What Is Normal?

Is a $400,000 house with NINJA loan normal?

How about a $200,000 REO with missing appliances, a dead yard, a long list of maintenance and no financing?

Maybe normal is a $300,000 flip after the flipper fixed everything and colored up the yard, and did some upgrades to the interior. 

Some may suggest that normal is more like a $300,000 sale with a 5.5% fixed rate and 20% down.

Then again, it may be more normal if this $300,000 sale is financed with a 3.5% down FHA loan at 4%.

Of course, all of the above is actually referring to the same house.

So what is normal? Analysts and economists have long accepted household formation, population and job creation as the basis for housing supply and demand. There was a study (I can't seem to locate) that showed that there is no correlation whatsoever. I am going to borrow a chart from my cyber friend Calculated Risk as an illustration:



housing starts

Housing starts, total and one unit structures – click to enlarge.



I think I am going to leave it to the Wharton grads to explain how population and employment fit into the above erratic housing starts chart. In fact, if you use employment as a factor, then we should be tearing down a few million houses since we have lost about 6-7 million jobs since the great recession. If population is a factor, then I suggest you invest in Cairo where the population is definitely growing much faster than that of Silicon Valley.

Is it normal that Wall Street is buying up all these houses? Wall Street OPM ('other people's money') is not only buying up all existing homes, now it is  squeezing out the buyers for new homes as well. The numbers work exactly the same way for new and existing homes. The builders would far prefer a no-contingency cash offer with no commissions, no lender fees and no marginal buyers that they have to coach into qualifying. In other words, builders can take a lower offer from Wall Street and still be as profitable as when they are selling to mom and pop.

Is this good housing policy? Of course not.  Where are the policy makers? Just like Greenspan during the sub-prime era, Bernanke is like a deer frozen in the headlights. He is busy with his QEs and claiming there is a housing recovery, while he should actually be busy writing his memoirs entitled: "I did not see it coming."

So what is normal? Logically, the past is only relevant if conditions in the future are expected to be similar. We know that with aging baby boomers, housing demand will be substantially different than when the same boomers were at the peak of their productive years. Should the demand rather be for duplex type constructions or grannie flats, as the boomers try to juggle taking care of elderly parents and boomerang kids?

Current economic conditions should also present a different outlook. For example, with youth unemployment so high, with student loans in the trillions, there is no reason why first time home purchases should not be delayed. It seems to me the worst thing policy makers can do is to give this group even more credit, especially long term credit like a 30 year mortgage that will entrap them forever.

However, I believe the new normal is going to be intervention. Here is a recent speech by Fed Governor Elizabeth Duke, entitled "A View from the Federal Reserve Board: The Mortgage Market and Housing Conditions"

This speech is significant because Duke usually labels herself as the Federal Reserve's main voice on housing.


Since joining the Board in 2008 amid a crisis centered on mortgage lending, I have focused much of my attention on housing and mortgage markets, issues surrounding foreclosures, and neighborhood stabilization.


For those who follow the housing market, I believe this speech is a must read. It provides insight into the data that the Fed is looking at and the Fed's understanding, or misunderstanding, of the real estate market. They seem to be overly concerned about lending to borrowers with low credit scores (emphasis mine):


“The drop in originations has been most pronounced among borrowers with lower credit scores. For example, between 2007 and 2012, originations of prime purchase mortgages fell about 30 percent for borrowers with credit scores greater than 780, compared with a drop of about 90 percent for borrowers with credit scores between 620 and 680 (figure 6).5 Originations are virtually nonexistent for borrowers with credit scores below 620


At the Federal Reserve, we continue to foster more accommodative financial conditions and, in particular, lower mortgage rates through our monetary policy actions. We also continue to monitor mortgage credit conditions and consider the implications of our rule makings for credit availability. For your part, I urge you to continue to develop new and more sustainable business models for lending to lower-credit-score borrowers that lead to better outcomes for borrowers, communities, and the financial system than we have experienced over the past few years.”


Governor Duke has completely forgotten about the sub-prime disaster. A low credit score is not a given, it is earned. A borrower must carry some balance, miss a few payments or even default on a few loans before they can garner a 620 or lower credit score.  The last thing that sub-prime borrowers need is more debt,  something that they have proven they cannot manage.

At the moment, we know prices are going up in certain markets, and so are sales. Mortgage rates are higher now than when QE3 started in September 2013. Investors are gobbling up everything in sight in their favored target markets. As an example, they are buying 30% of the houses in Southern California, 38% in Phoenix and 53% in Vegas. First time buyers do not stand a chance, especially if their credit score is an iffy <620, making their contingency offer most unattractive to a seller. The percentage of home ownership is declining. Are policy makers happy with these results? Are these intended or unintended consequences of public policies? What are policy makers going to do – more QE, more HARP, principal reduction or something even more creative?

In my opinion, there will definitely be more intervention. Intervention is the new normal.





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One Response to “What Is Normal?”

  • jimmyjames:

    In my opinion, there will definitely be more intervention. Intervention is the new normal.


    Of course there will be more interventions and more new normals and more new abnormals will keep popping up in places we’re not even looking at and then one sunshiny day- who knows when.. Mr Market will have his say and all the interventions and new normals will be priced to perfection-

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