Feds Intent On Another Housing Bubble/Bailout



Apparently, we’ve so much money in the government today, that we’re intent on fixing something that isn’t broken.  Yes, I know, that’s a shocker.  But, this is beyond stupid.

Reuters, among others, has a story out. 

Home prices rose in ninth straight month: S&P

NEW YORK (Reuters) – Single-family home prices rose in October for nine months in a row, reinforcing the view the domestic real estate market is improving and should bolster the economy in 2013, a closely watched survey showed on Wednesday.

The S&P/Case Shiller composite index of 20 metropolitan areas gained 0.7 percent in October on a seasonally adjusted basis, stronger than the 0.5 percent rise forecast by economists polled by Reuters.

“Looking over this report, and considering other data on housing starts and sales, it is clear that the housing recovery is gathering strength,” David Blitzer, chairman of the index committee at Standard & Poor’s, said in a statement.

While record low mortgage rates and modest job growth should keep the housing recovery on track, analysts cautioned home prices face downward pressure from a likely pickup in the sales of foreclosed and distressed properties and reduced buying investors and speculators.

Prices in the 20 cities rose 4.3 percent year over year, beating expectations for a rise of 4.0 percent.

Housing contributed 10 percent to the overall U.S. economic growth in the third quarter, while the sector represented less than 3 percent of gross domestic product, he said.

I haven’t written much about the housing market lately because there really hasn’t been much to write about.  It’s growth has been slow but steady.  This is exactly what one wants in a major economic sector.  As the article rightly points out, there is downward pressure because of people like me.  There are a lot of distressed properties still.  What needs to happen is these properties need to bottom out.  Yes, some people and banks will take a bath on this.  But, that’s how the markets work.  I won’t dwell on the part about making wrong decisions, that’s a huge part of how the markets work, instead, I’ll just point out that if the homes are sold at a very discounted price, then it is very likely the next sale of the property will be significantly increased.  In other words, a very short term hurt, for a significant long term gain.  The bottom part of the housing market is what keeps the housing market healthy.  As we saw in the early part of the last decade, when there is no bottom part of the market, a bubble quickly ensues, and then an inevitable crash.  But, still, even with the downward pressure, we see that housing has been a positive factor in our GDP.  There are some troubling spots in housing, which I’ll get to in a moment.

So, what’s feds’ reaction to this lonely bright spot in the US economy?

U.S. may expand mortgage refinance program: WSJ

(Reuters) – The U.S. government is considering expanding its mortgage refinancing program to include borrowers whose mortgages are not backed by Fannie Mae and Freddie Mac, the Wall Street Journal reported, citing people familiar with the discussions.

The refinancing program now being considered also seeks to include “underwater” borrowers who owe more than their homes are worth, the Journal said.

About 22 percent of all homes with a mortgage, or around 10.8 million homes, down from 12.1 million last year, were worth less than the outstanding balance at the end of June, the Journal said, citing data from CoreLogic.

Combined with Fannie Mae and Freddie Mac, which buy loans and repackage them as securities for investors, Washington’s footprint in the market has grown to account for nearly nine of every 10 mortgages.

This proposal isn’t so much a bailout proposal as it is a proposal to monopolize a market sector.  Of course, the problem with that is that the feds are complete imbeciles and can’t run an ink pen, much less the housing market.  But, like the infomercial says, “but, wait, there’s more”!

Townhall’s Kevin Glass reports the Federal Housing Administration (FHA), hit hard by the collapse of the housing bubble, is still making risky loans on the taxpayers’ dime, and may need a bailout in 2013.  Writing in the Wall Street Journal, Nick Timiraos reports that the FHA will be facing a $16.3 billion shortfall at the end of September, forcing the government to direct taxpayer money to the agency.

Further reporting from Timiraos is that the agency will be suspending its most popular reverse-mortgage program.  The federal government itself, despite the home bubble collapse in 2008, has added fuel to the fire.

In 2009, as home values plunged, Congress boosted the maximum home value that seniors could borrow against, fueling more demand for reverse mortgages. Private offerings of reverse mortgages disappeared as the housing bust deepened.

So, what happens when the feds pump billions into an otherwise healthy market?  We’ll have another bubble directly if the feds get their way. 

A final thought on being upside down on a mortgage.  Unless one scrapes to lower part of the market, looking for a bargain, then nearly all mortgages start being upside down.  Given the long term financing, and the interest rates people with poor credit ratings pay, they stay that way for quite some time.  22% is probably a higher percentage one would like to see, but the trend is getting better.  We’ve continued to spend $billions to fix something that is self-correcting.  And, we’re going to spend $billions more even the problem has already been resolved.  I just can’t figure out why the government is broke! 

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24 Responses to Feds Intent On Another Housing Bubble/Bailout

  1. DirkH says:

    I am just considering writing models to predict the exact moment of the USD’s collapse.

    Bernanke currently prints 7% or so of the US GDP (assuming 14 tn GDP, 1 tn being the amount printed by Bernanke).

    So that money will blow up bubbles SOMEWHERE – it is used to pay for benefits and bureaucrat wages; it seeps through the economy and will inflate prices somewhere – not where the FED wants it but somewhere.

    And, as we have 7% more money chasing goods every year, it fuels inflation. So, just to maintain the status quo, Bernanke will have to increase his money printing by 7% each year.

    After 2 years that’s 14% compared to today.
    After 4 years, 31%.
    After 8 years, 71%.
    After 16 years, 195% – the USD will then be worth a third of what it is now. (Factor 2.95 to be precise)

    The most interesting metric is the public debt in % of GDP / tax revenue. We see that it has spiked for Japan. They are near a financial singularity and will default within 2 years. This is the Keynesian endpoint.

    They pay NO interest on their debt – they had declared 0% long before the US – yet the need to issue more debt is so big that the rise in ratio of public debt in percent of GDP to tax revenue cannot be stopped.

    Doubtlessly, this will devour the USD as well, maybe some years later.

    When you consider this context, it doesn’t matter whether the feds try to blow up a housing bubble, or the education bubble (they will likely absorb the 1 tn of accumulated student debt). It doesn’t matter at all which bubble they will blow up. Bubbles will occur and burst on the way to the endpoint.

    I can’t say yet where the Eurozone stands in this game. We have outsourced some of our Keynesian endpoint to the PIGS but not all of it. Maybe we’ll be devoured with a delay.

    Any honest attempt to stop this would have to see a mass culling of bureaucrats but that has never been observed in the last few decades. Even the PIGS don’t cull them to any meaningful degree.

    • DirkH says:

      Oh sorry, I assumed erroneously that inflation / money printing stays constant at 7%. But every year this rate itself must of course be inflated itself, which gives us the following more realistic model:
      # a Python helper function:
      def step(a):
      global rate
      return a
      # Initial rate:
      rate = 1.07
      # Now let’s see, first step / first year we have “1” money:

      I’m not sure at which point we can call it hyperinflation. But that’s what “monetizing the debt” does.

      • DirkH says:

        I’m not sure about the
        rate = rate*rate
        statement. Might be too pessimistic. After 1 year, my inflator rises from 1.07 to 1.14 this way. Looks fishy to me. Increasing “7%” by 7 % should give something like 7.49 percent, or a new inflator factor of 1.0749.

        Modifying the statement to
        rate = (rate-1.0)*rate+1.0
        gives the following time series:
        >>> step(1.0)
        >>> step(1.07)
        >>> step(1.15)
        >>> step(1.24)
        >>> step(1.34)
        >>> step(1.46)
        >>> step(1.61)
        >>> step(1.79)
        >>> step(2.01)
        >>> step(2.29)
        >>> step(2.66)
        >>> step(3.16)
        >>> step(3.87)
        >>> step(4.95)
        >>> step(6.71)
        >>> step(9.96)
        >>> step(17.12)
        >>> step(38.28)
        >>> step(144.11)
        >>> step(1644.14)
        >>> step(196893.70)

        • DirkH says:

          That one pleases me much more. Because it allows for the first 4 Obama tn Dollar deficits without immediate runaway.

    • suyts says:

      “It doesn’t matter at all which bubble they will blow up. Bubbles will occur and burst on the way to the endpoint.”

      Yes, the money has to go somewhere, and it will, and it we’ll have a series of disastrous bubble bursting until the very end.

      I think, given the incestuous nature of our banking and finance people, once the US hits the bottom of the drain, the rest will soon follow. The recession of 2008 was just a prelude to a series of events which are sure to come.

      • tckev says:

        “…the money has to go somewhere…” so you better catch it while it’s hot because a little later it will worth diddly-squat

      • suyts says:

        No doubt. It’s horrible that money isn’t worth saving. That’s probably the worst part of this whole obscene thing.

        • DirkH says:

          The savers are getting destroyed. But one could look at it this way – it is just the Dollar that’s getting destroyed. What will you use as a medium for exchange when it is no more practical to use Dollars? Surely near the Canadian boarder people might pay in CAD instead. Bartering will become much more interesting. And so on.

        • suyts says:

          Yes, it’s a scary thought. I’m collecting copper wire just in case that’s the next medium. 🙂

        • DirkH says:

          I see it not as scary but as a shift from one means of exchange to others. We already switched from the D-Mark to the Euro. Our East Germans switched from DDR-Mark to D-Mark to Euros. I used French Francs, Italian Lira, Turkish Lira and whatnot for payments.

          Maybe it’s a little scary for Americans who never had to switch… but consider that the USD has lost 96% of its value since the birth of the FED.

        • suyts says:

          So maybe I don’t have to stock up on copper wire? 🙂 I’m not sure what will be the medium. Maybe we’ll use an old European trick and simply revalue the old currency. We’ll say $100 is now = to our old one dollar bill, and go from there.

        • DirkH says:

          Peru did that once in the 80ies (I think), but they opted for six zeros, so one new Inti was also known as an “Intimillion” in old Intis.

          Studying the history of older inflating countries helps. It’s not always as catastrophic as the Weimar republic or Zimbabwe.

        • suyts says:

          And it doesn’t have to be today, except for the fact that the world still turns to the US. We’re still the world’s largest economy and with world’s biggest consumers. Export nations won’t be able to ship their goods fast enough. Well, you know the rest.

  2. Latitude says:

    The S&P/Case Shiller composite index of 20 metropolitan areas gained 0.7 percent in October on a seasonally adjusted basis
    Let’s take a house that was $350,000…
    …and now can’t even sell for $150,000

    and it’s gained 0.7%…….
    ..a whopping $1000

    I feel like a party…don’t you?

    My second favorite is “house sells are up”…….

    ..up from what???? When you sold one house in the past five years…and you sell two?

    • DirkH says:

      Overall prices fell by 36% from the high in 2006.
      For a buyer it’s important to know whether the trough has been reached.
      Of course it’s little solace for the guy who bought at the peak. But as he was a house flipper anyway he deserves it. 😉

    • suyts says:

      Well, right, the houses were horribly overpriced, but as Dirk points out. Most were flippers who were preying upon the ignorant. They deserve it.

    • Latitude says:

      the biggest problem…

      we have over 1.5 million houses in the shadow market in Florida alone…..

      As long as the government is making their payroll, the banks and mortgage companies have no incentive to do anything about it…..they are hoping they can ride it out until prices come up

      But the fact that they are doing that….is driving prices down!

      • suyts says:

        Yep…. a bit self-defeating.

      • DirkH says:

        Yes, Lat, there are forces in both directions (upward pressure from buyers). At some point an equilibrium is established , and it seems to be now.

        (Ignoring the fact that if you price the houses in Gold or in NZD or AUD, it would still look as if they continue to become cheaper, the “constantness” of prices achieved now is on the sliding scale of the USD – or in other words, the decline of home values is now happening with the same speed as the decline of the USD)

        • Latitude says:

          and, as long as they keep printing money
          People should be very careful, what looks like a good deal in yesterday’s money
          will not be in tomorrow’s money

        • DirkH says:

          In general, in the inflationary regime the US is sliding into, and which Bernanke has confirmed is his intention, you better spend your cash today than tomorrow – and make sure to get cheap fixed interest rate credit, as much as you can get. Buy physical gold or other durable assets for it, now.

          The Icelanders had a word for it when they had high inflation before their short-lived banking industry boom : Wertbolga; inflation in theri language – you buy an expensive house and make a lot of debt, wertbolga will take care of that.

          The Turks do it to this day, as soon as they get their wages they go and buy cement, bricks, steel for their houses or exchange their Turkish Lira into Euros (which is inflating much slower).

  3. DirkH says:

    Here is an astonishing graph that shows the disconnect starting with QE.

    The RATIO of Copper to Gold used to behave EXACTLY like the S&P 500 (for obvious reasons : the ratio removes currency effects, and total copper demand correlates well with industrial activity)

    Starting in 2010, though, the S&P decoupled and is now 50% higher than it would otherwise be. With the ongoing pumping of money into the economy, this is going to get worse faster.

  4. David says:

    “Combined with Fannie Mae and Freddie Mac, which buy loans and repackage them as securities for investors, Washington’s footprint in the market has grown to account for nearly nine of every 10 mortgages.”
    Yep, just as they did leading up to the crisis, only more, they have nationalized the game, and the banks kow tow to them big time. (I think they recieved an offer they could not refuse) They simply stopped the court house auction to the common man. Now it flows through the short sale process, or a non owner , often middle eastern, or Chinese “group” purchases the foreclosed homes in mass before the public ever see it. (You can find evidence for this in the ever increasing rise of absentee owners despite the drop in foreclosures)

    I do not know where this will end, but the current market is not real. The affect of forcing short sales and removing the public from the bidding process on any foreclosures beyond the short sale process, is to create an articficial demand from the public for what is left in the general non foreclosure market. Itr is curious, the Feds are trying to rig the entire resedential real estate market. Markets have a way of rebelling against such manipulation, requireing ever stronger constraints until it all goes kaboom anyway.

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