The Sputtering Economy

My father, who would be 100 this summer, would hitch up the wagon on a farm in Castleberry, Texas, about 6 miles from downtown Fort Worth, to drive to church or to the Big City for supplies. He was 57 when they put a man on the moon. It was hard for me as a kid to relate to wagons and outhouses, although we grew up rather poor on the outskirts of a very small town on the edge of West Texas, living as country kids. It was a great life. We were all poor and didn’t know it.

My kids have some of the same issues about understanding my early era. I grew up as we were first starting to get power lawn mowers, a dream for me, as I hated push mowers and slings. But you had to constantly tinker with them. Neglect them for too long and they would start to sputter. When that happened, you first looked at the spark plugs, then the carburetor and the gas/air mix, filters, etc. And as I got older, that helped with my transition to taking care of my car. I was not a great mechanic but, as nearly everyone was, I was adequate.

Today? I can’t even figure out what is under the hood. No clue. And my tools back in 1967? Not designed for a 2010 model, let alone a hybrid.

Same with our old black and white TV of the late ’50s. As a ten-year-old kid, when the TV went out I would take off the back of the set, take out every one of the 20 or so vacuum tubes, and test them all. You wanted to test them all because if more than one was bad it was two miles to the store on my bike, and it was uphill at least one way. Those old tubes went out all the time. Just part of the price of watching TV.

Our economy today is like that old lawn mower engine. We get one piece of economic data that is good to very good, and the next day we get some bad news. Let’s look at some of the data for the past few weeks.

Last week we got the New York Fed Empire Index. It was simply ugly. It fell from 15.7 to a -11.4. But then this week we get the Philly Fed Index, and it’s shockingly high. The consensus saw a mild increase to an index level of 5, but it jumped 21 points to 22.5. And all the underlying components were very solid. It is hard to square such a difference when the cities that spawned these reports are about an hour train ride apart.

Capacity utilization is slowly rising, but is still at a recession level 72.7%, up 4 points from 12 months ago and the highest since over two years ago. So are we getting better or are we still mired in the doldrums? I think the answer depends on how many hours you are working.

The surveys from the National Federation of Independent Business continue to indicate that small businesses are not out of the woods. Hiring is at a virtual standstill but is at least not falling, as it was most of this year and last year. Business conditions are mixed. The survey is better than it was but still shows a sputtering economy.

The latest establishment employment survey shows job growth, though not at a level that can bring down the unemployment level. And if you look at the household survey, two things leap out. First, there is a significant rise in the number of people employed part-time. The rise in employment is not of a sort that prompts a sigh of relief. Part-time work, while better than none, does not inspire consumer confidence. It is not the fabric of a solid recovery.

Second, there are not many small business start-ups, which are the source, the feedstock if you will, of job growth. Whether because it is harder than ever to find money (it is) or because entrepreneurs are uncertain about what the future holds (they are), or for whatever reason, that is a very troubling metric. And the household survey showed a large decrease in the numbers of jobs and people working, a different story than the establishment survey.

What it all suggests is an economy growing between one and two percent. That is better than recession but not good enough to really bite into the unemployment rate.

Old and Outmoded

And that could mean trouble, as there are millions of people who are coming to the end of their 99-week extended unemployment benefits this next year. Although Congress rejected an extension this week, it was on a vote that required a 2/3 majority. That bill will be back as one that only needs a simple majority, and then it will be up to the Senate. Even so, as I understand it, benefits will only get extended for three months. At least that is the current plan.

Already, people are running out of their extended benefits. Earlier this year there were 12 million people on the extended and regular unemployment rolls. That is dropping each week and is now down to 8,854,206 people, according to the DOL. Since the regular continuing claims number is not really changing all that much, much of it is from people dropping off the rolls.

And the number of people on food stamps continues to rise. As of the end of August, when continuing benefits were running over 10M, a total of 42,389,619 people were receiving food stamps under the SNAP program. This was an increase of 553,379 people over July’s number, or an increase month-over-month of 1.32%. The year-over-year increase was 6,147,762 people or 17%. In July the increase was 17.51%.

Now here’s an interesting thing my friend John Vogel noticed. Households on food stamps are growing even faster than the number of individuals on food stamps. In August, 19,720,255 households were on food stamps, an increase of 284,877 households over the July numbers. This was a percentage increase of 1.47%. In terms of a yearly increase, the number of households grew by 3,159,502 or 19.1%, versus 19.53% recorded in July. As John wrote me:

“So, the numbers keep growing strongly, with households growing more rapidly than people. This still signifies more childless couples or single people being affected lately.

“I cannot figure this out yet, but I feel that we are going through a very significant change in household formation, in the type and quantity of available jobs, in small business stability and formation – and we are applying old, outmoded macroeconomic solutions to problems that will not and cannot respond.”

We’ll come back to that thought, but first we have to look at the definition of deflation.

We Have Deflation Exactly Where?

President Clinton famously remarked about his escapades that “… it all depends on the definition of what is is.” And similarly, whether or not we are in danger of deflation all depends on what your definition of deflation is. First, let’s look at the recent headline numbers. What we find is that core inflation, at 0.6%, as well as trimmed inflation (which takes out the statistical outliers and anomalies) are both at post-war all-time lows.

Another way to look at inflation is all-items inflation vs. core inflation, that is, inflation without food and energy. From the BLS website:

I have often joked that when you become a Fed governor they take you into a back room and do a DNA change on you. When you come out you are at all times and everywhere viscerally opposed to deflation. You will not let it happen on your watch.

And that is what happened in 2003, as deflation became a concern. The Fed under Greenspan allowed interest rates to stay low “for an extended period of time” in order to make sure deflation did not take root. Notice that it was in late 2002 that Bernanke gave his famous “helicopter” speech on deflation. There was very real concern in policy circles.

But should there have been? What if the way we measured inflation was flawed in some regard? Let’s play a thought game. Back in the early ’80s there was some consternation about using the price of houses as a way to calculate inflation. Read this paragraph from the BLS website (emphasis mine):

“Until the early 1980s, the CPI used what is called the asset price method to measure the change in the costs of owner-occupied housing. The asset price method treats the purchase of an asset, such as a house, as it does the purchase of any consumer good. Because the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons, the CPI implemented the rental equivalence approach to measuring price change for owner-occupied housing. It was implemented for the CPI-U in January 1983.”

Homeowner equivalent rent is 25.2% of the input when they calculate the Consumer Price Index (CPI). Thus it makes a big difference how you calculate the price of housing. It is extraordinarily difficult to find historical data on homeowner equivalent rent in the BLS database. You can find “shelter costs,” which include energy, insurance, etc. and are 41% of the CPI, but for our purposes today I want to focus more narrowly.

I did find an old release that shows the index value for the year 2000 to be 198.7 (http://www.bls.gov/cpi/cpid00av.pdf). The index value as of this October was 256.8. That means the rise in housing costs over the last decade was about 25% or roughly 2.5% a year, although in the last few years that number has gone deadline flat. And you can see that in the graph of total housing costs below.

But house prices went up by more than double that amount, and about 65% in the seven years from 2000 to 2007 (back-of-the-napkin estimate). That is an asset inflation of about 9-10% a year.

What if we had been using actual home prices as the measure of inflation? Let’s look at the year-over-year change in inflation for the last ten years:

Homeowners equivalent rent is 25% of the index. So take the home price rise, divide it by four, and add it to the inflation index. Inflation in the middle of the decade would have been running 4-5-6% and in 2005 would have been over 7%!

Would rates have been kept low “for an extended period of time” if we had still been using actual home prices? I rather doubt it – alarms bells would have been sounding. The Fed would have been leaning into the rise in “inflation.” Thus no housing bubble would have developed. And then no credit crisis.

And the difference all stems from how you measure inflation. These details matter. Now, let’s go back to that highlighted portion from the BLS web site.

“Because the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons [emphasis mine], the CPI implemented the rental equivalence approach to measuring price change for owner-occupied housing.”

In the 1980s the BLS (under Reagan, so not a liberal plot!) decided a home was an investment and not a roof over our head. It also conveniently allowed for lower official inflation, which is what Social Security and other government programs are tied to. But that change had significant unintended consequences.

O Deflation, Where Is Thy Sting?

Now, if you have no social life (at least on Fridays, when I write) you can go to the BLS website and get a plethora of data. (I bet that breakout of HOER is somewhere there, I just can’t find it, and their search engine needs an update.) One of the things they do is offer all sorts of ways to look at inflation, way down the page (http://www.bls.gov/news.release/pdf/cpi.pdf).

First, we find that inflation for all items is 1.2% over the last year. All items less food and energy, or core inflation (which the Fed pays attention to), is only 0.6%. That is getting dangerously low, isn’t it?

Maybe not. What you find is that inflation when you take out housing costs is a jaunty 1.9%. Right in the Fed target range of 1.5-2%. Even “core” inflation, when you take out housing, is 1.5%. That is not exactly something we should be worried about. That flat equivalent-rent number is showing a deflation risk that is simply not there.

But the Fed is worried about deflation and other things, so they are going to embark on a $600-billion quantitative easing, which among other things is going to help devalue the dollar and has already caused a rise in commodity, energy, and food prices.

We may in fact get some inflation, but precisely where we do not want it. While the Fed may prefer to look at core inflation, the rest of us live in a world where we buy food and consume energy. And for those in the lower part of the income spectrum, the rising cost of food and energy is disproportionately high. It acts like a tax on disposable income, which will hurt retail sales, which is PRECISELY what we do not need.

And all because we have the hubris to think we can measure inflation in some precise manner, and then choose policies to react to our imprecision.

Remember my 1967 tools? They wouldn’t do me much good if I had to try and fix my car today. Not that if I were in the desert and my car broke down I might not try. It is after all still an engine, and somewhere in there must be something I can understand.

I wonder if the Fed is not trying to fix a modern 2010 economy with tools made in the ’50s, based on theories based in the writings of a bunch of dead white guys. They were smart guys, I give you that. But times have changed. And our measurement tools seem flawed to me.

Thankfully, I rather think that the $600 billion can be absorbed without too much collateral damage. We do have a large economy, and the multiplier effect is at an all-time low. Or maybe I am just guilty of wishful, optimistic thinking.

Finally, this thought on what we can do to shore up home prices, from one of my favorite thinkers on the housing market, John Burns. Now here is a program that would work and also save taxpayers money. (http://www.realestateconsulting.com/content/our-proposed-rental-solution)

“Proposed Rental Housing Solution: Falling home prices don’t help anyone, and anyone who says we can let the free market take care of things is saying that it is ok for taxpayers and the banking system to lose many more billions of dollars, virtually assuring another recession and maybe worse. To boost housing demand and limit supply, we propose the following:

” 1) Create an Apartment REIT: Distressed sales need to be kept off the market. Rent out the Fannie, Freddie and FHA REO (owned properties through foreclosure). These properties currently comprise 42% of the 562,000 REO and a large percentage of the 5.1 million homes currently in the foreclosure pipeline (already 90+ days delinquent or in foreclosure). This is best accomplished by contracting with an outside firm (competitively bid of course) to manage local property management firms. The rental income will be self-sustaining and the properties will be financeable in the public markets, just like publicly traded REITs are financeable. The GSEs will benefit from future price appreciation too, as opposed to being damaged by further price deterioration. The Banks, who currently own 22% of the REO, should also be allowed to contribute properties to the REIT. The Administration can keep pushing for loan mods if they want, and we heard over and over again how government doesn’t want to foreclose on people. All we ask is that you keep the distressed sales off the market.

“2) Loans to Landlords: To stimulate demand and restrict supply on non-GSE distressed sales, have the GSEs make very safe loans to individuals or corporations who will promise to rent them out for an extended period of time. The GSEs should make a tidy profit on these loans, while also helping provide affordable rental housing to those who need it.

“3) Keep Mortgage Liquidity Flowing: Housing is extremely affordable right now, but the uncertainty in the mortgage industry is making underwriting more challenging, and uncertainty in the economy is hurting buyer confidence. Stop changing the underwriting rules so everyone knows what is required, and keep the fantastic financing environment. Once the economy turns around, real buyers will return to the market. We believe that the solutions above will also help restore home buyer confidence that prices won’t plunge, which will boost demand.”

Mexico, High Noon, and Thanksgiving

I was sitting in my office late last night. I had gotten an e-letter from my good friend Doug Casey, one of his occasional “Conversations.” In this one he decided to talk about music. I almost deleted it (music recommendations from Doug Casey? Gold mining stocks, maybe). But then I saw one song I had not thought of for years, and he had a link to a YouTube site where I could hear it. And then another and another. It seems Doug and I, both being of a certain age, grew up with the same music. It was late and I was in the house alone, so I turned up the speakers, poured some scotch, and went back down Nostalgia Lane.

He even mentioned Frankie Lane, and there was a link to the theme song from High Noon, which of course made me go to the original by Tex Ritter. About that time, my middle son, Chad, age 22, slipped into the room and scared the life out of me. After I recovered he asked me what in the world I was listening to. I found out, to my great shame as a derelict Dad, that he had never seen High Noon. I asked Tiffani, my oldest. No. Somehow my kids left home without ever seeing High Noon.

Really. How can you understand my father’s generation or how they shaped us without understanding the era that could make a High Noon? Once your kids are grown, there is not much that you can do to make up for what you didn’t do when they were in your hands. But I can change this one thing. When they are all home for Christmas, the only thing I want is for us all to sit down with Gary Cooper and Grace Kelly and watch High Noon and then talk about it. Now that will be a real present. And then, as we normally do, we can go watch a new movie. (There is a great DVD of High Noon at Amazon.com)

This week is Thanksgiving, and it looks like it will be crowded at the Mauldin home, with maybe some 30-odd (in some cases the right word) people. Seems someone wants to invite someone who has a friend, and it just grows. And it gets to be more fun. I love to cook, and this is one of those days when I pull out all the stops. My prime rib is the best ever and my mushrooms are to die for. As is everything at Thanksgiving. It seems everyone brings the things they are best at, and so we all feast.

Sunday, Tiffani and Ryan and I leave for LA and the Forbes Cruise down to Mexico. I am really looking forward to it.

Have a great week. If you are in the US, enjoy Thanksgiving. Spend it with friends and family and pause for a few moments to count all your blessings. And remember those in harm’s way who make it possible.

Your thinking about how fast the years have gone by analyst,

John Mauldin
John@FrontlineThoughts.com

DataQuick reports Bay Area Home Sales Fall Sharply; Median Price Dips Below Last Year

La Jolla, CA.—-Bay Area homes sold at the second-slowest pace for an October in more than two decades, the result of lost government stimulus, tight credit for pricier homes and lingering concerns about jobs and the economy. The region’s median sale price fell on a year-over-year basis for the first time in 13 months, a real estate information service reported.

A total of 6,122 new and resale houses and condos closed escrow in the nine-county Bay Area last month, down 3.3 percent from 6,334 in September and down 22.8 percent from 7,933 in October 2009, according to MDA DataQuick of San Diego.

Last month’s sales were the lowest for any October since 2007, when 5,486 homes sold, and the second-lowest since 1988, when DataQuick’s statistics begin. October sales fell 29.6 percent below the average October sales tally of 8,698. October sales hit their peak in 2003, when 13,392 homes sold.

“Part of what we’re seeing is the hangover effect from the expired home buyer tax credits, which spurred many to buy in the first half of the year. But that effect is fading. Now the real hurdles to more normal sales levels are the lack of meaningful job growth and the concerns many potential buyers have about job security and the overall economy. It’s why ultra-low mortgage rates, alone, haven’t turned things around,” said John Walsh, MDA DataQuick president.

“To really jumpstart the market, it’ll probably take a combination of at least the current level of affordability, a brighter economic outlook, and improved access to credit, especially for higher-cost homes.”

Last month the median price paid for all new and resale houses and condos combined in the Bay Area was $383,000, down 3.0 percent from $395,000 in September and down 1.8 percent from $390,000 in October 2009.

October broke a 12-month string of year-over-year gains in the median sale price, with those increases ranging from 1.8 percent to 31.0 percent. Last month’s year-over-year decline was the first since the median fell 8.8 percent, to $365,000, in September 2009.

So far this year, the median has peaked at $410,000, in both May and June.

Last month seven Bay Area counties logged year-over-year declines in their overall median sale prices, up from two counties to log such declines in September. Looking specifically at existing (not new) single-family detached houses, six counties – Contra Costa, Marin, Napa, San Francisco, San Mateo and Sonoma – saw their medians drop year-over-year, compared with three in September.

Last month the Bay Area’s overall median sale price of $383,000 stood 42.4 percent below the $665,000 peak in June/July 2007. The post-housing-boom low was $290,000 in March 2009. The regional median’s peak-to-trough plunge was caused by both a decline in home values and a huge shift in sales toward lower-cost homes, especially inland foreclosures.

HOA delinquencies have caused many associations to under-fund their reserves. Are assessments coming to make up for the losses? What other choice does an HOA have?

The road is long
With many a winding turn
That leads us to who knows where
Who knows where
But I’m strong
Strong enough to carry him
He ain’t heavy, he’s my brother

So on we go
His welfare is of my concern
No burden is he to bear
We’ll get there

Hollies — He Ain’t Heavy, He’s My Brother

Are you ready to carry your neighbor.

Some time ago, I wrote about the problems California HOAs are having with delinquent properties the banks do not foreclose on.

The amend-extend-pretend policies of lenders is fraught with unintended consequences. The obvious costs to lenders is lost revenue from squatters who get to stay in their homes without making any payments, but lenders are not the only parties involved who aren’t getting paid.

Local taxing authorities and Home Owners Associations (HOAs) also are not being paid. The taxes will get paid eventually because property tax obligations survive the foreclosure. Whatever bills the old owners left behind are the responsibility of the new owner. Bills due to HOAs are only paid after mortgage holders are paid in full. Since most delinquent homeowners are underwater, there is no equity left over to pay the HOA bills, and any delinquent amounts are not paid by the new owner. The costs of extinguished HOA dues are passed on to existing homeowners who are still paying their bills.

Home owners associations have only one recourse to compel an owner to pay their dues: foreclosure. In a normal real estate market — one where home owners have equity — the threat of foreclosure is an effective threat; however, when owners do not have equity and they are not paying their mortgage, HOAs have no leverage. HOAs are generally unwilling to foreclose because their ownership position after the foreclosure is subordinate to the surviving mortgages — an HOA foreclosure does not wipe out the superior liens. In other words, HOAs can take possession of an underwater property — which provides them no benefit — and in the process wipe out any claims to back HOA dues. Taking ownership of a property they cannot sell to a dues-paying owner does not help them.

Shared homeownership could mean paying your neighbors’ bills

People in condo, co-op and town house communities may have to pick up the slack for missed dues when other owners walk away from their homes or lose them to foreclosure.

By Kathy M. Kristof — November 7, 2010

For those who have a lot of cash or can get credit, this could be an ideal time to buy a house — the foreclosure crisis has pushed prices down and interest rates are way low.

But beware if you are looking to buy a condominium, co-op, town house or other property that’s part of a homeownership group. Another side effect of the foreclosure crisis is that you could end up responsible for some of your neighbors’ bills.

That’s because people in shared ownership communities chip in to pay the cost of maintaining the buildings and amenities such as swimming pools. Also, the funds, usually paid in monthly installments, are often used to pay for landscaping, as well as to insure the structures.

But when individual owners in a group walk away from their homes or lose them to foreclosures, the bills end up getting split by the remaining homeowners.

Sometimes those costs don’t get passed on immediately. Instead associations have been known to let bills pile up, creating potentially devastating surprises for owners.

Can you imagine how bad the assessments are going to be in the North Korea towers? The dues there are $998 per month, and probably less than a third of the “owners” are paying them. Assessments of tens of thousands of dollars are inevitable.

“There’s really a crisis within a crisis in the shared ownership community,” said Gary Poliakoff, coauthor of “New Neighborhoods: The Consumer’s Guide to Condominium, Co-op and HOA Living.”

The Community Assns. Institute trade group recently reported that more than half of the nation’s 310,000 community associations are struggling with “serious” or “severe” financial woes.

Some 59% of association managers reported that more than 3% of homes in their community groups were vacant, the study said, because the owners either had walked away from their mortgages or were unable to rent the homes. Some 65% of associations reported that more than 5% of their homeowners were delinquent on their monthly assessments.

“When some owners, including banks that have foreclosed on homes and now own them, don’t pay their share, other homeowners often must make up the difference through higher regular assessments or special assessments,” said Thomas M. Skiba, chief executive of the trade group.

If an association determines that it needs to levy a special assessment on homeowners, there’s no legal limit on how high that assessment can be. Unlike rent, homeowner dues aren’t subject to price controls.

And homeowners can’t just decide not to pay. Associations can get legal judgments to allow them to take a portion of homeowners’ wages or put liens on their properties.

“You are an owner, not a tenant,” Poliakoff said. “You are responsible for paying a share of the expenses, no matter how high they might be.”

To help avoid problems, check out the association thoroughly before you buy.

• Dig deep into financial records. Normally you are given a disclosure that reveals the level of dues. But you need more, Poliakoff said. You should get the association’s financial statement and find out what expenses the complex is paying, and what percentage of its overall obligations is handled by the dues.

Associations should have a balanced budget that covers both current and anticipated costs, he explained. But an increasing number of associations are either dipping into reserves or putting off prudent saving for anticipated big expenses, such as roof repair, because of the financial crisis.

The Community Assns. Institute survey, for example, said 38% of associations have delayed capital improvement projects, 31% are contributing less to reserves, 23% have borrowed from reserves and 6% have borrowed from banks and other lenders. Any of these factors can be a warning flag of trouble ahead.

• Make sure the association has adequate insurance coverage. Owners normally insure their possessions and the interior of their units, but associations generally hold the policy on structures.

One complex recently burned down and the owners found out too late that the association had cut costs by letting the fire insurance policy lapse, Poliakoff said.

• Check into an association’s reserves. Some states require that the associations maintain reserves for any expense that’s likely to exceed threshold amounts, such as $10,000. In those states the association must have a reserve study showing what the anticipated costs are, when they’re expected to be needed and how much money is set aside to handle them.

If the roof would cost $50,000 to repair and needs fixing each 10 years, for example, you’d expect that nearly half of that anticipated cost would be saved by year five. Even if a reserve study is not legally required, your association should have one.

• Look over the grounds. Some 35% of associations have reduced landscaping services and 12% are asking homeowners to do some work themselves, the Community Assns. Institute study said. If the grounds are not well-maintained, the value of a home is likely to diminish over time.

All good advice.

It’s different in Nevada

One of the first things I learned when I started analyzing properties in Nevada is that their HOA liens suvive a foreclosure. Unlike California where this debt is wiped out and the debt is spread to all the owners, in Nevada, HOA liens survive, and like back taxes, they must be paid by the new owner of the property. Being familiar with the HOA problems brewing in Calfornia, I think the Nevada law is a good one.

However, Nevada does create its own problems. There is currently no limit on the collection fees the attorneys for Nevada HOAs can charge. I saw a recent property with a $380 outstanding HOA bill. After all the collection fees were added up, the final bill was over $3,800. That is highway robbery.

The good news is that HOAs in Nevada are solvent and well funded. The bad news is that attorneys are using extortion tactics to make a fortune off collecting for HOAs. In the end, this hurts the banks because they must lower their expectations at public auction because buyers there know they must reserve enough to pay off the HOAs. The more money that goes to paying off the HOAs, the less money is left to recover on the loan.

DataQuick reports Southland Home Sales Fall, Prices Flat

La Jolla, CA—Southern California home sales dropped in October to their lowest level in three years amid doubts about the drawn-out market recovery, tight mortgage lending policies and expired government incentives. The median price paid for a home rose on a year-over-year basis for the 11th consecutive month, but at this year’s slowest pace, a real estate information service reported.

A total of 16,744 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 7.4 percent from 18,091 in September, and down 24.3 percent from 22,132 for October 2009, according to MDA DataQuick of San Diego.

A drop from September to October is normal for the season. Last month’s sales were the lowest for an October since 2007, when 12,913 homes sold, and the second-lowest since 1988, when DataQuick’s statistics begin. Last month’s sales were 30.6 percent below the average October sales tally of 24,123.

“In addition to a lousy economy, the housing market still has a couple of nasty bottlenecks it has to contend with. First, sales of newly-built homes are at a low, mostly because builders can’t build at a low enough price to compete with the inventory of resale homes, many of which are short sales or foreclosures,” said John Walsh, MDA DataQuick president.

“Also, lenders still haven’t opened the mortgage money spigot for buying move-up and prestige properties. These properties have come down in value by about half as much as entry-level homes. But trying to finance a higher-end purchase can be a real grind, even for well-qualified buyers with a 20 percent down payment,” he said.

The median price paid for a Southland home was $283,000 in October. That was down 4.2 percent from $295,500 in September, and up 1.1 percent from $280,000 for October 2009. The 1.1 percent annual gain was the lowest since the median began rising year-over-year last December. The last time the median was lower than October’s $283,500 was in February this year, when it was $275,000.

The median’s low point for the current real estate cycle was $247,000 in April 2009, while the high point was $505,000 in mid 2007. The median’s peak-to-trough drop was due to a decline in home values as well as a shift in sales toward low-cost homes, especially inland foreclosures.

Foreclosure resales accounted for 34.7 percent of the resale market last month, up from a revised 33.6 percent in September and down from 40.4 percent a year ago. The all-time high was February 2009 at 56.7 percent, DataQuick reported.

Just how bad is “Foreclosure-Gate” going to get? This is the million-dollar question and the answer is as frightening as its implications: Nobody knows.

For anyone who’s been living under a rock for the past three weeks, let’s recap. Three weeks ago, Ally Bank (formerly GMAC), dropped the bomb that it was investigating potential problems with how its foreclosure paperwork was being processed and halted foreclosure proceedings in 23 states. Within days, other big lenders likeJPMorgan Chase (JPM) and Bank of America(BAC) made similar announcements. Bank of America has now stopped foreclosures in all 50 states, just yesterday 50 state attorney generals launched an investigation into basically the entire mortgage servicing industry, and it seems that the rabbit hole is deepening daily.

All this less than a month before one of the most important mid-term elections in recent memory.

The housing market, already swooning, is slowly grinding to a halt, as uncertainty spreads from transaction to transaction. The most immediate fear is that buyers of bank-owned (or REO) properties will go away, removing an essential layer of demand for battered real estate markets around the country. If lenders didn’t foreclose properly, buyers could find themselves without clean title, opening a Pandora’s box of risks.

That having to give back a recently purchased home would be an extraordinarily rare event isn’t important; in times of great uncertainty, confidence is the only thing that matters. This is the lesson to be learned from the financial crisis of 2008-2009, where the fear of default, not necessarily the default itself, torpedoed firms like AIG (AIG), Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers, Wachovia (WFC) and others.

If all this renewed talk of gloom and doom in housing is unnerving, it should be. If not quashed in short order, the situation could quickly spin out of control. If homebuyers en masse lose faith in the system of property ownership, title, and transfer, we’d all of a sudden arrive at a very scary place. Home prices follow sales volume, and if sales dry up in a meaningful way, especially in markets dominated by distressed sales, prices would collapse.

For an administration whose stated housing policy is to prop up prices, this is an unacceptable outcome.

Policymakers, who for months have been fighting for legislation to slow the flood of foreclosures, find themselves in the uncomfortable position of defending the economic and social value of an efficient process for repossessing homes. Foreclosure is the housing market’s natural — albeit unpleasant — cleansing mechanism. Without it, impaired assets cannot be cleared and a sustainable floor in prices cannot be found.

There is, however, a silver lining to all this.

If you assume for a moment that the resolution for the so-called Foreclosure-Gate is not Armageddon, that cooler heads will prevail, it could end up being a massive blessing in disguise. For almost three years now, Washington has attacked the housing market Medusa by simply chopping off heads, leaving the body to regenerate more. Loan modifications have been a woeful failure while tax credits and other stimulus have proven transitory measures at best. But now faced with the specter of losing foreclosure, there’s a chance policy makers will wake up to the stark reality that only through repossession, through the efficient reallocation of REO properties back into the market, can the housing truly heal.

ForeclosureRadar reports:

The headline foreclosure news in October was the suspension of foreclosures by a handful of lenders, after certain procedures were called into question. While the announcements initially focused on 23 judicial foreclosure states outside of our coverage area, Ally (GMAC), PNC and Bank of America all later announced that they would be suspending foreclosures nationally. The week after the announcements, we saw evidence of those suspensions on Tuesday, October 12; after the Monday holiday. Ally restarted foreclosures just a week later on October 18; but neither Bank of America nor PNC have resumed foreclosure sales as of November 15th.

Foreclosure sales dropped dramatically across our coverage area as a result, though slight declines by other lenders would have likely led to a drop in October’s foreclosure sales regardless.

…

“Despite a short-term impact to foreclosure sales, the latest foreclosure scandal will likely lead to little more than a new scam perpetrated on those who have already lost their home,” says Sean O’Toole, CEO and Founder of ForeclosureRadar.com. “Much like the cottage industry of loan modification consultants that took up-front fees and provided little in return, we are now seeing consultants promising to overturn foreclosure sales, despite any experience in actually doing so.”

Arizona Foreclosure Outcomes:

California Foreclosure Outcomes:

Nevada Foreclosure Outcomes:

Oregon Foreclosure Outcomes:

Washington Foreclosure Outcomes:

From HousingWire:

Standard & Poor‘s analysts believe home prices will drop between 7% and 10% through 2011, erasing any improvements prices have recently made.

…

“Low mortgage rates will likely continue to encourage refinancing, but their influence on home buying activities has been limited due to the weak housing market and a lack of demand,” S&P credit analyst Erkan Erturk said.

…

Prices will continue to be pressed down as long as the market works through a backlog of distressed properties that remains elevated. Recent foreclosure moratoriums from major lenders because of documentation problems have only delayed this work, Erturk said.

On Fiserv:

Despite national gains in home prices through the second quarter, Fiserv, a financial services technology provider, said it expects a 7.1% drop over the next 12 months with some markets falling into a double-dip.

Nationally, home prices increased an average 3.6% in the second quarter from a year ago, according to the Fiserv Case-Shiller Indexes, which is generated by the technology company using data from the Federal Housing Finance Agency. The increases came from strong performances in higher-priced markets such as San Diego, Washington, and the San Francisco Bay Area.

At the end of the second quarter, the median U.S. home price was $177,000.

On a micro-level however, prices actually fell in 70% of the 384 metro areas. Markets such as Detroit, Mich.; Boise, Idaho; Reno, Nev.; and smaller markets in Florida and Oregon experienced double-digit drops.

Without the homebuyer tax credit that expired in April, home sales have plummeted, and Fiserv expects prices to follow before stabilizing again at the end of 2011.

Fiserv Chief Economist David Stiff said the largest declines will come in those markets that had strong spring and summer price gains.

“This is because the home buyer tax credit delayed the correction in home prices that is necessary to return housing affordability to its pre-bubble levels,” Stiff said.

Fully half of metropolitan areas tracked in the third quarter continued to show modest home price increases from a year ago, despite a sharp decline in home sales after the deadline for the home buyer tax credit, according to the latest survey by the National Association of REALTORS®.

In the third quarter, 77 out of 155 metropolitan statistical areas1 (MSAs) had higher median existing single-family home prices in comparison with the third quarter of 2009, including 11 with double-digit increases; two were unchanged and 76 metros showed price declines. In the third quarter of 2009 only 30 MSAs experienced annual price gains.

The national median existing single-family price was little changed at $177,900 in the third quarter, down 0.2 percent from $178,200 in the third quarter of 2009. The median is where half sold for more and half sold for less. Distressed homes, typically sold at discount, accounted for 34 percent of third quarter sales, up from 30 percent a year ago.

Lawrence Yun, NAR chief economist, said relatively flat home prices have been the hallmark of the 2010 housing market. “Even with swings in home sales, prices this year have been changing very little from year-ago readings. Areas with some larger swings in home price reflect the degree of distressed sales in those markets,” he said.

“Home sales through the first three quarters of this year are virtually the same as year-to-date sales at this time last year, and therefore broadly support home values. However, there are large local market differences with prices rising in job-creating regions like the Washington, D.C. area, the Dakotas and Texas; and also in markets recovering from over-correction such as California coastal cities,” Yun said.

With both prices and interest rates going down, affordability is expected to improve throughout 2011.

You’re holding me down (Oh Oh)
Turning me round(Oh Oh)
Filling me up with your rules(Oooh)

I’ve got to admit it’s getting better (Better)
A little better all the time (It can’t get no worse)
I have to admit it’s getting better (better)
It’s getting better

Beatles — Getting Better

With falling interest rates and falling prices, affordability in many markets is better than before the bubble began to inflate. Affordability has never been as good as it is now in Las Vegas. Even Orange County is affordable relative to its unaffordable history. If interest rates remain low and prices continue to fall, affordability will continue to improve throughout the year.

Zillow 30-year FRMs hit new low at 4.07%

by CHRISTINE RICCIARDI — Tuesday, November 9th, 2010, 3:48 pm

The 30-year, fixed-mortgage rate decreased after a stable two weeks, to new record low at 4.07%, according to the Zillow Mortgage Marketplace weekly update.

Zillow said the current 15-year, fixed average rate is 3.51% and the rate for a 5-1 adjustable rate mortgage is 2.91%. That type of mortgage maintains a steady rate for five years and then is adjusted annually thereafter.

Regionally, 30-year rates vary, but the majority of states witnessed a deflation. New York’s average rate fell 30 basis points to 3.98% last week, down from 4.28%. Rates in Florida fell substantially also, down to 4.02% from 4.13% the previous week, California’s rate decreased to 4.04% from 4.15%, and Texas saw its average rate disintegrate to 4.11% from 4.17%.

Pennsylvania’s current rate of 4.08% is down from 4.11% last week. Colorado’s average rate for a 30-year fixed mortgage shrunk to 4.10% from 4.14% at Nov. 2.

Washington’s 30-year FRM increased to 4.12%.

Zillow bases its averages on real-time mortgage quotes from lenders registered with the company. The national average comes from thousands of daily quotes by anonymous borrowers through the Seattle-based company’s website.

As mortgage demand continues to flag at historic lows, the pool of available money chasing that demand has been lowering its interest rate asking price to find a borrower. Each lower level increases payment affordability for buyers. Of course, this affordability is somewhat illusory because the debts are still very large. And Low Interest Rates Are Not Clearing the Market Inventory. Therefore prices will continue to fall, and as they do, affordability will improve even more.

Zillow: Home price depreciation to worsen market into 2011

by CHRISTINE RICCIARDI — Wednesday, November 10th, 2010, 10:53 am

Predictions for the fourth quarter housing market continue to dim as Zillow‘s third quarter market report released Wednesday suggests further house price depreciation through the end of the year.

September home prices depreciated 0.4% from August and 4.3% from one year a go to a national average of $179,900, according to the report. This is the 17th consecutive quarter of home price declines.

Zillow reported that nearly two-thirds (64.2%) of homes in the U.S. lost value between the third quarter of 2009 and the third quarter of 2010, and 27.3% of home sold in September were sold for a loss.

On Tuesday Foresight Analytics said residential, commercial, and construction loan delinquencies are expected to rise.

Delaware witnessed the most home price depreciation since 2009, down 18.5% to $174,700 in September 2010. California’s home prices appreciated since 2009, up 1.9% to $337,200.

Approximately one in every 1,000 mortgaged homes in the U.S. was liquidated in September, according to Zillow, marking the highest liquidation rate the firm has recorded since it started tracking data in 1996.

The chart above is a good illustration of the workings of the banking cartel. Up through mid 2008, they kept pace with delinquencies so foreclosure rates rose quickly. When lenders saw that this was doing to prices in subprime areas where the delinquencies were concentrated, they collectively decided to stop  foreclosing, allow squatting, and form a massive shadow inventory of unprocessed foreclosures on delinquent loans.

At first they were successful as the foreclosure rate declined, and prices began to stabilize. However, with any cartel, there is incentive to cheat and liquidate your holdings while prices are still high. The foreclosure rate has crept higher since the market superficially bottomed in early 2009. The result has been elevated inventories, and finally a reduction in prices.

Each of the last five years, housing inventory bottomed on December 31 and rose steadily through the spring. In 2008 and 2009, inventory was restricted and took out the end-of-year low. In 2010, we are poised to finish the year at levels similar to 2007 when the inventory rose from 795 houses to nearly 1300 in July of 2007. If we see inventory climb that high again next year, prices will certainly move lower.

The firm sees the liquidation rate remaining elevated because of an increase in negative equity rates. According to the report, the negative equity rate during the third quarter was 23.2%, up from 22.5% in the second quarter.

Foreclosure resales reached a near-peak level in September accounting for 20.1% of all sales made during the month. The peak percentage of sales attributable to foreclosure resales was in March 2009 at 20.5%.

Zillow said the firm doesn’t expect home prices to hit rock bottom until the first half of 2011, but concluded that “the length and severity of the current turndown is fast approaching the length and depth of the Depression-era.”

Zillow data is based on real-time mortgage quotes from lenders registered with the company. The third quarter report is available on their website and includes interactive charts and graphs broken down by state and by metropolitan statistical area.

Once prices are below rental parity for an owner occupant, how much lower does it have to go before you are motivated to buy? It is going to take a combination of enticed owner occupants and cashflow investors to stabilize the housing market.

What most people fail to understand is that this purging of debt and the economic problems that entails is for the long term benefit of the economy. As affordability improves, new buyers are spending less of their income on housing and more of it on other goods and services. The economy will not improve until the debt is purged, but the process will not be painless.

Freddie Mac says foreclosure problems may drain recovery

by JON PRIOR — Friday, November 12th, 2010, 10:46 am

Freddie Mac economists said recent problems in the banks’ foreclosure processes could slow what little momentum the recovery holds, and perhaps send the housing market down to a new low.

In the broader economy, October payrolls, manufacturing production and consumer spending picked up in the third quarter. Housing, the October job report and struggles in other major economies are keeping the recovery too gradual.

“There has been a spate of good news in recent weeks that suggests the fears earlier in the year about a so-called ‘double dip’ recession were overblown,” according to the report. “The recovery, though, remains too sluggish to do much good right now for the unemployment rate or the housing market.”

Banks and the government-sponsored enterprises, including Freddie Mac, are working through the glut of foreclosures that is hampering credit lines. Many including Bank of America, JPMorgan Chase, Ally Financial and Wells Fargo had to begin resubmitting improperly signed affidavits in many states, delaying that work and pushing down foreclosures in October.

Freddie Mac, itself reported $120.1 billion in nonperforming assets in the third quarter, up 33% from a year ago, and more than $6 billion in REO that needs to be sold.

Even with the Federal Reserve‘s plan to purchase $600 billion in Treasury securities through quantitative easing, Freddie still expects “sub-par” growth in GDP over the near term with a slow acceleration through 2011.

“The sluggish nature of the recovery means the unemployment rate will likely remain at or above 9% through much or all of next year, with a decline in unemployment only gradually providing relief to the housing market,” according to the report.

Investors buying in safe haven markets like Orange County are betting that incomes are going to rise. With 9% unemployment and no real prospect for recovery, it isn’t likely that salaries will be going up soon. We will likely see some inflation as the Federal Reserve tries to print enough money to jumpstart the economy. This inflation will not make its way into wages; therefore, it will not put upward pressure on house prices.