Notorious R.O.B.

I need help. Someone explain these numbers (PDF) to me, like I’m six years old.

I mean, I think I have a pretty good education. I think I have a pretty solid record in business operations, marketing, and overall management. I think I know how to read 10-K’s and spreadsheets and so on. But these numbers have me scratching my head.

	Rental vacancy rate				Homeowner vacancy rate
Year	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
2007	10.1	-	-	-	2.8	-	-	-
2006	9.5	9.6	9.9	9.8	2.1	2.2	2.5	2.7
2005	10.1	9.8	9.9	9.6	1.8	1.8	1.9	2.0
2004	10.4	10.2	10.1	10	1.7	1.7	1.7	1.8
2003	9.4	9.6	9.9	10.2	1.7	1.7	1.9	1.8

The Census Bureau did a study in April of 2007 on residential vacancy rates.  The real estate bubble supposedly burst in 2005.  According to this GAO study, from Q2 of 2005 to Q2 of 2007, foreclosure inventory “rose sharply” by 55%.

So… uh… where are all these people living then?

Look at from Homeowner vacancy rates from Q2 of 2005 in the chart above.  It goes from 2.2% to 2.8%. That 0.6% vacancy rate presumably means that some 1.2 million Americans lost their homes (300m population, 68.4% homeownership rate, then 0.6% of that number in additional foreclosures).

Meanwhile, the rental vacancy rate goes from 9.6% to 10.1%?  And it went up every single quarter since Q2 of 2005?

Three possible explanations:

1.  Foreclosures were happening for the most part on investment properties.  Those people who owned foreclosed homes have primary residences; they just walked away from their “quick flip” properties, having lost a bundle of money.  But they are not homeless and do not need an apartment.

If true, then the whole “homeowner rescue” legislation is a crock of steaming dung.  “Speculator rescue” is more like it.

2.  Developers built so many rental units from 2005 to 2007 that despite the increased demand, vacancy rates went up.

One would think one might have heard a thing or two about this.

3.  There are now legions of homeless people on the streets of America.

One would think one might have heard about an additional million homeless people.

So which is it?  Or is this the magical mystery vacancy rate number?

-rsh

According to the Zillow Blog, 1 in 7 American homeowners are now “underwater” on their mortgage. So the Zillowites ran a survey of 1300 homeowners. And found interesting answers:

One question we asked was:

Do you think homeowners who are currently facing foreclosure because they took out an adjustable rate mortgage or other loan that they can no longer afford should receive government assistance in order to be able to stay in their home?

Nearly half (48%) of homeowners said no. Meanwhile 28% support government intervention, and 24% “don’t know.”

Thank goodness that at least 48% of American homeowners still believe in capitalism. But the title of that post is “Foreclosures Are No Longer a Subprime Crisis”. The author goes on to ask:

But what about homeowners who didn’t take out a “creative,” or risky mortgage? Are there really many homeowners out there with good credit, a solid down payment, and all the right intentions who are at risk to default on their loans? Zillow’s Q2 Real Estate Market Reports point to dozens of U.S. markets where the stage is certainly set by fast-growing rates of negative equity.

Take the Miami-Ft. Lauderdale MSA, for example. The median down payment in 2006 was 10%, or $30,873 based on the median home value of $308,731 when that market peaked in Q1 2006. Since the peak, Miami home values have fallen 26.8% , meaning the average buyer that year has not only lost his down payment, but is now underwater on his mortgage by nearly $52,000. Should this homeowner now lose a job, or fall behind in payments, he’s in dire straits.

The implication is that we should in fact be supporting some sort of a government bailout for these “responsible” homeowners who are in dire straits. Whatever you might think of those idiots who did the no-money-down ARM’s and such, we ought to rescue the homeowners with good credit, a solid down payment, and all the right intentions who are at risk to default. That’s the implication.

You know what? I’m on board with a government bailout. By all means, let us rescue these honest homeowners who were victimized by a horrible housing market. They’ve already lost all of the equity in the house — at least the example in Miami did. If they should lose a job or fall behind in payments, why… that’s a terrifying situation. Sign me up. I’m all for it.

There is a condition, however, that I would have to insist on. (You knew there would be strings attached, right?) Here it is:

If you take taxpayer money to bailout your house, you forfeit all future gains.

Here’s how it would work.

A homeowner can get a low-interest government loan to restructure their existing mortgage. Using the example above, the home was valued at $300K; homeowner put down $30K, and financed $270K. The home is now valued at -25% from that peak, so $225K. The government will pay the bank $270K to buy the mortgage from the bank; it will then issue a low-interest 30-year fixed rate (say at the discount rate, which is what the Fed charges money center banks, currently at 2.25%) loan for $225K to the homeowner, eating the loss of $45K. The bank gets its principal back, although no profit on the loan. C’est la vie. It’s better than foreclosure and REO. The homeowner is able to stay in his house, and has payments that are way below market.

At the same time, the government computes what the market rate would have been for a 30-year fixed rate mortgage for the full $270K by the homeowner, with his FICO score, etc. It computes the difference between that loan and the government loan it just gave to the homeowner. Using today’s prevailing 30-yr fixed rate of 6.36%, the expected interest payments over 30 years would have been $335,448.27. The government loan, $225K at 2.25% over 30 years, comes to interest payments of $84,619.34. The difference is $250,828.93.

If the house is ever sold, the homeowner’s gains are limited to $225K plus the interest paid on the government loan to date. All amounts over that would go to the government. If the homeowner sells the house in 2012, he would have paid $21,190.27 to the government in interest. His gains are limited to $246,190.27. Everything over that amount goes to the government: you forfeit your future gains.

If the housing market should turn around, and the house’s value goes back up to $300K, then that appreciation goes to the government. If the appreciation is so much that it will cover the difference between a private mortgage and the government mortgage, then the homeowner is able to get that.

So for example, say our rescued homeowner sells his house in Miami after living there for 20 years, paying a 2.25% government mortgage. In the year 2028, his house in Miami is now worth $600K. The homeowner is able to get the $225K original valuation plus $74,608.17 in interest payments. That comes to basically $300K. The difference between the private mortgage @ 6.36% and the government mortgage over 20 years is $226,113. That goes to the government. The remainder of $74K ($600K – $300K – $226K) goes to the homeowner.

If the home is sold for less than $270K, the homeowner will end up owing the government the difference, which it will take directly out of paychecks, tax returns and any other direct transfer programs.

The principle is the same as the bailout.  If we, the public, are going to insure people against loss and risk, then by golly, we should get the rewards of the transaction.  In a normal capitalist economy, people are allowed to fail, because they’re allowed to succeed.  A private homeowner who weathers the storm can come out the other end and make the money back — because he’s taken on the risk, he takes on the reward.  If we’re going to have a program that makes people whole for risks, for job loss, for anything bad that could happen, then we should by rights be able to reap the rewards of taking that risk ourselves.

If the public rescues homeowners because house values dropped, then the public should benefit when house values rise.

With that proviso, I can support a government bailout.

-rsh

In light of this atrocious story, it might be time to think about some new initiatives. (H/T: Zillow Blog)

Not only is the bank owner losing any potential value in this property, but it will cost the bank an additional $10,000, “to pay $2,500 in sales commission and another $1,000 bonus for closing the $1 sale; the bank also will pay $500 of the buyer’s closing costs. Throw in back taxes and a water bill, and unloading the house will cost the bank about $10,000.”

It is well past time for us to consider a new 21st century Homestead Act.  I wrote about this previously as well, but the sight of a $1 house is evidence that something dramatic needs to be done.

• Rough outline of a new Homestead Act:
• Banks surrender the property to the municipality.  They can claim a loss for future tax writeoff, but importantly, they get the property off their balance sheets.
• Municipality waives all back taxes, transfer fees, etc.
• Utilities write off all water/electric bills, etc.
• Property is made available as is to any legal resident willing to live there.
• You must stay in the residence for at least five years.
• During your stay, you must maintain the house in reasonable condition and not engage in any illegal activities in the house.
• It must be your primary residence for those five years.
• You must pay all property taxes and fees associated with homeownership, such as for trash removal, water and sewage, etc.

At the end of the five year period, the homesteader receives full title to the property free and clear.

In a stroke, you have eliminated the foreclosure problem, provided a path out of urban blight issues, and provided low-cost housing to families who actually want to work at achieving their American dream.

It’s time.

-rsh

Inman News has a very interesting… I guess one would have to call it an Op/Ed or News Analysis on the Washington Post’s story on HUD Secretary Jackson’s last day:

An article in last Sunday’s Post deserves credit for attempting to go beyond the allegations of cronyism that forced Jackson to resign, and taking a deeper look at the role HUD policies may have played in the housing downturn. Unfortunately, the article doesn’t deliver on that promise.

The Post claims that because Jackson “pushed for legislation that would make it easier for federally backed lenders to make mortgage loans to risky borrowers who put less money down,” he will be “remembered as a Cabinet secretary so committed to carrying out President Bush’s goal of increasing homeownership that he encouraged policies that threatened to exacerbate the mortgage crisis.”

Matt Carter does go on to explain some of the political shenanigans that went on in wa-wa land (aka, Washington DC, which is like la-la land, aka, Hollywood, in that they both indulge in fantasies, but different in the personal attractiveness factor) and basically debunks the WaPo story.  The entire thing is worth a detailed read, especially if you’re interested in legal and political issues in real estate.

I thought it interesting, however, that there were two assumptions made in the story.

First, Matt assumes good faith on the part of the Washington Post.

What’s ironic about the Post’s story is that the Bush administration (and Republicans in general) usually come under fire from housing advocates for attempting to limit the government’s role in lending — especially when it comes to Fannie and Freddie, which during the housing boom were hobbled by caps on their portfolios and requirements to maintain additional capital (those limitations were imposed in the wake of management and accounting scandals that forced both companies to restate several years of earnings). Some critics say the limits on FHA, Fannie and Freddie were one reason “private label” lenders — many employing much looser underwriting criteria — were able to boost their market share so dramatically during the boom.

To claim that the administration’s lone attempt to expand a government-backed loan guarantee program “threatened to exacerbate the mortgage crisis” suggests a lack of awareness of the changes that took place in the lending industry during the housing boom, or the motives for expanding FHA loan guarantee programs.

Matt — maybe it’s not a “lack of awareness” but willful ignorance?  Or worse still, perhaps the WaPo simply doesn’t care about inconvenient things like the truth.  I think he actually means to suggest it, but is politely refraining from calling a spade a spade.  I have no such restraints, polite or otherwise.  Washington Post’s story is nothing more than a politically motivated hit piece on the Bush Administration written by left-wing editors and writers in an attempt to lay the blame for the current pain in the real estate market at the feet of the White House by any possible means.

It’s a shame, but that is the state of the “news” media in this country today.  When people like Ron Peltier of HomeServices and Alex Perriello of Realogy talk about the relentlessly negative media environment for real estate, there is some truth to their complaints.

As Matt Carter himself reports in another article on Inman, fact is that this whole ‘subprime’ thing may have been much ado about nothing:

According to the latest economic letter from the Federal Reserve Bank of San Francisco, it’s likely ARM loans have higher delinquency rates than fixed-rate loans not because of the payment shock associated with interest rate resets, but because the people who took them out had higher risk characteristics.

And later in the article:

The flip side of Yellen’s analysis is that markets that weren’t subject to lots of speculation are in better shape to weather the storm. PMI’s latest risk index shows a reduced risk of price declines in markets that didn’t see steep run-ups in prices during the housing boom.

Huh.  And here we are, thinking all this time that the reason why the housing market is in the tank is because of irresponsible bankers and mortgage brokers selling these DANGEROUS subprime loans to poor unsuspecting consumers.  Turns out, mortgages have less to do with delinquencies than the price fluctuation brought on by speculation?  Whodathunk reading the New York Times or Washington Post?

About those poor unsuspecting consumers… that’s the second assumption Matt makes.  He writes at the end of his excellent analysis:

HUD estimates the simplified disclosures will help consumers save $8.35 billion a year. Had those disclosures been in place during the frenzied buying of the housing boom, many buyers who got into homes by taking out loans they didn’t understand might have instead gone with more affordable mortgages — or not taken out a loan at all. (Emphasis mine)

Why do we continue to believe that the problem was buyers who “didn’t understand”?  Why do we persist in the assumption that these delinquent buyers were tricked, fooled, bamboozled into buying million dollar homes on $35K a year incomes?  Maybe these buyers understood perfectly well that they were taking an enormous gamble but simply didn’t care; maybe they all thought they’d get out before the market crashed and make a few tens of thousands of dollars for nothing.  Maybe they fell into the trap that every bubble-economy fool falls into: the Greater Fool theory.  Maybe they’re not poor unsuspecting victims after all, but simply gamblers without morals or ethics or sense of personal responsibility.

That would, after all, fit the profile of “higher risk characteristics”.

People are walking away from houses not because the loan terms got so damn onerous, but because their gamble didn’t pay off.  That’s the only possible interpretation of the San Francisco Fed report.  ARM or 30-year fixed, makes no difference — the rapid rise, then rapid fall, in housing prices does.  Those are the facts.

The responsible buyers, the ones who didn’t feel like speculating on real estate, who weren’t “flipping condos” and dreaming of making big bucks on No Money Down deals, they’re still buying in this market.  They were buying at the height of the boom too — but they didn’t go pouring everything into $2M condos on $50K a year.  They behaved like rational adults, rational consumers.  And they continue to do so.

Are there innocent victims?  Meh… I suppose… but it would have to be one hell of a story involving either a health crisis or unemployment to pass the smell test if someone bought a house they simply could not afford a mere two years later.

As for the Washington Post and the rest of their comrade-in-arms in the media… should we see a Democrat elected to the White House in the fall, I think we’ll suddenly find that the editors will discover hitherto unseen silver linings in the real estate cloud.  The sun will break through the dark clouds, and wonder of wonders, we may come to learn that WaPo and NYT begin to see a ray of hope, a brighter tomorrow.

Even then, making assumptions about their “lack of awareness” would be a step too far in the direction of naivete.

-rsh