Fannie/Freddie’s Bubble Mix

This guy’s opinions are usually suspect, but he’s got it right here – though he stops short of fingering the Tan Man specifically – from the WaPo:

It wasn’t that Fannie and Freddie made a prescient strategic decision to stay clear of the housing frenzy. They couldn’t have participated even if they had wanted to. The two agencies had committed various accounting irregularities earlier in the decade, and their regulator forced them to rein in their growth.

Moreover, Fannie and Freddie couldn’t compete with rapaciously expanding private lenders. Securitization was in full swing, enabling private lenders to offer low rates and increasingly aggressive terms to borrowers. In 2006, almost half the loans made by private lenders required no down payment and no documentation. Fannie and Freddie simply couldn’t play in that league, even though Congress had given them aggressive lending targets to help boost homeownership among lower-income and minority households.

Fannie and Freddie did play a significant part in the financial panic. As financial conditions began to weaken in 2007 and the private mortgage industry pulled back, the agencies partially filled the void. This was their chance to get back in the game. The memory of their accounting scandals had faded, and policymakers hoped the agencies could keep the housing market from unraveling. Fannie’s and Freddie’s originations of sketchy loans actually peaked near $160 billion in 2008, the year regulators placed them into conservatorship. The two agencies had jumped back into the housing market at precisely the wrong time.

The government’s takeover of Fannie and Freddie arguably ignited the global financial panic. The Treasury Department’s decision to wipe out shareholders of Lehman Brothers and Bear Stearns, two of the largest financial institutions on the planet, sent a shock wave through markets as it became apparent that no institution was safe any longer. Investors ran for the door, sending Lehman Brothers into bankruptcy one week later; a string of failures at other venerable institutions followed.

Despite Fannie and Freddie’s role in the panic, it is wrong to blame them for creating it; that distinction belongs rightly to the private mortgage market. Understanding this is critical to creating a stable, efficient mortgage finance system for the future. While Fannie and Freddie themselves deserve to pass from the scene, given their numerous past missteps, it is equally clear that the government needs to remain an important player in housing finance, providing consistent regulatory oversight and a backstop in case the private market collapses again.

Mark Zandi is chief economist at Moody’s Analytics, a subsidiary of Moody’s Corp. He is the author of “Financial Shock,” an book about the financial crisis. His column will appear regularly.


Quality Not Quantity

Just because a listing looks like a deal on paper doesn’t mean a thing these days.

Buyers want value.  They want extras.  They want to feel good.

They want a manageable floor plan that flows, a house that’s ready to move-in with a decent yard where they can watch the kids grow up.  Schools, culdesac, three-car, south-facing, one-story, newer, older, character….the list goes on and on.

The great news: If that’s what you are selling, you’ll get top dollar.

The not-so-great news: If that’s not what you are selling, you really need to work on your price.

San Diego Case-Shiller, Nov. 2011

The November 2011 Case-Shiller Index was released today.

Here is the San Diego seasonally-adjusted CSI, compared to two other indicators:

Month No. of SD Detached Sales Average $/sf SD Case-Shiller SA
Nov. 2010
Oct. 2011
Nov. 2011
Y-O-Y Chg.

It looks encouraging to me. Both of the markers on pricing are acceptable, rates are at all-time lows, and the leading indicator, number of sales, is on the rise.

But the negative soundbites will discourage consumer confidence, thwarting any euphoria building among homebuyers – who, as a result, will be reluctant to pay more than the comps. Sellers who can live with a reasonable price will have no trouble finding a buyer during the next few months.

Case-Shiller HPI: San Diego, CA  Chart

Case-Shiller HPI: San Diego, CA Chart by YCharts

Interest Rates’ Effect on Prices?

Rich T. noted that in the past there hasn’t been a significant relationship between rates and pricing:

There’s actually very little correlation between interest rates and home valuations, and if anything, homes have tended to get more expensive in rising rate environments (due to rising rates typically being accompanied by rising wages, as well as other external factors).  However, I think that a sufficiently steep and abrupt rate rise could really hurt home prices.

But recall that I am more concerned with minimizing monthly payments than the purchase price.  If rates rose enough to really impact prices, it’s likely that those higher rates would have affected monthly payments even more.  So for a long-term, heavily leveraged purchase, the threat of rising rates is a reason to act sooner rather than later.

tj & the bear agrees, saying that this time it is different:

J6P now has no useful equity, which means any purchase has to be financed in it’s entirety. That puts pricing directly tied to income via the payment, which in turn is determined by rates. IMHO any significant rise in rates will have just as dramatic an effect pushing prices downward as the original drop in rates did in pushing prices skyward.

The FedGov has thwarted previous bear campaigns with the various can-kicking devices in support of big banking, would they let interest rates get away from them?

Last week the Fed stated that they plan to keep rates low through the end of 2014. 

If something went crazy and mortgage rates did start rising, they would have to go up more than 1% to alarm home buyers.  Purchases of homes at an effective rate of 50% off with inflation will still be attractive.

But let’s imagine that rates did hit 5% or higher – what would sellers do?

Let’s examine who is selling today.  Short sales and REO listings only comprise 10% of today’s NSDCC detached inventory for sale.  The rest are probably split between long-termers with substantial equity and those looking to get out with enough for a steak dinner.

If prices went down, those with little or no equity would just stop making payments – then it would be up to the TBTF banks to decide whether they want to cause a foreclosure tsunami, or let the defaulters ride for free as long as they mow the lawn.  You can guess which path they’ll take.

The long-termers with substantial equity?  One more notch down and forget it – they aren’t going to give them away!

The initial scramble to buy something – anything – once rates went up would be exciting, but short-lived.  Fear/greed would overcome buyers who have been very patient, and they’d gladly get back on the fence in anticipation of plummeting prices.

Consider who the sellers would be – only those that need their equity to keep breathing.  The FedGovBigBank troika will take care of the rest.

If mortgage rates start rising, it’ll likely cause fewer and fewer sales.  There is probably enough organic demand who will keep buying with cash or big down payments to have pricing look statistically flat or lower.  But if there are few houses to buy, who cares.

Rich Toscano Show Transcript

Here is the link to the transcript of the talk show with Rich Toscano – it is imperfect:

Blog Talk Radio with Rich Toscano

A summary of his comparison of home prices vs. local incomes, and prices vs. rents:

Well, you can’t — some people say, “Oh, it should be three times income or something.”  It doesn’t really work that way because I’m just taking a per capita income like — well, I’ll tell you.  I’ll answer the question. 

The typical ratio has been about eight times per capita income. 

The ratio is eight for what it’s worth, but it’s really not really worth anything, except to compare it to what it’s been in the past.  So, right now — yeah now we’re much below — we’re about 7.3 or something like that and it was maybe 8.1 with historical — we’re roughly 10% below the historical price/income ratio. 

We’re about 4% below the historical price-to-rent ratio.  So, we’re in undervalue historically, not dramatically so, but we’re there, which is now, we just kind of might want to buy houses.

Rich also mentioned that he bought a house recently! He goes into detail about it here:



If this outlook is correct, as I believe it is, then today’s ultra-low rates make this an ideal time to take out a chunky 30-year fixed mortgage, and to sit back and let inflation hew away at the real value of the mortgage and the monthly payments over the years to come.

So, the missus and I went out looking for homes.  We only found one in our price range, a single family house in Bay Park, that we thought was awesome enough to be a long-term home.  So we made an offer, got a loan with as low a down payment as we could get away with, and have now re-joined the ranks of the titular Landed Poor.

I sat out an inflation-adjusted home price decline of almost 50%, and now I’m buying at a time when prices are cheaper than normal and monthly payments at 45% below their historical median.  That’s close enough for me.

Skyline View

I love this strategy – it was right on the money.

This first listed for $999,000, but after there were no takers for two weeks they lowered the price to $879,000.  It dropped them down into the next level of buyers, and boom – six days later they opened escrow:

A Realtor’s Role

In his video on Thursday, broker Jim Abbott made an impassioned argument against third-party advertisers. But it tip-toes around the role of real estate salespeople in general.

Do consumers want less from their agent?

In Colorado, agents can do less – they can be ‘transactional brokers’ as defined here, from wiki:

After 1994 (with changes in 2003), Colorado created the option of having no agency nor fiduciary relationship between brokers and sellers or buyers. Having no more than a facilitator relationship, transaction brokers assists buyers, sellers, or both during the transaction without representing the interests of either party who may then be regarded as customers.

In California, we don’t have ‘transactional brokers’ like they define them in Colorado, but there are “limited service” agents, and single or dual agency where buyers and sellers don’t have separate agents representing each party (like the traditional agency).  It can get murky.

Here is a court case that highlights one of the pitfalls:

In 2004, Hall Realty signed a transaction broker’s agreement to list and sell the Lake Forest Resort, a 12-unit RV park in Colorado owned by Daniel W. Weddel, which comprised six cabins, a home, a grocery store and an office area.

Hall Realty advertised the resort as a “turn-key business opportunity”; at the time, it was actually operating as an RV park. In 2005, Gilbert Barfield purchased the property.

In 2007, the Colorado Department of Public Health and Environment informed Barfield that the water supply system was improper for the property to operate as a 12-unit RV park. Around the same time, the CDPHE and the county reportedly notified Barfield that the sewage system did not have proper permits for the property to operate as it had been.

Additionally, according to court documents, the county informed Barfield that the property did not have the proper operating permits and ordered him to cease business operations.

Barfield filed suit against Hall Realty, alleging negligent misrepresentation (that Hall Realty was unreasonably negligent in determining the accuracy of its advertisement of the property as a “turn-key business opportunity”), fraudulent misrepresentation (on grounds that Hall Realty either knew the “turn-key” representation was false or was utterly indifferent as to its accuracy), and fraudulent concealment (arguing that Hall Realty either knew or was utterly indifferent to the fact that the seller had never obtained the proper permits, and failed to disclose this fact).

At trial, Hall Realty filed a motion for summary judgment, arguing that its role in the transaction was that of a transaction broker under Colorado Revised Statutes 2009 relating to brokerage relationships in real estate transactions.

As a transaction broker, rather than a fiduciary, Hall argued, its “duty ended by describing the opportunity as it appeared to be when listed: an (ongoing) ‘turn-key’ business opportunity,” and it had no duty to investigate or verify anything beyond that.

The trial court agreed and dismissed Barfield’s case.

Barfield appealed, and the Colorado Court of Appeals affirmed the trial court’s ruling. First, the Court of Appeals rejected Barfield’s argument that Hall Realty’s description of the resort as a ‘turn-key’ business opportunity — without investigating further — constituted negligent and fraudulent misrepresentation.

To prove fraud, Barfield would have had to show that Hall Realty either knew that its representations in the property advertisements were false, or was aware that it didn’t know whether the representations were true or false. Photographs submitted by Hall Realty to the trial court clearly showed that the resort was in active operation at the time of the listing.

Accordingly, ruled the Court of Appeals, “the evidence demonstrates that Hall Realty had no reason to believe that the resort was anything but an ongoing, operational RV park,” rejecting the fraud claim.

Further, the court rejected Barfield’s argument that Hall violated its duties as a transaction broker by failing to discover the permit issues with the property. On the contrary, found the Court of Appeals, state law expressly states that a transaction broker is not a fiduciary of the parties in the transaction, like a traditional real estate broker would be.

Additionally, a transaction broker, under the same act, is required to “disclose any adverse material facts actually known by the broker,” but “is under no duty to conduct an independent inspection of the property for the benefit of the buyer … and has no duty to independently verify the accuracy or completeness of statements made by the seller.”

Taken in conjunction, the court explained, the facts that the property was actually in active operations as a 12-unit RV park at the time of the listing, plus the act’s “clear directive that a transaction broker has no duty to investigate,” preclude Barfield from showing that Hall Realty’s misrepresentations were either negligent or fraudulent. As a result, the trial court’s ruling was affirmed and Barfield’s case was dismissed.

Cliff Front

For those considering a move to the San Diego area, make sure to take in some of the PGA golf coverage at Torrey Pines and see some of the spectacular weather we’ve been having – today it was 80 degrees!

P.S. The house next door – which you see a glimpse of in this video – has been on the default list for 2+ years.

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