Unless you’ve been living under a rock and given how bad the housing market is, this may be a reality, the big news making the rounds this week is the housing bailout plan otherwise know as the Housing and Economic Recovery Act of 2008. We can talk about the B-list theatrics with Mozilo shedding […]
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■Real Homes of Genius: Two For One in Compton. Southern California Housing Bubble Hangover.
■Real Homes of Genius: 675 square foot home in Lynwood California at $425,000?!
■Housing Contradiction: Home Prices Down = Sales Up. Any Questions?
■Ross Perot Charts: How I Learned to be a Housing Blogger from Ross Perot.

Unless you’ve been living under a rock and given how bad the housing market is, this may be a reality, the big news making the rounds this week is the housing bailout plan otherwise know as the Housing and Economic Recovery Act of 2008. We can talk about the B-list theatrics with Mozilo shedding a tear in the otherwise pathetic attempt to send off ugly daughter Countrywide in style via a shotgun wedding to Bank of America but you have to hand it to Mozilo, he knew how to play the political game well and realized Americans would eat up anything served up to them with a ribbon and perfume.  He also ensured a few high profile politicians had their fingerprints on Countrywide.  Collateral damage.

But make no mistake about the bigger issue. This bailout should it go through would be the biggest bailout in the history of the human world. That is how big this thing is. Given that Bank of America had its hand on writing or at least influencing part of the legislation, I’m sure we all know where this is heading. And what a coincidence that they are buying Countrywide trying to close before the 4^th of July while this legislation is being crammed down before the summer recess. What are the odds!!! Yet Americans are more worried about offshore drilling and saving 20 cents five years from now as opposed to seeing rampant inflation tax the hell out of the middle class family budget.

These issues are maddening and thankfully today I was able to land an interview with the uber-Senator Mr. Government Genius. These things can get complicated so we’ll ask him about this new government bailout.

Interview Conducted June 26, 2008:

Dr. HB: Hi Senator Government Genius. Thank you for agreeing to this interview.

GG: You’re welcome. Glad to be here in sunny California representing my sunny constituents! Woo Woo!

Dr. HB: Umm, ok. Let us get started and talk about this much-discussed housing bailout bill.

GG: I wouldn’t call it a “bailout.”
Dr. HB: What would you call it?

GG: I’d like to call it the “Housing and Economic Recovery Act of 2008″

Dr. HB: Isn’t housing what got us in this mess in the first place?

GG: Yes. But we didn’t build right the first time around. Now, we’ll build but instead of using other people’s money (OPM) we’re going to use the American tax payers’ money. Americans like it when we use the tax payers’ money.

Dr. HB: But won’t they realize that they are the ones who will ultimately pay for the financial irresponsibility and stupidity of others?

GG: Not necessarily. We’ll make it seem like we are really punishing lenders like forcing them to write-down 10 percent of their loan. Once they agree to this, we’ll move people from unfriendly evil mortgages into happy smiling government loans.
Dr. HB: Aren’t you effectively putting a bottom for, oh, I don’t know, lenders? Places like California have seen prices drop 30 percent in one year. Given current trends, it is very likely prices will fall another 20 to 30 percent. Doesn’t this essentially ensure that the government will purchase loans with embedded declines?

GG: Hard questions! Not really. See, money grows on trees or as I like to call it, in the nursery of the Federal Reserve. We have these really nifty printing machines and incredibly, the world allows us to print more money without producing anything to back it up. Imagine using your Epson printer at home and going into Adobe Photoshop and printing hundred dollar bills all night. Don’t do that because if you do that, it is illegal. When we do it, it is called stimulating the economy. See the difference? So if homes do decline after we buy them, we can just print more money and all will be fine.

Dr. HB: Wouldn’t that cause rampant inflation?

GG: Only on fuel, groceries, education, healthcare, and travel. You know, things Americans don’t need. But prices on homes will stabilize and go up and this is good since more people will be able to tap their God given right of home equity and go forth and consume again.

Dr. HB: Interesting. Do you believe in capitalism?

GG: Abso-freaking-lutely. I bleed Adam Smith. See, take a look…I’ve got Wealth of Nations tattooed on my back.

Dr. HB: Yeah, I really don’t need to see that. So you believe in capitalism. Now wouldn’t the government intervening and putting a bottom to home prices correcting go against the idea of a free market environment?

GG: Ummmm…I’m not sure I follow.

Dr. HB: Well it would seem somewhat situational to come in now that prices are falling using tax payers’ money to protect those that took risks during the housing bubble. Why didn’t the government step in and put a ceiling on how much prices could go up during the boom? Wouldn’t the same hold true on this as well?

GG: Capitalism is about always ensuring profits. I think Adam Smith said that in chapter 5.

Dr. HB: He didn’t say that. So basically what is occurring is a form of corporate welfare where lenders and Wall Street firms that took excessive risk now face a bottom which will be created with money from tax payers…many who did not gamble irresponsibly with their money. If it weren’t for this artificial bottom wouldn’t these firms simply collapse on their house of cards?

GG: Yes. And a world with no Bear Stearns is a very sad one indeed. Can you imagine waking up and having a world with no Countrywide, Lehman Brothers, Merrill Lynch, or Hummers? What a sad world that would be. I’m getting misty eyed just thinking about it. I think that is why Mozilo got a little choked up this week.

Dr. HB: We may have a world with no Hummers if gas prices stay this high. So you are telling me right now that essentially the government is ensuring selectively hand picked firms that would collapse without public intervention, is that correct? Now I know many of your constituents are thinking, “why not let a business that is poorly managed and is leveraged to the hilt collapse. In fact, the reason we are talking about this bill is because of these companies and lenders.” What would you have to tell them?

GG: Hello, we’re from the Government and we’re here to help. And this isn’t public support. This is support from the Federal Reserve. They have a big savings account, imagine your WaMu account on steroids. And this account, they can exchange one thing for another. Sort of like Columbus trading with folks back in the heyday in South America. It is a fair trade. You give us explosive evil mortgages and we float you some U.S. Treasuries.

Dr. HB: I’m not sure the public views that as a fair trade. Now, in this bill you also have an $8,000 tax credit for first-time home buyers. Economics would teach us, that giving tax credits to a sector will increase demand for it. It also teaches us that by giving a tax credit (aka less tax revenue) we will be increasing our massive deficits. How would you explain the logic of the tax credit?

GG: Well you see, we really want people to buy homes. I’m not sure why people aren’t buying more homes. I just bought 2 homes last month and it is fantastic! So with this tax credit we are basically saying to anyone sitting on the fence, “hey, come jump in the pool! The water is just dandy! And if things go boom we’ll just give you a government loan and all will be fine.” This will help us get more potential home buyers. And about that deficit, we’ll just figure out where to get that money later. Maybe we’ll exchange some old furniture in the White House over at the Federal Reserve.

Dr. HB: I wouldn’t be surprised if they accepted that. Another major contention in the bill is the raising of FHA loan limits. It looks like you guys are trying to raise the limits by 150 percent to $625,000. Now the median priced home in the United States is currently around $200,000. Why is there a need to raise the limit so high?

GG: This is where it gets complicated folks so listen up! Are you listening? Ok. Basically, people in high priced areas like California screwed up three times as much as folks that screwed up in states like Georgia, Ohio, Pennsylvania, and all those other states. For example, someone that bought a home in Ohio for $110,000 with a funky loan now finds their home only worth $100,000. If the lender wanted to move this loan into a FHA product, they’ll eat $20,000 and we’ll rework the loan given the new guidelines. But say you are a sunny Californian! You decided to buy a Real Home of Genius for let us say, $1,000,000. Now, your place is worth only $700,000. The lender wants to unload this turd, uh, I mean deflated happy asset into a FHA loan. The borrower now has a loan at roughly $625,000 and everyone is happy! That is why the cap is being raised.

Dr. HB: But isn’t that selectively helping a handful of states?

GG: Yes. But we all need to take one for the team! Come on nation! Let us take one for California!

Dr. HB: For the past few months, California, Arizona, Florida, and Nevada have accounted for 50 percent of all distressed properties. I doubt the other 40 states with moderately priced homes would like this.

GG: We’ll just tell them that if they don’t, their pensions are at stake and scare the crap out of them. That way, we sink together.

Dr. HB: Given that this bill is being touted at $300 billion, how are we going to finance this bill?

GG: Like I said, if we need to print money we will. Look at it this way. The United States consumes about 20 million barrels of oil a day. At $137 a barrel, that is $2,740,000,000. So with that said, you can pretend that this housing rescue plan is the equivalent of 109 days of oil or a couple of weeks before the general election.

Dr. HB: Nice perspective. Well I think that’s all the questions I have for you Senator. Enjoy your summer recess. I think most folks will be working trying to maintain a middle class lifestyle.

GG: No problemo. Hey folks, make sure you go out there and do your country a favor by buying a Real Home of Genius. It’s the American thing to do.

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Related Posts:
■Two 400+ Point Days in Two-Weeks: Why this is Horrible News for Housing. Volcker and Protecting your Mac.
■Real Homes of Genius: Two For One in Compton. Southern California Housing Bubble Hangover.
■Real Homes of Genius: 675 square foot home in Lynwood California at $425,000?!
■Housing Contradiction: Home Prices Down = Sales Up. Any Questions?
■Ross Perot Charts: How I Learned to be a Housing Blogger from Ross Perot.

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Small banks may be exposed to nearly $300 billion in bad construction loans granted to local builders and developers according to a new report by the Wall Street Journal.  The report estimates that more than 150 local banks could fail under the weight of the defaults.

Construction loans are dicey propositions in the crashing housing market as builders who bet on repaying loans with sold properties may be unable to repay the debt obligations on the existing projects.  Some projects are probably already abandoned and others will sell for pennies on the dollar leaving developers insolvent.

Further, because banks often allow developers to hold off on interest payments during construction the true ability of the developer to repay is often not known until it is too late.

More on the small bank crisis from Market Watch:

Small banks have some $280 billion of outstanding construction loans and analysts have predicted that as many as 150 smaller banks could fail in coming years after betting heavily on construction loans, The Wall Street Journal reported.

The practice of allowing real estate developers to delay paying construction-loan interest has raised alarms with regulators concerned that smaller banks are masking potential problem loans, the paper said.

Increasingly popular during the building boom of the last decade, many of these loans allowed banks to calculate the interest that would be paid on the loan overall and then set aside that amount in “interest reserves,” essentially allowing the banks to pay themselves until the property becomes profitable or the loan is paid off.

The loan can then be marked as a performing loan even if the project if it is financing is failing, a practice that concerns regulators, the report said.

But the tanking housing market means many of these projects may not be built — or even financed — leaving banks, and their investors, holding the bag.

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Source [blownmortgage]

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Ignore the spin folks.  Existing home sales are down 31% from their peak in 2005 and nearly 16% from last year.  The 2% increase in May doesn’t really tell you much, except for the fact that maybe foreclosure sales are becoming more appealing to folks.

As Calculated Risk so astutely points out May marks the end of the spring season usually touted by Realtors as the time when folks get out and buy a home and all is right with the world.  The busy season if you will.  No such thing this year.

A graph from CR shows that we’ve found some stability in the home sales for the last couple of months (REO anyone?) while new home sales continue to tank.

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Source [blownmortgage]

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Filed under: Major movement, International markets, Other issues, Bad news, Rants and raves, General Motors (GM), Market matters, Goldman Sachs Group (GS), Serious Money

It was only yesterday that I posted Serious Money: GM, GE, Gee Wiz!, concerned that Barron’s was betting on the wrong horse (which happens all too often — see Sunday Funnies: Big Brown a sure thing at Belmont) as it pumped up General Motors (NYSE: GM) in a cover story two weeks ago.

GM stock closed yesterday at $12.81 but today traded down to a new 52-week low of $11.21; as of 1:15, it is at $11.51, down nearly 10%.

GM is trading at a 30 year low. “Today’s drop came after a Goldman Sachs analyst cut his rating for GM to “Sell” from “Neutral” and his price target to $11 from $16, saying things could still get worse for the North American automotive industry as a whole.”

I wonder if he read my post yesterday . . . probably not. I am not a big fan of analysts as a group but this did not take a crystal ball. Barron’s should do a follow-up story explaining how their crystal ball got so fogged up.

Continue reading Serious Money: General Motors drops after Goldman ratings cut

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Filed under: Google (GOOG), Microsoft (MSFT), Nokia Corp. (NOK)

Of course, Microsoft (NASDAQ: MSFT) demonstrated the huge value of owning a pervasive operating system.

But what about the OS for mobile? Microsoft has been building its own alternative. Moreover, Google (NASDAQ: GOOG) has Android.

However, the winner may actually be the handset maker, Nokia (NYSE: NOK). This week, the company announced it is purchasing Symbian, which has about 60% of the global market for the mobile OS. The offer comes to about $409.8 million (to grab the 52% that Nokia doesn’t already own).

But, unlike Microsoft, Nokia isn’t taking a proprietary approach. Instead, Symbian is going to be open source.

True, this is likely to take some time (say several years), but in the meantime, Nokia can leverage its massive global platform by using Symbian’s 1,200 programmers. The upshot should be improved innovation and faster product launches (oh, and there will be no need to pay licensing fees to Symbian).

OK, so what about rival handset makers that rely on Symbian, such as Motorola (NYSE: MOT), Sony Ericsson Mobile and Samsung? Might they be worried?

Perhaps, but then again, they realize the importance of having standardization. And by being open source, the handset makers have the leeway to add their own capabilities.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

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Filed under: Private equity, Blackstone Group L.P (BX)

Robert Phillips is a veteran of the energy world. He was the CEO of Enterprise Products Partners L.P. (NYSE: EPD), a major natural gas player. Before this, he was a chairman of GulfTerra and the CEO of Eastex Energy, Inc.

Now, Phillips has a new venture: Crestwood Midstream Partners LLC. In fact, he arranged a cool $500 million investment from the Blackstone Group LP (NYSE: BX) and GSO Capital Partners, an affiliate of Blackstone.

Basically, Phillips will use his extensive background to build a pipeline operation through internal development and acquisitions (the entity got its start in November 2007, with the help of Kayne Anderson). And, of course, in light of the energy problems in the US, the timing looks spot-on.

With its strong backing, Phillips should have little trouble attracting top-notch talent. He has already hired Joel Moxley, who was senior vice president of gas processing at Crosstex Energy Services, L.P., and Brad Graves, who was the executive vice president of business development at Genesis Energy, L.P.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

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Filed under: Newspapers, Magazines, Google (GOOG), Citigroup Inc. (C), Goldman Sachs Group (GS)

MAJOR PAPERS:

• Last November, Google Inc (NASDAQ: GOOG) and 30 partners were said be developing a new type of handset using Android that was expected to revolutionize the industry. The first new phones were expected to be available in this year’s second half but are now slated for the fourth quarter the Wall Street Journal reported.
• According to people familiar with the situation, the Wall Street Journal reported that Citigroup Incorporated (NYSE: C) will make sharp cuts in its investment banking division this week.
• The Wall Street Journal reported that Live Nation Inc’s (NYSE: LYV) Chairman, Michael Cohl, stepped down down as a director and executive to end the strategy feud with CEO Michael Rapino. over how to pursue the “360 deals” with music superstars.
• The Financial Times reported that there are worries that investment banks will accelerate the pace of their layoffs this summer, after it became known that The Goldman Sachs Group Inc (NYSE: GS) gave pink slips to workers in its investment banking division last week. Goldman is now expected to lay off up to 10% of the workers at the division.

OTHER PAPERS:

• New Jersey put its $150M center for stem cell research on hold, the Star Ledger reported, eight months after ground was broken on the project.

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Filed under: Commodities, Oil

Minyanville’s top dog, Todd Harrison, dares to ask in public what Wall Street types quietly consider in private. For more insight and ideas, visit

www.Minyanville.com

A few Random Thoughts on the action in crude:

• A finski (a $5 bill) ain’t what it used to be - a 10% move at the beginning of last year. Now it’s barely 4%.

• While I’ve been bearish on crude through the lens of deflation — and I continue to believe all roads lead there — “pure trading eyes” sees the sideways action for the last month.

• United States Oil Fund (AMEX: USO) $104-$113 are the parameters to watch (filling of the gaps versus upside breakout). You can drive a truck through that, I know, but I don’t make the rules, I just try to play by them.

• Hands over eyes, sideways movement under resistance is a bearish churn. The same movement above support is a bullish base.

• My current position? Flatter than a sat on hat. And I like it that way… For now.

R.P.

Position in USO

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Filed under: Bad news, Ford Motor (F), General Motors (GM), Toyota Motor Corp. (TM)

Well, I can’t predict when the market will turn, or when Toyota’s (NYSE: TM) stock will once again be in favor, but I can tell you that I won’t be buying its shares here. According to this article, Toyota may not do as well as it planned in terms of sales in 2008 in the U.S. market. The company told investors that year-over-year growth in the number of cars sold is now in question. In 2007, Toyota moved 2.62 million automobiles in the U.S., and for 2008, Toyota wanted to sell 2.64 million cars.

I probably don’t need to say it, but I will: considering the negative trends in oil futures, gas prices, consumer confidence, inflation, recession potential, and the housing industry, the fact that the stocks of Toyota, General Motors (NYSE: GM), and Ford (NYSE: F) are having a really tough time right now is not surprising. Toyota’s stock closed down 2% on the news of the sales struggle at the end of Tuesday’s trading session. That’s not a particularly horrible downward move, and the stock is still a few bucks above its 52-week low, but I think there’s a chance the stock will take out that low at some point.

Investing in the auto industry might be a dicey move here. Sure, you could pick up some bounces, but being early in this space could prove depressing for even the heartiest investor. Auto sales might get worse before they get better (they’re pretty bad now as it is), so I’ll stay away from Toyota and this sector.

Disclosure: I don’t own any company mentioned here; positions can change at any time.

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I’ve been digging through the 44 page State of the Nation’s Housing report put out by the Joint Center for Housing Studies at Harvard University. The report is chock full of excellent data yet once again they miss on a few of their forecasts. I’ll get to the data in the current […]
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■Tell me the Sales Data: You Can’t Handle the Sales Data!
■California Examined: The Deep Budget Impact of the Mortgage Crises.

I’ve been digging through the 44 page State of the Nation’s Housing report put out by the Joint Center for Housing Studies at Harvard University. The report is chock full of excellent data yet once again they miss on a few of their forecasts. I’ll get to the data in the current report later but let us look at what the center director Nicolas Retsinas had to say less than two years ago in September of 2006. The reason it is important to dig deep into this forecasting is that so much credence is placed on these reports from many people in our country.

“September 24, 2006
The Providence Sunday Journal

HOUSING BUST AHEAD.” The headline hints of catastrophe: a dot-com repeat, a bubble bursting, an economic apocalypse. Cassandra, though, can stop wailing: the expected price corrections mark a slowing in the rate of increase — not a precipitous decline. This will not spark a chain reaction that will devastate home owners, builders, and communities. Contradicting another gloomy seer, Chicken Little, the sky is not falling.

Let me alleviate some fears.

Fear One: Prices will plummet.

From the start, the much-vaunted housing “boom” was an uneven phenomenon, driven by a strong demand for housing, coupled with constrained supply, particularly on the two coasts. In much of the nation, housing prices rose modestly; in a few areas, prices did not budge.

In those overheated markets — often fueled by immigration — prices were rising by as much as 20 percent a year. But even with soaring demand and limited supply, that escalation was not sustainable. Even with too-good-to-be-true mortgages, people cannot afford to buy homes that cost five times their income.

So in those overheated markets, moderation is expected. Moderation means that prices will stop rising at meteoric rates: The home owner who expected a double-digit profit after one year will be disappointed. A home will once again be more of a domicile, rather than an investment. In some regions, prices will flatten, rising around the inflation rate, which is the historic average. The fundamentals behind high prices — strong demand (more households will form in the next decade than in the last) and constrained supply — persist.”

How can someone point out so many right things yet be so wrong? First, there is a clear acknowledgment that coastal areas will moderate. There is also an acknowledgment that some people cannot afford homes without “too-good-to-be-true-mortgages” and incomes may be a problem. How is this dispelling the myth or the fear that prices will plummet? A lot of what is said is the exact reason prices have fallen! This is the problem with this type of analysis because nowhere in this explanation is there a reason for why housing prices will not fall. In fact, we are given many reasons for it to decline. And by the way, we now know that across the board this is a national housing bubble bursting. Talk about being massively wrong. Let us see what he has to say about the next fear:

“Fear Two: The economy will collapse.

Housing now represents over 20 percent of the gross domestic product (compared with 18 percent from the manufacturing sector). For most families, the investment in a home constitutes de facto savings: the build-up of equity is in the trillions of dollars. And home owners have tapped into that equity, using their homes as ATM machines for refinancing and home-equity loans.

Consequently, we are “well housed.” Indeed, two bathrooms, air conditioning, garages — the amenities our grandparents called luxuries — are standard.

All this activity has fueled consumer spending.

A Cassandra fear is that as home prices moderate, the moderation will show up in the gross domestic product. Yet, again, moderation is not a free-fall. The housing market will adjust slowly, with fewer sales and starts. History tells us that housing booms are not eternal — that most end — enabling incomes to catch up with prices.

Furthermore, builders have been building to meet demand. In regions where the number of households is growing, so is the need for housing. That demand will not slake. So the incentives for developers remain strong. We will see more construction over the next decade than over the last — and the last decade set a record.”

Again, the fact that he mentions that homes were used as ATMs to fuel the boom is another point for a housing bust and also, an economic slowdown. This is the type of analysis put out by this guy during the housing heyday that it is important to publicly put this stuff out now since I see many citing the 2008 Harvard study as a source to go for. Good data in the report but again, we see conclusions that simply do not make sense. This guy and David Lereah for example were cheerleaders during the housing boom. Only in this case, there is proof that he does understand the exact reasons for why housing would completely bust yet arrives at some conclusion that isn’t backed up with data.

In fact, everything in the report that supposedly wasn’t going to happen occurred exactly as he stated. Housing is collapsing and it is taking the economy down with it. Now you would think that one would acknowledge such bad forecasting but let us look at what is put out this week:

“(INMAN) For now, center director Nicolas Retsinas said mortgage rates have “barely responded” to aggressive easing by the Federal Reserve. While the supply of for-sale vacant units continues to grow, tighter underwriting standards have locked many would-be home buyers out of the market. And with home prices falling in most metropolitan areas, homeowners are remaining on the sidelines, he said.

“At some point demand will bounce back,” Retsinas said in a press release announcing the release of the report. “Historically, housing markets recover only after the economy has entered a recession and a combination of falling mortgage interest rates and house prices have improved housing affordability. It is difficult to judge how far away from these conditions we may be. It will take longer this time to rebound given the unusually high levels of foreclosures and constrained credit markets.”

Bwahaha! I think the majority of the public would categorize a recession as a “bad” economic thing - something that in 2006 was not going to happen. So now, the implication is housing prices collapsing and the oncoming recession are good because they will increase affordability. Wasn’t that fear number 1 and 2 that supposedly were only part of the tin foil hat housing bear crew? Talk about never having to say you were absolutely wrong. Mea culpa not welcome here.

The reason I bring this up is that we are seeing the exact same social phenomenon that occurred during the Great Depression. Folks kept listening to so-called experts even after the market was pummeling people into the ground. The benefit this time is information is quickly and easily disseminated. You can easily verify what people said a few years ago, measure it up to public data, and reach your own conclusions to who is right. This reminds me of mortgage brokers who swindled people into crappy loans who are now “foreclosure specialist” helping people from losing their homes because of, crappy mortgages. Surely you can see the circle stupidity in that? Or what about letting major banks have a say in the mortgage bailout legislation? Are these really the folks we should be looking to for advice on getting out of this ditch? A ditch which was dug out with their own shovel of incompetence.

2008 State of Housing - Los Angeles Style

The overall report is still overly optimistic about housing. After all, this is the same center that completely missed the housing bust. By the way folks, it is busting. We can debate the semantics of it but homes being off 14.1 percent nationwide and 30 percent off in California is a bust in my book. Now unless they quantify a bust by being off by 25 percent nationwide and 50 percent off in California we may be a few years away from that. Given the current trend and what is currently going on in our economy, the above is very likely. So let us take a look at some points in the new 2008 article:

“Although subprime loans and new types of mortgages have been linked to a temporary increase in homeownership, the run-up in homeownership rates predates the proliferation of such loans. In fact, the largest homeownership gains occurred before 2001 when the subprime share was still small and price appreciation was only starting to take off.

Several factors contributed to the surge in homeownership between 1994 and 2000. First, mortgage rates had started to decline in the 1980s and stood at much lower levels by the end of the 1991 recession. Second, the economy had entered a period of unusually vigorous and broad-based growth, with strong increases in incomes across the board. Third, home prices in some markets had fallen in the wake of the 1991 recession, improving affordability for many buyers. Fourth, federal regulators had stepped up pressure on financial institutions to meet the mortgage needs of low-income communities and minority borrowers. And fifth, the prime mortgage market had begun to rely on automated underwriting and statistical models of loan performance, enabling lenders to relax downpayment and debt-to-income requirements while maintaining about the same expected default rates. Lenders were thus able to identify a broader range of borrowers that qualified for prime credit.

The expansion of mortgage credit in the 1990s was therefore accomplished with traditional products and without adding much to risk. The growth in mortgage credit after 2003, in contrast, came largely from gains in much riskier subprime, interest-only, and payment-option loans. These novel mortgage products provided only a temporary lift to homeownership. Indeed, the national homeownership rate peaked in 2004 and has since retreated below its 2003 level.”

Once again we see the same logic that was used in 2006. Many of the reasons given here are exactly why we are facing a housing bust. First, we are told that the homeownership rate increased even before the subprime bonanza. Yet we are then given 5 reasons for the easy lax lending mortgage environment we have lived in. Incomes did not increase strongly during this time. That is why credit eased to keep consumption up! Plus, the technology bust of the early part of the decade wiped out much of that pseudo wealth. The “stepped up pressure” by regulators to increase homeownerships in lower income communities was a big sack of mortgage crap. This is where most of the egregious mortgage fraud occurred and all those housing gains are now gone including many hopes and dreams from people in these areas.

Again we are led to believe by the implication that homeownership rates actually increased for legitimate reasons but this again is false. The next year with the Alt-A pay option ARM implosion we will once again prove this Harvard report wrong. They are still under the impression that this mortgage mess is in the 9^th inning. But immigration will save the day!

“With many housing markets in a tailspin, the underpinnings of long-term demand have come into question. But unless the economy enters a sharp, prolonged recession that dampens immigration or slows household formations, the current housing cycle in and of itself is unlikely to diminish the long-run growth of households.

The propensity for Americans to form households is driven largely by the age distribution of the population, slowly changing social norms, and the pace of immigration. In the decade ahead, the aging of the echo boomers into young adulthood, the longer life expectancies of the baby boomers, and projected annual immigration of 1.2 million all favor an increase in net household formations.

Meanwhile, the impacts of recent social trends are likely to be minimal. Although deferred first marriages, high divorce rates, and low remarriage rates will continue to make single-person households the fastest-growing household type, these trends have started to level off. Assuming that age-specific household formations remain

about constant, changes in the number and age distribution of the adult population should lift household growth from 12.6 million in 1995 -2005 to 14.4 million in 2010-2020.

With their high levels of immigration and high rates of natural increase, Hispanics and Asians will contribute significantly to household growth. Minorities are expected to account for more than two thirds of the net increase in households over the next decade, with the foreign born alone contributing at least one-third of the gains.

Because minorities have lower average incomes and wealth, some have argued that their growing presence in housing markets will be a drag on home prices and rents. But when the minority share of households increased from 20.2 percent in 1990 to 29.2 percent in 2007, rents and house prices still rose ahead of household incomes. While their low incomes may force them to spend less on non-housing items as housing costs rise, minority households will nevertheless provide broad demand support to housing markets in the years ahead.”

Again, great data yet how can they reach such wrong conclusions? First, they tell us that immigration growth from minority groups is going to increase in the future. Yet they also explain that many of these people will be in the lower income brackets. So how does this bode well for higher home prices? If anything, this is a case that there will be a higher demand for affordable housing which is still strongly lacking in this country and is almost non-existent in California. And again, why use the gains of the housing bubble as a comparison measure? If anything, that should be a caveat as to why prices are still inflated.
Americans are also having less children and getting married later. The 1950s picket white fence archetype home is no longer a reality for many. We now live in a dual income society where fuel costs make it highly expensive for most middle class Americans to live out in the boondocks and commute to work. Many are choosing to be single. And as highlighted by the Great Depression, many folks delay getting married and forming households when times are tight. Aside from this Pollyanna view we are in a recession and this psychology pushes people from buying homes.

They also tell us that the baby boomers will be retiring soon in mass numbers. Many will retire to smaller homes or retire out of the country. This will only add more inventory to an oversaturated market. Keep in mind that the first baby boomers are already retiring just in lieu with the massive rise in foreclosures and over abundance of housing inventory. Good data yet most of the implications point to less households forming in the sense that people will not buy a home. That is until prices come in line with incomes.

Let us end with another section in the report:

“With credit markets in such disarray, the for-sale housing inventory at record levels, and only small declines in interest rates, emerging from today’s housing slump could take some time. Although demand fundamentals should support average annual completions

of more than 1.9 million units over the next decade (including single-family and multifamily units plus manufactured homes), the housing market must first work off the one million or more excess units that were vacant and for sale or temporarily taken off the market at the beginning of 2008. This could trim underlying demand to an average of 1.8 million new units annually in the decade ahead.

If the economy slips into a severe recession, the prolonged contraction could drive down the sustainable level of housing demand by slowing the loss of older units, forcing more households to double up, and reducing sales of second homes. But in the case of a mild

downturn, which most economists expect, the fundamentals of demand are likely to drive a strong rebound in housing once prices bottom out and the economy begins to recover.”

Oh! Have to throw in that little caveat eh? Well most economists didn’t see this housing bubble coming and most economists don’t work for Harvard.

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Via [DrHousingBubble]

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