get into a medical or financial crisis, FIRST, they will drain every asset you have, THEN you get the “free” aid. Whereas, if you have lived from paycheck to paycheck, and have no resources, you get the “free” aid immediately. So why save?

    As far as the reason for the “bailout”, I understand it quite well. And it is typical of our level of thought these days, to sacrifice any notion of principle in the avoidance of pain, thus exacerbating the situation father down the road. “Remember, folks, no matter how foolish you are, you can get away with it (if there are enough of you), and no matter how greedy , you can get away with it (if you have enough money).

    I believe the message this sends is more destructive to this country than the economic pain. And of course there will be hordes of people claiming benefits who have no serious difficulty, using gov funded programs to evade a less than idyllic situation.

  23. And one more thing about this bailout-It is not some win-win event- – the money has to come from somewhere- they can tax it, borrow it, or print it, in any case, eventually the people who are productive will have LESS money to invest, at the cost of bailing out those who were unable to manage their affairs. This also has an economic consequence.

  24. “And one more thing about this bailout-It is not some win-win event- – the money has to come from somewhere- they can tax it, borrow it, or print it, in any case, eventually the people who are productive will have LESS money to invest, at the cost of bailing out those who were unable to manage their affairs. This also has an economic consequence.”

    Which is precisely why I’m against bailouts. Bailouts, by reducing risk, encourage risky behavior. A few years back there were people who bought fixed rate multiyear contracts for heating oil. Well, at the time, heating oil didn’t rise in cost, so per thier contract the buyers were paying more for heating oil than the market rate. They were outraged. NPR ran a whole series of episodes about how grossly unfair it was that this people had to pay what they’d agreed to pay to buy heating oil, and how the government had to step in and help them out.

    Well, do you suppose with the price of oil doubling over the last year that those people ‘stuck’ in multiyear fixed rate contracts want government help to get them out of thier commitments now? Or, do you think that we should now be bailing out the companies that supply heating oil because they are forced by the terms of thier contracts to provide oil at a loss?

    If we did either, how do you think that would influence the behavior of the parties? Wouldn’t contractual obligations then become no risk affairs? If you won your bet, great. If you lost your bet, then the government would cover it. Imagine if gambling worked like that. Imagine if all investment worked like that. Wouldn’t you think people would take unnecessary risks leading to I don’t know, things like bubble economies?

    How many bubble economies have we seen lately? Part of me is even inclined to think that oil is in an economic bubble right now. I don’t think it actually is (I think you are seeing economic inelasticity), but the cynic in me wonders.

    I can’t even see a national security component to a bailout, and that is itself a much abused line of reasoning.

  25. The biggest problem is not with the Retail mortgages though that problem is huge. The problem is that the the contracts entered into by the Investment Banks and other major financial instutions have thrown the whole of the credit markets into a near panic.

    Bear Stearns was leveraged at an average of 35 to 1. Citibank had to take a loan of 15 Billion from the Gulf at a rate of 11%. Think about that. No one would lend City bank 15 Billion at 10 and 3/4. and with the drop in the dollar since the deal was made, Citibank probably got the better of the deal.

    The credit markets are not like the Equity Markets. No matter how far Equities go down, at some point you are left with bricks and mortar or something else of value.

    Credit is like a rubber band. You can stretch it, but once it breaks, it is gone. We got very close to banks refusing to deal with one another before th Bear Stearns bail out. They were afraid that they wouldn’t get their money back from their peers.

    In the end, though, I do not think that you can drive people from their homes. A place to live is a person’s economic base. Their recovery and therefore the economies recovery would be severely damaged if we took that tack as opposed to if we worked out some bail out. This does not even take into account the social unrest that it could cause.

    The mismanagement and incompetencies shown by the Administration, the Major Financial Institutions and the consumer have been rampant. I don’t blame it on any one group and if we bail out any of them we should bail out the all of them in proportion.

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