Bubble Meter

Homebuyer tax credit nearing renewal

2009-11-04T07:37:00.003-05:00

Stupid stuff like this is why, after a decade of voting straight Democratic in state and federal elections, I decided to stay home yesterday and let the winds of change blow. I'm disgusted with both political parties.

How the crisis could change economic theory

2009-11-03T09:26:00.003-05:00

Here's an interesting look at how our little housing bubble may change macroeconomic theory.

The crisis exposed the inadequacy of economists' traditional tool kit, forcing them to revisit questions many had long thought answered, such as how to tame disruptive boom-and-bust cycles. ...

"We could be looking at a paradigm shift," says Frederic Mishkin, a former Federal Reserve governor now at Columbia University.

That shift could change the way central bankers do their job, possibly leading them to wade more deeply into markets. They could, for example, place greater emphasis on the amount of borrowing in the economy, rather than just the interest rates at which borrowing is done. In boom times, that could lead them to restrict how much money various players, ranging from hedge funds to home buyers, can borrow.

D.C. area foreclosures double year-over-year

2009-11-02T08:10:00.000-05:00

From last Wednesday's Washington Post:

The number of Washington area homeowners in foreclosure has more that doubled in the past year, according to a report to be released Wednesday that shows the problem remains most acute in a few counties and could get worse as more borrowers fall behind on their payments.

About 2.7 percent of local borrowers are in the foreclosure process, meaning that the bank has started the legal process to take back the property, according to the report by the Urban Institute, a nonprofit policy research group based in Washington. That was slightly below the national average of 2.9 percent.

But that is up from about 1.4 percent in June 2008 and 0.5 percent in June 2007, according to the report. (The report excludes Howard and Anne Arundel counties.) ...

But the problem is far worse in three counties: Prince George's, where 5.2 percent of borrowers are in foreclosure; Charles with 3.9 percent; and Prince William with 3.7 percent. These areas had high concentrations of minority borrowers who were more likely to take out subprime loans, according to the report.

Cash for Clunkers cost $24,000 per car

2009-10-29T23:50:00.002-04:00

Edmunds.com has analyzed the car sales numbers during the Cash for Clunkers program and estimated that the marginal cost was $24,000 of our tax dollars for each new car sold:

A total of 690,000 new vehicles were sold under the Cash for Clunkers program last summer, but only 125,000 of those were vehicles that would not have been sold anyway, according to an analysis released Wednesday by the automotive Web site Edmunds.com. ...

The Cash for Clunkers program gave car buyers rebates of up to $4,500 if they traded in less fuel-efficient vehicles for new vehicles that met certain fuel economy requirements. A total of $3 billion was allotted for those rebates.

The average rebate was $4,000. But the overwhelming majority of sales would have taken place anyway at some time in the last half of 2009, according to Edmunds.com. That means the government ended up spending about $24,000 each for those 125,000 additional vehicle sales.

The average rebate value mentioned above seems like bad rounding. It appears the average rebate was closer to $4,348. Here's the math:

$3 billion overall cost ÷ 690,000 cars sold = $4,348 per car total cost

(690,000 / 125,000) × $4,348 = $24,000 per car marginal cost

In an example of regulatory capture (government regulators protecting the industry they are supposed to regulate), the Department of Transportation is defending Cash for Clunkers (i.e. "Car Allowance Rebate System") by saying that it was good for the auto industry:

"It is unfortunate that Edmunds.com has had nothing but negative things to say about a wildly successful program that sold nearly 250,000 cars in its first four days alone," said Bill Adams, spokesman for the Department of Transportation. "There can be no doubt that CARS drummed up more business for car dealers at a time when they needed help the most."

Note that what's good for car dealers is not necessarily what's good for the overall economy, just as what's good for Realtors is not necessarily what's good for the overall economy. Like the first-time home buyer tax credit, Cash for Clunkers is nothing more than wasteful corporate welfare.

The White House has come out with a weak, short-term-oriented defense of the program. Notice, however, that for the most part the left-wing economics bloggers who are usually quick to defend the White House against faulty economic reasoning (e.g. Paul Krugman, Mark Thoma, Calculated Risk) are remaining silent on this one. In fact, left-leaning economist Jeffrey Sachs is out with his own criticism of Cash for Clunkers' supposed climate benefits. Sachs actually makes the mistake of measuring total cost, rather than marginal cost, so the program is actually 5.5 times more wasteful than the numbers he complains about.

Just like the first-time home buyer tax credit, Cash for Clunkers is a handout of our tax money to the special interests who lobby Congress.

What does a median-priced house look like?

2009-10-29T08:06:00.003-04:00

The median price of a house in the United States is roughly $175,000. Here's what a house at that price looks like in different parts of the country.

Shoddy construction

2009-10-27T09:17:00.005-04:00

Discussing a recent New York Times article about shoddy condo construction during the boom, the Wall Street Journal's "Developments" blog writes:

The story about shoddy construction during the boom isn’t just a NYC tale. As M.P. McQueen reported in the Journal this summer, the furious pace of home building from the late 1990s through the first half of this decade contributed to a surge in defects. It caused shortages of both skilled construction workers and quality materials. Many municipalities also fell behind inspecting and certifying new homes.

The sheer volume of new buildings that went up during the condo construction boom is the main reason for the increase in defective buildings, lawyers and engineers told the Times.

So one would expect to see more problems in other cities that experienced a condo boom recently.

I doubt this is just a condo problem. It's something I've worried about when I eventually buy a home. So many homes were built during the boom, I bet many of them were rushed. I also bet that the increased demand for construction workers during the boom led to a drop in the average skill of the people hired to do the work, with many of them unable to even speak English. On the whole, houses built during this decade may be of inferior quality to houses built previously.

Government intervention added 5% to home prices

2009-10-26T06:19:00.005-04:00

Here's a summary of the analysis from Goldman Sachs:

Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday. ...

But these artificial props won’t last forever and may have created a false bottom in the market. “The risk of renewed home-price declines remains significant,” Goldman economist Alec Phillips writes in the report, “and our working assumption is a further 5% to 10% decline by mid-2010.”

Federal government policies encouraging loan mods have reduced the supply of homes on the market temporarily because it takes months for loan servicers (the firms that collect mortgage payments) to figure out which borrowers qualify. ...

Goldman estimates the tax credit has boosted sales by 200,000 units. ...

Mammoth purchases of mortgage securities by the Federal Reserve appear to have held home mortgage rates about 0.30 percentage point lower than they would have been, Goldman says. Those purchases are due to be phased out in next year’s first quarter.

Thanks to Kahner for pointing out Calculated Risk's response:

Based on Goldman's estimates, the first-time home buyer tax credit probably cost around $80,000 per additional home sold. Ouch.

Forget Wall Street, I think Congress needs a salary cut.

Classic!

2009-10-24T05:35:00.004-04:00

I've heard that financial journalists sometimes get jealous of the Wall Street tycoons they cover, but this is ridiculous:

Apparently CNNMoney.com staff reporter David Goldman wants his pay cut, too. My advice to Time Warner is go ahead, be generous, give the guy what he wants.

MarketWatch: Kill the Credit

2009-10-23T07:08:00.009-04:00

MarketWatch Washington bureau chief Rex Nutting argues against renewing the first-time home buyer tax credit:

The tax credit is an extremely ineffective stimulus, and like the TARP, it mainly rewards the very people who got us into this mess. ... Also, the tax credit gets the economic incentives all wrong. ...

The National Association of Realtors says about 2 million new buyers will take advantage of the subsidy this year, but the real-estate lobbying group admits that the vast majority of those buyers would have bought a home without any subsidy.

Most of the subsidy is wasted. ... It's expensive, but the worst thing about the subsidy is that it doesn't address the issue of oversupply, which is the main reason prices have fallen so much.

Most first-time buyers move from renting to owning a house. That subtracts one home from the vacancy list, but adds an apartment. The net change is zero. There is little gain for the economy.

In the second quarter, a record 4.4 million apartments were vacant (a record 10.6% of all units) and there were 1.9 million vacant dwellings that typically were occupied by the owner. The housing problem in America isn't that home prices are falling; it's that there are so many vacancies that prices must fall. Incomes did not rise as fast as home prices did, so many families simply can't afford current prices. The laws of supply and demand have not been repealed. ...

The tax credit is designed so a buyer can use it for a down payment. Combined with another flawed government plan to recreate subprime lending inside the Federal Housing Administration, the tax credit encourages more buyers to put less of their own money down.

The one thing we know about foreclosures is that they are much more likely if the owner has no equity. So the tax credit, which was designed to reduce foreclosures by helping to prop up prices, actually will lead to more defaults as already stretched buyers lose their jobs.

Remember, the first-time home buyer tax credit is costing $43,000 for every extra home sold. That's a massive waste of your money just to transfer an existing home from one person to another.

HUD unexcited about extending the tax credit

2009-10-22T05:33:00.000-04:00

The secretary of the Department of Housing and Urban Development (HUD) appears unexcited about extending the first-time home buyer tax credit:

The nation’s top housing official expressed doubt over the need to extend the $8,000 tax credit for first-time home buyers, and said that the Obama administration was reviewing whether the additional cost of extending the credit was worth any benefit in home sales.

Shaun Donovan, the secretary of the Department of Housing and Urban Development, told a Senate hearing on Tuesday that there was “clear evidence” that the tax credit had benefited the housing market. But he said that the “real issue” in considering an extension was whether an extension was worth the cost to the government in lost tax revenue.

Note that Calculated Risk estimates that the first-time home buyer tax credit costs about $43,000 for every extra home sold:

Here is the math: 1.9 million buyers qualify for the credit (the NAR estimates between 1.8 and 2.0 million) = $15.2 billion.

The NAR estimates the tax credit resulted in 350 thousand additional purchases. So divide $15.2 billion by 350 thousand = $43,000 per additional home. And the numbers will get worse if the program is extended.

The credit also appears to be vulnerable to tax fraud:

The Internal Revenue Service is examining more than 100,000 suspicious claims for the first-time home-buyer tax break, another sign of potential trouble for the soon-to-expire program.

It's a waste of money, poor economics, and vulnerable to tax fraud, so of course Congress will renew it.

The FHA failed a recent audit

2009-10-22T05:21:00.006-04:00

Reckless lending practices are part of what got us into the current financial crisis, and the government's response has been...

The Federal Housing Administration may be under-equipped to manage its exploding market share, according to an internal audit released last week. The report gave the FHA poor marks for its steps to screen lenders that are allowed to sell loans backed by the federal agency.

The FHA’s market share has grown sharply as the private mortgage market collapsed over the past two years, and the FHA now insures around one-quarter of all U.S. mortgages, up from around 2% in 2006. ...

The audit, by the inspector general for the Department of Housing and Urban Development, found that the agency was under-equipped to manage a big inflow in applications by lenders to make FHA-backed loans. ...

The agency’s management of its affiliated lenders remains a top concern because the FHA’s financial reserves have dropped below mandatory levels for the first time in its 75-year history. Critics warn that rising defaults on FHA-backed loans could require a taxpayer bailout, but agency officials insist taxpayer money won’t be needed. Fraud remains a top concern as defaults rise on loans backed by the agency. ...

Some in Congress want the agency to do more by increasing minimum down payments to 5%, up from the current 3.5%. The agency says that such a move would kill any nascent housing recovery.

Things are really messed up when 5% down payments would "kill any nascent housing recovery." 20% down payments used to be the norm. Is America really that addicted to debt?

Breakin' the law in D.C.!

2009-10-21T05:16:00.011-04:00

This is not exactly on topic, but:

The Heenes may have violated FAA regulations barring people from flying balloons or kites within 5 miles of an airport, an FAA official said.

Has anyone ever noticed the annual kite festival on the National Mall? That's only 2 miles from Reagan National Airport by my measurement. Somebody please arrest the Smithsonian Institution! Have FAA officials never been to D.C.?

It turns out that there's a qualification:

"…within 5 miles of the boundary of any airport…No person may operate an unshielded moored balloon or kite more than 150 feet above the surface of the earth unless…"

So, if you let go of your kite at the festival and it flies up 150 feet above the earth, then you're a malefactor.

Fiserv: Home prices to resume decline

2009-10-20T08:41:00.004-04:00

Home prices are predicted to fall 11% by mid-2010:

If you thought home prices were bottoming out, you may be wrong. They're expected to head a lot lower. ...

Overall, the national median home price is predicted to drop 11.3% by June 30, 2010, according to Fiserv, a financial information and analysis firm. For the following year, the firm anticipates some stabilization with prices rising 3.6%.

In the past, Fiserv anticipated the rapid decline in home-sale prices over the past few years — though it underestimated the scope.

Mark Zandi, chief economist with Moody's Economy.com, agreed with Fiserv's current assessments. "I think more price declines are coming because the foreclosure crisis is not over," he said. ...

If Fiserv's forecast holds, Miami real median home price will tumble to $142,000 by June 2011. ...

Brad Hunter, chief economist for Metrostudy, which provides housing market information to the industry, ... pointed out that the tax credit for first-time home buyers helped support prices during the three months of Case-Shiller gains. ... But the market assistance ends when the credit expires on Dec. 1. Hunter also sees a new wave of foreclosure problems coming from higher priced loans and prime mortgages.

With winter coming, Miami is about to start looking better and better.

Commercial vs. residential real estate prices

2009-10-20T06:06:00.004-04:00

From the CalculatedRisk blog, commercial real estate prices vs. residential real estate prices since 2001:

Note that commercial real estate prices aren't getting subsidized via the first-time home buyer tax credit. As far as I'm aware, they don't qualify for FHA loans either.

BubbleSpere Roundup

2009-10-19T09:24:00.002-04:00

Where the Hell is the Outrage? (Mish's Global Economic Analysis)
Will a new law mean better home valuations? (OC Register)
Alook at another job market number (Macroblog)
U.S. Bank v. Ibanez: More fun with foreclosures (Calculated Risk)

Lawrence Yun's Arlington condo

2009-10-19T05:47:00.000-04:00

Here are photos of the Arlington, Virginia, condominium where Lawrence Yun lives. Lawrence Yun, as you recall, is the chief economist for the National Association of Realtors. He has repeatedly mislead the public by making overly-rosy housing market forecasts. His misleading forecasts are often quoted by the press and presented as coming from an authoritative source.

Previously, I have posted a photo of Lawrence Yun's house in Centreville, Virginia, which he and his wife rent out. I have also posted a photo of the house of his predecessor, David Lereah.

More stimulus, but no more bubbles

2009-10-16T11:07:00.006-04:00

Washington Post business columnist Steven Pearlstein gives his recommendations for strengthening the economy:

...More money for extended unemployment benefits; more aid to the states so that they can maintain the most vital public services; and more money to expand mass transit, state college and university systems, efficient energy production and basic scientific research. The economist Paul Krugman estimates that for every dollar in extra debt that will be required to finance this fiscal stimulus, about 40 cents will be repaid almost immediately in the form of tax revenues from higher short-term economic growth. And if the money is invested wisely in quality projects with high returns, the other 60 cents could wind up being a boon to future generations, rather than a burden.

What would surely not be good policy, by the way, is to extend and expand the current tax break for first-time home buyers that is set to expire at the end of the year, as many in Congress are now advocating. Home buyers are already getting a huge benefit from the dramatic drop in house prices, along with the lowest mortgage rates in a generation, thanks to massive government infusions into Fannie and Freddie. For the government to go beyond those efforts and try to induce home sales that otherwise wouldn't have happened — at an estimated $75,000 a pop — would surely be cheered by home builders, real estate agents and the analysts at Goldman Sachs. But in truth it would be nothing more than a misguided attempt to reinflate another bubble.

As I said yesterday, Congress seems intent on reinflating the housing bubble.

Those dang mortgages!

2009-10-16T10:38:00.004-04:00

Gee, I wonder why Ken Lewis announced two weeks ago that he was retiring as CEO of Bank of America?

A decade after the stock bubble

2009-10-15T05:43:00.010-04:00

The Dow Jones Industrial Average has just hit 10,000, which is where it was a decade ago. Likewise, I predict housing prices will be at roughly today's level a decade from now, although the Democratically-controlled Congress seems intent on having another housing bubble in the interim.

Things don't look quite so rosy for the S&P 500—a better measure of the stock market—which is below its October 1999 level:

But don't worry. Some things have kept going up over the past decade. For example, the national debt:

$5.656 trillion in 1999
$11.909 trillion in 2009

What happens in Vegas...

2009-10-15T05:31:00.001-04:00

Wow!

Unemployment to remain high for years

2009-10-14T06:22:00.001-04:00

According to a survey of professional forecasters conducted by the Philadelphia Fed, the unemployment rate is expected to remain abnormally high for at least three more years.

When looking at the graph above, keep in mind that from the mid-1990s until 2007, unemployment generally ranged from 4-6%, with NAIRU (essentially the natural rate of unemployment) being about 5%. Furthermore, since 1947 there have only been three times when the unemployment rate exceeded 8%: the mid-1970s, the early 1980s, and now.

What effect do you think sustained high unemployment will have on foreclosures and home prices? What effect will sustained high unemployment have on mortgage rates? What effect will those mortgage rates have on home prices? Would we have had such high unemployment if there had never been a housing bubble? Add your thoughts in to the comments.

Is Bush to blame for the housing bubble?

2009-10-13T05:52:00.024-04:00

I have always been amazed at how people can be blinded by their political affiliation. Far left-wingers often go out of their way to blame Republican politicians for anything they can. Far right-wingers often do the same to Democrats. Often they will have different opinions on similar circumstances based on which party is in power.

An example of this political affiliation blindness is the fact that many people on the far left insist on blaming George W. Bush for the housing bubble, while I'm unaware of any right-wingers willing to blame him. Instead, many conservative Republicans blame it on Clinton.

In this graph, vertical blue bars mark when a Democratic president took office. Vertical red bars mark when a Republican president took office. Pay attention to the red housing graph line. It marks inflation-adjusted housing prices. Looking at the data, I can't see how either president can be wholly responsible for the bubble. In fact, I think blaming politicians at all mostly misses the mark.

So, who do I blame for the housing bubble? Alan Greenspan, who was appointed by both Republican and Democratic presidents. I don't claim that Greenspan necessarily started the bubble, but he certainly failed to do anything to stop it. Also, it was the second major asset bubble to occur during his chairmanship of the Federal Reserve. The first was the late-1990s stock market bubble. Asset bubbles are rare beasts, so having two sequentially under the same Fed chairman is unlikely to be a coincidence.

How to create better financial regulation

2009-10-12T06:38:00.021-04:00

From the comments of Saturday's blog post:

The trick is to have professional regulators who actually believe in the rule of law. Bush's fox-watching-the-henhouse approach was destined for failure.

My response:

Lots of people like to blame stuff like this on the opposing political party. For example, note how Republicans like to blame the housing bubble on the Community Reinvestment Act.

The truth is that nobody of any political affiliation likes to step in and take away the punchbowl when everyone's partying. Just look at the failure of anyone to do anything about the stock market bubble during Bill Clinton's second term.

Bubbles are caused by human nature. Since regulators are human beings, they are as susceptible as anyone else. How many home-owning regulators of any political affiliation would have wanted to rein in the rapid rise in housing prices, for example?

Instead what are needed are mathematical rules, such as requiring home buyers to make 20% down payments when buying homes. (Note that under President Obama and a Democratically-controlled Congress, the FHA is actively encouraging absurdly low 3.5% down payments.)

Larger down payments would encourage home buyers to care less about monthly payments and more about overall price. They also would give home owners a bigger buffer to protect themselves when home prices fall. They would also force home buyers to have more skin in the game, so they will be less inclined to just walk away when their home price falls.

All financial institutions should be required to maintain sufficient capital reserves, not just traditional banks. The required reserve ratio should automatically rise during booms and fall during busts. Countercyclical reserve policy like this would help stabilize both the financial system and the money supply.

Finally, teaser rates should be outlawed. Teaser rates are intended to take advantage of people's innate susceptibility to hyperbolic discounting. If someone isn't willing to buy a home based on the regular interest rate and the regular monthly payments, then they shouldn't be buying the home.

Constructive criticism of Obama's financial regulatory proposals

2009-10-10T06:45:00.011-04:00

Fortune magazine asks several economists their opinions about President Obama's financial industry regulatory proposals. Overall, they're not impressed.

Prof. Richard Carnell, Fordham University Law School:

It places naive faith in regulation. Yet regulation failed disastrously over the past decade. Bank regulators had ample powers to keep banks safe but did too little, too late.

Byron Wien, Vice Chairman, Blackstone Advisory Services:

There are two areas where I think regulation is needed. The first is bank leverage. The rules are on the books and it's up to the Fed to implement them. ... The second is derivatives and there we really need to write some new regulation providing greater transparency, margins, risk sensitivity, and awareness.

Prof. Darrell Duffie, Stanford University:

I think [the regulatory plan] is a major step in the right direction, but there's room for improvement. ... The regulatory plan could improve, most importantly, by providing additional clarity on how large systemic financial institutions can be safely resolved. There can also be further improvements in the price transparency of over-the-counter derivatives.

Michael Lind, New America Foundation:

I think this is doomed. ... In the U.S., discretionary regulation tends to be corrupted. I want structural separation between retail banking and casino banking, where retail money couldn't be used to finance the proprietary trading.

Jaret Seiberg, Concept Capital:

The fundamental problem during this crisis was that when times were good no one had the political will to pull the plug.

Robert Pozen, MFS Investment Management:

The Federal Reserve should monitor the system and then work with the functional regulator to fix problems. At the same time, we should fill the gaps in the functional regulation.

Way off topic

2009-10-09T05:36:00.016-04:00

Not being George W. Bush has its benefits, just ask Jimmy Carter and Al Gore.

Now back to your regularly scheduled housing bust...