Friday, July 30, 2010

Mobility and Underwater Homes: A humble suggestion

Today, the Washing Post reported:
Labor mobility has nearly ground to a halt in the past two years, and policymakers are increasingly worried that the slowdown is not just a symptom of the nation's economic struggles but also a barrier to overcoming them.
The biggest factor seems to be the large number of unemployed homeowners who have little or no home equity. Between 2006 and 2009, the number of renters who moved out of state decreased by 13.6 percent, according to census statistics, while interstate migration among homeowners has plummeted by 25.5 percent.
It must be a slow news day because this is no news. The WaPo covered it in June 2008. Bill over at Calculated Risk added:
approximately 1 in 8 households (the same proportion as with negative equity) will probably not accept a job transfer now because of depressed home values - and that is about 200,000 fewer households per year that will probably not move for better job opportunities.
This was all later confirmed by the Census Bureau in December 2008 and even more supporting evidence showed up in Paul Krugman's blog yesterday (source: Atlanta Fed). But I'm not here to berate the WaPo on repeating themselves, we all do it, I'm here to put a couple of things together and make a suggestion.

The problem
People with low or negative equity are not moving to the areas where they could find a job because they are trapped by unrealized losses or don't want to realize these losses. I would be willing to venture the guess than in the past households used proceeds from capital gains or built-up equity to fund relocation expenses; with low/negative equity, that just isn't possible.

Credit to MacroBlog
Additional obstacles
Cutting people's principal is a non-starter in many cases. Banks don't want to get a reputation for cutting loan principals and non-delinquent homeowners see it as reckless buyers getting rewarded at their expense.

A proposed solution
Seeing as how the government is already throwing massive amounts of money away trying to either reflate, or turn people into permanent renters, I suggest something slightly different. The government could maybe create a facility that lends money to underwater homeowners that need to free themselves from a home.

This is not a giveaway, it is a loan. This is not a below-market-rate loan, and therefore carries no implicit subsidy. The loans should probably made at a rate similar to or slightly higher than the original mortgage rate. Home-owners who are underwater and are being held-back from taking a job in a different area should be offered the loans, which would be contingent on a job offer. The loans would be used to pay-off negative equity at the time of a home sale. The borrower could then free him or herself from the home anchoring him or her down and return to employment.

I don't know if this next part is possible, but if the lending facility vowed to reduce the rate on the loans by a set amount if the borrower transformed the loan into a second lien on any new property bought, it could furthermore enhance the quality of these loans. These loans could then either be kept until maturity or sold to banks for securitization for a profit. Why a profit? Well, if the transaction was correctly orchestrated, the borrower rid him or herself of the anchor home, allowing them to enter a new job. If the borrower decided to buy a new home, the drop in rates would almost ensure they will be able to buy a similar home for a smaller monthly payment, improving the debt-to-income ratio. Because of the same lower rates, the new monthly mortgage payment plus the loan payment should be lower than the original mortgage payment, putting the borrower in a better position to meet their obligations. Additionally, banks holding undercollateralized loans would get to rid themselves of those loans and the possible losses associated with future defaults or short-sales. Finally, freeing people from their underwater properties would increase liquidity in the real-estate market, encouraging price discovery, getting assets to the people that want them and getting people to the employers that want them. Here's the list of pros in my mind:
  • Worker mobility is augmented
  • Worker / employer mismatched is reduced, increasing employment and PCEs and income taxes collected
  • Putting people to work reduces unemployment benefits being paid out
  • People decrease their debt service expense, leaving more money for PCEs
  • Real-estate liquidity improves
  • A couple of commissions are generated for brokers
  • Price discovery is sped up
  • Undercollateralized loans are reduced
There may be no debt permanently retired, but increasing mobility and employment prospects should put the underwater borrowers in a better position to pay-off their loans. If they still default, well, they probably would have done so anyways, and seeing as how the Fannie & Freddie black-holes probably guaranteed that paper, the Treasury would have probably taken the same loss on the assets--more if you include the added expense of the foreclosure process. Before you argue that it's basically a subsidy for the MBS holders, think about who owns $2T in MBS and who guarantees a whole lot of the rest.

Housing Affordability 1971-2009: Chart Roundup

This post is part of the series Housing Affordability 1971-2009

I have collected all of the charts from the previous posts in the series and put them in one post for easier access. For explanations on the data and commentary, please follow the links to the source posts.

Thursday, July 29, 2010

Housing Affordability 1971-2009: Data Sources and Collection Methods

This post is part of the series Housing Affordability 1971-2009

This is the last post of the series on housing affordability. At the bottom you will find a link to the spreadsheet so you can download it and play with the data if you want. Before that, I'll just add a couple of comments about the data and where it came from.

Owner's equivalent rent, rent of primary residence and CPI less shelter
These came from The BLS CPI website, and you can find the unique ID of the series used at the top of the "CPI-U data" worksheet. The two re-based versions just adjust the numbers to make 1971 and 1984 equal 100. This is done by taking the original value and dividing it by the 1971 or 1984 value respectively.

Monthly and yearly new home prices
These prices come from the Census. (monthly, yearly)

Monthly and yearly mortgage rates
These are posted on the Freddie Mac website. No adjustment was made for points.

Median household income
I cheated a little with this one. The series I found for median household income was limited, so instead I used the third quintile of the entire data set provided by the census.. I compared the overlapping years and the differences were so small that I decided it was OK to do this. There is no reason for the third quintile to be any less accurate than the absolute median.

Median fair-market rents
This is the rent data I decided not to use, it came from a HUD survey. Apart from being noisy and the data collection methods (phone survey with random dialing) being of poor quality, the series only started at 1979. I don't know anyone that participates in phone surveys, and didn't trust the sample to be representative.

I am making the spreadsheet available to save others the pain of having to copy values from PDF files into a spreadsheet. I do not mind if you create derivative works with any of the charts, but I do ask that you give me a mention. A simple "Credit to Morally Bankrupt for data in spreadsheet format" with a link to this post so others can download the source spreadsheet would be sufficient.

Download the spreadsheet in Microsoft Excel format.

Tuesday, July 27, 2010

Housing Affordability 1971-2009: Payments, Prices and Capacity

This post is part of the series Housing Affordability 1971-2009

In the last post I talked about the growth in prices in percentage terms. Today's post includes the same data, but using a nominal scale. While I think the percent change charts are great for looking at long-term, the nominal charts do a better job of communicating the differences in dollars and cents.

Here we can see the relationship between the median-price for new homes and the purchasing power of a payment equal to 30% of the median-household income. Judging by the gap, my estimate of 30% is close, but not perfect. I discussed my reasons for using this figure in Two Ways of Looking at It Once I post the source spreadsheet you will be able to fill-in any values you want to see plotted for the %-of-income and down-payment variables. Please note these are not in log-scale because the actual figures became a harder to read. You can find the log-scale versions at the bottom of this post.

Monday, July 26, 2010

Housing Affordability 1971-2009: Long-Term Trends

This post is part of the series Housing Affordability 1971-2009

In the last post I discussed the comparison I used for this analysis and why I chose certain data series over others. In this post we will look at long-term trends in income and prices and how lower interest rates have allowed prices to rise faster than income. Rents and the CPI less shelter figure are also included to illustrate the divergence of the trend home prices from the trend in consumer goods.

I am excluding shelter from the CPI figure because I want to display how the trend in housing differed from everything else and comparing housing prices to an unadjusted CPI would understate the growth in prices.

For rents, I decided to use the "rent of primary residence" series in the CPI. The BLS does not publish rents in their average price survey, and the only nominal figure I found came from the HUD, and after looking at collection methods, I was not impressed with the quality or coverage of the survey. Since the Census Bureau does not offer a national figure, I am still looking for better rents data1.

Sunday, July 25, 2010

Housing Affordability 1971-2009: Two Ways of Looking at It

This post is part of the series Housing Affordability 1971-2009

In the previous post, I discussed how borrowing capacity changes with respect to interest rates, finishing up with an example of the buying power of a $500 monthly mortgage payment from 1971-2009.  The example is obviously a gross oversimplification; income and price levels can and have changed since then.  To try to make some sense of this all, I decided to look at the data from two sides:
  • The change over time in the cost of a median-price new home and the monthly mortgage payment necessary to buy it, a function of the price level and interest rate. 
  • The change over time in the median-household income and the borrowing capacity based on it, a function of the income level and interest rate.
I chose to define borrowing capacity by calculating the amortized loan principal that would require a payment equal to 30% of a median-income household's earnings.

Friday, July 23, 2010

Housing Affordability 1971-2009: Interest Rates and Borrowing Capacity

This post is part of the series Housing Affordability 1971-2009

We'll begin the series by talking about interest rates and borrowing capacity. If you are already familiar with the subject, this may not be of interest to you as the discussion will be a bit basic. There will be more interesting things in the future, I promise.

For purchases that are as large and have as little equity as most home purchases, the effect of interest rates is very large. For example, a $100 monthly payment at the current rates of 4.4% could buy a $22,188 home assuming a 10% down-payment. The same monthly payment at 18.45%, last seen in October 1981, could only buy a $7,197 home assuming the same 10% down-payment; that's about a third of the purchasing capacity. While I picked the most extreme points in the data-set, the example serves its purpose. For this same reason, it is useless to talk about home prices without also talking about interest rates, as affordability is measured in the monthly payment, not total cost, for most people. With mortgage rates at historic lows, the buying capacity of a monthly payment is the most it has ever been. Furthermore, if deflationary pressures and extremely loose monetary policy don't cease, we could see that capacity increase even more, since purchasing capacity increases at an increasing rate as interest rates drop, as you can see below (click for larger image).

Thursday, July 22, 2010

Housing Affordability 1971-2009: Introduction

This post is part of the series Housing Affordability 1971-2009

The purchase of a first home by people I know in their mid-late 20s--a purchase many believed they had been permanently priced out of a few years ago--has been a common theme lately--and for good reason, homes are more affordable now than they have been since at least the 60s. From some of my work friends, to some of my old high-school friends, not a week went by over the last six months where I didn't hear or see (primarily on facebook) a reference towards buying or shopping for a new home, and it makes sense. With mortgage rates at historic lows, lower prices in many areas and a little help from the government, there hasn't been a moment in the last 39 years where housing has been so affordable when compared to buying capacity at current median incomes.

Wednesday, July 21, 2010

Chinese Money Supply: June 2010 Reserves keep trending down, loans increase

To see the latest data please see the label Chinese Money Supply

This is the latest money supply data from the People's Bank of China and China's National Bureau of Statistics. The English language version hasn't been updated in quite some time, but the Chinese-language version is regularly updated, although it seems like not in a normal schedule. As I've mentioned before, one of the requirements for a Chinese property bubble would be a large and rapid expansion of credit.

Please note that, purportedly because of demand for physical cash money, there is a significant distortion around the Chinese New Year.

As you can see in the first graph, the reserve rate keeps dropping, indicating an increase in loans, but the second graph shows us that, even if growth is still positive, it is at least no longer accelerating. This is what Pettis described as Beijing's stop-and-go measures in May of this year.

Friday, July 9, 2010

A thought about deflation in the United States

As I have written before, I believe that the natural state of an economy that is progressing and becoming more efficient is a deflationary one.
In a closed economy, a rise in productivity increases the amount of goods provided, leading to price decreases as the number of good rises and the amount of money stays the same. In this scenario productivity increases and money supply growth can coexist and maintain price levels stable, even if a small amount of money is being printed.
That is an oversimplification, but it gets the general point across. If we keep the monetary base stable, increases in population or increases in productivity will both have the same end result: higher potential output and a lower nominal price level. We use monetary policy as a tool to protect ourselves from this monster because the people in control of the big money machine are economists, and economists believe that people are rational utility-maximizing machines. What that means is that if people get used to the idea that prices steadily decline, they will continuously put-off spending because things get cheaper, which will drive sellers to lower their prices, creating a self-feedback loop that eventually will end up in the economy grinding to a halt. Generally, this makes some sense, but I just want to throw this one thing out there:

Tuesday, July 6, 2010

Some comments on an aging population and demand for securities

The Reformed Broker writes:
According to USA Today, there are approximately 79 million boomers in the American populace and the first wave of them turn 65 in the next year.

Wealth managers, brokers, investment advisors, financial planners, and family office guys will all feel the effects of this retirement onslaught, but nowhere on The Street will it be felt more than in the mutual fund complex.
I'm picking on him because he is linking to garbage. The linked USA Today article says:
The past three months alone, the average stock mutual fund has shrunk by 10%, according to Lipper, which tracks the funds. The past 10 years, the average stock fund has gained an average 0.2% — far below the stock market's average annual gain of 9.7% since 1926.
Ummmm, no. is 10% in terms of clients? Assets under management? Could this be caused by the recent draw down in equities? Where does the author get off trying to make a point saying MF assets have only grown by 0.2% per year over the last decade? That's clearly measuring from the 2000 peak (S&P @ 1,500) of a bull to somewhere in a bear market. Maybe assets didn't grow because valuations are actually lower now than they were in 2000--substantially so. How does the 1926-present average have anything to do with anything? Also, has the writer ever considered that MF assets could shrink as people move to ETFs or third-party money manager services?