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What is the real cure for the housing market? Part 3 Michael Krein

What is the real cure for the housing market?

 As we begin part three of my rant on this subject, let’s go back to the basics, supply and demand. Prices are falling because we simply have more homes for sale either by choice or distress than we do “qualified” buyers to buy them. More importantly we need the right kind of buyers if we want to preserve neighborhoods and restore values. We need owner-occupant homebuyers, those that are going to buy a home to live in it. Those that will maintain and improve that home with pride. Both of those sub-topics were covered in depth in parts 1 & 2 of this article, so we will be moving forward from here.

The fact is that we have a lot more foreclosures yet to come and with the homes already on the market, there is no way that we can ever absorb this excess inventory in the near foreseeable future. Until that inventory is absorbed – there will be no recovery in the housing markets, foreclosures will continue to increase and more and more of our tax dollars will need to be spent bailing out the banks and these foreclosures.

We need about 5 million qualified buyers, preferably owner-occupant buyers to absorb the excess demand and start prices back on an upward trend. The question that keeps coming up is where do we find them? My answer is that they are already here right under our very noses!

All of those foreclosures on the market were in fact actually owned by someone before they became foreclosures! It is these folks that were previously foreclosed upon that we need to help become homeowners once again. After all – we already know that they would prefer to own a home of their own – that’s how this all started in the first place!

Since we know how many foreclosures there have been – we know how many people have been foreclosed upon. It is pretty simple really. Take these same people who were previously foreclosed upon and let them buy another house. Demand is back – home prices stabilize and start rising again. We get owner-occupants back in homes – neighborhoods get saved, people get to start building wealth and equity again. The economy gets a boost, etc. etc. How much more could any of us ask for? There is a very simple way to do this, and it can be done relatively inexpensively and relatively risk free and in the long run would not only restore the housing markets but would also save us poor taxpayers billions and billions of dollars in the process.

Why can’t we have a second chance loan? Yes a second chance loan for previous homeowners who got caught up and in some cases victimized by the real estate market. I am not talking about investors here. I have no sympathy for them. An investment is just that an investment – you put your money down and take your chances. Where there is potential reward there is also potential risk. Most of the so called investors were not really investors – they were speculators and it was amateur hour. Most of these investors could have easily avoided their losses if they had bothered to take an hour or so and read a book on real estate investing. In reality, many could have avoided losing hundreds of thousands of dollars simply by investing 25 cents in late charges at the local library.

Enough said about investors. It was they by their own ignorance and actions that helped overinflate the housing markets and forced many ordinary hardworking folks to have to overpay fortheir home. It is these folks that we need to address. They were not out to make a fast buck, they were not using their home as an ATM. Most just wanted a place to raise their kids and have a home that they could call their own. It is this group that got taken advantage of the most. It is only in this group that we can truly say that there may have been victims. But semantics and liberalism aside, we can work within this group to restore the housing markets.

We can do so in an almost risk free and inexpensive manner. We can create a second chance loan program that is not only self-supporting but completely self-funded as well. We have millions of Americans who have previously lost their homes and would desperately love to own one again. Most of these folks do have jobs and are capable of making affordable payments. With home prices and interest rates where they are now, most can easily afford a home similar to the one they had lost. We could start moving these families back into homes of their own, where they could begin building equity again and helping to stabilize and improve our neighborhoods as only owner-occupants do. Right now there are millions of these potential homeowners out there renting instead of owning. While renting, they obviously will not be spending money improving or renovating the homes they are in as they do not own them. Nor will the landlords be renovating or improving the homes either as there is simply no motivation for either of them to do so right now. If we want to see values come back up, neighborhoods preserved and improved, then we must create more homeowners and less landlords – it is that simple.

It has been nearly 4 years since the foreclosure crisis started and it is still continuing to worsen. Why after four years has nothing been done to stop this?

The solution is quite simple – a homeownership recovery program. Right now the government is spending billions keeping people in homes who are not even paying for them. Loan modifications do not work. Nor for that matter have any of the other government programs. In reality – most of the programs tried so far have actually made it worse. By keeping people in homes who are not making their payments but also know that they are going to lose the home eventually, we have created another problem. No maintenance on the homes, and no money being invested to improve them. We end up with continually degrading properties and no money being spent on home improvement that could be a huge stimulus to the economy. More so with no end to the housing crisis in sight and prices still falling, there is no reason for anyone to pay their mortgage on an asset that is still going down in value.

Our current failed policies have so far only contributed to continued decline in real estate values are the real problem now. We need a major shift in housing policy. One that will increase consumer demand (create buyers), and do so substantially so that prices start back on an upward trend.

Restoring home values solves so many problems. It creates wealth again which would then help stimulate our entire economy. It would reduce and in some cases eliminate major losses from the banks on foreclosures, and hence save us billions more in bailout dollars. Higher home values translate directly to lower losses for the banks and especially us as the taxpayers (Fannie Mae, Freddie Mac, & other bailouts) It would further reduce and possibly eliminate strategic defaults, as once people realize that their house will come back in value again they will not be so quick to walk away from it.

The Obama administration has repeatedly stated that they want to get out of the mortgage business and government guaranteed homes loans and have the private sector step in in the governments place. The trouble is that the private sector is not going to step into a broken market – if the government wants the private sector to take over then they need to fix the problems first.

Once the real estate market bottoms out and the worst is over, private money will come back into the lending arena as the risks and potential losses are greatly reduced. So why don’t we halt this downward cycle – decide that this is the bottom and turn it around – it can be done quite easily.

We have the means at our disposal, the system and structure is already in place, no new legislation would be needed and the program would be completely self-funded so not only would we as taxpayers not have to spend any additional money, but by saving the housing markets and restoring values – we as taxpayers could all save billions in future bailouts as well.

The Second Chance Loan could put millions of Americans back into homes, preserve neighborhoods, restore values, eliminate and greatly reduce future bailouts and best of all it won’t cost taxpayers a dime. In reality it might even show a profit and at the same time save us billions on more bailouts and subsidies in the future!

Stay tuned for Part 4 of this article, we will explain how the Second Chance Loan program could work.

Mike Krein

What is the real cure for the housing market? (Part 1)

Buyers! Buyers! Buyers! Markets all function the exact same way – by the law of supply and demand. Right now the housing market is out of balance as we have more supply (excess inventory) then we have demand. We have more homes for sale than we have qualified buyers to buy them. But there is a key word here that everyone needs to pay attention to and that is the word “Qualified”. In order to be considered a true buyer, one must possess three qualities, one must be “ready”, willing” and most importantly “able”! With the term “able” almost being interchangeable with the word “qualified”. But there is one very subtle yet very important difference! An “able” buyer has cash in hand. A “qualified” buyer has the banks cash in hand by way of a new loan commitment. Right now in many markets almost half of the buyers in the market are “able” as they are cash investors, cherry picking bargains for investment. These are not the buyers that are going to go in and improve and preserve neighborhoods. More often than not, as the number of investor owned homes rises within a neighborhood, the quality and stability of the neighborhood diminishes proportionately. Again – selling to investors is not the way to save neighborhoods. The only way to save and preserve neighborhoods and restore home values within those very neighborhoods is by placing owner occupants in those homes particularly in the foreclosed properties that need to be renovated and cared for by a new family. So this creates two problems now: First there are not enough investors in the market to buy up all of the excess housing inventory and foreclosures. So the markets are still falling. (Not enough demand) Second – these are not even the folks we want buying up homes as they will typically not improve the neighborhoods or raise property values – and usually they do just the opposite. That brings us back to the “qualified” buyers – those able to get a loan to purchase a home that they will care for and live in. Exactly the type of buyers we want in the marketplace if we are to preserve neighborhoods and restore values. But where are they? Let’s go back to the concept of ready, willing, and able. We have millions of Americans who are ready and willing. After all who doesn’t want to own a home of their own? The problem is “able” or more specifically in this case “qualified”. There are millions of Americans out there who would love to own a home, but can’t because they are unable to obtain a mortgage under the current lending guidelines – most of which are being dictated by our government i.e. Fannie Mae, Freddie Mac, and FHA. So creating more “qualified” buyers and thereby increasing demand for housing and stabilizing and restoring the housing markets is really a function of lending standards – which in turn are controlled by the federal government. So in fact – the government really can solve the housing crisis any time it wants to! This is reality. The argument you will hear against this is that the government cannot afford to do this. That is a lot of hogwash, for one twentieth of the money the government has spent bailing out the banks – they could have restored the housing markets. If the people running our government had restored the housing market and values – the banks wouldn’t have had such losses and we wouldn’t have had to bail out the banks in the first place. To put it quite simply: the government chose to ignore spending $1 for the real cure and instead spent $20 on snake oil that didn’t work anyway. The real question is: who got rich selling that snake oil? Would you like to know what the real cure for our housing market is? Actually there are two possible cures and neither one will cost us poor taxpayers a dime.

Look for Part 2 tomorrow

Michael Krein

How fast and how high will interest rates rise? Part ll

How fast and how high will interest rates rise? Part II In part one of this article we talked about the Obama administration’s discussion about limiting the government’s involvement in the mortgage markets and the potential for drastic interest rate hikes. This next realization only adds fuel to the fire and makes it even more probable than ever that a drastic increase in home mortgage interest rates is looming just over the horizon. Let’s talk about “Deficit reduction” What a beautifully Orwellian form of double speak? The politicians love to tout Deficit Reduction as such a great thing! It is not a great thing, it is not even a good thing – it is really just a little bit less of a very very bad thing! Deficit reduction does mean that we live within our means; it does not mean that we stop spending money that we really don’t have. It just means that we stop spending as much money as we don’t have. Let’s make this as clear and simple for everyone. If you or I were to earn $100,000 per year – but we live a lifestyle that we cannot afford and spend $200,000 per year – like our federal government does at the end of the year we would have had to borrow an additional $100,000 just to make ends meet. After doing this the first year – we would finish off with not only nothing – but an additional $100,000 in debt as well. Realizing of course that this cannot go on forever, we wise up and decide to reduce our deficit by half, (just like the Obama administration claims to be doing) we cut back on some expenses and agree to only spend $150,000 on our unaffordable lifestyle. Yet we still only earn $100,000 per year. So again at the end of the year we have spent everything we earned, have saved or invested nothing and still have to borrow another $50,000 just to make ends meet. So what did this great deficit reduction accomplish – not only absolutely nothing – it actually left us in worse financial condition as now we owe a total of $150,000 that we cannot pay back! This is what your federal government is talking about with their great “deficit reduction”. If you or I were to try running our own businesses or god forbid our family finances in this manner – we would be out in the streets in no time at all. But there is still a bigger problem here – all of this money we keep borrowing has to be paid back – with interest! So now even if we did finally wise up and live within our means on our fictional $100,000 per year salary – we don’t even have that to spend because we still have the principal and interest to pay back on that other $150,000 that we borrowed and spent. So now a part of that $100,000 per year salary has to be used to paying off our debt and we end up with even less to live on and have to further do without because of it. Sounding familiar yet? Al least in our simple example – the problem can’t get too bad or go on for very long because eventually we would be regulated and corrected by the fact that no one will lend us any more money anyway. Unfortunately the federal government doesn’t believe it has that problem – they somehow think they can go on borrowing and spending forever. Even Deficit Reduction is still more spending money that we don’t have. Have I digressed? This article was about the future and the impending rise in interest rates. Now let’s see part II of the problem. Capital (money) is said to be like water always flowing to its best return. But the supply of capital is not infinite – there is only so much of it to go around. It is just like water in a bucket – if the government drinks it all – what is left in the pail for us? If water is scarce and in short supply whoever can pay the most for it will be the one to get it. With capital – the price is the “return” or interest rate. The government can pay whatever the market will bear. Can we? When the government borrows – it has an unfair advantage over you and I – the interest paid by the government is tax-free – when we pay interest it is not. They can pay less and the investor is still better off – we have to pay more in interest to have access to that capital (loans) because it is a rigged game. Put these together and what do you get? This idea of deficit reduction is still not enough. You get a government still on a spend and borrow binge, taking capital out of the markets and leaving less for consumers such as us which makes money more scarce and further driving interest rates up for the rest of us. Deficit reduction is not a balanced budget, it still takes capital out of the markets leaving less for the rest of us and forcing us to pay even higher interest rates. This effect went largely unnoticed when the government was using much of this borrowed money to subsidize interest rates through the purchase and insuring of mortgage backed securities ( see part 1). Now with the government pulling back from the mortgage market game, yet still increasing their borrowing, we now have a double pronged scenario for another storm in the mortgage markets with catastrophic implications for an already fragile housing market. How high will interest rates go and how quickly? No one knows for sure but if you were planning on buying and financing any real estate in the next few years – you might want to do it now. Even further price declines will most likely be offset by increased borrowing costs making the next several months the time that many of us will look back upon as the best time to buy real estate that any of us ever missed!

Mike Krein

How high (and how fast) will interest rates rise?

How high (and how fast) will interest rates rise? Last week the Obama administration came up with some new ideas about how the mortgage markets should work along with a plan to overhaul Fannie Mae, Freddie Mac and the FHA. As it stands right now Fannie and Freddie issue mortgage backed securities, while FHA primarily guarantees to buy back bad loans as a form of insuring the loans made by private banks/investors. It is through these vehicles that the federal government (really us – the taxpayers) seeks to create liquidity and lower interest rates. By using our taxpayer dollars, the federal government is in effect spending our money to back and guarantee loans. This way these loans carry a lower risk and have broader appeal to the investors who buy them. It is only for these reasons that interest rates have remained so low. Basically just another form of privatize the profits – socialize the losses. So be it – it is what it is. But now what? The changes that the Obama administration has proposed will gradually (maybe 2-3 years) take the government out of the Mortgage backed securities and insurance business. This will be done by phasing down (or out) Fannie Mae and Freddie Mac and limiting the role of the FHA. Right now – the government has nearly 95% of this market and these changes would bring their role down to possibly below 40%. Without those guarantees in place on the other 60% of the market - Will investors continue to buy mortgage bonds and if so at what price? If last week’s market reaction was any indication – it is going to be a lot worse than we thought… Nothing has actually been done yet – this was just the Obama administration talking about scaling back from the mortgage backed security business. Even though nothing has actually changed yet – just the mention of the idea of less government involvement here drove the market nearly 50 basis points the other way! If this was the reaction just because they are talking about it – can you imagine how the markets will react if they actually do it? Given the risks right now and investor sentiment when it comes to the housing industry, our current albeit artificially low interest rates could easily swing by 2 or 3 percentage points. This will certainly have a drastically negative impact at what is now and will continue to be an extremely fragile housing market at best. The drop in purchasing power alone from such an interest rate hike could easily turn a decent housing market downwards. In our current state it could kill what there is of the market altogether! Combine this idea with an impending bout of inflation, (how much money have we actually borrowed and/or printed) and the removal of these so-called safety valves and interest rates could go through the roof and lead us right into another recession. Can anyone say “Jimmy Carter”? But it might be even worse as we have another factor coming into play which will only compound these issues further. Stay tuned for Part II

Mike Krein

Predicting the Housing Markets

One of the questions I am constantly being asked is: “When is the market coming back?”

This is really a pretty silly question. As the response from me would need to be: “back to what?”

Most people are usually referring to the highs of the real estate market which tended to have been somewhere in 2007, depending of course on where you lived.

But back to what? - Is a reasonable answer? If the market coming back means overinflated and unsustainable? – My answer is hopefully never.

If people are asking if their house will ever again be worth what it was in 2007, the answer is probably yes but not for a very long time to come.

Other people are always asking me if I think the market has hit bottom yet? Nobody has ever been right when answering this question either. Furthermore you will never know when a market has hit bottom until after it has been coming back up for several months. Therefore you can know where the bottom was until after you have passed it. Nobody has ever really been able to time a market.

Right now the housing markets are basically unpredictable for the simple reason that they were being artificially manipulated.

For example in many markets we have no idea what the true supply or demand really is because the inventory primarily of foreclosed homes is being held back in many markets. In some of these markets when a home does hit the market it has multiple offers on it the same day.

Nobody knows how much inventory is really being held back nor when it will hit the market. For that reason even though there is a shortage of “saleable” inventory and what is available tends to receive multiple offers, the prices still aren't being bid up that much over the asking price.

Trying to gauge exactly what is going on and will happen next is pretty much impossible.

There are a few different scenarios that could play out in a few basics and patterns that are starting to emerge.

But first and foremost housing markets are no longer national, there are regional. This has to do with the massive population shifts that are starting to occur. There are some markets such as Michigan and Ohio that may never come back. There are other markets such as Nevada and Arizona which will probably not only come back relatively quickly but do so in an extraordinary manner.

We also have to remember that we are in a national recession with unemployment in excess of 10 to 15% in many areas. How local housing markets will recover will be greatly dependent not only on when but where employment comes back.

Most real estate markets when in balance will appreciate at about 3 to 5% per year or normally just above the inflation level. Markets also tend to oscillate as return to their norms, with the swings both up and down becoming smaller and smaller as they approach stability.

In my home market of Clark County Nevada the swings were some of the most severe in the country. We shot way above our historical norm and then after the bust, we fell down well past its historical norm. If all else in the economy were stable our housing market is probably 20 to 25% below where it should be.

Assuming the rest of the economy comes back and unemployment returns to normal levels we should see a 20 to 25% increase in prices assuming that our excess inventory can be absorbed. This comes back to population shift, as more and more people choose to leave other areas of the country and move to Nevada, this excess inventory could be rapidly absorbed in prices would actually shoot past and above our historical norms. This is what most likely will occur; the only question is how soon?

 The fact is that during periods of high unemployment, people become much more mobile and are willing to trade proximity to friends and family in return for a job and/or a better quality of life. In other words they are much more willing to relocate.

This is going to become particularly true for those located in high tax states.

Obviously this is just a blog of a very limited nature and there are hundreds of other factors that could be argued. But I had to make a bet, the fastest markets to “come back” are going to be Nevada, Arizona, and parts of Florida.

 

The rise and fall of the housing markets….

There’s been a lot said about what caused the real estate bubble and the subsequent crash.

There is not enough finger-pointing in the world to cover everyone who was really involved. The simple answer was greed - plain and simple -on everyone's part.

Certainly government policies had a lot of influence and possibly helped to create the scenario that allowed everyone else to jump in. Frankly I've always wondered about that, meaning the government's role not only in direct policy but almost from a political relations standpoint as well.

The fact is so many economists are always so wrong because all of their fancy charts and graphs never seem to include enough about human nature itself.

The reality is that when people feel poor they spend less money, when people are spending less money the economy slows. When people feel rich they spend more money in the economy grows. No reason to over complicate this.

Coming out of the late 90s and the tech stock boom people felt rich, and they spend money because they felt rich. The economy hummed along and everything was rosy. When the tech bubble burst and stocks came crashing down around January of 2000, people felt poor again. They stopped spending money and the economy started to slow.

It was really about wealth and wealth creation. How does one create wealth? There are several ways, but the easiest and fastest is to simply raise the value of the assets you already have.

Now the government could not re-inflate the stock market, so they did something even better in that they inflated an even larger market, they inflated the real estate market. It was simply supply and demand, increase the demand on a known quantity and the price will rise. Demand was increased through liberal lending policies that created buyers that never should have existed.

Unfortunately they did it a little too well and after that human nature took over and euphoria ensued. During the boom you couldn't walk into a cocktail party without hearing about who just flipped what, and who just refinanced for how much. Everybody was bragging about how well they were doing in real estate.

And so the abyses began, you had many people who were now financing a lifestyle that they really couldn’t afford with the increased equity in their homes. Hell - to many of these people a dollar borrowed was a dollar earned. Boats , cars, trips,  - not a problem with the way the value of our house keeps going up we can just do this again next year.

Not to mention everyone was now a real estate investor.

Investors - my ass ……… it was amateur hour at the highest levels. It was a bunch of people who had no idea what they were doing all believing they were getting something for nothing and patting themselves on the back and convincing themselves they were geniuses. Quickest way to go broke is to take credit for a market.

The reality is I have absolutely no sympathy for any of these so-called investors. First off an investment is just that, an investment you put your money down and spin the wheel like everyone else and sometimes you win and sometimes you lose - that is called risk - and the amount of return that you get is in direct proportion to the risk that you take.

The funny thing is I have spoken to hundreds of these so-called investors right up to the time I took the house back for the bank. Not one of them had a clue what they were doing. I can honestly say that with 90% of the ones I spoke to - had they bothered to even get a little education about what they were doing, they wouldn't have gotten themselves into this mess. Seriously, $.50 worth of late charges at the library and reading a book or two, most of them wouldn't have lost what they did, and many might have actually made a few bucks when it was all said and done.

So nope, no sympathy for them. Making money in real estate can be tough, but it's even tougher when you're stupid. When you choose to be completely ignorant, you deserve what you get.

But it was the investors, by the way an interesting side-note here is that about 25% of the homes that I foreclosed on and took back for the banks were owned by either real estate agents, loan officers, or sometimes both. It was the so-called professionals that should've known better and that were the biggest drinkers of the “Kool-Aid”.

Now, before you think I am completely heartless on this matter, I will tell you who I do feel sorry for. I feel sorry for the young couple who was forced to overpay and to over borrow just so they can have a place to raise their kids.

These people weren't looking to get rich, they weren't flippers, they were not investors, they just wanted a home of their own. A piece of the same American dream that their parents had. It was these younger families primarily that got royally screwed.

These were the folks that got hurt. And no, nobody forced the gun to their head and told them they had to buy a house. But the reality for many was that they were so afraid that if they didn't buy a house then, they would never be able to afford to them the future. Sad really.

So they overpaid, they over borrowed, they took teaser rate loans with adjustable rates, all because they were getting priced out of the market by a bunch of greedy fools.

I'm not a fan of all of this government intervention, frankly I don't like my tax dollars being used to reward and bailout those who refused to live within their means, while those of us who did act responsibly get nothing. Actually we get less than nothing, it is those of us who acted prudently that are being forced to pay for those that did not.

With that said I do sympathize with some people who got burned during the housing boom and bust.

 

But who really is to blame?

Who really should be paying to clean up this mess?