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  • NAR's Pending Home Sales Index Drops in December, But Remains Above December 2010 Level

    The National Association of Realtors Pending Home Sales Index topped 100 in November. That represented a 19-month-high for the index. So while the index edged down in December, to 96.6, the big picture is still somewhat hopeful, says NAR chief economist Lawrence Yun : While we are not likely to look to the NAR as a primary, objective source of analysis on the state of the housing market, Yun is certainly a credible source, and the index's ups and downs do provide a helpful read on one key aspect of the economy. Read the NAR press release here .

  • Forbes: Top 12 Cities Primed for Real Estate Rebound

    If the economy is to pick up in 2012, we will need to see some recovery in housing markets. Forbes is featuring a slideshow of US cities that are "ripe for a rebound." Here is the list: San Jose, CA, Houston, TX, Boston, MA, Raleigh, NC, Austin, TX, Oklahoma City, OK, Fort Worth, TX, Pittsburgh, PA, New Orleans, LA, and Rochester, NY. Note that cities like Las Vegas and Fort Myers--cities that saw home values seemingly drop off a cliff--are not on this list. The Forbes list features cities where housing didn't drop too much, as those cities simply have too far to climb to get back to level ground. Click here to roll through the slide-show and look at the data for each of the above cities. Then see what cities you would keep on this list, and what others you might add.

  • Chart(s) of the Day: The Effect of Construction Crash on Jobs and GDP

    Adrian Peralta-Alva , Senior Economist at the St. Louis Fed , gives us two charts that highlight the impact of the housing boom and bust on employment and GDP across 31 nations: Peralta-Alva writes: The chart on the left shows the direct effect of the changes in construction sector employment from 2008 to 2010 versus total employment for 31 different countries. The change in construction sector employ- ment is the construction sector’s proportion of 2008 employment times the percentage change in this sector’s employment from 2008 to 2010. This chart also contains a statistically fitted line that illustrates the strong relation between the two variables. The fitted line implies that declines in construction employment can directly account for about half of the observed changes in total employment. The chart on the right shows a similar analysis for the direct effects of construction sector output declines and declines in total GDP. The statistically fitted relation between these two variables is still positive, but a little weaker as the dots do not follow the line as closely. This weaker relation may be explained, at least in part, by the fact that the share of total employment in the construction sector is considerably higher than its share in GDP. Read Construction and the Great Recession here .

  • EconBrowser: Climbing the Mountain that is the Mortgage-Debt-to-Income Ratio

    James Hamilton thinks that in order to return to a healthy economy we need to do something about this: Household mortgage debt skyrocketed in the 2000s, and income did not keep up. The solution depends on some mix of foreclosures, increased saving, and GDP growth. But these elements don't make good teammates with the economy in its current state. So Hamilton, writing at EconBrowser , offers some support for the Federal Housing Finance Agency proposal to alter the Home Affordable Refinance Program : One obstacle to refinancing has been mortgages that are underwater, which means that, as a result of declines in house prices since the time of the purchase, the principal owed on the mortgage exceeds the current resale value of the home. Previous rules would not allow Fannie or Freddie to guarantee a loan whose value exceeds that of the home, which refinancing an underwater loan would require. The new FHFA proposal relaxes that requirement so as to allow refinancing for underwater loans that were originated more than 2-1/2 years ago and on which the borrower is current on the payments with no late payments over the last 6 months. One question of interest is, who will ultimately end up losing the income that corresponds to the household's gain from refinancing? Since the original loans are currently guaranteed by Fannie or Freddie, and since Fannie and Freddie's liabilities in turn are now de facto guaranteed by the U.S. Treasury, one's first thought might be that the household's gain is ultimately the loss of the U.S. Treasury. However, Fannie and Freddie guarantee against default but not against the loss that comes from pre-payment, so it's the holder of the loan, not the U.S. Treasury, that loses. On the other hand, Fannie and Freddie own over a trillion dollars of the loans themselves, and the Federal Reserve owns another trillion. The Federal Reserve contributed $82 billion to the U.S. Treasury this year from its earnings on the mortgage-backed securities and other assets that it holds. A lower income flow from these would reduce the size of the payments to the Treasury that the Fed is able to make and increase the net contribution the Treasury needs to make to keep Fannie and Freddie solvent. Read Hamilton's full analysis here .

  • Boston Fed: The Relationship Between the Housing Crash and Confidence in Real Estate and the Economy

    In a new paper for the Center for Behavioral Economics Federal Reserve Bank of Boston , economists Anat Bracha and Julian C. Jamison , explore how the housing crisis and the Great Recession have affected Americans' attitudes toward home ownership. They sifted through recent Michigan Survey of Consumers data, and found that direct experience matters quite a bit: Our main results are as follows. People who lived (in 2008) in ZIP codes that were hardest hit by the crash in housing prices, as compared to those in areas that were least severely affected, are significantly more likely to be confident about owning a home if they are older (above 58 in our sample) but are significantly less likely to be confident about owning a home if they are younger. These results control for demographics, current absolute house price levels, and other factors, but importantly they are concentrated in the approximately one‐third of our sample who report that either they or someone close to them actually lost a large amount of money in real estate during the crisis. We argue that the latter result implies that mere information is not enough, and instead something like hands‐on experience is required to change confidence in home ownership. This is because presumably almost everyone was exposed to multiple media headlines about what had happened in their neighborhood and around the country, and yet they do not show a similar divergence in confidence. In terms of the striking age differential, one possibility is that relatively younger respondents were indeed more malleable, and hence they internalized the sharp drop as a regime change. In the new perceived regime, housing is an insecure investment and thus (relatively) to be eschewed. Available evidence from economics and psychology further suggests that such a change is likely to be persistent. On the other hand, older respondents – whose models of the world are harder to alter – see the drop in house prices as a temporary dip in a stable long‐term upward trend, making it a particularly good time to purchase. Of course it is also possible that older consumers buy homes more for consumption and less for investment, although the wording of the question was explicitly designed to hone in on general beliefs and away from individual circumstances. In their research, Bracha and Jamison also found that despite all the losses in real estate over the last four years, few Americans see renting as a desirable option: Read Shifting Confidence in Home Ownership: The Great Recession here . (Hat tip Binyamin Applebaum, NYT )

  • Martin Feldstein's Housing Fix

    Martin Feldstein has a good conversation starter in the New York Times today. While the need to create jobs remains the biggest economic hurdle for policy-makers, the housing crisis is still with us. Consumer spending requires jobs, and strong wage growth, first, of course. But consumer wealth has been tied to housing for a long time in our economy. Housing values will struggle to climb again as long as so many houses remain in foreclosure and/or valued below what people owe on them. To get housing values back up, first we need to stop the bleeding. And Feldstein proposes the following: To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110 percent of the home value. About 11 million of the nearly 15 million homes that are “underwater” are in this category. If everyone eligible participated, the one-time cost would be under $350 billion. Here’s how such a policy might work: If the bank or other mortgage holder agrees, the value of the mortgage would be reduced to 110 percent of the home value, with the government absorbing half of the cost of the reduction and the bank absorbing the other half. For the millions of underwater mortgages that are held by Fannie Mae and Freddie Mac, the government would just be paying itself. And in exchange for this reduction in principal, the borrower would have to accept that the new mortgage had full recourse — in other words, the government could go after the borrower’s other assets if he defaulted on the home. This would all be voluntary. This plan is fair because both borrowers and creditors would make sacrifices. The bank would accept the cost of the principal write-down because the resulting loan — with its lower loan-to-value ratio and its full recourse feature — would be much less likely to result in default. The borrowers would accept full recourse to get the mortgage reduction. Read How to Stop the Drop in Home Values here .

  • Building a New Agent Based Model for Understanding the Economic Crisis

    The old models failed us, and so we need new ones. That's the thinking of Doyne Farmer , professor at the Santa Fe Institute . Farmer says macro models led some to believe that a 20% drop in housing prices would not have much effect. So he is collecting data to build an "agent based model" of the housing crisis. The aim is to then build an agent based model of the global economic crisis. Farmer is doing this work with the help of a grant from the Institute for New Economic Thinking , and he explains his work in this INET interview:

  • Cohan Discusses Goldman, 'Money and Power', over Tea with the Economist

    Goldman Sachs remains among the most influential financial institutions, and among the most captivating (for all the right and wrong reasons). So it is no wonder that William Cohan's latest book, Money and Power: How Goldman Sachs Came to Rule the World , out this spring, is on many people's summer reading lists. In the book, Cohan tells the history of Goldman Sachs up through the subprime mortgage scandal. Cohan recently joined The Economist for tea, and discussed the book:

  • Fewer Homes Foreclosed in May

    The number of foreclosures across the U.S. dropped in May, according to RealtyTrac . From the release: Default notices (NOD, LIS) were filed for the first time on a total of 58,797 U.S. properties in May, a 7 percent decrease from the previous month and a 39 percent decrease from May 2010. May’s total was the lowest number of monthly default notices since December 2006 — a 53-month low. Foreclosure auctions (NTS, NFS) were scheduled for 89,251 U.S. properties in May, an increase of 3 percent from the 31-month low hit in April, but still down 33 percent from May 2010. May’s monthly increase followed eight straight monthly decreases in scheduled foreclosure auctions. Bank repossessions (REOs) decreased on a monthly basis for the second straight month in May, with 66,879 U.S. properties repossessed by lenders during the month — a 4 percent decrease from the previous month and a 29 percent decrease from May 2010. Since the so-called robo-signing controversy came to light in October 2010, REO activity has followed a rollercoaster pattern, with five monthly decreases and three monthly increases. Still, the inventory of repossessed homes continued to rise, as lenders are having a hard time selling them. Read the full release here .

  • Calculated Risk: The Distressing Gap in Home Sales

    New homs sales rose 11.1 percent in March according to data released by the Census Bureau yesterday. But the 300,000 sales were nearly 22 percent lower than the 384,00 new homes sold in March of last year. One key factor to consider while looking at new homes sales in this economic climate is the availability of less expensive existing homes, including foreclosed homes. Calculated Risk shares the below graph. Note the growth of the "Distressing Gap"--the difference between existing home sales and new home sales--over the last two years. Calculated Risk provides more analysis (with graphs) of the new home sales data here and here .

  • Congressional Oversight Panel Sees Little Progress in Fighting Foreclosure Crisis

    The Congressional Oversight Panel has once again concluded that a Treasury Department is coming up short of expectations. This time it is Home Affordable Modification Program (HAMP) , Treasury's foreclosure prevention program. COP raised concerns earlier this year that Treasury was not doing enough to stave off a foreclosure crisis, and now it seems HAMP has made too little an impact to satisfy members of the panel. From COP's December report: In some regards, the program‟s failure to make a dent in the foreclosure crisis may seem surprising. HAMP‟s premise was straightforward: Because the foreclosure process allows lenders to recover only a small fraction of the value of a mortgage loan, lenders should generally prefer to avoid foreclosure by voluntarily reducing a borrower‟s monthly payments to affordable levels. Through HAMP, Treasury attempted to sweeten this deal by offering incentive payments to all parties to a mortgage loan modification. Yet despite the apparent strength of HAMP‟s economic logic, the program has failed to help the vast majority of homeowners facing foreclosure. A major reason is that mortgages are, in practice, far more complicated than a one-to-one relationship between borrower and lender. In particular, banks typically hire loan servicers to handle the day-to-day management of a mortgage loan, and the servicer‟s interests may at times sharply conflict with those of lenders and borrowers. For example, although lenders suffer significant losses in foreclosures, servicers can turn a substantial profit from foreclosure-related fees. As such, it may be in the servicer‟s interest to move a delinquent loan to foreclosure as soon as possible. HAMP attempted to correct this market distortion by offering incentive payments to loan servicers, but the effort appears to have fallen short, in part because servicers were not required to participate. Another major obstacle is that many borrowers have second mortgages from lenders who may stand to profit by blocking the modification of a first mortgage. For these reasons among many others HAMP‟s straightforward plan to encourage modifications has proven ineffective in practice. Here's COP chair, Sen. Ted Kaufman , discussing the report: Read the full report here .

  • Economic Letter: Underwater Mortgages and Likelihood of Default

    The rise in "underwater mortgages"--roughly understood as when the principal owed on a house exceeds its market value--has been widely reported. But these maps from the Federal Reserve Bank of San Francisco highlight the change. Here's the share of underwater mortgages, state-by-state, in 2000: Now look at the underwater rates for the fourth quarter of 2009: These maps are from the latest Economic Letter, in which John Krainer , senior economist at the San Francisco Fed, and Stephen LeRoy , a visiting scholar there, examine the relationship between house prices and default rates. When housing prices drop and a mortgage is underwater, that does not, they say, mark the point where it is in the borrower's best interest to default: At what point does it serve a borrower’s rational interest to default? A handy rule of thumb is to use the underwater threshold at which the outstanding loan balance equals the house’s market value as the location of the default point. However, that underwater point is not consistent with rational behavior on the part of the borrower (see Merton 1974 and Krainer, LeRoy, and O 2009). To understand why, consider a homeowner who is at the underwater point, with the house value exactly equal to the outstanding balance of the mortgage. Should this borrower strategically default? We argue that the borrower still has incentive to stay in the house. Going forward, the borrower is in a “heads-I-win, tails-you-lose” position vis-à-vis the lender. If house prices fall further, then the borrower can default immediately, so that declines in house prices translate into losses for the lender. On the other hand, if house prices rise, then the gain accrues to the borrower. With no downside risk, the borrower will not actually be indifferent as to whether to default. Contrary to what many might assume, the borrower will actively prefer not to default. With both upside potential and downside protection against future losses, the borrower rationally should wait before defaulting. The observation that homeowners will not rationally default as soon as they fall underwater on their mortgages has some powerful implications. First, even though the borrower apparently has no equity in the house because house value is equal to the amount owed on the mortgage, the borrower behaves as though equity were positive by not defaulting. The borrower does not default because the decision to do so is not based on the book, or accounting, value of the homeowner equity, which is zero. Instead, it is based on the economic or “market value” of the equity, which remains positive. Second, the fact that homeowners distinguish between market and book values of their homeowner equity implies that they also distinguish between the market and book values of their mortgages. This is a simple relationship based on household balance sheet identity. The value of a homeowner’s assets (in this case the house) must equal the sum of liabilities (in this case the mortgage) plus the homeowner’s equity. The big difference between the market and book value concepts for mortgage valuation is that the market value of a mortgage depends on house prices while the book value of the mortgage does not. Based on market value, the default point is the house price at which the benefits and costs of staying are exactly matched by the benefits and costs of leaving. Put another way, the homeowner defaults when the market, not the book, value of equity is equal to zero or, equivalently, when the market value of the house is equal to the market value of the mortgage liability. The default point calculated this way is always lower than that based on book value, sometimes by a wide margin. Read Underwater Mortgages here .

  • Rajan on Political Responses to Income Inequality and Economic Crisis

    Over at Project Syndicate , Raghuram Rajan --professor of Finance at the University of Chicago's Booth School of Business, and former chief economist at the IMF--draws some links between income inequality and the global economic crisis. In particular, Rajan sites the expanding gap between those American workers in the 90th percentile for wages and those in the 50th percentile, and the political responses to that shift as creating credit bubbles. Perhaps the most important is that technological progress in the US requires the labor force to have ever greater skills. A high school diploma was sufficient for office workers 40 years ago, whereas an undergraduate degree is barely sufficient today. But the education system has been unable to provide enough of the labor force with the necessary education. The reasons range from indifferent nutrition, socialization, and early-childhood learning to dysfunctional primary and secondary schools that leave too many Americans unprepared for college. The everyday consequence for the middle class is a stagnant paycheck and growing job insecurity. Politicians feel their constituents’ pain, but it is hard to improve the quality of education, for improvement requires real and effective policy change in an area where too many vested interests favor the status quo. Moreover, any change will require years to take effect, and therefore will not address the electorate’s current anxiety. Thus, politicians have looked for other, quicker ways to mollify their constituents. We have long understood that it is not income that matters, but consumption. A smart or cynical politician would see that if somehow middle-class households’ consumption kept up, if they could afford a new car every few years and the occasional exotic holiday, perhaps they would pay less attention to their stagnant paychecks. Read How Inequality Fueled the Crisis here .

  • Fears of More Subprime Risks in FHA Lending

    Representative Tom Pric e (R-GA) is among those criticizing the Federal Housing Administration for "risky mortgage practices." Price writes, in Investor's Business Daily , that the FHA is " dabbling in the riskiest of loans and heavily leveraged, we sadly expect the FHA's troubles to get worse before they get better. " Price is not alone. So with the FHA's practices sparking fear of more loan failures, Marketplace 's Paddy Hirsch revisits the dangers of subprime lending in this Whiteboard video: Subprime from Marketplace on Vimeo .

  • Graphic: Housing Costs vs. Income, from Visual Economics

    We know housing prices have been falling for the last few years after a steady, thirty-year climb. But Visual Economics puts those prices in perspective, charting them against median income in this visualization: Read analysis of the above graphic at Visual Economics, here . (Hat tip Barry Ritholtz )
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