NORTHWOOD

Loan modifications and short sales are only solutions government and lender focus on

Nov 212012

Based on their recent behavior, it’s safe to conclude the government and the banking cartel believe they can resolve all their ills through loan modifications and short sales. Despite a huge shadow inventory of delinquent loans, lenders have slowed their foreclosure processing, and they show no signs of picking up the pace despite the recent increase in delinquencies likely caused by people opting for a free ride. I believe lenders will ultimately be forced to push out committed squatters in a foreclosure, but I also believe that lenders will also try and fail at every other alternative first. The push for loan modifications Lenders have good reasons to pursue loan modifications. If these failing programs could be made successful, they [Read More...]

Shiller: 50 years for house prices to reach peak levels without another bubble

Nov 152012

Many markets in Orange County barely corrected during the bubble collapse. Many of the most desirable markets are already selling for more than peak values due to the stimulus intended to revive the rest of the national market. This will be the story over the next few years as some markets inflate mini-bubbles in reaction to stimulus while some markets languish under the weight of shadow inventory liquidations. Over time, the substitution effect will kick in and the markets will reestablish the equilibrium they once had prior to the housing bubble. Of course, that assumes politicians stop stimulating and manipulating the housing market at some point — an assumption that may be proven false. Nobody who isn’t kool aid intoxicated [Read More...]

The voice of housing entitlement today

Nov 052012

The housing bust is littered with sob stories about people losing their family homes. As I noted Responsible Homeowners are NOT Losing Their Homes. To see the truth in this statement, one needs to have a clear definition of “responsible homeowner.” A “responsible homeowner” is a buyer who, if they utilized financing, did not stray from the conservative parameters set forth by lenders (prior to the bubble) and financial planners. This includes using a maximum 28% debt-to-income ratio on the mortgage, at least a 20% downpayment and fixed-rate conventionally amortizing financing. Few who fit this definition are going to lose their homes; although, some of them may chose to walk away from the debt because they are hopelessly underwater. The only [Read More...]

Deleveraging is a myth: Generation Ponzi doesn’t repay loans

Nov 022012

When consumers take on debt, eventually it’s paid off. Debt is not an asset people spend their lives accumulating, at least it’s not supposed to be. Paying off debt is a process known as deleveraging. In a growing economy, young people take on debts to buy cars and houses while old people pay off debts. In aggregate, debts should grow at a measured pace. When lenders make debts grow too fast, the economy becomes over-stimulated and debtors become insolvent. When large numbers of borrowers become insolvent, a credit crunch ensues, and the bills come due. This flushes out the Ponzis and mass deleveraging takes place. When economists think about deleveraging, they envision people who got a little overextended tightening their [Read More...]

The spring rally is over

Oct 112012

Every year prices and sales volumes increase from January through August, then they decline for the remainder of the year generally hitting bottom on the last business day in December. The pattern repeats every year, and it’s not new or surprising. realtors generally take advantage of this phenomenon to call the bottom every year and to stoke fears of being priced out to generate more spring and summer sales. By fall, many buyers stop looking, particularly those with families who don’t want to disrupt their children by moving during the school year. Over the last five years, sales volumes have been extraordinarily low due to the collapse of the housing bubble and the resulting unemployment and trashed credit from millions [Read More...]

Will the home mortgage interest deduction be repealed?

Sep 262012

Do we really need to give high wage earners a huge tax break as an encouragement to take on excessive debts? That’s what the home mortgage interest deduction really does. If the deduction were eliminated, home values in areas like Orange County populated by high wage earners would drop to establish a new equilibrium, but nobody would go without. In fact, the home mortgage interest deduction does little or nothing to increase home ownership rates because the low wage earners at the fringe of affordability don’t use the deduction anyway. Studies have show home ownership rates are just as high in countries like Canada that do not have the deduction. So why do we keep it? Apparently, there is a [Read More...]

Strategic defaulters would recommend others do the same

Sep 192012

Most people are cautious by nature waiting for others to pioneer new places, new ideas, and new patterns of behavior. People will observe the results of pioneering behavior, and if the pioneers are rewarded and recommend what they did to others, the herd will follow. If the pioneers are handsomely rewarded and strongly recommend a course of action to others, the herd can turn into a stampede. The rewards of strategic default has bankers worried. With 11 million underwater loan owners, the last thing bankers want is a wave of strategic default as overextended borrowers realize they can eliminate their debt-service payments with little or no penalty. The onerous burden of housing debt may be soothed by rising prices, but [Read More...]

Niether presidential candidate benefits from the housing bubble

Sep 022012

President Obama’s housing policies have been as successful as the circumstances would allow. Back in June I quipped, Obama’s housing policy succeeded wildly by failing spectacularly. Personally, I would have preferred he let the banks go bankrupt, nationalize them, fire management, recapitalize the banking system, and sell them off the bank’s stock when the economy recovered. Unfortunately, the flash-point of the crisis occurred while Bush was still in office, and these institutions were deemed too big to fail. Obama continued Bush’s flawed policies and looked for solutions that did not bankrupt the banks. This left few good options. Once bank bankruptcy was taken off the table, the natural corrective mechanisms in the system could not be allowed to function. Mark-to-market [Read More...]

When will the inventory return to the MLS?

Aug 142012

With the serious problems facing the housing market including high delinquency rates creating a massive shadow inventory, a weak economy, tepid demand from owner-occupants, excessive consumer debt, a depleted buyer pool due to credit impairment, and artificially low interest rates, it’s a wonder housing prices aren’t still heading straight down. The recent uptick in prices is largely due to a successful attempt by the lending cartel to restrict for-sale inventory on the MLS. Without this inventory restriction, prices would almost certainly be headed lower. At some point, the shadow inventory of delinquent mortgage squatters will be cleared out. The liquidation will either lower prices or limit appreciation for a long time while these properties are processed. The big question is, [Read More...]

Rising home prices are the cure for strategic default

Aug 102012

Just as buying a home is an emotional decision, defaulting on the mortgage and giving up a home is too. Any borrower who is deeply underwater and making payments in excess of a comparable rental would benefit financially from strategic default. That’s the math. However, defying the logic, very few loanowners are actually defaulting. People cloak their reasons with intellectual rationalizations, but it’s an emotional decision based on the desire to keep their family home and the ethical considerations that go along with the decision. As with any emotional decision, it may be right, or it may be wrong depending more upon the perceptions of the decision maker rather than some outside measuring stick. Since this is an emotional decision, [Read More...]

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