by Tanta on 8/08/2008 08:34:00 AM

The Washington Post reports on tenants caught up in the "foreclosure crisis":

Thousands of unsuspecting renters who have been paying their rent on time are getting enmeshed in the foreclosure crisis that is plaguing the housing market.

In many cases, their landlords, often individual real estate investors, bought properties during the boom days, rented them out, then failed to keep up with their mortgages. The homes went into foreclosure, often unbeknownst to the tenants, who face disrupted lives and even homelessness. . . .

The Mortgage Bankers Association, which tracks foreclosures, does not know how many tenants have been uprooted this way. But one in five foreclosures initiated in the third quarter last year were not occupied by the properties' owners, the group said. Some of those nearly 70,000 properties may have been vacation homes. Others may have been vacant. But a large chunk were probably rentals, and as the foreclosure rate has climbed this year, those numbers have probably climbed.

This isn't the first story we've seen, by any means, about the plight of tenants in foreclosure. As far as it goes, there's nothing particularly wrong with the focus of the article--on the effects on the tenants themselves.

But I am as usual struck by the apparent lack of curiosity displayed here about how you can have so many foreclosures of cash-flowing rental properties. It makes perfect sense that vacant "investment" properties get foreclosed a lot: the owner has to carry the mortgage payment without any income from the property. But a foreclosure of a property with a paying tenant is, historically speaking, rather unusual. It means one of several things:

1. The purchase price of the property was simply nonsensical for an investment property, given market rents. Even though the tenants are paying, the rental payment is significantly less than the carrying costs of the property and the owner's other income is in no way adequate to make up the difference. This was a dumb loan for the owner to take and a dumb loan for the lender to make. The odds that it involved appraisal fraud--either an inflated value of the property based on the comparable approach or inflated market rents used to inflate the value on an income approach--are excellent.

2. The property was never intended to be a rental property in the first place. This would be the old "If I can't keep making the payment on this expensive house, I'll just move into mom's basement and rent it out" thing that some people told themselves during the boom. This loan wasn't made with inflated market rents in mind only because no one actually gave a moment's worth of serious thought to what market rents--and normal vacancy rates and so on--actually were likely to be.

3. The tenant is paying rent, but nowhere near what the market would support. This may be a "non-arm's-length" deal between landlord and tenant, or a desperate amateur landlord, or a naive tenant who doesn't recognize "too good to be true" or some combination thereof.

4. The owner is simply skimming rents. That is, the cash flow from tenants could cover all or nearly all of the mortgage payment, but the owner is either a classic fraudster or an idiot trying to juggle a "real estate empire" who simply never intended to apply rental payments to the mortgage.

If there are "thousands" of loans like this, then I posit that it might be more helpful to see these tenants as caught up not in a "foreclosure crisis," but in either a real estate swindle or an insane lending boom that finally had to end. That may not mean much to the tenants involved, but it would help for public policy reasons to stop thinking of foreclosure as the "cause" of these disruptions rather than the inevitable result of such "malinvestment."

by Calculated Risk on 6/03/2008 06:22:00 PM

Here is an update on the Ireland housing market from UTV Insight:

Part I: (8 minutes)



Part II: (8 minutes)



Part III: (8 minutes):

by Calculated Risk on 5/25/2008 05:35:00 PM

Note: It is not my intention to embarrass Mr. Kudlow, rather to simply show why his analysis was wrong (typical of many back in 2005) - and why the "housing bears" were correct.

Back in June 2005, Larry Kudlow wrote: The Housing Bears Are Wrong Again

"If [the housing bears] had put a little elbow grease into their analysis, they would have learned that new-housing starts for private homes and apartments haven’t changed much during the past three and a half decades.

Although year-to-date housing starts have kicked up to 2 million, average new construction since the early 1970s has hovered around 1.5 million to 1.75 million new starts per year. During the same period, the number of American households has increased by 48 million, or 75 percent, according to the U.S. Census Bureau. It is plain to see that the family demand for homes has far outstripped the supply of newly built residences. So it should not be shocking that home prices have tended to rise on a steady basis, averaging 6.5 percent price gains over the last 35 years."

*******************

Click on graph for larger image.

This graph shows housing starts from 1970 to the present. Kudlow's claim that housing starts "haven’t changed much" and "hovered around 1.5 million to 1.75 million per year" was not quite accurate. Housing starts did average 1.59 million per year from 1970 through 2005, but there was a wide variation in starts.

Then Kudlow goes on to state:

"During the same period, the number of American households has increased by 48 million, or 75 percent, according to the U.S. Census Bureau. It is plain to see that the family demand for homes has far outstripped the supply of newly built residences."

According to the Census Bureau's Housing and Homeownership data, the number of occupied housing units increased from 63.6 million in 1970 to 108.2 million in 2005, or about 44.6 million.

Looking at the same Census data, we can see that total housing units increased from 69.8 million in 1970, to 123.9 million in 2005, or about 54.1 million during that same period. We can obtain a similar number by adding the total starts from 1970 through 2005, about 57 million starts.

Some of these housing units are second homes, but why is it "plain to see" that demand for homes had "outstripped" supply? There were significantly more housing units built (57 million starts) during this period than new households formed (44.6 million) in the U.S.!

Perhaps Kudlow, when looking at those peaks of housing starts in the '70s and early '80s, was fooled into thinking that the recent peak in activity wasn't extraordinary, especially since the U.S. population is growing. This was an inaccurate view.

The second graph shows the trend of people per household (and people per total housing units) in the United States since 1950. Before the period shown on this graph there was a long steady down trend in the number of people per household.

Note: the dashed lines indicates estimates based on the decennial Census for 1950 and 1960.

Starting in the late '60s there was a rapid decrease in the number of persons per household until about the late '80. This was primarily due to the "baby boom" generation forming new households en masse.

It was during this period - of rapid decline in persons per household - that the peaks in housing starts occurred. Many of those starts, especially in the '70s, were for apartments. Even if there had been no increase in the U.S. population, the U.S. would have needed approximately 27% more housing units at the end of this period just to accommodate the change in demographics (persons per household).

Now look at the period since 1988, the persons per household has remained flat. The increase in 2002 was due to revisions, and isn't an actual shift in demographics.

Here is a simple formula for housing starts (assuming no excess inventory):

Housing Starts = f(population growth) + f(change in household size) + demolitions.

f(change in household size) was an important component of housing demand in the '70s and early '80s. In recent years, f(change in household size) = zero.

So, unless Kudlow is arguing for a significant further reduction in housing size, he shouldn't have been comparing starts in recent years to starts in the '70s and '80s.

And finally, Kudlow should have been looking at the rampant speculation in 2005, both with flippers and homebuyers using excessive leverage. That is what defines a bubble, and that is what I focused on in April 2005: Housing: Speculation is the Key.Read on ... there is much more.

by Calculated Risk on 4/14/2008 01:03:00 AM

From the NY Times: Housing Woes in U.S. Spread Around Globe

In Ireland, Spain, Britain and elsewhere, housing markets that soared over the last decade are falling back to earth. Property analysts predict that some countries ... will face an even more wrenching adjustment than that of the United States ...

Once-sizzling housing markets in Eastern Europe and the Baltic states are cooling rapidly, as nervous Western Europeans stop buying investment properties in Warsaw, Tallinn, Estonia and other real estate Klondikes.

Further east, in India and southern China, prices are no longer surging. With stock markets down sharply after reaching heady levels, people do not have as much cash to buy property. Sales of apartments in Hong Kong, a normally hyperactive market, have slowed recently, with prices for mass-market flats starting to drop.

In New Delhi and other parts of northern India, prices have fallen 20 percent over the last year. ...

For countries like Ireland, where prices were even more inflated than in the United States, it has been a painful education, as homeowners learn the American vocabulary of misery.

“We know we’re already in negative equity,” said Emma Linnane, a 31-year-old university administrator.

"Negative equity" will be a strong candidate for the phrase of 2008.

by Calculated Risk on 1/11/2008 04:09:00 PM

From Bloomberg: Shiller Says Bank of America May `Have Some Problems'

``There's a tendency for people to underappreciate the risk of the housing market,'' Shiller said. ``I might have a lower valuation of Countrywide than Bank of America does.''
...
``Maybe Countrywide and Bank of America are going to have some problems going forward,'' he said. ``When people see that their houses are worth a lot less than their mortgage balance, they have an incentive to default. The troubled mortgages that Countrywide already has will be followed by even more troubled ones.''

How far will prices fall? How many homeowners will be upside down? Will it become socially acceptable for upside down homeowners to walk way from their homes? What will be the impact on Countrywide (and BofA) if house prices fall 20%? If prices fall 30%? What if 10 million homeowners default over the next few years?

Those are some of the questions I'd be asking if I was at BofA. I've tried to quantify some of these numbers, and the downside risks are huge. From the earlier post:

The following graph shows the number of homeowners with no or negative equity, using the most recent First American data, with several different price declines.

At the end of 2006, there were approximately 3.5 million U.S. homeowners with no or negative equity. (approximately 7% of the 51 million household with mortgages).

By the end of 2007, the number will have risen to about 5.6 million.

If prices decline an additional 10% in 2008, the number of homeowners with no equity will rise to 10.7 million.

The last two categories are based on a 20%, and 30%, peak to trough declines. The 20% decline was suggested by MarketWatch chief economist Irwin Kellner (See How low must housing prices go?) and 30% was suggested by Paul Krugman (see What it takes).

I think Shiller is correct; the risks from housing are still underappreciated.

by Calculated Risk on 1/01/2008 03:19:00 PM

Click on photo for larger image.

This is a photo taken at the Sacramento Airport by Itamar

We wouldn't want anyone thinking "housing bubble", would we?

Best to all.

by Calculated Risk on 12/18/2007 08:11:00 PM

Krugman speaks at Google on Dec 14th. Krugman was on book tour, but he spoke about the current economic issues instead.

Paul Krugman is a professor of economics and international affairs at Princeton University, and the author or editor of 20 books and more than 200 professional journal articles. In recognition of his work, he has received the John Bates Clark Medal from the American Economic Association, an award given every two years to the top economist under the age of 40. The Economist said he is "the most celebrated economist of his generation."

by Calculated Risk on 10/21/2007 06:55:00 PM

WSJ: Europe Feels Housing Chill

The real-estate slowdown that hit the U.S. is spreading to Europe.

Home prices in some of Europe's hottest markets are falling after a decade of double-digit-percentage price increases. The reasons resemble those across the Atlantic: higher interest rates, faltering confidence and tighter lending standards.
...
Home prices in Spain more than doubled over the past 10 years, but the average price of an existing home has fallen slightly since July, according to real-estate agent facilisimo.com. France experienced its first quarterly home-price decline in nearly a decade in the third quarter, according to its federation of real-estate agents, while Irish house prices in August were 1.9% below the year-earlier level.

The weakening home market could hit European economies. An expanding construction industry has fueled growth in Europe. Now, construction in Spain and elsewhere is easing. ...

by Calculated Risk on 9/21/2007 11:48:00 AM

From Fed Vice Chairman Donald L. Kohn: Success and Failure of Monetary Policy since the 1950s. An excerpt on the causes of the housing bubble:

"... it is far too soon to pass judgment on what went wrong in the U.S. housing market and why. I suspect that, when studies are done with cooler reflection, the causes of the swing in house prices will be seen as less a consequence of monetary policy and more a result of the emotions of excessive optimism followed by fear experienced every so often in the marketplace through the ages. To some extent, too, the amplitude of the housing cycle was heightened by the newness of the subprime market, the fragmentation of regulatory oversight responsibility for that market, and the complexity and opacity of the newer instruments for transforming and distributing risk. Low policy interest rates early in this decade helped feed the initial rise in house prices. However, the worst excesses in the market probably occurred when short-term rates were already well on their way to more normal levels, but longer-term rates were held down by a variety of forces. And similar, sometimes even sharper, trajectories of house prices have been witnessed in some economies in which the central banks said they were paying more attention to asset prices."

Many very lengthy papers will be written on the causes of the bubble. Agree or disagree, Kohn touches on a few key points: monetary policy definitely contributed to the initial surge in prices, lax oversight - Kohn says because of "fragmentation of regulatory oversight responsibility" - allowed the bubble to expand, and speculation played a key role. I'll post on what I consider the key causes this weekend.