Housing Recovery From the Perspective of Financing and Refinancing

I am going to start this article off with a trick question. Which is a more secure loan, one at 56% LTV (loan to value) or one at 80% LTV?

The answer is kind of in the chart below.  Would you rather own the loans extended in 2005 or the loans extended in 2011? The fine print at the bottom is even more telling, or perhaps I should say not-telling. These are all LTVs that are using a "V" that is nothing but a wild guess.



Estimated current LTV ratio of Fannie Mae's single family credit guarantee portfolio – click for better resolution.



Below is another great chart that illustrates some commonly used misinformation.  Remember MEW (mortgage equity withdrawal)?  The wealth effect? The housing ATM? Alan Greenspan? All of that seems to have been long forgotten, but here is an interesting example. If I owed $1 million on my house and Alan Greenspan told me that my house was worth $2 million, should I have  felt rich since I had $1 million in equity?  Should I have done a MEW and bought a few retirement homes, or panel my $2 million mansion with marble walls?  The really smart people who did not believe Sir Alan promptly sold their "$2 million" house to the dumb ones who believed him, and who then promptly took out $2 million loans while dreaming that Sir Alan would declare that the house was going to be worth $3 million in no time.







US single family mortgage debt relative to the value of the housing stock – click for better resolution.



The gray area of the chart above is exactly that, a gray area. These are numbers that are totally fabricated. The record $13.5 trillion in equity during 2006 was a complete mirage, and so is the $7.5 trillion today. What is real is the blue area, the mortgage debt. This is what we should look at.

Since the bursting of the bubble,  mortgage debt has dropped about 10% to its current level of $9.5 trillion. There are a number of significant events.

1. Freeing of the Mortgage Slaves

There have been about 4 million foreclosures to date, and maybe 1 million (?) of short sales. This trend is expected to continue.  As the evil forces continue to try to enslave the masses with screwy programs such as HAMP and HARP, the people are wising up, albeit slowly. The chart below shows that 35% of the victims do re-default within 24-26 months.




The atrocious performance of modified mortgage loans – click for better resolution.



2. No New MEW

Perhaps there really is no equity to withdraw,  but home owners have apparentlylearned their lesson. They are no longer using their homes as no limit ATMs.

3. Net Savings from Refinances

Week after week, the Mortgage Bankers Association (MBA) reports loan applications dominated by refinances.  Last week refinances were 83% of all applications. For Fannie Mae alone, between 2009 and 2011, refinances made up 78 percent, or more than $1.4 trillion worth, of the loans that Fannie Mae purchased or guaranteed. According to the Federal Housing Finance Agency (FHFA), more than 10 million homeowners have refinanced through Fannie Mae and Freddie Mac. Bernanke has exerted a monumental effort in trying to bring mortgage rates down. If the average refinance results in 2% savings in mortgage rates, that is $20 billion in payment reduction per $1 trillion in refinances, and that is assuming the borrowers did not extend the loan term in the process.



mortgage rates

30 year fixed mortgage rates, after being worked over with the Bernanke Kool-Aid – click for better resolution.


The problem facing Bernanke is not the rate but the slope. For his policies to remain effective, the rates must continue to fall. At 3.5%, he is just about at the end of the rope.


4. Greenspan Bubble vs Bernanke Bailout.

In this remake of King Kong vs Godzilla, the Greenspan monster wins by a landslide. This last chart shows how much more the Greenspan bubbled sucked out of the economy compared to Bernanke's 24/7 printing press. Just compare the amount of financing from 2001 to 2006 to the post 2008 QE bailouts.


fre mortgage origination

Single family mortgage originations – click for better resolution.


In conclusion, I see how much effort has been put into propping up the real estate market and I see such miniscule results.  Am I being too bearish?

(all charts in this rant from recent Freddie Mac presentation)


Addendum, by Pater Tenebrarum:

To Ramsey's last question: from a purely psychological perspective, coupled with the historical experience with typical post-bubble trajectories, he is definitely not too bearish. Anyone not calling for a bottom in US real estate today is in fact a lonely contrarian voice – the list of prominent and not-so-prominent bottom callers meanwhile is getting longer than Methusela's beard.

However, secular bear market cycles simply do not work like that – the true bottom, when it comes, will not be called by all and sundry and allow the entire class of investors to 'get in right at the bottom that everyone recognizes in real time'. Items that have been subject to a major investment bubble go through very long periods of price declines, often interrupted by what are only later identified as having been false starts (a.k.a. 'bear market rallies'). These false starts are as a rule inspired by easy monetary policy, so Ben Bernanke's interventions fit right in. Caveat Emptor!





Charts by: Fannie Mae



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5 Responses to “Housing Recovery From the Perspective of Financing and Refinancing”

  • JimH:

    > The gray area of the chart above is exactly that, a gray area. These are numbers that are totally fabricated. The record $13.5 trillion in equity during 2006 was a complete mirage, and so is the $7.5 trillion today. What is real is the blue area, the mortgage debt. This is what we should look at.

    Sorry, I have to disagree completely with that statement. You are completely forgetting about the home equity of those who own their homes free and clear, which despite everything the past few years, still stands at over 30% and is probably RISING due to all the cash purchases made by real estate investors. By your analysis, you are basically saying the Townhome I bought for cash three years ago for 92K and is now my primary residence (and was “worth” 280K at the bubble peak here in Reno in 2005), has no equity.

    That said, it is clear that the amount of equity in homes that are NOT owned free and clear has declined dramatically. I believe Doug Short once produced a graph showing the dramatic decline in home equity of those who have a mortgage. Once upon a time, those with mortgages still had around 50% equity in their home. But the bubble years and then the collapse really chipped that down to less than 30%, if I remember the chart Doug produced correctly.

    Finally, as for the housing bottom – I personally think we have already passed the bottom both nationally and here in Reno where I live. This doesn’t mean we will be returning to highs anytime soon. Indeed, I like to think of the “recent bounce” as the typical bounce that happens when a stock is oversold. Most likely this winter and into 2013, prices will stagnate and perhaps fall a bit again – perhaps even stagnating near or around the lows. However, I would be very, very surprised if the median sales price nationwide takes out the lows that were put in and then continues to head lower.

    Instead, my “real estate prediction” is for a long period of stagnation once we get over this “oversold bounce.” People’s attitudes about housing have changed dramatically due to the bubble and recession, and the odds of having another big bubble in housing here in the USA anytime soon is about 0%. And of course the stagnant wages and lousy job prospects for the young pretty much guarantee that housing prices will – at best – rise nationally very little.

    I’m 99.9% positive that here in Reno the “bottom is in.” Prices are up an astounding 30% this year. And while part of this bounce is artificial due to the national mortgage settlement and a 2011 NV law forcing banks to actually prove they have the right to foreclose before they can foreclose on a property, not all of it is by any means. Investors from all over have been flooding the market here, scooping up mass properties for cash. Undoubtedly, when the economy takes a turn for the worse – property prices will stagnate and likely fall a bit here again. But I’d be very surprised if the lows seen a year ago in Reno are actually taken out. Equity sales are now – amazingly – the most common sale here in Reno. Foreclosures have fallen to 9% of total sales, while short sales have risen to 41%. The fact that equity sales are – for the first time in like 5 years – the most common sale speaks volumes about the turn we’ve seen in the property market. This same phenemanon is happening in Phoenix and Las Vegas, too.

    There’s also another reason I’m feeling confident that the “low” is in for real estate prices. None of the real estate bears, except for perhaps Calculated Risk, have changed their views despite statistics to the contrary that show a turn in the real estate market. I take that as a good, contrarian sign.

    Last but not least, when looking at a real estate bottom, you really do need to look at affordability. Right now, housing affordability is essentially “back to normal,” as if the whole housing bubble never happened. Except for places like NY, SF and DC and Williston, ND and similar areas – property nationwide is going for around 2.5x to 3x annual income – making the USA the most affordable real estate market among developed countries. Compared to the bubbles now ongoing in Canada, the UK and much of Europe – our housing bubble is essentially over. We can quibble about whether or not prices might stagnate and for how long, or whether prices might fall from where we are at by 5-10% or so – but to expect another “crash” is not supported at all by any statistics I’ve seen.

  • hettygreen:

    Aside from the very eloquent technical arguments for this not representing the bottom of the real estate market (even in the most depressed areas of America) there is still far, far too much analysis, hand wringing and excitement about this so-called ‘asset’ for it to have actually formed a meaningful bottom. No offense intended but when (if ever in my remaining lifetime) I can go a month or three without seeing or hearing or reading anything, reasoned or otherwise, about owning real estate I might be inclined to think the worse is over. Of course, as alluded to in this piece, by that time the real estate ownership well should be so thoroughly poisoned as to exert a generational aversion for the stuff.

    I can easily remember a time forty years or so ago when no one in my then cohort (late 20s/early 30s) was particularly interested in ‘owning’ a home for anything more than decent shelter, let alone in constant throes of irrational house ‘horniness’ for granite, copper, spa baths and exotic hardwood finishes. The uber die hard enthusiasts would be well served by reading what Adam Smith has to say about ‘housing stock’ in his magnus opus Wealth of Nations, but no, the language tends to the arcane (I rather prefer it to the sound bite, text message universe we currently inhabit) and no one it seems has the inclination or attention span required anymore. O tempora! O mores!

    • JasonEmery:

      The housing bottom is almost certain to be unrecognizable, to non-Austrians. Pundits will be cheering the rising housing prices, even as they lag the price of most other items.

      The biggest gainers will be food, energy, clothing, and other basic goods.

      Rising housing prices will be good for the economy, even if they lag the general price level. It will allow distressed buyers to unload their homes, as opposed to foreclosure. Also, it will allow folks with job opportunities in other cities to move much more easily than at present.

      Of course it will be an illusion, since food will be doubling in price as housing goes up 25%, but that will be ignored by the Keynesians and Friedmanites.

  • Mark Humphrey:

    Another reason to be bearish on house prices is the long running campaign to depreciate the dollar. People are loaded to the gills with mortgage debt, if they’re lucky, at least compaed to the 14 million or so that are under water. Obviously, as the dollar depreciates, living costs rise which makes debt servicing more burdensome.

    At some point, perhaps in the next couple years, bond investors will awaken to the implications of stampeding deficit spending and endless money printing. Then interest rates will begin a long march skyward and house prices will get hammered again.

  • zerobs:

    The reason I wouldn’t call a market bottom yet is the refinancings. Simply put, not all refi’s are alike.

    MEW is recovering to what I consider a normal, sustainable percentage. (Then again, I think most people think “recovery” means “return to the good old bubble days” which I certainly don’t.)

    We’re getting closer to recovering to the point where people who shouldn’t be taking housing loans aren’t taking them. Still have foreclosures and short sales to go through, but we’re getting closer.

    The one I don’t get is refi’s. I am not a banker but I would think any mortgage market where refi’s are more than 20-25% of the market is unhealthy. If the refi’s RESTART the loan at 30 years all over again, I consider those to be somewhat meaningless refi’s because they retard equity (not as bad a MEWs, but still retardation). If a 2-year old 30 is being refi’d into a 28-year loan at a lower rate, these are mildly meaningful refi’s – euqity isn’t built any faster but the interest money is put to use by a micro player rather than a macro player. The only refi’s that have any meaning are the ones where the term is shortened – equity is built faster and interest money is put to use at the micro level rather than macro.

    In a healthy housing market refi’s simply can’t be a huge percentage. The fact that refi’s are so much of the market implies that equity is still not being built.

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