Marginal Utility

by Tom Bozzo

Brad DeLong blogs the train wreck at a clown show that is the McCain policy apparatus so I don't have to (big report due in a week, sorry remaining readers). He has a quite brilliant twofer.

First, there's the suckitude of the McCain health plan. Or, rather, the evolution from

We're phoning it in, to

OMG, people are looking at it and figuring out ways it might suck, so

Sweeten it, but...

That's too expensive for our small-government-conservative narrative, and voila,

Let's commit political suicide!!

You know, we have llike seen this before. On health care:

• McCain started with a tax credit that was equal in aggregate to the additional tax he levied on employer-sponsored health benefits in the first year--in later years the credit became much smaller than the tax.
• Then it was like ooops, that's not popular. We know--we never intended to subject employer-sponsored benefits to the FICA tax, only to the income tax.
• Then it was like ooops, now we're scared that the plan is fiscally irresponsible and will raise the deficit. We know--we will cut Medicare!
• Then it was like ooops, we have to carry Floria. We know--have Sarah Palin say that McCain will not cut but will protect your entitlements.

Can't anybody play this game? If we lose the election to these clowns, I am going to be really embarrassed. It seems as though nothing is competently staffed out--as if nobody in the McCain campaign cares about actually having policy proposals, but only about having something incoherent that an ignorant and lazy reporter can be deceived into thinking is a policy proposal.

Second, on the housing crisis, McCain pulls his new bailout plan out of his behind at the "debate." However:

But it soon develops that much of Senator McCain's proposal is not his but Barney Frank's, and that the differences make it not a homeowner relief bill but an imprudent banker profit and rescue bill.

And so our so-called conservatives want to nationalize negative home equity (that's some concern for the taxpayer, there):

[DeLong quoting the Politco] “Clearly we face the trade off that we would in fact be taking the negative equity position and putting it on the taxpayers books instead of putting it on the private lenders books or the homeowners books,” Holtz-Eakin told Politico. “We think the balance of risk has shifted to the point where this is the way to go.”

Does the McCain website say that? No.

But by the time I got to the website, it read differently:

JohnMcCain.com - McCain-Palin 2008: For those that cannot make payments, mortgages must be re-structured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they’ve already suffered. [Apparently that last sentence was struck by a panicked editor -- ATB.]

Apparently the schmuck who was assigned the job of writing up the web description did not believe the plan could possibly be what he was told it was.

Most deliciously, someone couldn't stop from thinking out loud in naming the "program," such as it is: it's the "American Homeownership Resurgence Plan (McCain Resurgence Plan)." Apparently it's change someone can believe in.

(Cross-posted at Angry Bear.)

Labels: Health Care, Housing Bubble, John McCain

by Ken Houghton

I haven't done any hard searching yet, but after some desultory searching at Zipskinny, one thing stood out.

I was checking, basically, ZIP codes in which I've lived (19119, 47331, 07040, etc.).

At a glance, you can tell that the middle one above is from the Midwest and the other two are East Coast. And, as David Brooks tells me, the soul of the Earth is different. More stable.

So here's my attempt at making a table:

ZIP Codes	City and State	Stability (same home 5+ years)
06880	Westport, CT	64.0%
19119	Philadelphia, PA	62.4%
44116	Rocky River, OH	61.0%
07040	Maplewood, NJ	60.0%
45385	Xenia, OH	58.8%
47331	Connersville, IN	57.5%
46544	Mishiwaka, IN	56.7%
43230	Gahanna, OH	50.4%
94706	Albany, CA	50.1%

Need to work on those border lines. (UPDATE: Ah, so they just don't show in Preview mode. No idea about all that white space, though.)

Judging by the data—which, as noted is a semi-random sample: ZIP codes in which I've lived, ZIP codes where relatives live, a Place of Legend* to which some old friends moved recently (Westport), and three Ohio cities that are suburbs of Cincinnati (Xenia), Columbus (Gahanna), and Cleveland (Rocky River; h/t Erin for that one being chosen)—it appears that most of those nice, stable Midwestern towns are less stable than the East Coast Dens of Iniquity.

I'll be waiting for David Brooks to apologize for every column he's written in the past eight years. Expect that will happen about the time he accepts one of those offers to actually provide accurate statistical analysis to him.

*Fortunately, since this is a family blog, the phrase "doing Westport" is not defined at The Usual Sources.

Labels: Housing Bubble, Statistics

by Tom Bozzo

Mike Ivey reports in the Capital e-Times that Madison homeowners rank high for house-poverty:

The city was ranked No. 10 in a survey of places with the highest concentration of homeowner debt because of home equity loans or second mortgages. It said 27 percent of homeowners here have a second mortgage or home equity line of credit.

Sacramento, San Diego, Washington, D.C., and Colorado Springs were ranked as the four markets with the highest debt load. Denver, Minneapolis, Los Angeles, Boise [?!], Las Vegas and Madison rounded out the top 10...

The survey was based on U.S. Census data to determine which of the country's largest 150 housing markets had the highest percentage of outstanding home equity and second loans. Forbes combined that data with housing price trends from the National Association of Realtors, to gauge which markets are experiencing steep price drops.

You'd have to wonder about a ranking that puts Minneapolis and Boise ahead of Vegas on the stress-o-meter. Other statistics aren't so dire. Also via Ivey, who has an excellent long piece on stalled residential construction projects in the area:

At the same time, the Madison area housing market has held up better than a lot of places. In Nevada, for example, nearly one in 140 households was facing a mortgage foreclosure last month. In Dane County, the figure was just one in 2,598, according to RealtyTrac.

That 1-in-2600 foreclosure rate is a considerable increase over pre-crash rates, but the level is a bit more like it. The Madison metropolitan area as a whole never saw the sort of house-price inflation (I should update this graph) that dangled hundreds of thousands of dollars of ephemeral equity in the faces of Joe and Jane Homeowner, in contrast to the Irvine Housing Blog's tales from Real Estate Hell. Which is not to say that I'd want to have to sell my house anytime soon.

Anyway, the mere presence of home equity loans and/or HELOCs doesn't say a whole lot. They're a source of relatively cheap credit, and if you have to borrow money, cheap is good. You'd never say that a HELOC borrower was more stressed than an otherwise identical borrower who had the HELOC debt on credit cards. As with many tools, they're dangerous when misused — and, moreover, widely were — but Forbes seems here to have gone for the data that was around rather than data that were directly on-point.

Labels: Housing Bubble, Madison

by Ken Houghton

UPDATE: See correction from Tom in comments. Oh well.

Reagan defenders are perpetually saying that, after he created massive deficits and a recession with the 1981 tax cuts, his people learned better, and all of the following tax cuts were "revenue-neutral."

I'll leave it to the folks at AngryBear to graph out the truth of that statement; suffice to say, the 1986 revision (discussed here and, most especially, here, to pick two from Divorced One Like Bush) has long been cursed by me. Generally, 1986 made it harder to get out of a poverty trap, and easier to maintain Generational Wealth without doing anything.*

But—or, probably, for example—the one thing that 1986 did was eliminate the first $250,000 per person on gains from the sale of real property.** And since there is no chance we will make anything near that limit, there is no chance that I will have to negotiate with the IRS over why we haven't didn't buy another house in the United States over the following two years.****

And, in part, we have RR to thank for it.

*If you believe either of those two is a good idea, please explain your theory of economic growth, and Why No One Will Publish It Except the AEI.

**Technically, I believe the ceiling was set lower, and raised either seven or ten years later.*** But Reagan set the standard for considering basic housing to be "an investment."

***Strangely, those try to cast some portion of the blame for the housing boom/bust on that Clinton administration action ignore that the standard was set by Their Leader.

****This, of course, assumes the current house can be sold.

Labels: Housing Bubble, mortgage, My home not native land, Tax Incentives

by Tom Bozzo

Most of Madison was never especially bubbly, but the Big Shitpile has a way of getting under one's shoes:

Sub-Zero/Wolf of Fitchburg, a manufacturer of high-end refrigeration and cooking appliances, will lay off 235 employees at its plants in Fitchburg and Phoenix, Ariz...

"It's no secret what's going on in the economy and what's happening with consumer confidence," [Chuck Verri, VP of HR] said. "We're building inventories too rapidly and we've got to do something to react."

Verri said employees were notified Monday and will lose their jobs on or after June 13.

He said the slowdown in construction of high-end homes and condominiums is a major factor in the layoffs.

So no high-end housing market recovery until at least the fall. Now that buyers of $10,000 fridges demonstrably are not recession-proof, we may need to look to mega-yacht cancellations for more bearish news.

Labels: Housing Bubble, Madison

by Ken Houghton

Consider this the counterpoint to yesterday's "they played without me" post.

Every once in a while, there is a statement that is so egregiously offensively wrong that it demands a blogspot. But, since after today I have something in common with Barkley Rosser's eldest daughter, I'm buried.

Fortunately, Felix came through with bells on.*

The statement, by the way, is:

Some argue that adjustable rate mortgage (ARM) originations fueled the bubble. Yet the ARM's share of total originations is a very weak forecaster of home prices, implying ARMs, although a source of cheap financing, are not a determinant of home prices. If ARMs were not available from 2001 to 2004, home purchases presumably would have been financed with long term debt, which was also very affordable.

You can guess the source.

*The only thing he leaves out is that Alan Greenspan himself encouraged people to take out ARMs, just as he started tightening. Of course, as with Himself being 100% in bonds (at his age) in 1996, just before he started loosening, this is purely coincident.

Labels: Housing Bubble, mortgage, Personal Finance Advice of Alan Greenspan, PortfolioMarketMovers

by Ken Houghton

And maybe Alanis Morissette portrayed her accurately, judging by the current contretemps at the Mortgage Bankers Association (h/t Dealbreaker).

Economists Question: Identify the "moral hazard," if any, in the linked story. Explain how it could have been quantified, mitigated, or defined by one or both of the parties.

If you do not believe there is "moral hazard" in the above case, but still believe in "moral hazard" for residential transactions, please define the differences so as to explain the differences between the two scenarios.

Labels: Housing Bubble, humor, Moral Hazard, mortgage

by Ken Houghton

Two months ago, with these two posts, I felt like an outlier.

Now, Menzie Chinn documents the case for 40-50%.

Labels: Econbrowser, Housing Bubble, mortgage

by Tom Bozzo

1. Hilldale Phase 2 delayed (again), a little sign of the CRE bust?

Barry Adams's State Journal lede blames the "harsh winter and changes to the design" for a delay in the start of construction at the seven-acre moonscape across from the office until July. This would house a greatly expanded Whole Foods, provide 3 floors of office space, and a 140-room hotel. When last we heard from Jos. Freed & Co., just a month ago, the harsh winter, the phase was supposed to be completed by spring to summer '09; it's now fall '09 to early '10.

I'd figured that Whole Foods would keep the project more-or-less on track, especially seeing as there's reportedly a tenant interested in a full floor of the office building. Oh well.

This project had been an example of the condo bust's losses looking like CRE's gains, at least for a while; the hotel replaced one proposed condo tower, and another mixed-use building (3 floors of office, eight of condos) was scaled back to a 5-story office building, since reduced to 3. Next stop, the soccer fields at Hilldale Phase 2?


2. Big Sh*tpile in Little Madison Revisited, Overture trust balance reaches new lows.

Who could have predicted that 8.25% annual returns aren't risk-free? Well, Mayor Dave Cieslewicz, of course, and the editorial pages of both papers.

The geniuses who manage the trust's investments have managed to turn $109.3M in December '05 to $100.1M as of March 14; they needed to maintain $104 million to make the 2005 refinancing work as advertised, with the trust paying the construction debt and making a contribution to the Overture Center's maintenance.

The problem has been pretty simple all along: too little money required to do too much stuff, so the plan has depended on generating returns sufficiently large that they can't be counted on all the time. As it turns out, you can be too generous and too cheap. The original assumption was a 9% annual return (in 1999, when it was assumed it would be generated from stock market holdings), and the times being what they are, they got 2% through 2005. The refinancing plan shaved off 75 bp, but was especially sensitive to low realized returns in the early years (oops).

Something I wonder is why a nonprofit endowment like this can't buy into a better class of money management. Some of you have surely seen that the peer group for Jane Mendillo, the Wellesley investment manager recently hired to helm the management of Harvard's endowment, turned in a 13.9% 5-year annual average return to the middle of last year. (I'm curious to see what the last nine months have done to the high-flying endowments.) The Overture fund isn't in this size class, but nevertheless I wonder how its management does so poorly? And why can't they just buy into the competent management of larger endowments (i.e., are there tax or regulatory obstacles to doing so)?

The solution, of course, is to raise more capital for the fund — something that was advertised as being facilitated by retaining quasi-private ownership of the facility, but which has yet to materialize except, perhaps, by way of a bailout to prevent a chorus of I-told-you-sos.

Labels: High Finance, Housing Bubble, Madison

by Ken Houghton

First, there's was Buyer's Remorse. Now, the WSJ gives us Buyer's Revenge:

Mr. Buompensiero, a gray-bearded inspector for REO Asset Services-1st Realty Group, rang the bell. When no one answered, he taped a letter to the door offering the occupants $1,000 to move out. The catch: They won't get a cent if they trash the house before they leave.

"If it was me, I'd take the money," Mr. Buompensiero said as he drove away. Either way, they're "going to get thrown out in a couple of weeks."

And this is not only A Good Thing, it's a Standard, if unadvertised, Business Practice:

No one tracks how frequently such payoffs are made. In Las Vegas, agents hired by the banks to handle foreclosed properties say the "cash for keys" approach, as it's known in the industry, is a regular part of the job. After all, formal eviction proceedings can take months and cost potentially much more than a payoff.

Strangely, all of the evidence comes from people with a clear principal-agent problem:

About 95% of the auctioned properties, however, go unsold and revert to banks eager to get the properties off their books. Some owners just walk away peacefully. But agents say a significant number take what they can carry and take revenge on the rest.

There's no data, apparently, so there's really no economic solution. So why is the WSJ discussing it?

Because some people are at least "haggling over the price":

The owner, a 43-year-old man with two children who spoke on the condition that his name not be used, says he bought the property in 1993 for $140,000. Three years ago, he says he had the house appraised for $440,000 and took out a $207,000 home-equity loan to pay off credit-card bills and buy his wife a new van. His initial payments were an affordable $1,800 a month.

He fell behind, however, after he went through a divorce and his landscaping business faltered, just as his interest rate was rising. The man worked out a payment plan with the bank and borrowed heavily from his father, but, including penalties, his monthly payments rose to $4,000, he says. After two months, he says, he ran out of money, and the bank foreclosed.

He called Mr. Carver after receiving the cash-for-keys note, but was left cold by the bank's initial $500 offer to leave the house soon, intact and broom-swept. "If I stay here it will cost them a lot more money," both men remember the former owner saying....

Mr. Carver consulted with the bank and upped the offer to $2,800.

"Better than nothing," the owner responded.

Last week, Mr. Carver went to the house, found it clean and whole, and handed the man a check. "Everybody walks away somewhat happy," Mr. Carver said. "I guess."

There's a doctoral thesis in this. However...

(more in next post)

Labels: Housing Bubble, Moral Hazard, mortgage

by Ken Houghton

Jim Cramer's column in Metro this morning was singing the praises of Toll Brothers and Ryland, another homebuilder. So it is probably only right that CR finds this:

The little bit of good news was KB Home's cancellation rate improved slightly (similar to other builders):

The Company’s cancellation rate improved to 53% in the first quarter of 2008 compared to 58% in the fourth quarter of 2007.

After his BSC call, I didn't think there was anywhere else for him to go. But clearly he's "Workin' in a Coal Mine":

Workin' in a coal mine
Goin' down down down
Workin' in a coal mine
Whop! about to slip down

Added: A Yahoo! Finance graphic for the optimists who think there may be more to Residential Housing than the general market:

Just for giggles, here's the three builders, over the past year, vs. the S&P500 Index:

UPDATE: My Loyal Reader, whose sense of time comes from a Mark Thoma link, recommends "the original" video.

Labels: High Finance, Housing Bubble, Journamalism

by Tom Bozzo

(Note, this post has been expanded and edited from the original version posted over the weekend, and bumped. -Ed.)

The question arose as to what my problem with Adam Davidson's analysis on NPR [*]was, exactly. Davidson fielded a listener question asking how a seemingly small problem like subprime mortgage defaults could lead to a widespread financial crisis. Much of Davidson's answer discussed the role of leverage in amplifying losses, which clearly is part of the story.

The offending part was an introduction that ran with the premise of the question — small cause, big effect — leading Davidson to suggest that the situation was akin to having a failure in the rubber-band industry torpedo the whole economy. That, no doubt, was exaggeration for comic purposes. But the entire underlying premise is questionable at best.

The housing industry may be just one sector of the economy (if one, along with finance, that was strongly leading the growth out of the 2001 recession), but more relevant is that the
housing boom or bubble created what's looking like several trillion dollars' worth of now-vanished "equity" on household balance sheets. Thanks to lax lending and borrowing practices, a lot of mortgages were thus collateralized by assets valued at bubble prices. That makes for a large hit to households' finances and to the holders of mortgages and MBS; a big deal. Of course we've seen hundreds of billions of dollars in asset write-downs so far — with quite a bit more to come if the Nouriel Roubinis of the world continue to be right.

That leads us to the next big cause, which after Dr. Hypercube's coinage is the "matryoshka lemons" problem. That is, all the slicing and dicing of mortgages for MBS and MBS-derivative securities left the market not only unsure who was holding bad (or potentially bad) debts, but in fact all but unable to determine the actual quality of the securities. Hence, once large and liquid markets dried up overnight. The first casualties here were some lenders who relied on the ability to borrow short, lend long, and quickly pack securitized loans off to investors. This is also a big deal, since securitization is the linchpin of postmodern mortgage lending.

Having borrowed lots of money to make bad bets in illiquid markets then is a follow-on consequence of the big systemic problems.

In short, I think a better answer would have been that the triggering events — deflating the housing boom in general, and the securitization market failures — are big and not small. Subprime was maybe the likeliest starting point because so many of those loan contracts were structured to fail in response to the least shock, but ultimately the subprime failures were symptomatic of the general overvaluation of real-estate assets rather than causal.

In effect, Davidson's account (especially in the summary of the response linked above) is that leverage took a small problem in the housing market — i.e., subprime — and made it big. Correctly accounting for the roles of the housing bubble and the MBS market failures suggests that leverage took a big problem and made it fast.

Why does the distinction matter? The lessons and eventual remedies could well vary a lot depending on whether we've been seeing an amplification of problems created in rogue elements of the financial system, or whether the "shadow banking system" is fundamentally broken. I think the evidence points toward the latter situation.


[*] The NPR page now has a summary, but not a full transcript of the proceedings.

Labels: Housing Bubble

by Ken Houghton

Barry Rithholtz relays a story that must send shivers down NAR spines:

The daughter of Vice Chairman and co-founder Bruce Toll informed the company last month that she and her husband "did not intend to make settlement" on a $2.47 million home they had previously agreed to purchase, the company said in a regulatory filing.

Metropolitan Opera Broadcast buffs, such as the proprietor of this blog, can start worrying now.

Labels: Housing Bubble, Moral Hazard, opera

by Ken Houghton

Via Minyanville:

The CFO at Los Angeles-based KB Homes (KBH) sums up the conflict of interest by saying the stimulus package “[is] a shot in the arm to the market. It’s going to spur people to move up to a more expensive home, and that’s going to get the new and used markets moving again.”

Yep, the market for KB Homes especially has always been driven by people who make less than $75,000/year, and who think that $600 justifies adding mortgage debt.

Not even a hedge fund can make that math work.

Labels: Housing Bubble, mortgage

by Ken Houghton

Dilbert Dogbert, in comments to an old post, noted the glory of Barstow:

Barstow is high desert and may not see snow for decades but it is high and therefore colder than hell, California style, in the winter. Other than that the wind can blow like hell too. High winds mixed with sand!

It's not just that my college girl friend* is Barstow High Class of 1976, which, iirc, was the last year that high school was open. It's for precisely those reasons that I was looking at Barstow.

Anyone can want to live on Newport Beach, or in Miami. And you can rationalize building up the suburbs of Chicago.

It takes something else to move to Barstow (good luck with the $4.8million offer). Or Xenia, OH. Or even, say, Southfield, MI.

So I've been looking at Barstow to remind myself that, while there may be areas where the drop is more than 30%, the national average may not get that high. Because I really don't want to be correct that 30% is optimistic.

And I was almost there. until I read this post at CR today.

That "six trillion dollar" figure—first heard, to my knowledge, from Robert Shiller's lips at the AEA two and one-half weeks ago—is now coming reportage.

With the worst yet to come.

*who has been AARP-eligible for the past two months and thirteen days, not that I'm counting.

Labels: Calculated Risk, Housing Bubble, mass media

by Ken Houghton

Via Dr. Black, an article on Florida real estate and rentals gives us this blooper:

Most new condos, he said, were purchased to generate rental income.

"They're getting $1,200 a month in rent, tops," Painter said. "It's hard to keep a cash-flow property when you paid $500,000 and can only get $1,200 a month rent."

There are so many things wrong with these two paragraphs. Dr. Black trashes the first 'graf, so let's deal with the second.

"hard to keep a cash-flow property" doesn't even begin to cut it. If the mortgage is at 6.5%, your cost is just over $3,600*—three times the market rent. You're losing about $2,400 a month, before taxes and maintenance and any housing association fees. That's $30,000 a year in carrying costs.

Why don't you take the loss? Because, at 6.5%, the break-even sale price for a $1,200 month payment (1:1 rent equivalent, again excluding those other costs) is $189,000.

You need an interest rate of approximate 0.95% per year to be breaking even on $1,200 of income and a $500,000 exposure.

So the choice is: do you want to lose $30,000 a year, or between $250,000 and $310,000 upfront?

*All calculations on my HP12-C, rounded, based on monthly payments and a 30-year fixed rate mortgage.

Labels: Housing Bubble, mortgage

by Ken Houghton

I spent the usual ca. 90 minutes in the doctor's office Friday night (follow-up to this, which appears to be "just" a sprained shoulder). Most of that time was an Oprah episode that visited three families (and re-visited a fourth) that were overextended.*

Now this was a fine set of interviews, I have to tell you.** The returnees (saved for the end) were a couple where he worked full-time and somehow they didn't have health insurance for their children.*** There was also the couple with two SUVs, the second of which they describe as "an impulse buy" due to "pressure from the salesman"—who apparently sold them two SUVs on the same day, so they now have three cars and two drivers.**** And there was the couple making $6,600/month (not certain if that was net or gross) who spend $1,800/month on child care. And there was another, whose details I probably slept through.

They were all interchangeable, so I have no memory of anything that distinguished the fourth couple. Their common claim: Our marriages are falling apart, and we would do anything to keep them together.

And who knows more about finances and marriage than famed lesbian Suzie Orman?*****

There was one piece of advice that was given to all four couples: sell your house(s). You cannot afford it (them).

Think about that in the context of this (h/t Dr. Black). And I don't have the impression these people were in a bubble area, though at least one may have been in the suburbs of Chicago.

Note the plural above. This is because one family—the one with the SUV "impulse buy" above—got into their dire straits because three things occurred in rapid succession: (1) the bought the new house without being able to sell the previous one, (2) the bought the new SUVs, and (3) he was laid off, turning a dual-income family into single-income.

Now, don't get me wrong. It is likely that, even if the first house had been sold, then would have had some troubles paying for two cars, a house, and children on a single income. But it's difficult to avoid the reality: the inability to sell the first house triggered their problems.

So telling them "sell your houses," as if those are liquid assets, isn't the best idea in the world.

This was made most clear by the "returning" couple. The wife's hair was cut.****** And they had moved into an apartment, and were trying to maintain a budget.

But they haven't sold their house yet.

So, basically, they're covering a mortgage, property taxes, and an apartment rent now. Or maybe they're not covering a mortgage; maybe they're just moving closer to foreclosure.

One way or another, this appears to be poor financial planning advice—or at least poor execution of same.

But in Oprah-world, they're "trying to stay together," so everything is great.

Meanwhile, there are four houses on the market, and at least one spare SUV for sale, and people are thinking they should make their carrying costs even higher by renting an apartment as well.

What did I learn from Oprah? Houses are not quick assets. But I knew that already; it just seems that Suzie Orman and her clients don't.

*Wait! Didn't we just have six years of prosperity. How do they find these people?
**Not fine enough to keep me fully awake, so I may mix up a few people.
***They declared that this was because the wife spent all their monies on Starbucks and her hair (without noticeably good results), but this does leave one to wonder about the "good job" the man supposedly has "full-time" that did not offer health insurance for his family.
****Keep this couple in mind.
*****That she is gay relates to the link, since straight people don't have to worry about "losing 50%" of their inheritance. Otherwise, let us be generous and assume her knowledge of finance and financial planning needs is accurate.
******To her benefit, I think. Not that that means much.

Labels: conspicuous consumption, Economics, Housing Bubble, mass media

by Ken Houghton

Via Dr. Black, the Irvine Housing Blog revisits a property, now listed for 26.3% less than it was initially.

Citi (whose only capable high-level executive, judging by their presentation today, departed because of alleged relationships with Maria Bartiromo) is projecting a 7% decline in house prices over each of the next two years. That would leave the house in "deisrable Heritage Park" around the $388K level, or 31.2% down from its last actual sale—in May of 2005.

The plural of anecdote still isn't data, but induction may be gathering steam.

Labels: Housing Bubble, mortgage

by Ken Houghton

A while back, I asked if anyone had a model that could support house prices only dropping 30%. This was after Paul Krugman called Goldman's 15% projection "improbable on the low side," and noted that a 30% drop would leave us at 2003 levels, which still strikes me as a rather high support point.

While 30% has become the standard assumption—at the AEA panel I missed most of, someone (Blinder? Roubini? UPDATE: The Bayesian Heresy notes that it was Robert Shiller) noted that a 30% drop would reduce home "values" by $6 trillion ($6,000,000,000,000)*—data is difficult to find.

Via Dr. Black, we now have a piece of data. And it doesn't exactly support the null hypothesis:

Arsenault said he and his three partners may buy a block of about 50 new, unsold condominiums in Orlando, Florida. They have a price in mind and they're willing to wait until they get it: 40 cents on the dollar.

"There's a risk to buying too early in the downturn, but buying too expensive is our biggest pitfall," he said....

"They sold land at 40 cents on the dollar and they're happy to get it," Bryan said. "The value of land is eroding by the minute."...

The price, $70 million, or about $10,000 an acre, was lower than the sale price for the same land that Horton had in escrow six months ago, said Wolff Co-President Tim Wolff.

Forty cents on the dollar for land, forty cents on the dollar for homes. While I'll still grant that the plural of anecdote is not data, it remains to be seen if those points will be outliers. But the evidence doesn't favor the idea that they will be.

*This sounds as if it is a lot of money, but only partially because it is. There are two mitigating factors: (1) since it is only the appreciation, in absolute terms, over the past four to five years, it is arguably mostly froth on the bubble and (2) it assumes an overall decline in selling prices, but houses are not quick assets, so the "loss" will not be realised in any direct way, other than, for instance, a reduction in MEW.

Labels: Housing Bubble, mortgage

by Ken Houghton

Louis Hyman sends a shudder through Ken Lewis's heart:

Homeowners cannot build equity in an overvalued house, no matter what the terms of the mortgage.

In the "ownership society," equity is all, and voting with your feet becomes the right thing to do.

Labels: Bushonomics, Housing Bubble