Economic Indicators

Just a few odds & ends I thought were worth reporting:

Both Lowes and Home Depot had better than expected quarters. This is a positive sign for the construction industry, as is the fact that builder sentiment was up for the second straight month according to the National Association of Home Builders, which attributed the gain in part to the $8,000 tax credit for many first-time buyers. (Source: WSJ, CNBC)

Although the above is favorable news and indicates a stabilization of the housing market in the near future (stabilization, not rebound), there are still a few shoes to drop, such as impending defaults on commercial real estate loans and the effect of those defaults on small to mid-sized banks. A Wall Street Journal study predicated on similar criteria as those used by the federal government for the large bank stress tests shows potential losses of $100 billion for 900 small to mid-size banks relating to commercial real estate loans. These losses would dwarf the losses from residential loans, anticipated to be approximately $49 billion for these same banks. (Source: WSJ)

In Jamie Dimon's conference call for JP Morgan today, he had harsh words for the TARP program relating to the lack of clarity as to the means by which the government will allow repayment. He also noted that it is possible we are seeing a bottom in the economic downturn. (Source: CNBC)

In short, a mixed bag...

Misconception

Regarding the most recent stimulus package which is now in effect, the $8,000 tax credit for first-time home buyers is in fact a true credit. As a practical matter, it replaces the $7,500 "tax credit" which preceded it and which was actually a loan. The only caveat is that a homeowner must retain ownership of the property for three years, or the $8,000 will be recaptured. (I believe the entire $8,000 out of the proceeds of the sale will be recaptured. However, I am not certain if the amount recaptured is predicated on the amount of the capital gain on the home. In other words, is the amount recaptured capped by the gain if the gain is less than $8,000?) In addition, this credit is gradually reduced for individuals whose income is over $200,000 per year and couples whose income is over $250,000 per year. (Sources: MAR, WSJ)

As an aside, President Obama's budget calls for a reduction in the Mortgage Interest Deduction on a graduated basis for individuals whose income is over $200,000 per year and couples whose income is over $250,000 per year. (Sources: MAR, WSJ, CNBC)

Without getting too political, people should look long and hard at the economic philosophy underlying the graduated phasing out of benefits as referenced above based on income ratios. Does this comport with your economic school of thought, along with your goals and aspirations?

$15,000 Credit Update

According to Fox Business, part of the compromise regarding the stimulus package was the watering down of the $15,000 tax credit for the purchase of a primary residence. Originally, the credit was to cover the purchase of any primary residence, regardless of the number of homes one had owned in the past. However, it now appears that the credit will be applicable only to first-time buyers.

This is obviously a blow to real estate professionals including, but not necessarily limited to, real estate agents & brokers, mortgage lenders & brokers, and home builders. Weren't these stimulus packages, TARP, etc. designed to stabilize the housing market? After all, it is the general consensus that the crux of the economic distress rests with the real estate meltdown. Hmmm...

$15,000 Tax Credit

As of yesterday, February 4, Republicans were making great strides toward inserting a powerful real estate stimulus into President Obama's proposed stimulus package. According to the Associated Press, Republicans appear to have been successful in negotiating a $15,000 tax credit into the package. Specifically, the tax credit is for 10% of the value of the home, with a cap of $15,000. (The current credit is for $7,500.) Purportedly, the breadth of the credit will also be expanded to include all home buyers, as opposed to only first-time buyers. (Source: Associated Press)

In the event that this credit comes to fruition, the positive ramifications for the market should not be discounted or underestimated. I envision this credit being a tipping point for the countless people who want to sell their current homes and then purchase new homes. Many people are not selling because they fear they will not be able to afford to buy another home. For many, this tax credit could be the answer. This credit will offset a large portion of the costs associated with buying and selling. Similarly, first-time buyers who are on the fence as to whether to pull the trigger will have another reason to dive into this buyer's market.

As an aside, here are some statistics for the local housing market (15 towns from Boxford through Littleton, MA) covering trends for December as compared year over year (December '08 as compared to December '07): Single-family home sales increased 7%, but the most dramatic shift was an increase of 158.1% in sales of multi-families. In contrast, condominium sales slid by 39.4%. The drastic increase in multi-family sales is explained in large part by the steep decline in the median price, which fell by 36.2%. Prices for single-family homes and condominiums fell by 10.5% and 15%, respectively. All three types of properties described herein are still sitting on the market for an average of 4 to 5 months. (Source: Northeast Association of REALTORS).

Mortgage Developments

The Senate reached an agreement in principle with Citigroup wherein Citigroup is giving its blessing to legislation allowing for bankruptcy judges to cram-down mortgages. The cram-downs will allow judges to reduce the principal and/or interest on troubled mortgages so long as the homeowner shows that they attempted to negotiate with the lender prior to filing bankruptcy. Further, the mortgage at issue would need to predate the legislation. The proposed legislation, in its current form, would only apply to Chapter 13 bankruptcies. (Source: WSJ)

Whether the above will be a positive or a negative is anyone's guess. Will this stabilize the real estate market, or just increase Chapter 13 bankruptcies, prolonging inevitable sales with another layer of red tape? Moreover, will this move chill the already frigid environment for mortgages, further restricting the flow of credit?

On a more decidedly positive note, Fannie Mae, in conjunction with Bank of America (through its subsidiary, Countywide Financial Corp.) has implemented a pilot program regarding short sales, the bane of many Realtors' existence. This program is not yet available locally, but calls for the lender to preapprove the price on a short sale, thus enabling Realtors, sellers and buyers to have a much clearer view of the playing field and increasing the likelihood of a completed transaction. (Source: WSJ)

If anyone sees a downside to preapproved short sales, please enlighten me at your earliest convenience. It appears to me that this approach is long overdue.

FED Rate Slashed

The FED just cut the target rate to between .25% and 0% and said it will do all things necessary to keep mortgage rates and the cost of money low. It will likely keep the target rate at this level for quite some time. The FED will also be aggressively buying mortgage-backed securities and does not appear to be concerned with inflation. (Source: CNBC)

My simple advice with regard to real estate: Buy! Buy! Buy! Upsize! Do not sell and/or downsize for the next few months. From a cyclical perspective and in light of the posturing of the FED, the market from a seller's perspective may look better in 3 or 4 months as mortgage rates are likely to decline, thus helping to stabilize prices. Again, I must stress - as I have in the past - that I am not overly optimistic with respect to a quick turnaround. I am looking for a bottom and then a very gradual uptick in prices and sales volumes.

Second Bailout Package

FED Chairman Ben Bernanke is currently testifying on Capitol Hill and giving his blessing to a second stimulus package should Congress deem it appropriate to pass such a measure. He is stressing that any package should focus on freeing up the credit market. In addition, Mr. Bernanke is encouraging Congress to ensure that any package be fashioned in such a way so as to not unduly burden the budget deficit. (Source: CNBC)

My understanding is that the first package (somewhere between $700 billion and $850 billion) was inclusive of the $250 billion that the government is in the process of funneling into the banks. Roughly half of that money will go to nine major banks with the other half being distributed to smaller banks. This action and the remainder of the first package was also intended to free up the money supply and/or credit.

My questions are as follows:

Where is the remainder of the money from the first package going and/or what are the remaining details of the first package? (There is talk of writedowns of principal on mortgages, restructuring of mortgages to certain homeowners and the purchase of certain debt on the open market.)

Should we not allow the first package to be fully implemented prior to passing a second package, or, at minimum, have a clear explanation as to why the first package will be insufficient?

How are we going to pay for these packages, particularly if the government buys bad debt at above market prices? Are we simply delaying the inevitable with regard to the cyclical nature of the economy, and thus causing a larger financial crisis in the not-so-distant future?

How long does the government intend to be an owner/investor in major financial institutions which have previously been the province of the private sector (excluding Fannie Mae and Freddie Mac)?

In my opinion, most importantly:

With respect to any writedowns of principal on mortgages, is this going to be done uniformly for all homeowners and, if not, what will protect the equity for homeowners who are excluded from the writedowns? Will the excluded homeowners not immediately lose equity as a result of writedowns on principal of similarly valued comparable properties?

In the event that these proposed writedowns are not uniform and certain homeowners are excluded, this will be tantamount to a vast redistribution of wealth. Whether one agrees with such actions by the government is not my concern for purposes of this blog, but let's be clear on what the intended and unintended consequences of these action will be on the economy as a whole, certain classes of people and you, the reader of this blog.

The Little Guy / Small Businessman

Here's what no one seems to be talking about...(those who are, aren't speaking loud enough, or aren't being heard!)

As the federal government picks and chooses which financial institutions will be saved and people debate "moral hazard", the issue remains liquidity. In the housing market, that means loans for builders and mortgages for consumers. From my perspective and for my benefit, I am in no rush to see more homes built with the supply as it is, so my concern is with access to mortgages.

As we all know, or should know, mortgages were being given out too liberally. This debt was ultimately packaged and sold on the open market through complex vehicles that no one understood. When borrowers started to default on mortgages and the end investors figured out that what they had bought was backed by no-documentation/no-verification loans, the money supply dried up. (simplistic, but basically accurate)

Here's the problem now...

As is often the case, the pendulum has swung way too far in one direction. There is/was a valid need for the loans discussed above. The small businessperson who uses legitimate tax planning tools is unable to justify his/her ability to pay back a loan and right now it is almost impossible for him/her to qualify for a mortgage.

I sincerely hope that the mortgage industry is able to create a mechanism by which these people can qualify for mortgages. In the alternative, the government must restructure the tax code so as to make it practical for small businesses to make a profit on paper. After all, small businesses employ roughly 70% of the workforce. Owning a small business has many drawbacks. Do we really need to create another by blocking access to home ownership for the people taking most of the risk and who act as the engine for our economy?

Fannie/Freddie

As many of you may have heard, Fannie Mae and Freddie Mac, which own, or guarantee, roughly $5 trillion in U.S. mortgages are on the verge of being taken over by the federal government by way of conservatorship. (Source: WSJ)

This raises many issues:

Is this merely semantics? It is my understanding that both agencies are usually classified as quasi-goverment agencies. I suspect the stockholders may suffer, but what effect will this have on the average consumer applying for a mortgage? There will likely be a shakeup in the corporate hierarchy, but, again, what will the practical consequences be in the functionality and viability of these agencies?

I suspect that there will be a stabilizing effect on the mortgage industry and that rates will improve slightly over the short term. Of course, the converse could also hold true. The need for a government takeover could affect the psyche of the general public and institutional investors in such a way as to have a negative impact on the economy as a whole, including the availability and affordability of mortgages.

The practical implementation of this takeover in conjunction with the changes that follow should be closely scrutinized by anyone who has an interest in the subjects covered in this blog. This may be a non-event or could reverberate through the housing/mortgage industry for the next few years.

MASS June Housing Stats

The trend in Massachusetts housing continues as numbers on both sales volume and price for June improved month over month, but are worse with respect to a comparison with June of 2007. (Source: MAR)

Sales of single-family homes decreased by 14.9% (June '07 compared to June '08), but were up 21% when compared to May of this year. The median selling price of $334,900 was the highest since October of '07, but was off 8% when compared with June of '07. (Source: MAR)

Condominium sales decreased by 2o.3% in June '07 compared to June '08, but were up 14.4% when compared to May of this year. The median selling price of $296,000 was the highest since July of '07 and was off less than 1% when compared to June of '07. (Source: MAR)

Inventory of residential homes for sale is at the lowest level in a year at 8.3 months. Although at the high end of the spectrum, this is considered a healthy supply of inventory and shows marked improvement over May when inventory was at 9.8 months of supply. (Source: MAR)

Days on market for properties selling in June was 129 days and 140 days for single family homes and condominiums, respectively. (Source: MAR)

Finally, to those of you who braved last night's weather and joined my family and me for our annual Lowell Spinners outing, thank you for making it a great time!