Tag: Housing Marketplace

Credit Market Changes Visualized

I found a few charts recently that are very useful in conveying magnitude of the recent changes we have seen in the mortgage market. The first two are courtesy of the Weldon Financial Monitor, and the last one is an excel chart from a market analyst colleague of mine. Let’s take a look.

Chart 1: 30 percent of lenders across all types of credit are reporting a tightening of lending standards – over the previous year, there had been a net easing of standards for the most part. Notice the spike corresponding to the news in early August… Tougher to get financing for just about anything…

Chart 2: Specifically for home financing, the lenders report the concerns that are influencing their decision to tighten standards. Housing market woes are topping the list.


The bar for qualification has been raised, as evidenced in the charts above. Somewhere between “qualified” and “not qualified” there is a spectrum of, “qualified, but paying a premium”. This spectrum, and the premiums paid has always been there, but it is much broader now, and again, the bar is lower. So more mortgage borrowers are flopping into the “qualified, but paying a premium” category.

Chart 3: Just one example of this expanded spectrum can be seen by looking at the historical spread between conforming and non-conforming (jumbo) interest rates over time. The spike in 07Q3 matches up with the charts above.


The good news is that we are seeing this spread slowly trickle back down. The markets do not expect this spread to flatten back as far as it had been in recent years, but we saw the pendulum swing from one extreme to the other, and we are in the process of returning to a more neutral ground.

Real Estate Markets Are Local And General


Its going to be interesting to see what comes of this adjustment in housing prices. In the San Francisco Bay Area, many are defiant when it comes to bubble talk. San Francisco has some of the highest demand for housing in the nation as exhibited by the lofty price per square foot that homeowners pay. Its a city with a one of the most beautiful natural settings in the world and has a unique and vibrant culture that acts as a magnet for visitors and residents from around the country and world. Employment and recreation opportunities are abundant. Rarely will you meet someone in San Francisco who complains “I’ve got to get out of this town”…

But its tough to just plug your ears and ignore some of the voices out there commenting on the state of our housing market and its potential to affect the overall US economy. As I always say, the analysts all look at the same data and come up with forecasts on both extremes, and our reality is likely somewhere in the middle. Barry Ritholtz at The Big Picture has a steady flow of alarming news and charts on the housing market. And John Mauldin has my attention this week after his analysis of the recent Fed policy statement, where he suggests that the surprisingly deep rate cut is indicative of a key change in their approach – proactive versus reactive – and signifies that the Fed is fearing the effects of a housing collapse on the greater economy.

I don’t mean to spread the negative-only end of the outlook, but I think its prudent to be realistic, and I try to keep my ear close to the ground for more local news and data. To this concern, I recently came across an interesting site that helps ‘check the weather’ in the neighborhood. Allow me to introduce you to foreclosureradar.com, where you can type in any address and see a map showing the homes in various stages of foreclosure within the specified area. Its very interesting to play with, though the specific data is only available to paying members. I think you can get a sense of your local market by keeping an eye on this, and though of course its not exactly conclusive, its at least a little informative.

Making Sense Of Today’s Market

When speaking with clients lately, it has been made clear to me that the current state of the mortgage marketplace has affected everyone on very different levels. Some people are clearly touched by the panic and have several questions about “what does this mean to me?”, while others seem oblivious that this ‘credit crunch’ thing has anything to do with them now or in the future. More power to them. A panic state – when widespread – is a breeding ground for irrational individual behavior.

The financial talking heads in the media have a few challenges in getting rational information through to the public. For one, many of the faces on the news channels don’t always follow it themselves. But when they surround themselves with economists and analysts who do get it, they need to make sure they speak in parlance that the general public can handle. CDOs, RMBS, ISM, and BBB- are not terms that reside within the daily vocabulary of people with professions outside of the financial arena.

To that concern, here are two articles that offer a broken-down explanation of what is going on right now in the mortgage market, why ‘the subprime meltdown’ affects other areas of borrowing money, the role of the Federal Reserve, etc. You can access them here and here.

Lessons To Be Learned While Countrywide-Hating


Do you remember when we used to party like it was 1999? That was 1999. And then 2000 came, and the stock markets took a digger. A bunch of people lost a bunch of cash, and everyone freaked out about how crazy and dangerous the markets were. Just months earlier, everyone thought they could quit their job to make a fortune day-trading shares of BBQ.com, and other great business latest and greatest IPOs. It was easy while it was easy, and then, the bubble burst.

But what happened after a little time passed? Everyone looked back and said things like “should have seen it coming” and “that was unsustainable growth – had to correct at some point”. And this is always what happens in a market cycle. It booms, it busts, and you want to be there while it’s booming or your neighbor is going to drive a nicer car than you – and we don’t like that. If you are tired of my references to Kindleberger’s Manias Panics & Crashes, skip ahead to the next paragraph. Otherwise, please note that the author walks the reader through the common traits of all history’s asset bubbles, and many of his lessons are being learned – again – by today’s housing market participants. To understand the psychology that drives a market to extremes, he cites a South Sea stock investor in 1720 who said, “When the rest of the world are mad, we must imitate to some measure.”, and he generalizes that “There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.” No wonder… its in our nature. Monkey see, monkey do. Read it now to put today’s market in context with history – and to give peace with the idea that we have seen it all before, and things will get worked out.

Moving along… one of the typical components a market de-bubbling is the scapegoating. Heads need to roll, somebody needs to take the fall, etc. Its formula. And rightfully, there needs to be an understanding of the players involved in creating the bubble. But don’t join the witch hunt this time, because chances are you had a piece of the action this go around. I am not going to dispute any of the accused in Barry Ritholtz’s list which includes: The Federal Reserve, Borrowers, Mortgage Brokers, Appraisers, Federal Government, Fannie Mae, Lending Banks, Wall Street firms, CDO Managers, Credit Agencies (Moody’s, S&P), Hedge Funds and Institutional Investors. Read his paper for elaboration on each participant.

An interesting article came out on 8/26 in The New York Times specifically flinging mud at one of the mortgage players, “America’s number one lender”, Countrywide. From reading it, it seems some disgruntled ex-employees ran to the press in an effort to expose some of the more eye-popping sales realities of the firm. And if this article is accurate, it would represent a disappointingly low standard of professionalism for an atmosphere where business of a financial nature is to be conducted. But who knows… the media is going to push this kind of sensational stuff to build on the souring momentum of everything connected to this phase of the market.

Keep things in perspective. Stay calm. Great time to read a book.

How A Recession In Housing Affects The Rest Of The Economy


Watch CNBC for 5 minutes and 30 seconds and you can get a good sense of the attention being paid to the day-to-day developments in the housing and mortgage markets. At this point it is no secret (or real surprise) that the housing industry is in a recession. We have increasing inventory, slowing sales, and decreasing prices. The construction unemployment rates are rising. The mortgage industry is facing a fairly turbulent adjustment with several companies collapsing on short-notice, and leaving several consumers left waiting for the money to buy their homes.

But most agree that these adjustments are good for the industry’s long-term benefit. This is typical of the market cycle. Its just that the other side of the cycle carried the industry so far for so long, that this side feels more intense.

Paul Kasriel of Northern Trust highlights some of the ways in which the housing industry’s growing pains can spill over into the greater economy:

“The tentacles of the housing recession are reaching beyond consumer spending. Freight haulers, both truck and rail, are reporting weaker volume growth because of the decline in residential construction activity. With fewer housing developments popping up in suburbia, newspaper advertising revenues are being adversely affected. And the producers of construction equipment, such as Caterpillar, are experiencing softer domestic sales.”

It will be interesting to watch this develop. And of particular interest will be to monitor the role of the Federal Reserve, who is attempting to tread a fine line between averting a significant economic recession and giving the market participants false confidence through bail-out gestures.

So Much For The Soft Landing Theory?


Holy smokes! The market is changing quickly, as the ‘other side’ of the cycle has arrived with a thud. Rates and products in the mortgage market are changing rapidly, and many homeowners are going to get caught up in the crossfire. Last week at American Home Mortgage, 800 Million dollars of would-be loan funds piled up in just 3 days as the company announced that it would not fund deals that had already signed. Forget those in underwriting, application, etc. 800 Million dollars – that’s a lot of homes! Think of the domino effect of broken purchase contracts, failed credit payments, etc. This kind of spiral is what causes the market to buckle, and why a quick change in liquidity is referred to as a “crunch” or “crisis”. Read more about it here, or here, or here.

As for today specifically, Mortgage Bonds are trading higher on unexpected news from Europe connected to US sub-prime mortgage investing problems, as well as Stocks trading lower off the same news. French Bank BNP Paribas, second largest bank in Europe, announced it has temporarily halted withdrawals in three of its mutual funds that have exposure to US subprime credit. As you can imagine, investors like you and I, who are told that their own funds are not available for withdrawal, would be quite worried. In the day’s only economic news, Initial Jobless Claims edged higher by 7,000 claims to 316,000, the highest weekly total since June 30 – a positive factor for the Bond market.

I often talk about the book “Manias, Panics and Crashes“. About a year ago I started reading this book again, and everyone looked at me like I was a doomsayer. But there is so much historical information in this book that can be applied to the current situation. It gives a detailed look at the anatomy of an asset cycle, and when and where systemic breakdown can occur. Rather than stick your head in the sand, take a look at it and consult with a professional about your finances, so that you can be sure you are prepared to weather this storm in housing and the mortgage market. Are you liquid enough to get through this?? It promises to get at least a little uglier before the dust settles. But this correction will be healthy for the long run.

Foreclosure Chart, The Return Of The Investor?

RealEstateJournal posted this chart courtesy of Realtytrac showing the foreclosure data monthly in a quick article with tips for buying foreclosure homes. You can note a slight drop from May to June, but I don’t think many are expecting that the housing market has ‘bottomed-out’ just yet. Today’s release of New Home Sales data was a disappointment, and showed that we are still not eating away at the inventory.
I see continued optimism from real estate insiders, one notable exception would be Angelo Mozilo, CEO of Countrywide, who has made a few comments over the last 6 months relating this housing recession to the Great Depression, that this is the worst market he has seen, and enacted layoffs and cost-cutting measures. He has also been under the microscope for selling $118 million of his company’s stock – a clear sign of lowered expectations… what are you gonna do…
I posted here back in May of 06 that the caliber of real estate investor had significantly changed, and that the pros had vanished. Soon after, the amateurs disappeared as well, and the only investor activity we have seen recently has been folks looking to capture a good gain on an inflated property, and 1031-Exchange it into something different.
In the last few weeks however, I have seen quite a bit more investor interest. Folks who are not afraid and who know that a market like this has “deals”. They embrace the Warren Buffett‘s mantra of “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” But I wonder if they are premature and if the market is going to deteriorate significantly further before things settle down. I know those builders do not want to hold inventory into a declining market, so I expect to see further cuts in prices, and increased incentives. I’m not buying into the media‘s doom & gloom rhetoric, but I do not think there is any reason to be anxious just yet… Deals are certainly out there…
John C. Glynn, CMPS
Real Estate Finance & Mortgage Planning
San Francisco Bay Area

More Movement For Change To Real Estate Commission Model

The Federal Trade Commission has issued a lengthy report getting behind the movement for change to the way Real Estate commissions are structured for residential US Real Estate transactions.

I wrote about this in a previous post with a similar report from the AEI–Brookings Joint Center for Regulatory Studies. I’m a huge fan of the Freakanomics guys; they have some interesting criticism of the Realtor commission model despite a few oversights and a petty undertone. Also, 60 Minutes has a story coming up this Sunday about alternative compensation models. Its unclear if they will contribute to this debate with balanced representation, but the fact is that this issue continues to be one of the biggest in the Real Estate business today.

It continues to be a very interesting battle, and the National Association of Realtors (NAR) has their defenses of course. Problem is, most of it sounds ‘defensive’. There is some merit to the claims made by NAR, but the inherent problems with professionalism and integrity within this business make these defenses ‘not applicable in all cases’. Some good insight to their viewpoints can be found here (see links at bottom of that page for more).

At the bottom line is a comment I give frequently: work with a professional. It holds true in Real Estate and financial services as much as it does in medicine or auto repairs.

The Accidental Landlord

With the turn in the real estate cycle upon us, there is a whole new sector of realty animal, who find themeselves on the wrong side of the buy & flip fringe. Whether they bought yesterday, or 10 years ago, they intended to sell right now. But a few things needed to happen first: Entitlement changes, condo conversions, marital separations, graduating high schoolers, etc. And while they were waiting, the market changed.

And so by the time it became feasible to sell, these folks didn’t like the conditions or the values, so they decided to keep the property and rent it out. And here they are, the ‘Accidental Landlords’. According to this site, 1 in 5 landlords was an accidental case. Demographic details are also available at the site.

All the action happens at the margins. Watch these cases to see the emerging trends in the market. This is a potential flop in the supply/demand dynamics of rental and ownership housing. These are likely your first sellers when market conditions inch up.

If you are in the position of feeling forced to hold inventory, its imperative that your financing plan allows you the flexibility to withstand cashflow fluctuations. Don’t let selling a home be a limiting factor if you want to move. Learn how you you can prioritize these goals with financing strategies by talking with a certified mortgage planner.

Rocker’s House Sells At 37% BELOW Asking!!

Is this a sign of the times? Jack White, of The White Stripes, recently sold his home in Detroit for $590k, a full $340k below the original asking price of $930k. Wow!

I often talk about real estate values being a function of ‘micro markets’, where local trends may be different from larger national ones. And Detriot has had one of the slowest markets in the past several years. But this is an interesting case – 37% is a big discount!

The value of the home – or anything – is a function of the pool of willing buyers, and what they are willing to pay for it. I don’t know how White could have been so far off with the original asking price. I wonder if he expected the fame tie-in to bring a premium to the sale price. But this is a guy who recently put out an album called “Get Behind Me Satan”; not necessarily a title that would be expected to have broad appeal to the folks in the top tax brackets… and the custom design clearly limited the appeal to average home buyers. You’ld have to be a major fan to want to buy the home with White’s sense of style. So limiting the appeal to a pool of buyers who may not share his own socioeconomic profile seems to balance out as a ‘net negative’ in terms of being a high profile case.

No matter what the reason, his expectations were way off.