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| The housing 'recovery' is built on false confidence | The housing 'recovery' is built on false confidence |
| (about 2 hours later) | |
| In finance, people like to dub the services that banks provide "products". For instance, advice on your 401k is a "retirement product". Mortgages are another product. Checking and savings accounts are also products. | In finance, people like to dub the services that banks provide "products". For instance, advice on your 401k is a "retirement product". Mortgages are another product. Checking and savings accounts are also products. |
| But the most popular product that Wall Street sells – and the most profitable – is one you'll never actually find on any brochure. That product is confidence. Right now, confidence is the backbone of the housing recovery. | But the most popular product that Wall Street sells – and the most profitable – is one you'll never actually find on any brochure. That product is confidence. Right now, confidence is the backbone of the housing recovery. |
| Confidence is the best product of all because it's self-replicating. It's time-consuming and expensive to find brokers to sell stocks or loan officers to sell mortgages. All you need to sell confidence, however, is evidence of previous confidence. The housing market is a perfect example of this. Today, the National Association of Realtors released its numbers on existing home sales, which are a monthly indication of the health of the housing market. | Confidence is the best product of all because it's self-replicating. It's time-consuming and expensive to find brokers to sell stocks or loan officers to sell mortgages. All you need to sell confidence, however, is evidence of previous confidence. The housing market is a perfect example of this. Today, the National Association of Realtors released its numbers on existing home sales, which are a monthly indication of the health of the housing market. |
| Like most housing indicators over the past year, the news looks good at first glance. The annualized home sale rate was 5.18m in May, compared to 4.97m in April. The annual rate of sales is at the highest since November 2009. Prices are up; the median price of a home or condo in the US is now $208,000, which is up one-sixth from the same time last year. For six months, housing prices have risen 10% or more. | |
| The fastest home prices rose this much before was in October 2005, at the height of the housing bubble. Taken at face value – and that's a risky proposition – these numbers appear to tell us that enough people have the ability and desire to buy homes that they're driving up the prices. | The fastest home prices rose this much before was in October 2005, at the height of the housing bubble. Taken at face value – and that's a risky proposition – these numbers appear to tell us that enough people have the ability and desire to buy homes that they're driving up the prices. |
| Similarly, housing starts – ground broken on new homes – were also up this week after struggling for months. In addition, the Case-Shiller Index of home prices signaled that many troubled markets that were devastated by foreclosures, including California and Nevada, are now rebounding. Anyone who was underwater on his house – that is, who owed more on the mortgage than the house was worth – can now dig out and consider selling, as CoreLogic noted recently: | Similarly, housing starts – ground broken on new homes – were also up this week after struggling for months. In addition, the Case-Shiller Index of home prices signaled that many troubled markets that were devastated by foreclosures, including California and Nevada, are now rebounding. Anyone who was underwater on his house – that is, who owed more on the mortgage than the house was worth – can now dig out and consider selling, as CoreLogic noted recently: |
| "Regaining equity creates options for those who might now consider selling their homes because they can close a transaction with enough cash to make a down payment on the next home. Higher prices also attract the interest of builders who see opportunity in increased demand. In both cases, a broader supply brings inventory more in balance with demand." | "Regaining equity creates options for those who might now consider selling their homes because they can close a transaction with enough cash to make a down payment on the next home. Higher prices also attract the interest of builders who see opportunity in increased demand. In both cases, a broader supply brings inventory more in balance with demand." |
| This looks like a win-win. Unfortunately, win-wins don't really exist when it comes to money. When one person wins, another loses. So it is with housing. This recovery, for some, will be a trap. | This looks like a win-win. Unfortunately, win-wins don't really exist when it comes to money. When one person wins, another loses. So it is with housing. This recovery, for some, will be a trap. |
| The housing recovery should be approached with caution because of the underlying factors behind the great numbers. The majority of buyers are not regular people. In fact, first-time homebuyers are a smaller part of the housing market than they have been in years. | The housing recovery should be approached with caution because of the underlying factors behind the great numbers. The majority of buyers are not regular people. In fact, first-time homebuyers are a smaller part of the housing market than they have been in years. |
| "It's a precarious recovery because it's based on rentals, not new home owners," economist Gary Shilling said in an interview this week. Builders are breaking ground on multi-family homes – rentals – at a far faster pace than they are on single-family homes this year. Starts on such rentals are up 40% so far this year. That's confirmation that the most powerful buyers of residential homes right now are banks and private investment firms, flush with millions of dollars and eyes for a good deal, who are looking for homes to sell or rent. | "It's a precarious recovery because it's based on rentals, not new home owners," economist Gary Shilling said in an interview this week. Builders are breaking ground on multi-family homes – rentals – at a far faster pace than they are on single-family homes this year. Starts on such rentals are up 40% so far this year. That's confirmation that the most powerful buyers of residential homes right now are banks and private investment firms, flush with millions of dollars and eyes for a good deal, who are looking for homes to sell or rent. |
| "If you've signed a lease in the past year, there's a good chance your landlord wears a tailored suit and works on Wall Street," The New Republic wisely wrote in February. The Blackstone Group alone – just one of many investors, including Colony Capital, that are snapping up properties – spent $1.5bn on homes last year, according to Bloomberg News. | "If you've signed a lease in the past year, there's a good chance your landlord wears a tailored suit and works on Wall Street," The New Republic wisely wrote in February. The Blackstone Group alone – just one of many investors, including Colony Capital, that are snapping up properties – spent $1.5bn on homes last year, according to Bloomberg News. |
| This keeps the housing game all in the family. Where investment firms like Blackstone are called the "buyside" of Wall Street, banks are the "sellside". That's because they do the selling: of stocks, of bonds, of mortgages, of homes. Banks, who hold the great stock of housing because of housing-bust dump of foreclosures, are limiting the supply of foreclosed homes for sale so that there isn't a glut on the market. | This keeps the housing game all in the family. Where investment firms like Blackstone are called the "buyside" of Wall Street, banks are the "sellside". That's because they do the selling: of stocks, of bonds, of mortgages, of homes. Banks, who hold the great stock of housing because of housing-bust dump of foreclosures, are limiting the supply of foreclosed homes for sale so that there isn't a glut on the market. |
| The recovery, however, will inevitably inspire the return of some of the corruptions and abuses of the old boom. | The recovery, however, will inevitably inspire the return of some of the corruptions and abuses of the old boom. |
| First the abuses: this is the time to keep a close eye on how the sausage of the recovery is made. Things are going to go wrong; people in the housing industry will be tempted towards corruption. About 18% of May home sales were foreclosures or short sales, and were sold cheaply: at about a 15% discount. Foreclosures are a big part of the recovery, and the production of foreclosures is ugly. | First the abuses: this is the time to keep a close eye on how the sausage of the recovery is made. Things are going to go wrong; people in the housing industry will be tempted towards corruption. About 18% of May home sales were foreclosures or short sales, and were sold cheaply: at about a 15% discount. Foreclosures are a big part of the recovery, and the production of foreclosures is ugly. |
| When foreclosed homes are desirable to sophisticated, institutional, credit-worthy buyers, it stands to reason that banks will try to scrounge up as many foreclosures as possible. Banks are one-celled capitalist organisms: if there is demand for a product, banks will do everything possible to produce more of that product. That is part of their business purpose: to watch the market, and take advantage of it. | When foreclosed homes are desirable to sophisticated, institutional, credit-worthy buyers, it stands to reason that banks will try to scrounge up as many foreclosures as possible. Banks are one-celled capitalist organisms: if there is demand for a product, banks will do everything possible to produce more of that product. That is part of their business purpose: to watch the market, and take advantage of it. |
| This path to profitability is not always a process, however, that consumers can always accept as a moral one. Lo and behold, a class-action lawsuit filed this week alleges that Bank of America rewarded staff who pushed homeowners into foreclosure faster. The alleged rewards were pathetically modest: gift certificates to Bed Bath & Beyond or Target were considered enough, apparently, to permanently kick people out of their homes. Bank of America disputes the lawsuit, saying it paints a false picture of the bank's foreclosure practices. | This path to profitability is not always a process, however, that consumers can always accept as a moral one. Lo and behold, a class-action lawsuit filed this week alleges that Bank of America rewarded staff who pushed homeowners into foreclosure faster. The alleged rewards were pathetically modest: gift certificates to Bed Bath & Beyond or Target were considered enough, apparently, to permanently kick people out of their homes. Bank of America disputes the lawsuit, saying it paints a false picture of the bank's foreclosure practices. |
| It doesn't exactly stretch credulity, however, to recognize that banks provide bonuses to the best producers – whether they produce derivatives, mortgages or foreclosures. If the courts find that there is a bonus-backed push towards foreclosure, it is particularly sinister because there is ample evidence that banks are not acting fully in good faith as they process foreclosures. | It doesn't exactly stretch credulity, however, to recognize that banks provide bonuses to the best producers – whether they produce derivatives, mortgages or foreclosures. If the courts find that there is a bonus-backed push towards foreclosure, it is particularly sinister because there is ample evidence that banks are not acting fully in good faith as they process foreclosures. |
| They make plenty of mistakes: misjudging delinquencies, overcharging members of the military and seizing homes where mortgages were current, and, for good measure, some banks are literally robbing widows of their homes. | They make plenty of mistakes: misjudging delinquencies, overcharging members of the military and seizing homes where mortgages were current, and, for good measure, some banks are literally robbing widows of their homes. |
| Another potential abuse comes from the sheer volume of houses that are being bought by cash-rich institutional buyers. With hundreds of thousands of houses snapped up by investors, it is dubious that the firms are painstakingly arranging each mortgage and signing their names in ink. It is instead more likely to a thinking person that many firms may, logically, depend on automatic signatures to speed up the process. This practice, when it is abused, is known as "robo-signing," and it was the subject of several lawsuits and settlements with Wall Street banks. There is no signal yet that automatic signatures are currently being abused in the housing recovery, but it is one area to watch for trouble. | Another potential abuse comes from the sheer volume of houses that are being bought by cash-rich institutional buyers. With hundreds of thousands of houses snapped up by investors, it is dubious that the firms are painstakingly arranging each mortgage and signing their names in ink. It is instead more likely to a thinking person that many firms may, logically, depend on automatic signatures to speed up the process. This practice, when it is abused, is known as "robo-signing," and it was the subject of several lawsuits and settlements with Wall Street banks. There is no signal yet that automatic signatures are currently being abused in the housing recovery, but it is one area to watch for trouble. |
| Outside of the potential abuses, there are other reasons to be skeptical of the cheerleading around the housing recovery. The numbers are not what they seem. When you hear the hyperventilating around the rising stock prices of homebuilding companies, remember as one economics blogger notes that residential construction is actually at 1998 levels because it's difficult to find financing: | Outside of the potential abuses, there are other reasons to be skeptical of the cheerleading around the housing recovery. The numbers are not what they seem. When you hear the hyperventilating around the rising stock prices of homebuilding companies, remember as one economics blogger notes that residential construction is actually at 1998 levels because it's difficult to find financing: |
| "Something is holding back construction. Anecdotal evidence suggests that local and regional banks who used to fund residential construction are still holding back." | "Something is holding back construction. Anecdotal evidence suggests that local and regional banks who used to fund residential construction are still holding back." |
| The giddy rise in house prices, too, should be examined skeptically. For one thing, in a sane market, such double-digit rises for so long are not sustainable. Housing prices depend on the economy and the health of the consumer. | The giddy rise in house prices, too, should be examined skeptically. For one thing, in a sane market, such double-digit rises for so long are not sustainable. Housing prices depend on the economy and the health of the consumer. |
| The economy is not improving that fast; both unemployment and income is relatively stagnant; and lending is not rising, we should be suspicious that housing - which depends on all of those - is suddenly booming. House prices are rising when the rest of the economy is languishing; that's either a sign of an overheated market or some external manipulation. | The economy is not improving that fast; both unemployment and income is relatively stagnant; and lending is not rising, we should be suspicious that housing - which depends on all of those - is suddenly booming. House prices are rising when the rest of the economy is languishing; that's either a sign of an overheated market or some external manipulation. |
| In fact, that is exactly what is happening. The biggest product in the housing market right now is not new homes or mortgages or rentals. It is confidence: people are buying because they believe other people are buying. That's a weak foundation for a real recovery. | In fact, that is exactly what is happening. The biggest product in the housing market right now is not new homes or mortgages or rentals. It is confidence: people are buying because they believe other people are buying. That's a weak foundation for a real recovery. |