Monthly House Payments, Rents, and Incomes

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Last week we compared San Diego rents and incomes to home prices. Let's now do the same for monthly payments on those homes.

The following charts compare San Diego incomes and rents with the monthly payment on a typical single family home. Non-nerds, avert your gaze from the rest of this paragraph as it goes into the minutiae of how the graphs were constructed. The home price is figured using the Case-Shiller price index rebased to the December 2007 median single family home price. The mortgage payment is calculated based on the average Freddie Mac 30-year fixed rate mortgage with a 20 percent down payment. I've also added in property tax at 1.1 percent (thanks to reader Tom for the suggestion).

Given that mortgage rates continue to be quite low by historical standards, it should be no surprise that homes look quite a bit more reasonably priced when you compare rents and incomes to monthly payments instead of home prices. While the price-to-income and price-to-rent ratio would have to respectively fall by 25 and 24 percent to reach the levels seen at the trough of the 1990s housing bust, the payment-to-income ratio would have to fall 19 percent and the payment-to-rent ratio by just 18 percent to hit their mid-1990s low points.

And the payment-to-income and payment-to-rent ratios are quite a bit closer to the bottoms of their pre-bubble ranges than to the tops -- a characteristic not shared by the price-to-income and price-to-rent ratios. The accompanying charts make monthly payments look downright reasonable on a historical basis.

But taken in isolation, monthly payments aren't the right metric to use in order to judge home valuations.

It is pretty clear that for most of the history displayed on the charts, the payment-to-income and payment-to-rent ratios hewed pretty closely to mortgage rates themselves. Typically, the monthly payment ratios would move up when rates were moving up and down when rates were moving down. It wasn't until the recent housing bubble, when the payment ratios shot up while rates dropped and then languished at generational lows, that this relationship broke down.

But the recent bubble is an abberation in which home prices rose not due to low rates but to an extended period of incredibly reckless mortgage lending. Looking back beyond this risky-lending-induced bubble, there just isn't much historical data to suggest that homes should necessarily be more expensive when mortgage rates are low and less expensive when rates are high.

The point can be further illustrated by comparing the recent bubble peak to the early 1980s, when double-digit mortgage rates prevailed. If monthly payments are a good valuation metric, then these charts suggest that the overvaluation of the recent bubble was not nearly as large as that seen in the early 1980s. This is ridiculous, of course. The recently burst bubble absolutely blew away prior booms in terms of magnitude, as a quick glance at the bubble aftermath depicted in this long-term foreclosure graph easily demonstrates.

While payments aren't a good valuation metric by themselves, however, they do have an influence. Monthly payments are a crucial element of the rent-or-buy calculation and will thus affect the level of demand coming from renters or investors jumping into the market. This phenomenon can perhaps be seen in the fairly consistent payment-to-rent "floor" in the second chart above.

All told, it's certainly worth keeping an eye on how monthly house payments compare to rents and incomes. But we'll keep an eye on everything else, too.

-- RICH TOSCANO

Thursday, September 4 -- 9:49 pm

Home Prices Making Their Way to Normalcy

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Now that we've gotten Case-Shiller home price data for the first half of 2008, let's check back in on the long view of how home prices stack up with their underlying fundamentals: local incomes and rents.

As of the last update to these charts, which included data through December 2007, San Diego home prices -- despite having dropped substantially -- were still higher in proprtion to rents and incomes than they had been at either of the two prior bubble peaks.

That is no longer the case. At least, not with the home price-to-income ratio, which has now dropped below prior peak levels and could as a result be considered within the bounds historical normalcy (though admittedly very close to the upper bound).

As of June 2008, by the measurement approach described in the above chart, the ratio of home prices to area incomes had dropped 39 percent from the peak was back to a level last seen in January of 2002.

In order to reach to the low point seen during the last housing bust -- and I'm not saying that's necessarily going to happen -- the price-to-income ratio would have to drop a further 25 percent from here.

The June price-to-rent ratio, on the other hand, was still above the peaks achieved at the heights of the prior two bubbles. It nonetheless tells a similar tale to the price-to-income ratio: the June price-to-rent ratio was 37 percent down from the peak, falling to a level last seen in March of 2002.

It would have to drop a further 24 percent from here in order to equal the 1997 post-boom low point.

Now for some clarifications. First, as is always the case with these graphs, we are making some very broad generalizations by aggregating all home prices, incomes, and rents in the county at any given time into just three numbers. These calculations serve only to provide a very big picture view of approximate relative valuations over time.

Second, while the rent figures are fairly up to date, the income data ends in 2007 and income has been extrapolated into 2008 based on 2007 growth rates. It's probably pretty safe to say that per capita income is growing more slowly in 2008 than it did in 2007, so the more recent income figures above are likely slightly overstated. However, that doesn't really matter all that much because home prices swing a lot more wildly than incomes. The vast majority of changes to the price-to-income ratio over shorter intervals are caused by changes not in incomes but in home prices, for which the data is pretty well up to date.

Finally, I've included 30-year fixed mortgage rates on the chart to show that despite substantially different interest rates over time, the price-to-income and price-to-rent ratios have tended to remain fairly contained. The exception would the sky-high valuations of the the recent bubble, which I maintain owe more to incredibly loose mortgage lending standards than to low rates.

Next week we will put mortgage rates at center stage and take a look at how rents and incomes have compared to monthly mortgage payments over time.

-- RICH TOSCANO

Friday, August 29 -- 5:22 pm

A Spring Rally! Kind Of!

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The Case-Shiller home price index for June indicates that San Diego home prices fell 1.5 percent between May and June. There was an unusual bright spot, however, as the high-priced tier of the index actually didn't decline for a month. High-priced home rose .3 percent in June, according to Professors Case and Shiller. This may not seem like much but it's the first actual increase for over a year.

The other tiers didn't fare so well, as usual. The mid-priced tier was down 1.6 percent for the month and low-priced tier was down 2.4 percent. As I'm fond of pointing out, and as the next graph demonstrates, the different post-bubble performance between high-, mid-, and low-priced homes is the flipside of how nutty each price tier got during the boom.

From their respective peaks, the high tier is down 19.9 percent, the middle tier 31.2 percent, and the low tier 39.5 percent. The aggregate San Diego index is down 29.5 percent from its November 2005 peak.

Check back soon for a long-term comparison of local home prices, rents, and incomes.

-- RICH TOSCANO

Wednesday, July 9 -- 5:30 pm

Bottom Calling: Now Its Own Genre

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I think it's funny that the folks at the North County Times have created a "Bottom calling" tag in their new business blog.

The titular bottom-calling in their inaugural post for the new category was made by longtime DataQuick pundit John Karevoll. In addition to opining that sales volume had already hit bottom, Karevoll said:

“I'm pretty sure we're at or very close to the bottom here in true values. The only thing that could throw things out of whack is if there is a nasty recession or a year or two of nasty inflation that would push interest rates up and prices would have to come down. But I don't see either one of those happening, so I think we're very close to the bottom.”

Karevoll was pretty circumspect -- in addition to the disclaimers above, he noted that the market is likely to "drag along the bottom for a while.”

Nonetheless, this is a fairly bold call. We already appear to be in a recession here in San Diego, to address Karevoll's first disclaimer. And to address the second, inflation is already at a level that certainly seems to me to qualify as nasty (although I admit that the mortgage market seems not to have noticed).

In addition to job loss and inflation problems, foreclosures keep piling up every month, the mortgage industry has utterly fallen apart, and San Diego homes remain overpriced based on their historical relationship with rents and incomes.

So I'm going to go out on a limb here and offer the opinion that we are not at or very close to the bottom for San Diego home prices.

I will qualify this by saying that some areas are a lot closer to the bottom than others, and that I am referring here to countywide prices in aggregate.

Incidentally, the "true values" bit in Karevoll's quote alludes to the oft-discussed (here, anyway) shortcomings of the median price as an indicator of actual home price changes. Fortunately, the Case-Shiller index will be able to tell us who ends up being right on this call.

-- RICH TOSCANO

Wednesday, July 9 -- 5:30 pm

Punish the Savers

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According to last week's update of the Consumer Price Index (CPI), consumer prices in the United States increased by 5.6 percent between July 2007 and July 2008.

Meanwhile, the Federal Reserve's funds rate -- which is the rate you are always hearing about the Fed raising or lowering -- has sat at 2 percent ever since the Fed's final (so far) rate cut in April. The Fed funds rate was as high as 5.25 percent back in 2007 before the Fed began slashing rates in the wake of the mortgage crisis.

The Fed funds rate heavily influences short-term interest rates such as those paid out by bank accounts or CDs. The Fed's rate-cutting campaign has resulted in an average savings account interest rate that is, according to bankrate.com, under 2.6 percent per year.

So to sum it up, people are able to get a 2.6 percent return (before taxes) even as they've watched the purchasing power of their savings decline by 5.6 percent over the past year.

It's pretty clear that the Fed has only pushed rates so low because the speculative boom that took place in the housing and mortgage markets has now reversed so violently. The unnaturally low Fed funds is just another form of bailout -- one by which savers are watching their real wealth disappear for the benefit of the housing market and the financial industry.

I'm kind of surprised more people aren't upset about this.

-- RICH TOSCANO

Tuesday, August 19 -- 6:04 pm

Employment Weakness Continues to Spread

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San Diego County shed jobs again in July, according to the EDD's latest estimates. As in the prior month, the problem wasn't that the housing-related sectors accelerated their decline, but rather that the non-housing sectors were unable to make up for housing's weakness as they had in the past.

The construction industry was hardest hit, as usual, down from the prior July by 7,500 jobs or 8.4 percent. The financial sector, which includes real estate, was down by 4,700 jobs or 5.8 percent. And the retail sector, which I have grouped in with the housing-related sectors because it had previously benefited so greatly from the home equity ATM, was down by 2,200 jobs or 1.5 percent.

The remainder of the economy had been bouncing along at a year-over-year growth rate of about 15,000 jobs. The non-housing economy has weakened, however, and for the last couple of months has grown at closer to 10,000 jobs (July in specific saw growth of 9,800 jobs or 1.0 percent).

As growth in the rest of the economy has become less able to offset housing-related weakness, the overall employment picture has darkened. In total, San Diego lost 4,600 jobs on a year-over-year basis, a decline of .4 percent. The county's unemployment rate rose to 6.4 percent.

-- RICH TOSCANO

Friday, August 15 -- 12:02 pm

Mortgage Defaults Slow -- Kind Of

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While the number of homes entering the final stage of foreclosure hit another all-time record in July, the number of homes entering foreclosure actually declined.

This decrease may not be very meaningful, however. To begin with, the number of notices of default (NODs, which notify owners that they have entered the foreclosure process) is only slightly down from its recent record heights. As the accompanying graph shows, the number of NODs filed in July was substantially higher than anything seen during the region's protracted 1990s housing bust.

In addition, even this decrease may be temporary. A recent Wall Street Journal article notes the significance of California's recent foreclosure legislation:

A new state law in California requires lenders to wait an additional 30 days after a homeowner misses the first payment before filing a default notice and use more "due diligence" to attempt a loan modification. The law took effect July 8.

The article goes on to cite some experts as believing that the new law has simply caused a temporary respite in new foreclosures, and that the numbers will surge back up again within a few months as delayed foreclosures eventually get processed.

If this explanation is correct, then we can probably expect further decreases in NODs for at least another month and a corresponding increase soon thereafter.

-- RICH TOSCANO

Tuesday, August 12 -- 11:44 am

More Home Sales, Less Inventory in July

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Housing resale volume increased in July, ending up 16.4 percent higher than it was last July. At the same time, resale inventory declined to end up 9.7 percent below where it was a year ago.

So both elements of "months of inventory" calculation -- which measures how much supply there is in comparison to demand -- improved to 6.3 months of supply. In addition to being a vast improvement over the 12 months' worth of inventory seen late last year and early this year, this reading actually beats out either of the prior two Julys. And 6 months' worth of inventory -- just a hair's breadth away from the July reading -- is considered by many to be a "normal" market.

So is normalcy returning to housing? For the answer to that question I direct you to the latest writeup on monthly foreclosures. As positive as the improvement of overall supply and demand is, it doesn't seem positive enough to outweight the negative effects of all those forecslosures piling up and waiting to be sold.

Normalcy does not appear to be forthcoming until foreclosure activity comes back to earth. And I'm not talking about a temporary decrease in official foreclosure filings that could be the result of, I don't know, a "foreclosure sanctuary" or something like that. I'm referring to a purging of bad loans such that the vast majority of remaining homeowners are willing and able to make their mortgage payments.

The pickup in volume is a good thing for the market, but it alone will not be enough to restore normalcy until the lending system itself has become healthy once again.

-- RICH TOSCANO

Saturday, August 9 -- 9:50 am

Median Home Prices Drop in July

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The median price per square foot of resale homes sold fell again in July. This metric is not as accurate as the Case-Shiller index discussed last week, but it is available two months sooner. And outside of the distortion caused by the subprime lending implosion in early 2007, the median price per square foot -- aka the size-adjusted median -- has been a pretty accurate predictor of the Case-Shiller index. So it's worth looking at.

The size-adjusted median for single family homes dropped a fairly hefty 3.6 percent last month -- its worst drop since February. The condo size- adjusted median, on the other hand, actually increased by 2.4 percent. But considering the drubbing inflicted upon the condo median over the last few months this rise is not so impressive. Even after the July increase, the median condo price per square foot was 9.4 percent below where it had been just three months earlier.

Combining the two property types, the overall size-adjusted median price was down by 1.6 percent for the month. It has declined by 33.0 percent since peaking in September 2005.

-- RICH TOSCANO

Wednesday, August 6 -- 4:45 pm

Quick, Everyone -- Into the Foreclosure Sanctuary!

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City Attorney Mike Aguirre has filed a lawsuit against Bank of America and its new subsidiary Countrywide. The central complaint of the suit appears to be that Countrywide engaged in fraudulent practices by putting people into high-risk mortgages and that Countrywide, as Aguirre put it in a press statement, "originated loans with little or no regard for the borrowers’ financial ability to afford the loans or to sustain homeownership." The suit is intended to prevent Countrywide (now Bank of America) from initiating foreclosure on any homeowner who has a high-risk mortgage and who actually occupies the home.

The lawsuit may be well-intentioned, but it's unlikely to help San Diego and there's a fairly good chance that it will make things worse.

It's also yet another bailout attempt.

It's true that many borrowers were defrauded by members of the mortgage industry. The mortgage industry participants involved should be thoroughly smacked around by the long arm of the law.

But the suit seems much more sweeping than that. It attempts to stop Bank of America from foreclosing on any owner occupier -- fraud victim or not -- with a high risk loan. ("High risk" here is my shorthand for low-down payment, "teaser-rate" loans that trade low initial payments for higher payments down the road). And Aguirre stated that he "would like to see San Diego become a foreclosure sanctuary." The suit seems less intended to protect fraud victims than to stop San Diego foreclosures outright.

There's a big difference between those two goals.

It's true that many borrowers were defrauded. But a lot more borrowers weren't defrauded. Most of the borrowers who have defaulted or will default on their mortgages are in that situation because they willingly took on high risk loans in order to buy homes that they couldn't really afford with the intent of profiting from home-price appreciation.

This type of behavior was absolutely rampant during the boom. To cite just one representative statistic, an incredible 67 percent of San Diego mortgages issued throughout most of 2006 had teaser rates.

Rather than being pressured or defrauded into taking on high-risk loans, most boom-time borrowers eagerly snapped them up. Perhaps Countrywide had, as Aguirre put it, "little or no regard for the borrowers’ financial ability to afford the loans or to sustain homeownership." But neither did the borrowers themselves.

Whether these borrowers acknowledged it or not, they were taking a big gamble on the housing market. When that gamble didn't pay off, they bailed out.

A sizable subset of this group, incidentally, lied about their incomes so that they could purchase more expensive homes than the lenders would have allowed.

Do all these people really get to be in the sanctuary too?

According to the lawsuit and Aguirre's statements, the answer is yes. People who took unwise risks and even those who themselves defrauded Countrywide are now being protected, at someone else's expense, from the consequences of their own actions. Chalk up another bailout attempt.

Whether you consider it a bailout or not, it's not clear how this suit will help those who deserve it.

Let's review some background.

It's important to understand that foreclosures are not causing the housing downturn. The downturn is the result of the massive speculative bubble by which home prices rose far beyond the levels that could be supported by local incomes. Now the bubble has burst and prices are falling back toward reality.

Foreclosures are an effect of this process, not its cause. Most people who default on their mortgages do so because they are "upside-down" meaning that the home loan amounts, which are based on bubble-era pricing, are greater than the values of the homes themselves. Borrowers in this situation often have little incentive to keep paying a loan that's worth more than the home itself when they could rent an equivalent home for less than they are paying on their loans. So, they stop paying the mortgage.

In this type of situation, preventing a lender from foreclosing doesn't actually help the borrower, who'd still be better off dumping his or her oversized mortgage.

The only way to actually help the borrower in such a case is to reduce the loan balance so that the borrower is no longer upside down. But that ushers in a whole new set of problems. True, it would help some people at first. But then everyone else, seeing that they could get their loan balances reduced if they stopped paying their mortgages, would want in, too.

The potential chain reaction of mass defaults could cause the entire mortgage market to seize up. This would almost certainly render the housing situation worse, not better.

If Aguirre wants to put a halt to foreclosures without changing loan balances, he won't help many people. And if he hopes to force reductions in loan principals, he could cripple the mortgage market and substantially worsen San Diego's housing crash.

The lawsuit carries another potential consequence. No matter who wins this round, lenders may start to feel that they will no longer be allowed to foreclose on homes in San Diego. As a result, they may be reluctant to issue future home loans here without protecting themselves through higher rates. The lawsuit could potentially make it substantially more difficult or expensive for a borrower to get a mortgage in San Diego.

Such futility and unintended consequences are to be expected when politicians try to fight the symptoms rather than the disease.

Here at voiceofsandiego.org we've been warning for years that the boom-era frenzy of risky mortgage lending -- still well underway when we started writing about it -- would have dire consequences. If the lenders were to be taken on, that was the time to do it.

But the risks were studiously ignored back when the good times appeared to be rolling. Now the damage is done. The money's already been borrowed and home prices have been driven into the stratosphere. All that can be done now is to allow the damage to heal.

Home prices have to come back down to levels that are supported by incomes. The bad loans must be purged from the system. That's the only fix at this point. This process will not be pleasant, but it will be vital to restoring the long-term health of San Diego's housing and mortgage markets.

Like all the other bailout attempts we've seen, Aguirre's lawsuit seems intended to short-circuit this crucial return to normalcy. And like other bailouts, it is likely to do more harm than good.

-- RICH TOSCANO

Wednesday, August 6 -- 4:45 pm

Case-Shiller Home Price Index Declined Again in May

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The Case-Shiller home price index declined once again in May. The index, which is the most accurate available proxy for home prices and is calculated by comparing subsequent sales of the same home, fell 1.4 percent for the month.

The low-priced tier of the index once again fell hardest, declining 2.9 percent for the month. The middle tier fell .6 percent and the high-priced tier dropped by 1.1 percent. This is the first time during the housing bust, at least as far as I remember, that the high-priced tier declined by more than one of the other two tiers.

From their respective peaks, the low-priced index has fallen by 38.0 percent, the mid-priced index by 30.1 percent, and the high-priced index by 20.1 percent.

The aggregate index is down 28.9% since the November 2005 peak. By this measure, overall San Diego home prices are now lower than they were in October 2003.

-- RICH TOSCANO

Tuesday, July 29 -- 8:31 pm

The Future of Foreclosures

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Earlier this year I wrote about Joseph Galascione, a San Diego real estate broker who does some serious digging into the local mortgage pool to try to ascertain the prevalence of future foreclosures. Below are some conclusions from Galascione's recently released study of mortgages due to reset in the third quarter of this year. The study, incidentally, is freely available at the website of Galascione's firm, ERA® Metro Realty.

To review the premise, a resetting loan is considered to be at "high risk for foreclosure" if the borrower made a down payment of less than 20 percent and the monthly payment is expected to increase by at least $500 upon reset. (If the 20 percent cutoff seems overly severe, keep in mind that prices have dropped substantially since most of these loans were taken out -- so depending on timing and location, a borrower could have made a 20% down payment and still have no equity at this point).

In total, of the 5,722 mortgages scheduled to reset in July, August, or September of this year, 2,606 are considered to be at high risk for foreclosure. That's 45 percent. And while the percentage of high risk loans is about the same as it was in the first two quarters of 2008, the total number of high risk resets in the third quarter will actually be 46 percent higher than it was, on average, in first two quarters.

Due to the time lags involved, Galascione expects that any third-quarter resets that eventually go to foreclosure will not typically hit the market until March or April of 2009. It appears that foreclosures will be with us for a while yet.

Unless, that is, Mike Aguirre outlaws them. But that's a blog entry for another day (Monday, to be specific).

-- RICH TOSCANO

Friday, July 25 -- 9:38 pm

Foreclosures Still Piling Up

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I have typically presented long-term charts of foreclosures to provide a comparison between recent foreclosure activity and that of the region's early-1990s housing bust. It would be nice to zoom in on that data a bit, however, as it becomes kind of difficult to track the short-term wiggles on such a long time scale. So let's just acknowledge that foreclosures are currently stacking up nearly three times as fast as they were during the the 1990s housing downturn so that we can take a closer look at the last few years.

The accompanying graph shows monthly NODs (notices of default, which are warnings sent to delinquent borrowers) and NOTs (notices of trustee sale, which happen after the NODs and inform the borrowers that their homes are about to be repossessed) since the beginning of 2005, which is shortly after the time that foreclosures started to rise from their record low levels.

For the month of June, NODs were ever so slightly down from their all-time high while NOTs set a new record. I don't have much to add to that. Tune in later this week, however, to hear what a couple of local experts have to say about the potential for future San Diego foreclosure activity.

-- RICH TOSCANO

Tuesday, July 22 -- 12:34 pm

Employment Goes More Negative

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San Diego County employment declined on a year-over-year basis in June. While the loss of 4,900 jobs only amounts to .4 percent of total employment, it is actually the worst annual employment decline for many years.

Interestingly, the long-suffering sectors dependent upon the housing boom -- construction, finance, and retail -- held relatively steady for the month. It was the non-housing sectors that saw deterioration. Growth outside the housing boom sectors was still handily positive at 10,900 jobs, but this a big drop from the 15,000-or-so yearly jobs that have typically been gained in recent times. The green line on the accompanying graph shows how June's non-housing job growth stacked up.

One should never make too much of a single month's data, especially with these employment estimates that are often heavily revised down the road. So while we will wait for more information before drawing any firm conclusions, this month's data suggests that the pervasive weakness in the housing and financial markets has begun to spill over into the general economy.

-- RICH TOSCANO

Friday, July 18 -- 4:31 pm

Pay Up for Fannie and Freddie

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I will begin this blog entry with an allegorical play in three acts -- starring you as the protagonist!

Act I

Your deadbeat brother-in-law shows up at your door and explains that his business, Joe's Exclusively Deep-Fried Seafood and Mortgage Hovel, hasn't been doing so well. You aren't surprised, given that his company is extremely indebted and has been mired in accounting scandals for years.

As a result of his troubles, he has gotten himself into so much debt that he has no chance of paying it off. He asks you and your spouse for a loan.

Act II

Your spouse, sympathetic of course, suggests that you lend Deadbeat Brother-In-Law (DBIL, for the remainder of the play) some money. You suggest to your spouse (Spouse) that since DBIL is unable to pay his current debts, loading him up with yet more debt isn't really a good solution. You also note the unlikelihood of being paid back in such a scenario.

Act III

Without asking you, Spouse dips into the joint checking account and lends DBIL the money anyway. Spouse also makes a big investment in the stock of DBIL's insolvent Mortgage and Deep-Fried Seafood business. But Spouse tells you not to worry: it's in everyone's best interest, and anyway, DBIL wasn't actually having any financial problems in the first place! Also, the stock pays out its dividends in fried clams!

Fin

Well, if you imagine that Fannie Mae and Freddie Mac are the Seafood Hovel, Treasury Secretary Hank Paulson is your spouse (yikes), and you are the U.S. taxpayer, then the above play (except for the part about the clams) pretty much actually took place over the weekend.

As suggested here on Friday, the government announced yesterday that it will further advance the creeping socialization of the U.S. financial system by bailing out mortgage giants Fannie Mae and Freddie Mac. (They didn't use those exact words).

I'll let Bloomberg provide the non-allegorical version:

Paulson, speaking yesterday on the stairway to the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in the companies and lend to them, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank.

I should note that my use of the word "bankrupt" is a bit of editorializing on my part. After all, Paulson and company -- the same people who insisted all along that there were no problems in housing (as also noted on Friday) -- continue to tell us that Fannie and Freddie are actually not at risk of going broke. I guess that's why they held an emergency Sunday press conference to announce that they'd be throwing taxpayer money at Fannie and Freddie hand over fist.

-- RICH TOSCANO

Monday, July 14 -- 3:51 pm

Nationalizing the Mortgage Industry, Maybe

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Fannie Mae and Freddie Mac, collectively known as the government-sponsored enterprises or GSEs, are huge government-backed yet privately owned companies whose main purpose is to buy mortgages. They are also, according to a recent Fed governor among others, insolvent -- that's "broke" to you and me.

This story is all over the news so I'm not going to rehash it -- here's a NY Times piece for those who want more. I just wanted to note that this is a huge crossroads for the housing and mortgage finance bailout efforts about which I've written several times on these pages.

A failure of the GSEs would be huge. They either own or guarantee over $5 trillion worth of mortgages, accounting for nearly half the mortgage debt in the country. And in the days of dwindling private mortgage issuance, the GSEs provide a huge chunk of the lending that takes place. Were they to stop buying mortgages, as the Times article puts it, it "could bring much of the American housing economy to a standstill." Many think that the government would step in and take over the companies before that was allowed to happen.

Treasury Secretary Hank Paulson was out this morning implying that there won't be a wholesale bailout or takeover of the GSEs. But as I suggested in an article back in April, if the government is willing to bail out the creditors of a mid-level investment bank like Bear Stearns, there is no way they will allow the enormous GSEs to fail.

A government takeover of the GSEs would really amount to nothing less than the nationalization of the U.S. mortgage industry. It would also amount to yet another taxpayer bailout of financial institutions that took enormous risks and made commensurately enormous profits before the good times ended.

I will end with some previous quotes from some of the folks who may even now be gearing up to effect said bailout:

"[House] price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas." -- Fed Chairman Ben Bernanke, Oct. 20, 2005

"[The housing downturn] looks to be a very orderly and moderate kind of cooling." -- Fed Chairman Ben Bernanke, May 18, 2006

"All the signs I look at [show] the housing market is at or near the bottom." -- Treasury Secretary Henry Paulson, April 20, 2007

"I don't see [subprime mortgage market troubles] imposing a serious problem. I think it's going to be largely contained." -- Treasury Secretary Henry Paulson, April 20, 2007

“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.” -- Fed Chairman Ben Bernanke, May 17, 2007

Happy Friday, everyone.

-- RICH TOSCANO

Friday, July 11 -- 12:31 pm

Housing Oversupply Continues to Wane

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Existing home sales rose again last month, climbing to within 4.1 percent of last June's sales. This is a vast improvement from the 30 percent year-over-year declines seen early in 2008 but it is still far below boom-time levels of activity.

The number of existing homes for sale improved even more markedly, declining during a period of typical seasonal increases to land 5.1 percent below last year's inventory level.

The months-of-inventory figure, which measures supply against demand, has now dropped to 7.1 months, slightly below the level seen last June and well below the that seen after the credit crunch began in late 2007.

All in all, June's supply and demand situation was the most favorable in over a year. But while overall listed inventory is on the decline, foreclosures -- most of which will end up as must-sell inventory down the road -- are at record levels. Time will tell which of these factors takes precedence in setting future home prices.

-- RICH TOSCANO

Wednesday, July 9 -- 5:30 pm

Silent Spring

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The typical spring home price rally was a no-show for 2008, if the size-adjusted median price of resale San Diego homes is to be believed. By that measure, single family home prices fell by 2.1 percent and condo prices by 5.8 percent between May and June. A volume-weighted aggregate of the two fell by 3.3 percent for the month.

Since the series peak in September 2005, the size-adjusted median price -- which is a slightly shorter way of describing the median price per square foot -- has fallen 29.5 percent for resale single family homes, 36.4 percent for resale condos, and 31.9 percent in aggregate.

The recent shift in buyer preference towards lower-priced properties may be causing some distortion in the size-adjusted median because it doesn't account for quality of the properties sold, except inasmuch as quality can be measured by square footage. So the price of a given home may or may not have fallen to the same degree as the size-adjusted median (and that's without even considering the vast price change disparities seen from one locality to the next).

However, this data suggests that as a whole, springtime has come and gone for San Diego without a price rally to show for it.

-- RICH TOSCANO

Date: 7/4/08

Mortgage Rate Update

E-MAIL POST

We haven't paid much attention to mortgage rates of late, a fact that is understandable given that the real action in the mortgage market has involved defaults on high-risk loans rather than incremental rate changes. But let's check back in on the topic.

The accompanying chart displays rates for 30-year fixed and 1-year adjustable mortgages along with the effective Federal Funds Rate. It's clear to see that just as the multi-year increase in the Fed Funds Rate didn't do much to increase fixed mortgage rates (which are more dependent on long-term rates than the Fed-controlled overnight rate), its current decline hasn't exerted much downward pressure on fixed rate mortgages either.

As a matter of fact, fixed rates are not a whole lot lower than they were when the Fed began cutting rates back in mid-2007.

Adjustable rate mortgage (ARM) rates have fallen a bit, but they are notably higher than they were when the Fed Funds Rate was hovering around 2 percent back in 2005.

In short, the Fed's dramatic rate-slashing extravaganza hasn't put much downward pressure on mortgage rates at all.

-- RICH TOSCANO

Date: 7/1/08

Alt-A Pain Still Ahead

E-MAIL POST

I'll just say up front that this is one of those lame blog posts that links to another person's blog post and then appends a little extra commentary at the end, which is exactly the type of blog post that one might expect on a Friday afternoon in late June.

The linked-to blog post in question comes from local real estate luminary Jim "The Realtor" Klinge, and it offers up a host of data comparing subprime and Alt-A mortgages in California. The difference, to put it simply, is that while "subprime" describes mortgages given to borrowers with low credit scores, "Alt-A" describes high-risk mortgages granted to people with better credit scores.

I've long argued that subprime loans weren't the only ones at risk of default, and Jim's data (sourced from the New York Fed) shows that this is true. (For instance, 23.5 percent of Alt-A loans have late payments over the past two years.) But what interests me most about Jim's post is that it suggests that much of the Alt-A pain may still be pretty far in the future.

Specifically, while 43.4 percent of California subprime mortgages are due to reset in the next 12 months, only 3.6 percent of Alt-A mortgages are in the same boat. However, 43.3 percent of Alt-A's have resets 24 or more months in the future, versus just 6.2 percent for subprime loans.

Now, there's more to this all than resets. As I've noted on the blog before, the evidence suggests that a lot of underwater loans are going into default well before the reset date.

This makes sense. At the peak, homes were so expensive that it cost more to make the monthly loan payments than it would to rent an equivalent home. So once borrowers who bought near the peak are underwater, they have an incentive to bail immediately and start saving money every month by renting.

Unless, that is, the borrower has a negative amortization loan. In this case, the borrower is actually paying less each month than is actually owed, and the excess is getting tacked onto the mortgage principal. For these folks, their artificially low mortgage payments might be lower than the rent on an equivalent house. In this case it would make sense to stay with the mortgage until the loan reset, but not afterward, both because neg-am loans typically reset sharply upward and because the all the extra debt that had been piled onto the principal would likely lead to a highly-underwater loan.

So the little theory I am advancing is that when it comes to predicting default, reset dates matter a lot more for negative-amortization loans than for fully amortizing loans.

I have no data to support this theory, but it makes sense.

Some related data, though, can be found in Jim's table: 30.8 percent of Alt-A loans were neg-am, versus 0.1 percent for subprime loans.

So considering that a lot of Alt-A loans are negative amortization, and that a lot of them are a long while from resetting, we may be seeing high default rates among more creditworthy (to use a loose interpretation of the term) borrowers for years to come.

-- RICH TOSCANO

Friday, June 27 -- 3:02 pm

Home Prices Drop Again in April

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San Diego single family home prices as measured by the accurate-but-lagging Case-Shiller index took another hit in April. The overall index declined 2.6 percent from the prior month, 22.4 percent from the prior year, and 27.9 percent from the November 2005 peak.

As usual, those aggregate numbers hide some huge disparities between homes at different price levels. The high-tier index (accounting for the upper one-third of sale prices) fell 1.5 percent for the month compared to 2.7 percent for the mid-priced tier and 3.5 percent for the low-priced tier. The accompanying graph shows that this pattern has been in place since the beginning of the decline. The vastly different performance on the way down is pretty much the flip side of the differences we saw on the way up, when lower-priced properties rose a lot further due to the explosion in subprime mortgage issuance.

April's decline in the aggregate index brought overall home prices back to a level last seen in November 2003. Adjusting for the effects of inflation as measured by the Consumer Price Index, home prices were just below where they had been in November 2002.

-- RICH TOSCANO

Wednesday, July 9 -- 5:30 pm

Employment Goes Negative Again

E-MAIL POST

San Diego employment declined on a year-over-year basis in May, according to the latest estimates from the California Employment Development Department. This is only the second time in 15 years that annual employment has shrunk, the first time being in March of this year.

The loss of jobs continues to be centered in the industries that became unsustainably bloated as a result of the housing bubble. From May of 2007, construction employment fell by 8,900 jobs or 10.0 percent, finance and real estate employment by 5,400 jobs or 6.6 percent, and retail employment by 1,900 jobs or 1.3 percent.

Things looked a lot brighter outside of the three housing boom industries. Employment in other sectors grew by 13,000 jobs or 1.3 percent, and the green line on the accompanying graph shows that the growth trend in the non-housing economy has remained pretty steady.

However, the increasing burden supplied by the housing-related sectors was heavy enough to drag overall employment down by 3,200 jobs or .2 percent. The orange line on the graph shows total San Diego job growth in a fairly steady downtrend.

There continues to be some controversy about the birth-death model, which posited a increase in construction, finance, and retail employment from hypothetical new business formation even as the known, existing businesses continued to shed jobs. For more information on this topic see the Bureau of Labor Statistics' monthly birth-death figures or my previous articles (first here, then some vindication here) questioning the accuracy of the birth-death model at job growth inflection points.

-- RICH TOSCANO

Wednesday, July 9 -- 5:30 pm

Prices Way Down, Sales Way Up

E-MAIL POST

Last week I noted that May had been another good month, as these things go, for home sales. But there is more to the story, as you might expect. Just as there has been a huge disparity in price declines between different areas of San Diego, the recent surge in sales activity has been every bit as uneven.

Using the zip code-level sales data kindly offered up by our pals at the Union-Tribune, I collected information on all zip codes that had more than 20 sales either in May 2007 or May 2008. I put the resulting list in order based on the year-over-year change in sales activity, with the biggest sales increase at the top. Then I took some averages for the top 20 zip codes (those with the biggest increases) and the bottom 20 (those with the biggest decreases). The two lists are here for anyone who wants more detail.

The results, summarized by the table to the right, were pretty clear. To begin with, the sales disparity among different zip codes is huge. The top 20 zips averaged a year-over-year sales increase of 38 percent while the bottom 20 averaged a decrease of 42 percent.

There was a big difference in pricing between the two categories, as well. The average median price (that sounds funny, but it's the average of the 20 zip codes' individual median prices) in the top 20 was $352,228, which was down 25 percent from last May. And the average median in the bottom 20 zips was $640,463, which was down only 8 percent from a year back.

In short, the lower-cost areas that have taken huge price hits are seeing a big resurgence in activity. More expensive areas whose prices have been resilient, on the other hand, have experienced a severe drop in activity.

A few implications leap to mind. First, because the composition of sales has shifted towards lower-priced homes, the plain-vanilla median price is almost certainly overstating shorter-term price declines at this point. There is no shortage of analysts pointing this out, by the way. (Oddly enough, not so many of them were pointing out the compositional changes that caused the median to overstate price increases in early 2007).

Second, this is not a good sign for the high end of the market. All the talk of desirability is meaningless if there aren't actual desirous people buying actual houses. The challenges faced by the high end, covered here before, may be taking their toll.

Finally, the increase in sales volume is obviously a sign of improvement in the lower priced markets. At the same time, this is where foreclosure incidence is highest, and for now, foreclosures are still winning. But at least something good is finally happening at the long-suffering low end of the housing market.

-- RICH TOSCANO

Wednesday, July 9 -- 5:30 pm

Housing Supply and Demand Improves Again

E-MAIL POST

While there wasn't much good news in the home price department last month, sales volume and inventory made for another story.

Sales activity quickened in May, resulting in a 5.2 percent decline in volume from a year prior. This number doesn't seem all that impressive on the surface, but compared to the 30 percent annual declines on display earlier in the year it is actually a big improvement.

Inventory also flattened again so that it was just 1.4 percent over last year's figure.

The number of months' worth of inventory declined to 7.6 months -- still in or near bear market territory, but a vast improvement over the 12 months of inventory we saw earlier in the year.

That's the good news. The bad news is that as much as sales have been increasing they still aren't keeping pace with foreclosure activity.

Homes going into foreclosure tend to eventually end up as must-sell inventory, which is the type of inventory that puts the most downward pressure on home prices. So while volume has increased and current inventory has moderated, San Diego's housing market will probably not be out of the woods until that pipeline of future must-sell inventory clears out a bit -- or at least until it stops filling up so fast.

-- RICH TOSCANO

Wednesday, July 9 -- 5:30 pm

Still No Spring Rally for Median Home Prices

E-MAIL POST

The size-adjusted median price for San Diego resale homes fell again in May, dropping 2.0 percent from April's median.

However, that number hid some widely disparate behavior between property types: the size-adjusted median was actually flat for single family homes while it fell a whopping 5.9 percent for condos.

From the peak of the series in September 2005, the size-adjusted median has fallen 28.0 percent for single family homes, 32.5 percent for condos, and 29.6 percent in aggregate. The bulk of that decline has taken place within the past year.

-- RICH TOSCANO

Tuesday, June 10 -- 6:01 pm

Foreclosure Frenzy Continues in May

E-MAIL POST

May was another month for record-breaking foreclosure activity. This time, the new all-time high was set by trustee sale notices (NOTs), which happen late in the foreclosure process and serve as notice of an imminent home repossession. 1,762 NOTs were delivered in May.

Notices of Default (NODs), which serve as an earlier warning that the multi-month foreclosure process has been initiated, were down 5 percent from the prior month. However, the 3,422 NODs delivered in May is the second-highest number on record.

NODs and NOTs were respectively up 114 percent and 187 percent from May of last year.

The accompanying graph, which adjusts NODs and NOTs by San Diego's labor force size to provide a long-term comparison of foreclosure prevalence, shows that the recent level of foreclosure activity continuest to be worlds apart from what took place during the region's protracted 1990s housing bust.

-- RICH TOSCANO

Saturday, June 7 -- 12:00 pm

Return to 2003, Again, or Possibly 2002

E-MAIL POST

As promised, here is a followup chart to Friday's article on how long it's been since home prices were at current levels.

This chart once again uses the Case-Shiller index to track San Diego home prices but adjusts those prices for the effects of inflation as measured by the Consumer Price Index. By taking account of inflation, we can observe how expensive housing is (and was) not just in dollar terms, but compared to everything else.

The high end fared best once again, of course. Adjusted for inflation, the high tier of the March Case-Shiller index was back to levels last seen in August 2003. The middle and low tiers, in contrast, had fallen all the way back to valuations last seen in October and September of 2002, respectively.

As of March, the aggregate index of all single-family resale home prices was at an inflation-adjusted level last seen over five years ago in April 2003.

-- RICH TOSCANO

Monday, June 2 -- 8:53 pm

Return to 2003

E-MAIL POST

Earlier this week we examined how much home prices have fallen in percentage terms. Let's now look at things a different way: how far have prices fallen in terms of time? In other words, how long ago was it that prices were last at their current levels?

The accompanying chart attempts to answer this question using the three tiers of the Case-Shiller home price index in addition to the overall index for San Diego. To find the appropriate months, I just took the March value of each index (the most recent available, unfortunately) and noted what prior month was closest to the March figure.

The low tier has regressed the furthest, you will be unsurprised to learn. As of March, the Case-Shiller low tier index had fallen to a level last seen in August 2003 -- over four and a half years prior. The middle tier index had fallen to its October 2003 level. The resilient high tier was still firmly in 2004 territory, at least, back to its April 2004 value.

The aggregate index was closest to the level last seen in January 2004. It was actually slightly lower than the January 2004 value, so in a manner of speaking you can say that San Diego is back to 2003 pricing overall.


In reality, the results are in all likelihood worse than what you see above due to the time lag involved in the Case-Shiller index (used here nonetheless because it is by far the most accurate home price index). To begin with, the index lags by two months -- the March figures were just released earlier this week. On top of that, the index is calculated based on the prior three months' worth of home sales. For example, the March index was based on sales that closed in January and February as well as March. Assuming a consistent trend, then, March's value is more indicative of February pricing than of March pricing.

These facts lead the above chart to be overly conservative on both sides of the calculation. First, a match to the October 2003 Case-Shiller index value, for example, actually implies a match to September 2003 price levels. Second, the March 2008 index value represents February prices, and here we are nearly in June. (The evidence suggests that home prices have continued to decline since February.)

Sorry, I had to throw those last two paragraphs in for the nerds. The point is that as far back as prices appear to have reverted in the above chart, they've very likely reverted even a little farther than that.

When inflation is taken into consideration, "real" home values have regressed farther back still. But that is the subject for a followup chart -- check back on Monday (or maybe Tuesday) for that.

-- RICH TOSCANO

Friday, May 30 -- 12:40 pm

Another Month of Home Price Declines

E-MAIL POST

The S&P/Case-Shiller home price index for San Diego, which is the most accurate measure of aggregate single family home prices, declined 2.6 percent between February and March.

The high-priced index tier, which is composed of the most expensive one-third of homes that were sold during the period in question, was down but once again demonstrated relative strength. High-tier homes declined 1.2 percent for the month to end up down 18.0 percent from their June 2006 peak. The accompanying graph shows that the high tier has experienced a spring rally of sorts as the pace of price declines let up from previous months.

The middle tier of the index was down 2.3 percent for the month and 27.7 percent from its November 2005 peak. The low-priced tier continues to take the brunt of it, down 3.4 percent for the month and 33.8 percent from its June 2006 peak.

The continued underperformance of the low tier is primarily due to the explosion in subprime credit availability, which first helped low-end prices rise in great excess to prices in the higher tiers and then led to a preponderance of foreclosures among those same formerly high-flying properties.

The Case-Shiller index indicates that as of March, San Diego single family home prices in aggregate had declined 25.9 percent from their collective November 2005 peak.

-- RICH TOSCANO

Wednesday, July 9 -- 5:30 pm

Foreclosures Creeping Up the Economic Ladder

E-MAIL POST

I recently wrote that San Diego's more upscale housing sub-markets aren't out of the woods just yet. One of my arguments concerned the behavior of the region's more creditworthy borrowers: it's not that they stayed away from risky loans during the boom, just that the types of loans they tended to get took longer to reset than the subprime loans that are currently blowing up all over the county's less expensive neighborhoods.

For a visual I point you to the mortgage reset chart hosted on the always-informative Calculated Risk economics blog. While I suspect that San Diego was a little ahead of the nationwide figures represented on the chart, the fact remains that the types of risky loans often taken out by the well-heeled have barely begun to reset. (This March article offers a more in-depth treatment of the afore-linked chart and the topic of Option ARMs, mortgages that can cause particular trouble upon recast given their negative-amortization payment schemes).

Now a bit of evidence for higher-end mortgage distress is starting to trickle in. The blog Housing Wire features two recent examples. One involves a study performed by an asset disposition company showing that its California foreclosure sale rate for properties over $417,000 has increased almost eight-fold from a year ago. (No San Diego-specific info, unfortunately). The article suggests that non-subprime foreclosures are just beginning their climb at this point.

Another Housing Wire report from back in March shows that even by then, delinquency rates on Alt-A mortgages (riskier loans made to borrowers with good credit) had risen to a hefty 17.4 percent.

Interestingly, the March report contends that for Alt-A loans -- most of which took the form of stated income mortgages, aka "liar loans" -- resets aren't the problem at all:

...[N]ote that very few Alt-A borrowers are staring down a pending reset throughout 2008. Yet they are defaulting in droves anyway.

While non-industry media are incorrectly and inexplicably zeroing in on rate resets as the driver behind the recent spike of Alt-A borrower defaults, most industry experts that have spoken with Housing Wire have suggested that as many as 70 percent of Alt-A loans originated in recent years have been fraudulent.

Interesting. We'll have to keep an eye on those non-subprime delinquencies.

-- RICH TOSCANO

Friday, May 23 -- 6:07 pm