The effect on the housing market will be devastating.  It is not bad enough that we have not yet recovered from the collapse of 2007, nor that banks are manipulating the market by controlling the shadow inventory, nor that mortgage applications have dropped 40% since the $8,000 Federal tax credit expired in April, 2010.  Having hung, drawn and quarted the housing industry nothing will do but to drop a white  phosphorus grenade into the remains. 

The thinking (if indeed it can be called that) is that this tax credit is an entitlement of the rich.  As we all know, the rich must be punished for having the bad grace to have actually earned wealth, thus helping out the “little guy”.  I don’t know about anybody else, but I’ve been around to see the rich punished in this way a time or two, I’m still waiting for my benefit. 

If that logic isn’t cockamame enough for you, the fact is that doing away with the Mortgage Interest Deduction is a tax increase that punishes home owners at all levels of the economic spectrum.  To start with, it will dis-incentivise millions of prospective homeowners by making their effective annual costs higher than they otherwise would have been.  Secondly, millions of home owners will find that they can no longer afford to own a home and give up home ownership either through forced sales or foreclosure.  It will drive the price of homes downwards, pushing more homeowners underwater and shoving those already underwater deeper.  Lower home prices will result in lower local tax revenues for schools and municipal services.  Oh, and it will reduce the Federal tax revenues which were being “saved” in the first place. 

LORD, save me from Congress saving me money.

Having successfully held inventory at artificially low levels for months, they have released a larger number of properties for sale, there are 41% more properties for sale in May than there were in February of 2010, just in time for the Summer selling season.  But even this massive increase is only a drop in the bucket.  Nationwide 7% of all homes are in mortgage default; in California, 20% of all home owners are 30 or more days late on their mortgage payments, 6.98% are over 90 days late but not yet in the foreclosure process; 10% o California homes are already are already formally in the foreclosure process.

These are grim numbers.  They are not going to get better any time soon. All this means that mortgage defaults will increase over time at a much faster pace than the banks are taking them back and doling them out to the market.

Despite all the hoopla over declining unemployment numbers, the decline is so minuscule, and so tenuous that it does not look reliable to me.  I remain a pessimist.  32 States have quietly borrowed over $37,800,000,000 from the Federal Government to cover extended unemployment benefits, California alone got $6,900,000,000 of that.  Does that make you feel optimistic?  “Do you feel lucky, punk?  Well do ya?”

Of course that money came directly from Taxpayers-R-Us.  Except that the money isn’t really there which means that it was borrowed in our name.  Which means that we’ll have to pay it back with interest over time; it gives our grand kids something to look forward to.

But of course the only place the money gets borrowed is by the Federal Reserve, which is neither Federal, nor a bank nor has any reserves.  Recent Fed auctions have been somewhat disappointing, seems not so many people want to lend money to Uncle Sam based on the full faith and credit of the US Government. Consequently the Fed has been buying it’s own bonds.  This works because they can print their own money (don’t try this at home, folks).

Of course when the Fed prints money backed by nothing but hot air the value of money falls.  Then the value of money falls it takes more money to buy things: inflation.  Inflation makes us all poorer because out money buys less.  Inflation hasn’t been a big problem for a while, although it has been eating steadily at us at about 2%-4% per year, year over year for a long time.

When inflation goes up sharply, then the Fed has to cut interest rates to slow the inflation rate down.  Once interest rates are raised then it gets harder to borrow money, especially for big ticket items like houses.  When borrowing becomes costlier fewer people will be able to do it.  Which means that fewer people are going to be able to buy a home under those circumstances.  Which will mean that sellers will either have to hang on to their properties or lower their prices until buyers can afford them.

So, to answer the question: Whither the California Housing Market?  As long as supply is held in check and interest rates are held at artificially low levels, the housing market will prosper.  Once either or both of those circumstances changes, as it will, then the housing market will surely slow.  I am still bearish on housing in California.  We are currently in a sort of Indian Summer which of it’s nature cannot last.

There is a correlative question to the former: should I buy now or not?  There are good arguments either way.  In the overall I’d say for now, buy.  Why?  Because although you’ll be paying higher prices in the short term, even when prices fall they will be driven up again by inflation.  Further, you’ll be borrowing at ridiculously low interest rates and paying it back in inflated dollars.

Government-backed mortgage giant Freddie Mac today asked for $10.6 billion in additional federal aid after reporting a loss of $8 billion in the first three months of this year.

To date Freddie Mac has been provided with around $51 billion in government funds. The new aid would bring the total assistance to the lender to over $61 billion.

Late last year the Treasury Department essentially agreed to provide a blank check to Freddie Mac and fellow government-backed lender Fannie Mae when the agencycontroversially removed the cap on federal support for the lenders.

Sigh.  Really makes me long for the good old days when we were just sure that Fannie and Freddie were sound, carefully watched and regulated by those paragons of unimpeachable virtue, those steely eyed guardians of the public weal, yea, verily, Congress!

We knew it was coming, so it is not surprising that that Fannie and Freddy will keep on coming back for more, again and again, until something happens to tear them away from the government teat.  I guess it is true after all, that government can do things which no one else can do, or would want to do: endlessly nourish that which is big to fail.

I wonder how much of those billions Congress dished up (courtesy of Taxpayers R Us) will be rolled back to Congress as campaign contributions?

Forestalling Foreclosures Redux

But a solution has been found!  Here in the Land of the Bust (no, not the Playboy Mansion) the California legislature has allocated $200,000,000 for more State tax credits to first time home buyers, doubling the amount allocated to the purpose last year.  No, seriously, and Governator signed it.

Full speed ahead!  This time the Titanic really is unsinkable.   We don’t need no steenkin common sense!  We’re going to re-inflate the housing bubble to save us from the lingering effects of the housing bubble!  Yay!  Break out the bubbly, let’s celebrate!

Say, what?

Oh my goodness, where do I start?

Housing inventories are down.  Nobody who has equity and can help it wants to sell in this market, and most people don’t have equity and so can’t sell in the traditional way.  Thousands and thousands of people who should have been foreclosed on over the course of the last year and a half are still in their homes and  not paying their mortgages.  These people should be dong short sales but are just riding it out until something happens to put an end to their misery.  A lot has happened: moratoria, freezes, false hopes based on weak and ill-conceived government programs, the banks’ unwillingness to acknowledge their losses. Meanwhile there are still loads of buyers out there who think that the market has bottomed out and want to get their $8000 of “free” government cheese.

Meanwhile California has dug itself into a $20,000,000,000 hole and can’t get out.  With tax revenues plunging despite substantial tax increases, continuing job losses, skilled workers and entire businesses fleeing the State for sunnier economic skies and impending bankruptcy what do our political masters do?  They do what they always do: double down on deficit spending.  Why do you ask?  Still clinging to the Keynesian economic model (which was discredited seventy years ago and repeatedly since then) they seek to stimulate the goose to lay more golden eggs not by feeding it, but by giving it a suppository.

This will only drag the crisis out even further, as it always does when government tries to solve government created problems with taxpayer dollars.  The system is clogged with toxic assets which need to be purged.  Keeping people who can’t afford their homes from experiencing the pain of foreclosure makes as much sense as helping people suffering from food poisoning retain the meal that gave it to them.  The process is unpleasant, messy and smelly, but it is necessary.  The sooner it gets done the sooner its over.  So lets stop with the phony solutions and do what we all know has to be done.

There are consequences to this. There is not as much inventory available in the market as would normally be expected. Naturally homeowners with equity are reluctant to sell at depressed prices unless forced by outside pressure to do so. Home owners with negative equity can’t sell unless they are willing and able to kick in a big chunk of change from their own pockets. This has had the consequence of driving prices upwards as would-be home owners who were unable to buy during the peak of the market find that they are now able to do so and are competing for limited available inventory. Lower priced homes in particular are receiving multiple offers resulting in bidding wars. Bidding wars create social proof that this is a good time to buy, feeding the frenzy even further.

Meanwhile the shadow inventory grows. Banks have been refraining from issuing Notices of Default. I have spoken to numerous home owners who have not made a mortgage payment for over a year and haven’t heard a peep from their banks. Many Notices of Default and Notices to Sell are filed but the bank fails to follow through with the foreclosure. In both these cases the bank is letting the home owners stay as caretakers for what will necessarily become their property, thereby avoiding costs for maintenance, insurance and taxes for which they would become responsible the moment they become the owners. Of course many of these delays are the result of homeowners trying to work out a loan modification (only about 1% are successful!) or a short sale (on which more in a moment). And very often the bank takes the property back in foreclosure and does not put it on the market (I see a lot of this), sometimes becoming the landlord either for the previous owner or new tenants, sometimes they just leave it vacant.

The result is that in many communities the number of homes actually on the market is dwarfed by the number of homes facing foreclosure. In many cases the ratio is grater than 2:1 and even 3:1.

It is not going to stay that way. The FDIC has taken notice of the banks’ practice of hiding their toxic inventory. They shut down over 100 banks last year (Remember IndyMac, Wachovia & Washington Mutual?) and is on track to shut down over 200 this year. The word from the FDIC is, “Clean up your toxic inventory or we will do it for you.” And the banks said, “Yessir!” Funny, they never say that to me.

The FDIC is not the only agency of the government taking notice. Our political masters in Congress have made several ham fisted attempts to clean up the housing bubble mess they’ve created (they were for it before they were against it, but not really). Now, finally, like any blind squirrel worth his salt, Congress has finally found a nut, and what is even more special, has not devoured it forthwith but made it available to Taxpayers-R-Us. ‘Course it’s gonna cost Taxpayers-R-Us, but not too bad. Who’d ‘a thunk it?

The hammer is coming down, finally, on all those homeowners who’ve been on the brink of foreclosure for the last year and a half, as well as the many thousands who have yet to undergo the process and who inevitably will as the economics of their situation becomes unmanageable. At long last there is a way to restore the market to some form of rational balance and help homeowners in trouble exit their predicament with a modicum of grace and a minimum of pain.  You can get more info over here.

What happened to this poor shlub doesn’t have to happen to anybody facing foreclosure.

Click image to see full size.

Yep.

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.

So we’ve managed to kick the can down the road a little ways while the problem gets bigger and more unmanageable, government doing what government does best: gumming up the works.  Looks like it’s time to invoke W.C. Fields again: “Take the bull by the tail and face the situation.”

Government has no business being in the mortgage industry, nor, should Congress in all it’s asinine wisdom decide to bail out all these distressed home owners by buying up their bad mortgages, the housing business.  When I was in High School I had the opportunity to drive a 1953 Ford that had this disquieting quirk: you had to turn the steering wheel fully 1/4 turn before it would engage the steering gear and the wheels would respond.  I kept it mostly inside the lines, but it I was fishtailing a great deal until I got the hang of it.  It’s a wonder I didn’t wind up in a ditch or worse.  The bigger the bureaucracy the longer it takes to respond to inputs, the wilder and more out of control it gets.  When that bureaucracy is the government, it’s drunk too.

Why now is easy to answer.  When these caps were set in 2008 there was a window within which the administration could make changes without the consent of Congress, that window is due to expire at midnight on December 31, 2009.  After that date any changes would have to be approved by Congress.  This Congress would not have balked at granting the the administration anything it wanted, but would, in Congress’ inimitable fashion, wanted to embellish it somehow.  That would have led to a public discussion, which the administration evidently did not want.  Some transparency might have inadvertently crept in.

As to why, who better to shed some light than Edwart Pinto at Business Insider dot com.  He lists five possible reasons, but this is the bottom line:

The above actions would preserve and strengthen the government’s involvement and control over the country’s housing finance system and make it harder to reintroduce substantial private sector involvement later on.  They would also continue distortions in the marketplace leading to who knows what unintended consequences. Finally these steps would do nothing to deleverage the housing finance system, a key step in returning it to any degree of normality.

In a nutshell, it nationalizes the mortgage industry.

How surprising.  Not.