The Housing Market Debate: 2011

About

The Debate focus is:
1. Can the Housing Market recover in the United States after the huge crash?
2. If the Housing Market can recover what steps must be taken for a complete recovery to occur.
3. What were the major causes of the Housing Market Crash.
4. Housing Market Cycles.
5. Comparisons to the Japanese Housing Market Crash.
6. Economic definitions (ie what is a housing bubble), models, and economic data that pertains to the housing market either directly or indirectly.
7. Historical discourse of the housing crash.

Example of Housing Crisis:
(the same house) Year 2002 : $300K ----> Year 2005 = $600K ----> Year 2010 = $200K
In general housing prices go down according to supply and demand. If there is an increasing supply the housing prices go down because of the increased inventory of homes for sale on the market. The state of the economy also effects the value - if there are no jobs people won't buy a house. If banks don't lend people won't buy a house. Housing prices go up when there is demand from a strong economy and a decreasing inventory of houses. As the inventory depletes housing tracks go up to fill the need. If there is no demand there's no reason to build new homes.

When there are 20 forsale signs up for a house and only a few buyers the price goes down.

If there are 3 houses and 5 able & willing buyers the price goes up.

The increase in foreclosures and everyone (including investors) trying to jump out of the market at once caused housing prices to come down rapidly. Why would anyone want to buy a new house when the prices go down especially when there are a ton of foreclosed houses at reduced rates?
They don't! There's simply no reason to pay to have a house built unless it's a custom when there's excess inventory and even nice houses went up for foreclosure because of the slow economy overall.

Historical Discourse

Historical discourse of the Housing Collapse
US Housing Market Peaks Out
In 2004 to 2005 Arizona, California, Florida, Hawaii, and Nevada recorded price increases in excess of 25%.
US Housing Market Begins Declining
Later in 2005 (the end of the 4th quarter) Housing prices halted abruptly. Median prices nationwide dropped by 3.3% between the 2005(4th quarter) - (1st quarter) 2006. By year end of 2005 846,982 properties were in some stage of foreclosure.
In 2006 housing inventories begin to build up. The US Home Construction Index (HCI) is down over 40% in mid August 06 as compared to the year earlier. Foreclosures jump to 1,259,118 up 42% from 2005.
In 2007 Home sales continue to fall and prices continue to decrease. The plunge in existing-home sales is the steepest since 1989. The subprime mortgage industry collapses and foreclosure activity doubles from 2006. Rising interest rates threaten to depress prices further as problems in the subprime markets spread to the near-prime and prime mortgage markets.
February 2007 - more than 25 subprime lenders declare bankruptcy or put themselves up for sale.
April 2nd 2007 - New Century Financial, the largest US subprime lender, files for chapter 11 bankruptcy.
In August a worldwide credit crunch erupts as subprime mortgage backed securities are discovered in portfolios of banks and hedge funds around the world. Many lenders stop offering home equity loans and "stated income" loans. Federal Reserve injects 100Billion for banks to borrow at a low rate.
August 16 2007 - Countrywide Financial Corporation (the biggest mortgage lender) narrowly avoids bankruptcy by taking out an emergency loan of 11 billion from a group of banks.
August 17 2007 - Federal Reserve lowers discount rate by 50 basis points from 6.25% to 5.75%.
August 31 2007 - Ameriquest (once the largest subprime lender in US) goes out of business.
September 18 2007 - The Federal Reserve Bank lowers interest rates by 1/2% (50 basis points) to 4.75% to "limit damage" to the economy from the housing and credit crisis.
September 30 2007 Housing prices fell 4.9% from Sept. 2006 in 20 large metropolitan areas according to Standards & Poor's - Case-Shiller index. It's the 9th straight month prices have fallen.
October 15-17 2007 A consortium of US banks backed by the US government announced a "superfund" (super-SIV) of $100 billion to purchase mortgage-backed securities whose mark-to-market value plummeted in the subprime collapse.
October 31 2007 The Federal Reserve Bank lowers the federal funds rate by 25 basis points to 4.5% and the discount window rate by 25 basis points to 5%.
November 1 2007 The Federal Reserve Bank injects $41B into the money supply for banks to borrow at a low rate. The largest single expansion by the Fed since $50.35B on September 19, 2001.
December 11 2007 Federal Reserve Bank lowers the federal funds rate by 25 basis points to 4.25 percent and the discount window rate by 25 basis points to 4.75 percent.
December 24 2007 A consortium of banks officially abandons the U.S. government-supported "super-SIV" mortgage crisis bail-out plan announced in mid-October, citing a lack of demand for the risky mortgage products on which the plan was based, and widespread criticism that the fund was a flawed idea that would have been difficult to execute.
December 26 2007 Standard & Poor's Case-Shiller index of housing prices in 20 large metropolitan areas for October 2007 is released showing that for the 10th straight month priced have fallen, but most worrying is that the decline in home prices accelerated and spread to more regions of the country in October. "Since their peak in July 2006, home prices in the 20 regions have dropped 6.6 percent. Economists' predictions of the total amount of home price declines from the bubble's peak range from moderate 10–15 percent to larger 30–50 percent price declines in some areas.
End of Year 2007 A total of 2,203,295 foreclosures were filed on 1,285,873 properties during the year, up 75 percent from 2006. More than 1 percent of all households were in some stage of foreclosure during 2007, up from 0.58 percent in 2006.

Lehman

Lehman Brothers Subprime mortgage crisis and collapse

In August 2007, the firm closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took an after-tax charge of $25 million and a $27 million reduction in goodwill. Lehman said that poor market conditions in the mortgage space "necessitated a substantial reduction in its resources and capacity in the subprime space".

In 2008, Lehman faced an unprecedented loss to the continuing subprime mortgage crisis. Lehman's loss was a result of having held on to large positions in subprime and other lower-rated mortgage tranches when securing the underlying mortgages; whether Lehman did this because it was simply unable to sell the lower-rated bonds, or made a conscious decision to hold them, is unclear. In any event, huge losses accrued in lower-rated mortgage-backed securities throughout 2008. In the second fiscal quarter, Lehman reported losses of $2.8 billion and was forced to sell off $6 billion in assets. In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten. In August 2008, Lehman reported that it intended to release 6% of its work force, 1,500 people, just ahead of its third-quarter-reporting deadline in September.

On August 22, 2008, shares in Lehman closed up 5% (16% for the week) on reports that the state-controlled Korea Development Bank was considering buying the bank. Most of those gains were quickly eroded as news came in that Korea Development Bank was "facing difficulties pleasing regulators and attracting partners for the deal." It culminated on September 9, when Lehman's shares plunged 45% to $7.79, after it was reported that the state-run South Korean firm had put talks on hold.

On September 17, 2008 Swiss Re estimated its overall net exposure to Lehman Brothers as approximately CHF 50 million.

Investor confidence continued to erode as Lehman's stock lost roughly half its value and pushed the S&P 500 down 3.4% on September 9. The Dow Jones lost 300 points the same day on investors' concerns about the security of the bank. The U.S. government did not announce any plans to assist with any possible financial crisis that emerged at Lehman.

The next day, Lehman announced a loss of $3.9 billion and its intent to sell off a majority stake in its investment-management business, which includes Neuberger Berman. The stock slid seven percent that day. Lehman, after earlier rejecting questions on the sale of the company, was reportedly searching for a buyer as its stock price dropped another 40 percent on September 11, 2008.

Just before the collapse of Lehman Brothers, executives at Neuberger Berman sent e-mail memos suggesting, among other things, that the Lehman Brothers' top people forgo multi-million dollar bonuses to "send a strong message to both employees and investors that management is not shirking accountability for recent performance."

Lehman Brothers Investment Management Director George Herbert Walker IV dismissed the proposal, going so far as to actually apologize to other members of the Lehman Brothers executive committee for the idea of bonus reduction having been suggested. He wrote, "Sorry team. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize."

Financial fallout of Lehman

Lehman's bankruptcy was the largest failure of an investment bank since Drexel Burnham Lambert collapsed amid fraud allegations 18 years prior. Immediately following the bankruptcy filing, an already distressed financial market began a period of extreme volatility, during which the Dow experienced its largest one day point loss, largest intra-day range (more than 1,000 points) and largest daily point gain.

What followed was what many have called the “perfect storm” of economic distress factors and eventually a $700bn bailout package (Troubled Asset Relief Program) prepared by Henry Paulson, Secretary of the Treasury, and approved by Congress. The Dow eventually closed at a new six-year low of 7,552.29 on November 20, followed by a further drop to 6626 by March of the next year.

The fall of Lehman also had a strong effect on small private investors such as bond holders and holders of so-called Minibonds. In Germany structured products, often based on an index, were sold mostly to private investors, elderly, retired persons, students and families. Most of those now worthless derivatives were sold by the German arm of Citigroup, the German Citibank now owned by Crédit Mutuel.

Wednesday, October 19, 2011

Foreclosure Trend Chart 2007-2010 (Q1):

(click any chart to enlarge)

From 2002-2004 The Federal Reserve "fed funds rate" policy (see picture below) was artificially low encouraging banks to lend and the FED didn't raise the rates fast enough to prevent a credit bubble and reflect the true market risk. After the housing collapse the FED then began lowering rates again which was the partial cause of the first collapse. It was an attempt to prop up the markets but the damage had already been done. When rates are artificially low (say below 2%) it actually crimps credit because it doesn't reflect the true market risk. They got away with this the 1st time because the market hadn't busted yet but would have great consequences. Low rates also cause inflation in commodities because it weakens the buying power of the USD because commodities like oil are imported on the most part:

Each of the five largest investment banks took on greater risk leading up to the subprime crisis:

Gold Prices double between November 2005 - March 2008 and triple between November 2005 - April 2011. The most likely cause is artificially low rates that are set by the FED. Had people borrowed money to invest in gold instead of houses they would have tripled their investment.:

Hover over state to get foreclosure data - California is the worst by the looks of it:

California and Illinois are major industrial centers in the US are hit very hard by foreclosures.

The negligence in the housing market is extended to the government - debt creation exceeding all eras except for the world wars. This chart is Total Spending as a % of GDP(Gross Domestic Product):

National Debt as a Percent of National Income

Don't be fooled by Clinton. He signed a bill to repeal the Glass Steagall Act that deregulated the banks and may have been partially responsible for the severity of the housing bubble. This repeal allowed banks like Bank of America to gamble with the money people put in their checking and savings account like a hedgefund does. With the losses of the bets they either have to be bailed out or face bankruptcy.

Even if they don't go bankrupt they face a condition known as insolvency where the bank doesn't have the assets to cover it's debt obligations. Banks are greedy organizations that need to be regulated properly. The Glass Steagall Act was created because of the 1929 depression and it's rules designed to prevent another one. It wasn't too long after it's repeal that we had the great housing collapse and the great recession.

Sen. Carter Glass (D–Va.) and Rep. Henry B. Steagall (D–Ala.-3), the co-sponsors of the Glass–Steagall Act.

President Bill Clinton repealed Glass Steagall on November 12, 1999. The housing bubble peaked and burst in 2005 but Clinton looked like a financial genious while he was in office. Later the country had to pay deeply for his move to let the banks hold their own reins so to speak.

The onset of the economic crisis took most people by surprise. A 2009 paper identifies twelve economists and commentators who, between 2000 and 2006, predicted a recession based on the collapse of the then-booming housing market in the U.S: Dean Baker, Wynne Godley, Fred Harrison, Michael Hudson, Eric Janszen, Steve Keen, Jakob Brøchner Madsen & Jens Kjaer Sørensen, Kurt Richebächer, Nouriel Roubini, Peter Schiff and Robert Shiller.

Among the various imbalances in which the U.S. monetary policy contributed by excessive money creation, leading to negative household savings and a huge U.S. trade deficit, dollar volatility and public deficits, a focus can be made on the following ones:Commodity boom, 2000s energy crisis and 2007–2008 world food price crisis.