I ran across this article from U.S. News & World Report, dated 1/19/10 concerning “strategic defaults”:
The article is interesting in that it summarizes various facets of the “strategic default” situation and presents an interesting example of the dynamics that one “underwater” homeowner faces.
I have mentioned “strategic defaults” on numerous occasions. It is a very important “wildcard” in the residential real estate equation.
SPX at 1097.60 as this post is written
Given the incredibly outsized intervention efforts in the residential real estate market, I think it is important to examine some dynamics of the real estate bubble.
Here is a chart from the 12/15/09 Contrary Investor commentary that I believe is interesting, as it depicts some underlying residential real estate fundamentals. It shows the equity and mortgage debt situation. The underlying data is from the Federal Reserve Flow of Funds:
http://www.contraryinvestor.com/
As far as real estate prices are concerned, I would like to show two charts, both from the CalculatedRisk blog:
http://www.calculatedriskblog.com/
The first chart was posted on 12/21/09 and is the LoanPerformance Price Index from 1976:
Next, a chart posted on 12/29/09 showing the LoanPerformance Index as well as Case-Shiller, from January 2000:
As others have commented, it appears as if the overall intervention efforts are aimed at reflating (or to re-inflate) the housing bubble. Conventional (investment) wisdom has held that reflating a burst bubble is impossible.
However, I think given the tremendously outsized intervention efforts in housing, we are truly in a unique situation. I don’t believe there has ever been such a large intervention effort in our country, at least in the last 150 years. Depending upon how one would measure such intervention efforts, it might even be among the largest interventions in world economic history.
A casual observer might assume that such an outsized effort would be destined to be successful. However, (economic) life is not that simple.
From an ”all things considered” standpoint, I don’t believe the residential real estate bubble has actually burst. It appears to me that it has somewhat deflated. I base this view on a variety of fundamental and technical factors.
Assuming this view is correct – that the residential real estate hasn’t popped – the implications are immense. I think it is likely that one of two possibilities will occur from here, and each could happen in a relatively rapid fashion. The first possibility is a “successful” reflation of the residential real estate market, with accompanying economic activity. The second possibility is a collapse of the residential real estate market with accompanying economic repercussions. As to the path real estate will travel from here - my previous writings on interventions, bubbles and real estate indicate my thoughts on the subject.
If a “successful” relation occurs, one is led to wonder as to the characteristics of such a “successful” reflation of the real estate bubble. Among other critical questions is how long would such a reflation last?
I think it very important to note the quality and durability of the economic activity that occurred in the first phase of the bubble, which peaked in 2006. Can one hope for any better outcome during a subsequent reflation?
These issues are critical to the concept of Sustainable Prosperity, of which I have previously frequently commented.
SPX at 1137.37 as this post is written
Here is a Wall Street Journal editorial on the December 24 developments at Fannie Mae and Freddie Mac. This editorial provides some new perspectives on the matter:
http://online.wsj.com/article/SB10001424052748704152804574628350980043082.html
My original comments on these developments was on December 28.
I feel it is critically important to understand the extent of intervention as it pertains to the housing market. Fannie Mae and Freddie Mac continue to play an very large role in these intervention efforts.
SPX at 1135.43 as this post is written
I would like to make a couple of comments regarding the speech Ben Bernanke gave on January 3. It was titled “Monetary Policy and The Housing Bubble.” (pdf)
I could make a significant amount of comments regarding this speech, as I partly or fully disagree with many of the points presented.
I will, however, briefly comment on a couple aspects of the speech. First, from page 21:
“Although the house price bubble appears obvious in retrospect–all bubbles appear obvious in retrospect–in its earlier stages, economists differed considerably about whether the increase in house prices was sustainable; or, if it was a bubble, whether the bubble was national or confined to a few local markets.”
I agree with the general premise that bubbles aren’t always obvious. As I said in my December 2 post, “Some bubbles are harder to spot than others.” As far as the housing bubble was concerned, in my opinion it was a relatively easy bubble to identify as it occurred, based upon a variety of characteristics.
Second, from page 22:
“That said, having experienced the damage that asset price bubbles can cause, we must be especially vigilant in ensuring that the recent experiences are not repeated. All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs.”
I think it can be strongly inferred from this excerpt, as well as other statements that he has recently made, that he doesn’t believe there are asset bubbles currently in existence. My analysis indicates otherwise, as I discussed in my December 2 & December 16 posts.
SPX at 1136.43 as this post is written
For those who may have missed it, there was a notable development on December 24 concerning Fannie Mae and Freddie Mac. Here is The Wall Street Journal link and the Treasury Dept link:
http://www.ustreas.gov/press/releases/2009122415345924543.htm
http://online.wsj.com/article/SB126168307200704747.html
Basically the government announced plans to cover an unlimited amount of losses at both companies.
It is yet another testament to the extent of intervention in the real estate markets.
I think this “blank check” approach carries many risks. A while back I wrote an article about how interventions could be effectively managed. The article is not intended to condone or support the concept of interventions. However, there should be a regimented approach to their administration. These interventions carry a tremendous amount of risk, aside from the substantial amounts of money being expended. Here is the link (it is also listed among the articles on the right-hand side of the home page):
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SPX at 1126.48 as this post is written
Yesterday The Wall Street Journal had an article titled “Debtor’s Dilemma: Pay the Mortgage or Walk Away.” Here is the link:
http://online.wsj.com/article/SB126100260600594531.html
The article has a variety of statistics and views on the issue of “strategic defaults.” As well, it discusses the legality and consequences of such.
I have previously written numerous blog posts on the issue of “strategic defaults.” (Those posts can be found under the “Real Estate” category listed along the right side of the home page). ”Strategic defaults” is an exceedingly important concept for a variety of reasons. Like many economic issues, it is a very complex topic dependent upon many factors. I find the topic fascinating.
It should be very interesting to see the course of “strategic defaults” as time progresses.
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SPX at 1096.08 as this post is written
Yesterday The Wall Street Journal published an article titled “One in Four Borrowers Is Underwater.”
The story contains a variety of statistics with regard to homeowner equity and home ownership issues. It gives a good overview of the situation, and this facet of the residential real estate situation is not pretty. As the headline states, 23% of all mortgage holders are “underwater,” i.e. they owe more on their mortgages than the underlying house is worth.
There are several reasons that this situation is important. A couple include:
As I have written previously (my other Real Estate posts are under the “Real Estate” Category listed on the right-hand side of the home page) the real estate issues facing this country are severe, very complex, and not well understood.
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SPX at 1107.71 as this post is written
Here is a story from The New York Times of October 8 that discusses the situation at the FHA:
http://www.nytimes.com/2009/10/09/business/09fha.html?pagewanted=1&_r=2
What I found particularly interesting in this story was a quote from Barney Frank, the chairman of the House Financial Services Committee:
“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”
My comment on the above quote:
??
SPX at 1085.74 as this post is written
On Tuesday The Wall Street Journal published an editorial on the FHA (Federal Housing Administration). I found it to be a good overview of the situation there. The editorial can be found at this link:
http://online.wsj.com/article/SB10001424052970204488304574428970233151130.html
I find this FHA situation highly disconcerting, especially in light of how similar situations have played out, and are playing out, elsewhere. This situation is, of course, exacerbated by ongoing weakness in the residential real estate market, which I have commented on extensively. (those blog posts can be found under the “Real Estate” category listed on the right-hand side of the page)
SPX at 1029.21 as this post is written
I would like to highlight an article from last Thursday titled, “Second Wave of the Credit Crisis: Collapsing Commercial Real Estate” It can be found at this link:
http://www.ibdeditorials.com/IBDArticles.aspx?id=335660380569943
The article gives a good summary of the Commercial Real Estate (CRE) situation as well as makes other interesting observations.
CRE is yet another huge, menacing problem area inherent in our current economic situation.
SPX at 1025.57 as this post is written