Real estate investing is all about analysis, so this week we’re highlighting some important projections and opinions from real estate economists. It’s only the middle of the week, but it’s been a big one so far. For starters, CoreLogic economists have identified HARP 2.0 “winners and losers,” with distressed borrowers – and thus, the housing market – ultimately benefiting very little from the program because in order to be eligible you must be current on your horribly underwater mortgage payments[1]. However, the GSEs will definitely be coming out ahead, says CoreLogic chief economist Mark Fleming, because the program reduces default risk on GSE-insured mortgages. Furthermore, entities in the loan origination market are likely to benefit substantially from the 2 million estimated additional transactions starting in 2012 and continuing into 2013. Fleming also believes that HARP could amount to a “significant economic stimulus” since it could cut household expenditures for those who qualify by about $2,500 a year. That money represents “an effective tax cut,” he says. However, investors holding mortgage-backed securities (MBS) lose out on the new plan, seeing prepayment speeds increase and getting capital back much sooner and with “fewer options for investing it at a similar rate,” he said, adding that “there are no silver bullets” when it comes to fixing the housing market, and that ultimately the only cure will be “a stronger economy and the passing of time.”
Moving on from HARP 2.0, David Stiff, Fiserv’s chief economist, is predicting some serious doom and gloom for the housing market in 2012. By next June, he says, housing prices will be 35 percent below peak values in 2006, creating a triple-dip in the housing market[2]. Stiff says that increased foreclosure activity, sustained high unemployment and an increased volume of REO properties entering the market along with the looming “shadow inventory” will all work against the housing market and create historically low home prices by the summer 2012. Stiff also predicts that Florida, Las Vegas and California will also be hit by this dip particularly hard, with total losses since 2006 of 66 percent in some areas. On the bright side, Stiff is predicting the start of the housing comeback to follow shortly after this allegedly final dip with home prices climbing a small but significant 2.4 percent between June 2012 and June 2013.
Finally, some economists at the Federal Reserve are clearing adjustable rate mortgages (ARMs) of blame in the recent housing crisis[3]. Arguing that they were not as risky as they have been portrayed and that during the housing crisis, ARM payments went down rather than up for the most part, senior economist Paul Willen told the Senate Banking Committee that “the data just refute that theory [that ARMs contributed in a significant way to the housing crisis].” He added that 60 percent of borrowers whose homes were foreclosed had fixed-rate mortgages and that “only 12 percent of foreclosed borrowers experienced payment shock.” Instead, Willen blames falling prices and “life events” for the housing crisis.
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[1] http://www.dsnews.com/articles/corelogic-identifies-harp-20-winners-and-losers-2011-10-31
[2] http://money.cnn.com/2011/10/31/real_estate/home_prices/index.htm
[3] http://www.dsnews.com/articles/economist-arms-not-as-risky-some-think-2011-10-31
I’d once said that the ARMs didn’t impact the market so much either, but I have to qualify that. A simple, conforming ARM with a relatively low margin and a stable index may have actually seen a rate reduction. Many of the ARMs with 2 point spreads to the floor and 6 or 8 point spreads to the ceiling with a 6 month LIBOR index, 2 point annual move and a rate at 8% in 2006 or 2007 may not have moved down to current market. These people watched the rates fall and even with their ARM, they could not take advantage of it.
So, that point is not necessarily valid. It may be so for the squeaky clean, plain vanilla borrower or the FHA adjustable borrower, but for most it has not provided much or any rate relief.
I’d bet my next Christmas bonus that this Willen guy has found his conclusion and then gathered the data to support it. He is also wrong about blaming the drop in prices and ‘life events’ for the crisis. MR. WILLEN, JUST LISTEN. THE CRISIS WAS CAUSED BY LOSS OF JOBS. LOSS OF JOBS WAS CAUSED BY THE SUSPENSION OF CONSTRUCTION JOBS AND THE MYRIAD OF OTHER JOBS SUPPORTED BY THOSE. CONSTRUCTION STOPPED WHEN THE OVERBUILDING (YES – SOME DEVELOPERS FALSELY PROMISED INVESTORS THAT HOUSES WOULD HAVE A CASH FLOW AND THEN BE SOLD. THIS FELL APART WHEN THE LEASE OPTIONEES COULD NOT GET THE LOAN THAT THEY HAD BEEN TRYING TO GET FOR THE LAST TWO YEARS. YOU CAN ONLY STRETCH THE IMAGINATION OF LENDERS SO FAR AND THEN THEY BREAK.THESE INVESTORS THEN HAD TO DUMP THE DOZEN HOUSES THAT THEY BOUGHT OR BE FORECLOSED. THE DUMP OF THE INVESTOR HOUSES RAPIDLY BROUGHT THE PRICES DOWN AND CONSTRUCTION COSTS WERE STILL ABOVE RESALE COSTS SO CONSTRUCTION STOPPED.)
So, Mr. Willen, the economist, you are dead wrong. Please don’t try to rationalize your desired result. You can’t see the truth because you have been too far removed from reality. The truth is that lending got a little crazy (pushed somewhat by Washington’s mandates for equal treatment and the foolish reliance on credit score – - that is another whole tirade), prices got pushed up, people believed that it was normal to support those kinds of payments and they suckered in. If htey hadn’t lost the jobs, they’d still be struggling to make the payments. However, at some point reality set them straight. They could use all their savings and retirement money to pay the bank a few measley payments that would still not make a dent in the mortgage or they could stop the bleeding and make some sense out of the mess.
I invite you economists to come see the economy in action. Stay with me for a few days or a few weeks and I’ll show you real people who did not have life events happen. They had bank and job events happen.
If it wouldn’t be nearly impossible, I’d say sue the banks who made the bad loans that caused the bubble that burst and caused the pricing drop that caused the construction stoppage that caused the job loss. That is not such a stretch. Causation has been proven.
While I am glad to see some effort by the government to help distressed home owners, I wonder about the removal of the warranties that lenders commit to in making loans owned or guaranteed by Fannie Mae and Freddie Mac? Will this be good for real estate and America in the long run or does this only benefit the banks?