Tuesday, July 8, 2008

Fed in Crisis Mode as Fannie Mae, Freddie Mac Shake World Stock Markets

Fannie Mae, Freddie Mac Stocks plummet 18+ % after Fed official says housing market problems will continue into 2009, and the mortgage entities lack $29-46 Billion in capital. With no end in sight to the turmoil created by the housing crisis, Ben S. Bernanke said the Fed would issue new lending rules next week, and may extend its temporary financial lifeline to major Wall Street firms. Fed to Clamp Down on Exotic and Subprime Loans:

It's a Great Time to Buy in our area. The selection is great!

CAAR Stats for Current Month:
Active Listing Inventory: 3,683
Number of Listings Sold: 35 or 1% of total inventory
Median price of Listings Sold: $257,000
Average Days on Market for Listings Sold: 116


Dave Phillips, CAAR CEO said...

Note: these stats are through the first 8 days of July. The stats on the front page of CAAR.com are live (well, maybe a few minutes old). I think your point is that we have TOO MANY listings. Yes we do. The good news is that inventory is down a bit. At the end of May we had over 4000 listings, so 3678 is heading in the right direction.

You may disagree, but the surplus of inventory is the real "problem" (or opportunity if you are a buyer) with the market. The credit issues are real, but are more man made than part of a natural market condition. I am a big believer of the power of the law of supply and demand and everything else is somewhat irrelivant in the long run.

Real C'ville - The Bubble Blog said...

We do agree that there is too much inventory. "Snarky" as we are in some of our posts, we think the whole local microeconomy would be better off if properties that didn't really HAVE to sell were removed....

For instance, the NINE houses in Belmont, about which we recently posted. Do they HAVE to go now? Who knows. But to have such a large # put on the market at such high prices is troubling...we think these asking prices belong in your category of 'unrealistically' priced.

They'd go "like hotcakes" if they were $140-160K asking, with some wiggle room. Despite what we think about the overvaluing of Belmont, there are still LOTS of artsy types and/or Yuppies who'd go for a cottage--IF it was more affordable. But a college-educated 20-30 something nowadays is often in heavy debt w/student loans AND w/credit cards, and won't qualify for today's mortgages....

And we doubt Mom and Dad would take a drive by and agree to co-signing.

Yes, we know the CAAR stats are 'live,' and sorry if that was not adequately conveyed.

Montpellier said...

I agree with Dave that the glut of inventory - the excess of supply - is the source of price pressure. I too very much believe in market fundamentals and objective reality.

Simply put: there are more sellers than buyers. The question becomes, why?

At the simplest, let's just start with population...are people leaving our MSA? Are we seeing a net outflow of jobs and population - reduced "household formation"? I think anyone who's looked around the area anytime in the past three or four decades can readily attest that the exact opposite is happening. Should be plenty of buyers!

Next, how about new construction? Is there a real glut of housing in our area - overbuilding? Well, it's difficult to say for certain without researching housing occupancy permit numbers, but given the constant media buzz over the past decade about lack of affordable housing in the area, I think it's a safe bet that construction didn't out-pace household formation. Moreover, the rapid rise of the price bubble here, versus places like Atlanta (developer's heaven) where they just bulldozed and built without restriction, suggests that the supply didn't outstrip demand - or those pesky laws of supply and demand would have kept the price increases somewhat in check.

Perhaps, as the head of a local housing trade association, Dave has access to or have compiled hard numbers on occupancy permits and household formation? Care to share Dave?

So, if the number of units built and the number of new households didn't deviate from their historical pattern, what caused the sudden surge in new home buyers and prices? Prices in our area from the late 80s through the late 90s were more or less flat, by comparison with '00-'06. Where did all these new people with lots of money to bid up prices come from?

Well, how about an economic boom? Did people's wages suddenly start growing such that a whole bunch of previous renters were able to save up downpayments and qualify for bigger mortgages? How many people really saw their income increase? During the 90s we had the great productivity boom of the internet. There was the dot-bomb bubble, but more than that, there were big productivity gains by corporate America. So, how many people got that much richer? Only the top 1/2%! There was no trickle-down.

However, wages did improve slightly, as we recovered from the post-Reagan hangover, and the economy picked up. And what happened to housing prices from 1992-2000? They did increase - modestly - they 'recovered' from the popping of the previous bubble.

So, after the dot-bomb bubble burst and wages were flat (declining with inflation), where did all this new money for housing come from?

Simple - suddenly cheap credit was available at deceptively and artificially low rates to people who weren't really creditworthy. Sure, there's always been a pent-up demand for houses among the non-credit-worthy - we'd all like a pony, please - but that doesn't mean we can all really afford one.

I don't agree that the excess of supply in the MLS is a 'problem' or somehow 'unnatural' - really, the credit markets are no less man-made than houses are - I don't recall seeing a house grow from a tree.

I believe that's the free market at work - according to the Natural Laws of economics (versus faith-based reality & statistics). It is a perfectly natural reflection of market fundamentals: there are more high-priced properties than there are buyers who can afford them. That itself, just like the bubble on the way up, is a reflection - a symptom/side-effect - of the credit bubble.

If these properties were priced such that buyers could afford them - including their current owners - then there wouldn't be so many on the market. Many, many of the current buyers are people who could only afford to 'own' (and I think that belongs in quotes when the bank has a lien for >50% of your house) with a teaser rate and constant refinancing - essentially eternal revolving mortgage debt. They cannot afford to really pay them off - not at the inflated prices they paid.

Moreover, anybody who really could afford a house they could actually pay off, already has one! The world is terrified about the downfall of FNMA and FRE because they are the only big institution still making loans. The bad housing market will turn into a true housing driven depression if they stop writing. The bad conditions were seeing are a direct reflection of the fact that the GSEs refused to completely throw out standards of credit-worthiness for borrowers. They do not give loans to people who can't really afford them, and that means there are many fewer buyers.

The higher prices are, the fewer people really qualify. This is a "natural" result of the free market. Jim Duncan has a up on this today. His tale perfectly illustrates why the current market situation is a direct and "natural" result of the credit markets

Dave Phillips said...

Sorry for the delayed respone. I was hiding out in rural Vermont with a bad/no Internet connection.

You said, "Perhaps, as the head of a local housing trade association, Dave has access to or have compiled hard numbers on occupancy permits and household formation? Care to share Dave?"

Unfortunately I do not have access to this data locally. If I did I would share - sorry.