Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | |
| S&P Futures | 1307.6 | -3.8 | -0.29% |
| Eurostoxx Index | 2412.5 | -19.590 | -0.81% |
| Oil (WTI) | 98.35 | -0.600 | -0.61% |
| LIBOR | 0.5566 | -0.003 | -0.45% |
| US Dollar Index (DXY) | 80.226 | 0.428 | 0.54% |
| 10 Year Govt Bond Yield | 2.05% | -0.01% |
Markets are mixed this morning, with the broader indices lower following Europe, and the Nasdaq up on Apple’s earnings. AAPL is up about 8% pre-market. Conoco Philips also reported good earnings this morning. United Rentals reports after the close, which should provide another data point as to the state of the construction industry. Construction / Housing has been the achilles heel of this recovery, and if that sector is turning around, the economy could finally be on its way.
I didn’t watch the SOTU last night (I always just read speeches), but it doesn’t sound like there was anything market-moving in it. Natural Gas is up a little, presumably on the lack of a production target. The US dollar is stronger this morning and bonds are up 1/3 of a point, presumably on Europe, not necessarily the SOTU.
Perhaps the timing of the robo-signing settlement was not a co-incidence. In the speech last night, Obama laid out a plan for refinancing underwater mortgages. The fine print will not be available for some time, and it will require Congressional approval. I have noted in the past that you have to get the originators on board with this plan, and put-back risk is the big hurdle. Put back risk means the government can decide after the fact that a mortgage violated underwriting standards and can force the originator to buy it back. Re-financing underwater homes will by definition violate underwriting standards. The government can tell originators that it will allow underwriting violations for this program, but there is nothing preventing a future administration from changing the rules. An originator makes exactly the same profit on a 80% LTV loan as they do on a 120% LTV loan. So why would originators take the additional political risk when the returns are exactly the same? They won’t.
The FOMC rate decision will be released this afternoon. I don’t think anyone expects a change in policy, but people will be interested in seeing if the the Fed takes note of the early signs of a turnaround.
Filed under: Earnings Announcements, Economic data, Economy, housing, Morning Report, stock market | Tagged: robo-signing |
All Things in Moderation 
Brent
” An originator makes exactly the same profit on a 80% LTV loan as they do on a 120% LTV loan. So why would originators take the additional political risk when the returns are exactly the same? They won’t.”
This is a question that has been in my mind for awhile. And so if we made you King of finance for a day how would you solve this thorny problem. jnc wants to go at it the old fashioned way…cram downs with bankruptcies where necessary. My question with that is would it not tie up the court dockets with an avalanche of cases. Perhaps that could be solved with special courts. But if homeowners are simply forced to eat their mortgages won’t they walk away from them anyway?
Any ideas on how we get out of this mess Brent? It is critical. Yesterday Cantor was on with Kudlow…and when ole Larry hit Cantor with a forecast of 3% GDP growth and some continuing job growth Cantor responded with yeah but it should be a 5% growth coming out of a recession. Kudlows next guest an economist was very optimistic and when told of Cantor’s 5% claim he replied, “Yes in normal times perhaps but in normal times 2% gain would be in housing to go with the 3% they are forecasting thus giving the 5% number Cantor mentioned. IE housing is still a huge problem. Any solutions Brent?
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RUK,
Well to take this piece by piece, I would first say “doing something about housing” typically means “stop prices from falling.” And that presupposes that housing is mis-priced – in other words, it is too cheap. I disagree that housing has fallen too far. If you look at incomes vs house prices, the median existing house price has typically been valued at 3.2x to 3.5x. That ratio dropped to 3 in the early / mid 70s, and it peaked at 4.8x during the bubble. It is now at 3.42, more or less in the historical range, and on the expensive side of that range. I don’t think the government should do anything about house prices – they are more or less where they should be.
Now regarding housing’s contribution to the economy, I believe we are getting to the point where housing is no longer a drag and is a neutral variable. Housing starts have been running at around 600k annually since the bubble burst. To put that number in perspective, the average since 1959 has been around 1.5 million. The recession troughs of the early 80s and the early 90s were around 800. Household formation is running at 1.3 million a year. And the last time we cracked 1 million starts (still a ridiculously low number) was June of 2008. Homebuilder CEOs are becoming more optimistic as backlog builds. I would not fall out of my chair with shock if we start seeing some 800k – 1 million prints this summer. In other words, i expect housing to slowly become more of a contributor to growth as the excess inventory is worked off. Another positive sign for the housing market is rental prices which are increasing.
I am a free market kind of guy, so you’ll not be surprised at my prescription, which is to do nothing. Let the market clear. You may see a temporary spike down in prices as the market bottoms, but I believe it will be healthier for the economy to get it over with.
I believe the obama administration has had the mistaken belief that foreclosures are driving the housing market lower, and if we just stop the foreclosures, we will stop the slide in house prices. To me, it ignores the fact that it isn’t necessarily supply and demand that drives prices – it is expected supply and demand. If buyers know that there is a ton of supply waiting in the wings, they aren’t going to pay up for property now. People aren’t stupid.
I also believe that the banks, who hold a lot of this underwater paper, believe they are going to get some sort of relief from the government, and I believe it was the program laid out last night. If the government allows originators to refi underwater mortgages, guess what – the bank gets paid back par! So what incentive to they have to re-negotiate terms? Or for that matter, to do short sales? First time homebuyers are the plankton of the housing market and should be snapping up short sales. THAT would be a real shot in the arm for the real estate market. The problem is the banks are dragging their feet and making short sales difficult, demanding 20% down and taking over six months to close, presumably in anticipation that they are going to get taken care of through a refi program. If the government disabused the banks of the notion that another backdoor bailout is in the cards, then they have the incentive to liquidate their inventory and short sales are the way to go. The first time homebuyer is the key, and they can’t afford to pay the inflated prices of 5 years ago. Let the market clear and give the banks the incentive to lose inventory at today’s prices, not yesterday’s.
All the government has to do is….. nothing.
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Brent,
Thanks so much for that informative and for me at least, educational response.
A bit of disclosure. I hold a Florida R.E. Broker’s license. I obtained it largely to augment the income I derive from helping my wife with her dental practice. I concentrated on Commercial. But I got my license during the boom and even though I’m no Paul Krugman I just couldn’t bring my “sphere of influence” my wife’s dentist friends into that market. I considered it speculation. 8 unit apartment buildings here in St. Pete were selling at negative cap rates. I couldn’t see taking someone into a deal where they are required to continue to “invest” money in property that loses money each year, in hopes of flipping it after a few years and reaping what for awhile were outsized rewards.
I like your analysis of housing starts, and I agree with you the first time homebuyers could be helping us out here if not for the stringent financing requirements. Our upstairs tenant is a Residential broker and he and his wife have survived because they managed to get hooked up with BOA and are now doing short sales. But they have expressed exactly what you’ve pointed out…they are now being approached by first time buyers but they can’t get the financing.
I don’t know if you aware of the CCIM designation in commercial real estate but I took their four week long courses.
I remember saying to one of the broker teachers..yeah this is great information but what do you do when there is no cap rate to calculate..he said..stay out of the market until it regains sanity. lol
I appreciate all your info Brent..and often do nothing is the best advice…kind of like the admonition to Physicians..first do no harm.
I went to a real estate conference in Orlando in 05. An economist there offered a most simplistic analysis. HIs postion was that if you calculate population growth and normal economic times we should average about 3.5% annual GDP growth. If the growth was higher…get ready for the correcting drop…if it was lower…then prepare for the increase. Obviously too simplistic but perhaps not without merit.
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Link to SoTU transcript:
http://www.washingtonpost.com/politics/state-of-the-union-2012-obama-speech-excerpts/2012/01/24/gIQA9D3QOQ_story.html?hpid=z1
Very good dial focus group analysis from Stanley Greenberg (courtesy of PL)
http://www.democracycorps.com/strategy/2012/01/president-obama-scores-with-middle-class-message/
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jnc
Thanks so much for the link to the focus group. Because I’m obviously a partisan progressive I was wondering if I was seeing what I wanted or whether others also agreed.
I have been among many on the left to be critical of Obama. I’m a peacenik and so I think he’s been too slow to draw down…but as they say all’s well that ends well.
My basic thought however comes down to this…I don’t believe there is any job..Bain Capital, Olympics organizer, Speaker of the House, Governor, or Senator(yeah I’m saying like virtually all Presidents Obama wasn’t ready) that truly prepares somebody for the Presidency. It is a uniquely challenging and difficult job.
We’ve spent a lot of time and money for Obama’s OJT and it seems he has learned well. That is what gives me a sense of optimism. I think he’s starting to hit his stride. Remember Reagan was in virtually the same position as Obama at the same point in his Presidency, and in fact his approval ratings at this time in his Presidency were a dismal 35%
Just a few years later Reagan had turned those numbers on their head and hit his highest approval rating of 68%!!!
I’m not suggesting Obama is Ronald Reagan, just saying he’s actually in a
pretty good position when viewed with some historical perspective.
http://en.wikipedia.org/wiki/United_States_presidential_approval_rating
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“jnc wants to go at it the old fashioned way…cram downs with bankruptcies where necessary. My question with that is would it not tie up the court dockets with an avalanche of cases. Perhaps that could be solved with special courts. ”
Keep in mind that bankruptcy courts are already “special courts”. Bankruptcy is handled with dedicated bankruptcy judges and courts. Any issues that are appealed go to Federal district court.
I would expect that any spike in filings would be no more than what occurred in 2005 with the passage of BAPCPA and the run up prior to the law going into effect.
http://en.wikipedia.org/wiki/Bankruptcy_Abuse_Prevention_and_Consumer_Protection_Act
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I have to ask — do you have the best memory or everything booked marked? your ability to pull links — old krugman stuff for example — never ceases to amaze.
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It’s all in the Googling. You have to think like a search algorithm.
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jnc/Brent/john/banned
Do you guys see any similarity between the S&L crisis of the late 80’s and our current mortgage mess. Of course I realize we didn’t mix in all the toxic MBS and amplify that problem even more with CDS back then, but in terms of financial institutions and lending/mortgages were there any similarities. I know old time real estate brokers have never forgotten that crisis because it certainly trashed the real estate market for awhile.
Any similarities? Anything we might learn?
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You would have to look up the RTC that was created to deal with it. My impression is that size wise, the S&L crisis was tiny compared to the last one, but I don’t have the numbers.
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I told everybody that if you change the tax law on carried interest, hedge funds would just restructure the transactions. Prehaps the words of a former Wall Street investment bank attorney carry more wieght?:
“How to Dodge a Carried Interest Tax Hike”
http://www.cnbc.com/id/46120273
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“Obviously, you are not going to simply accept being treated differently by the law just because you were the one managing the capital rather than the one supplying it. In fact, this seems a bit unfair: it rewards those who already possess wealth and punishes those who must raise it from others.
Instead of the old carried interest structure, you create a non-recourse loan.
Your investor puts up his original $100 million. Now only $80 million of that goes to purchase an 80 percent share in the fund. The remaining $20 million becomes a loan to you. You use the proceeds of that loan to purchase a 20 percent share in the fund. ”
That’s beautiful. Yet again, I find easy validation for being a flat taxer.
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As you know, I have long maintained that using people making $100,000 a year to regulate people getting paid tens of millions to get around them is futile, unless you enact the simplest legislation possible so as to give the junior varsity guys a fighting chance.
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We have two morning reports and the links to recent posts are confusing. Can we date the title?
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My worries today are about the results of the Fed meeting this afternoon. This expresses my feelings toward them:
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jnc:
Yet again, I find easy validation for being a flat taxer.
When will people learn?
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I blame public schools.
fun fact — best way to silence a dinner party: “i don’t think we should fund publicly run schools.” crickets.
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That’s like blaming “weather” for “tornados”. Not inaccurate, but very broad.
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The flat tax also nicely resolves the issue of how much of Newt Gingrich’s proceeds from Newt, Inc. were earned income and how much were capital gains/profits.
http://thinkprogress.org/economy/2012/01/23/409602/gingrich-tax-dodging/?mobile=nc
http://www.forbes.com/sites/janetnovack/2012/01/22/gingrich-used-payroll-tax-ploy-often-attacked-by-irs/
Answer: It wouldn’t matter, it would all be taxed the same.
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When will people learn?
Learn what exactly? That people can dodge taxes as the code is currently written? That a flat tax is simpler?
best way to silence a dinner party: “i don’t think we should fund publicly run schools.” crickets.
I’m glad that despite being 32 when I get together with my friends for the equivalent of a dinner party we’re far more likely to “Ice” someone than get into a discussion of funding public schools.
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i have no idea what that means. you’ll have to translate in to policy dork for me.
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You don’t know being iced means?
You hide a bottle of smirnoff ice somehwere. Whoever finds the smirnoff ice has to take a knee and slam the bottle immediately. If you google “getting iced” you’ll see videos of it.
That doesn’t happen everytime we get together, but it happens more frequently than do discussions of the pros and cons of publicly funded education.
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you would have been extremely popular among my college friends.
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Hah…well that is my group of college friends and just yesterday we were emailing about drug testing of welfare recipients so we can bore people with the best of them. However, when we get together as a larger group we regress to our college selves.
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Seeing as my circle of friends include a great many public school teachers, that conversation would meet a great deal of eye-rolling rather than stunned silence. It’s not as uncommon a opinion as you would want to think and they encounter it on a regular basis.
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i’d think teachers would be in favor — get out from under the administration and the various requirements/rules.
looks like another post topic.
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You are undervaluing the perceived benefit of union protection against arbitrary action by administrators and parents.
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no unions in VA for schools — it’s illegal.
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gotta run. but i’ll do a post on this in the next couple of days and we can continue then.
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“no unions in VA for schools — it’s illegal.”
That’s not precisely true. I believe that the VEA (Virginia Education Association) is the teachers union in VA. However, I believe there are limitations on the ability to collectively bargain, and membership is not a condition of employment (i.e. Right to Work).
http://www.veanea.org/home/who-we-are.htm
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nova:
best way to silence a dinner party: “i don’t think we should fund publicly run schools.” crickets.
Heh. Very true. I had exactly that happen once. It was a breakfast in a restaurant, not a dinner party, but the political banter that had been going on immediately came to a halt when I wondered why, if we need public schools to make sure kids get an education, we don’t need public grocery stores to make sure kids get fed.
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Given I work for the public schools, I gotta say, I’m totally for the funding of publicly run schools. And for more reasons than just that. But as we go through a merger to make a mega-merger, I think even single districts would benefit from shared purchasing power, but individually managed blocks, with separate administration.
The merger here is happening mostly because of false expectations and underlying beliefs, however. There’s general confusion, apparently even among city council and school board members, how each system is funded and who spends what, and because of presumptions based on race and poverty levels, there was a sense (often expressed) that the poor urban city school system would now get “its fair share” of the rich white suburban county school’s money. Unfortunately, this gets both the demographic makeup of the county schools wildly wrong, and also gets the money picture exactly backwards. City schools spend almost twice, per student, than the county schools. This message never seemed to get through.
Issues are complicated by local municipalities looking into starting their own school systems. Most of them are small enough that it will take a radical increase in their taxes to pay for the school system they were getting, in essence, I suspect . . . but time will tell. Although, like the folks who thought the county was hiding a magical money tree that they were now going to get, the merged system, whatever it’s deficits, is not going to be sufficiently worse than starting their own school systems from scratch (except for, of course, the school buildings, but any of them with debt to service would have that debt taken over by the municipality, and there is sometimes quite a bit of debt left).
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Going to a non-public system is a purely hypothetical concept since public schools are the educators of last resort. Many a doctrinaire conservative I know home-schools or private schools most of their kids but sends their special needs child to public schools since the open market costs of the mandated services would be exorbitant.
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See the market? Wow. Huge bond rally.
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FOMC statement. Low rates until late 2014. Previously early 2013.
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Yup. Interesting change.
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Who are the losers? Savers again?
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Stocks rallying on the statement. The Fed statement seems bearish to me, but what do I know?
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Definitely bearish. Odd to see such a rally in both treasuries and equities.
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Don’t fight the Fed, I guess…
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jnc4p:
Who are the losers? Savers again?
It would certainly seem so. I’m socking $$$ away for a downpayment on a house next spring and currently have ~$45K sitting in a savings account. I was paid $8.44 in quarterly interest last month. . . and, since I need liquidity and can’t invest in anything long term, the advice given to me last fall was that I might as well let it sit there because no where else is going to pay substantially more.
Bleh!!
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jnc:
Who are the losers?
Anyone who was short treasuries, that’s for sure.
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Bonds up 2 points. Wow. Just wow. Somebody is getting their head handed to them today.
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Anything associated with real estate investment has been going boom and will continue to do so.
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Also inevitably we will wind up in bubble city. What the Fed is doing is basically pushing everybody into one trade. No one is going to be on the other side. Hello, can you say 2000s all over again?
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You can expect a dropoff in mortgage lending too, as these are not profitable numbers to lend out for 15 or 30 years on.
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They’re doing it because the duration of newly originated mortgages is only 2.9 years. (Yes I know that once rates rise, that duration will become 10 years). But with the 3 year at 30 bps, it is an incredible pickup in yield. Don’t necessarily agree with it, but that’s what they’re doing…
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I don’t agree. Even though we know banks make money on the points, under Dodd Frank they now have to keep a percentage of those they originate.
Also you’re the bank and I’m a potential buyers of your MBS. You’re telling me the best tranches are getting 4.5% and I can get a AAA or AA corporate bond for the same or 100 basis points higher? Good luck!
Hell, I can do student loans, and do much better than that, and no issues with non-recourse.
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yello:
Going to a non-public system is a purely hypothetical concept since public schools are the educators of last resort.
Given that there are almost three times as many public schools as private schools in the US, that seems to be exactly backwards. A non-public system is purely hypothetical because public schools are the educators of first resort for the vast majority of people.
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Boom, that’s the sound of state buget negotiators committing suicide as their pension fund projections just got uglier.
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Another endorsement for the Ron Paul investment portfolio, courtesy of the US government.
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“At our request, William Bernstein, an investment manager at Efficient Portfolio Advisors in Eastford, Conn., reviewed Rep. Paul’s portfolio as set out in the annual disclosure statement. Mr. Bernstein says he has never seen such an extreme bet on economic catastrophe. ”This portfolio is a half-step away from a cellar-full of canned goods and nine-millimeter rounds,” he says.
http://blogs.wsj.com/totalreturn/2011/12/21/the-ron-paul-portfolio/
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Oh I subsequently Googled the anonymous Mr. Bernstein and found him to be a prolific writer of financial advice books, whose main idea is to buy ETFs. LOL
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Yes, I ROFLed when I read that piece. Had a highly amusing discussion in the thread of young Suzy Khimm whose English degree from Yale left her slightly unprepared to judge the quality of financial posturing.
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Apparently if you own shares in a mutual fund that purchased mortgage backed securities, you are personally responsible for evicting people who are delinquent on their mortgages from their homes.
Waiting for them to indict CALPERS.
http://thinkprogress.org/economy/2012/01/25/409804/romneys-profited-foreclosure-florida/
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*Facepalm* By that brilliant logic, the following headline would be equally applicable “Ashot Benefited from Michigan Foreclosures”. After all, my house was about $80,000 more expensive 5 years ago but thanks to all the foreclosures I got it relatively cheap. I better never run for office.
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The initial durkne orgy of buying is calming down now. We’ll probably end the day relatively flat to slightly down since all the short sellers were executed last month. nothing special to drive us into the close unless it’s the Fed’s growth forecast which comes out later. that will probably put a dent in the euphoria.
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I was pessimistic. Bernanke’s statement indicates white horse still saddled and ready.
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Forgive me for being too prolific today. Fed days always get the blood moving better than Red Bull:
“Fed Sees Slower Growth But Offers No Hint Of More Easing”
http://www.cnbc.com/id/46134420
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Food is higher on maslow’s hierarchy of needs, thus most people take care of themselves. Society does see a need to provide for those who don’t or can’t provide for themselves, thus gov’t often steps in as a food supplier of last resort.
Schooling is lower on the hierarchy. Many might skip it, if not compelled, or if they had to provide for themselves. Yet society benefits by having an educated populace & workforce. Thus society has an interest in providing a baseline education for all.
In other words, comparing publicly funded education to publicly funded food is an impe
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… an imperfect analogy.
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bsimon:
Society does see…Yet society benefits…society has an interest
Some day I think we should have a more in depth discussion about this, for I think it is a conceptual problem that underlies a lot of disagreements, certainly between libertarians and non-libertarians, and probably between left and right more generally. Society is not an entity that can actually “see” or “benefit” or which has interests.. It is an abstraction. And therefore when we talk about society “doing” something, we should be more specific about what is actually meant by the phrase.
I’d also point out that society ought not be conflated with government.
Anyway…
thus gov’t often steps in as a food supplier of last resort.
Actually it tends to step in as as a money supplier of last resort, thus enabling those that otherwise cannot obtain food to do so. Why couldn’t it act in a like manner for education?
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“There is no such thing as society. There are individual men and women, and there are families.” M. Thatcher. (meant to request as quote of the day.
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Perhaps you guys can enlighten me.
If there is no society, only individuals, then how can there be a family…family is a concept no? Yeah blood is sometimes a common denominator but I can find common denominators for society as well.
Perhaps you guys prefer the word group as opposed to society. Is group an abstract concept as well?
I do agree that government is not synonymous with society.
A country like Somalia may not have much government, but they do have a society…perhaps a society of pirates but a “group” of folks who presumable are tied together by some collective interest.
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ruk:
If there is no society, only individuals, then how can there be a family
I wouldn’t say there is no such thing as society. But it is a “thing” in the same sense that any abstract concept is a thing, like, yes, a family. Each is an idea that denotes a certain kind of relationship or connection between people. But that is a different order of “thing” than, well, actual, live people.
People take action, people have needs, people place value on things. Societies do not. When we say that society does this, or needs that, or values X, we are using shorthand for what we really mean, which is that some core number of people within this group called “society” do this, or need that, or value X. Society as a “thing” has no capacity for, no means of, doing, needing, or valuing outside the capacity or means of the individual people that comprise the society.
Is group an abstract concept as well?
Yes.
I do agree that government is not synonymous with society.
That’s good. So that means you agree that to say that society should do X (again, to the extent that such a phrase is meaningful) does not mean that the government should do X.
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““There is no such thing as society. There are individual men and women, and there are families.” M. Thatcher. (meant to request as quote of the day.”
That’s a bit of a stretch. There is a difference between the United States and Iraq beyond just the government.
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Scott:
So that means you agree that to say that society should do X (again, to the extent that such a phrase is meaningful) does not mean that the government should do X.
Absolutely. That is not to say, however, that sometimes government shouldn’t step in and take action. For instance, to work the same equation in the opposite manner, Society shouldn’t discriminate on the basis of color, but it took Government making it a law to effect change. Do I think it would have happened anyway? Yes, because–good, bleeding-heart liberal that I am–I believe that the vast majority of people are good at their cores. But it would have taken a few hundred years or so. Heck, the Highland Scots still haven’t entirely forgiven the English.
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