Discussing the housing crash and flippers, GSE reform, too many regulations hurting housing and affordability and more starter homes being built…
Interesting stuff from Robert Shiller in the NY Times:
There is still no consensus on why the last housing boom and bust happened. That is troubling, because that violent housing cycle helped to produce the Great Recession and financial crisis of 2007 to 2009. We need to understand it all if we are going to be able to avoid ordeals like that in the future.
As I often say, those that forget history are doomed to repeat it…
But the explanations for what happened in housing are not, I think, to be found in the conventional data favored by economists but rather in sociologically important narratives — like tales of getting rich through “flipping” houses and shares of initial public offerings — that constitute the shifting mentality of the era.
Again, as I often say: real estate is not a get rich quick scheme. Yes, you can build wealth and you can make money in real estate by either flipping homes or owning rental properties. But it isn’t easy and isn’t without risk.
The public fascination with speculating in housing has been held in check by regulators empowered by the 2010 Dodd-Frank Act, but that restraint is tenuous with the election as president of a real estate promoter intent on reducing regulators’ power. These narratives are still potent and could easily spur further spirals in the housing market.
It is scary to think some of the mistakes of the past could be repeated. I would say that flippers are not the biggest cause of the housing crash. Yes, they may have contributed a little but I place more blame on the banks and Wall Street.
Watt & Mnuchin Talk About GSE Reform
Since the topic was brought up, let’s look at some recent comments about GSE reform from Treasury Secretary Mnuchin and FHFA Director Watt.
This has been an unresolved issue for far too long and one we are committed to fixing. We will ensure that there is both ample credit for housing and that we do not put taxpayers at risk. This Committee has done extensive work on this along with your work on community financial institution regulatory relief. My hope is that we can partner on both of these issues. I look forward to working with the Congress to develop a solution.
Nothing ground breaking. While reform of the GSEs will require Congress to do something, their recent track record does not give me much hope. And Mnuchin told the Senate Banking Committee that he wants the GSEs to keep sending their profits to the Treasury.
This will keep the GSEs in a weak or vulnerable state if they hit a bump in the road. This could send them back to Congress for another tax payer funded handout.
Because the status of the Enterprises in conservatorship and housing finance reform seem to be hot topics these days, it seems appropriate for me today to elaborate on some of the points I made about these topics last week when I testified before the Senate Banking Committee. In the written statement we delivered to the Committee before last week’s hearing and in my testimony, I drew a distinction between decisions we have made (and continue to make) as conservator and the decisions Congress must make. The essence of what I said boils down to this: FHFA has made substantial progress during conservatorship on reforming Fannie Mae and Freddie Mac (what I generally think of as “GSE reform”), but it’s the role of Congress to do the bigger job I generally think of as “housing finance reform.”
Think about how long it has been since the housing market crashed. Yet very little has been done after the initial plans to keep the GSEs alive. And we are to expect something meaningful to come from Congress?
But at least Mnuchin and Watt are talking about reforming the GSEs. I agree with Watt that the GSEs must be allowed to rebuild their capital reserves in case something bad happens to the US housing market.
Considering the fact that Pres. Trump is committed to cutting government spending, you would think he would be OK with starting to rebuild the GSEs’ capital buffers so tax payers are not hit with a massive bill. As I often say, hope for the best but plan for the worst.
The key thing when talking about reforming the GSEs is that access to mortgage credit for the average American MUST be preserved.
No more petrol or diesel cars, buses, or trucks will be sold anywhere in the world within eight years. The entire market for land transport will switch to electrification, leading to a collapse of oil prices and the demise of the petroleum industry as we have known it for a century.
This is the futuristic forecast by Stanford University economist Tony Seba. His report, with the deceptively bland title Rethinking Transportation 2020-2030, has gone viral in green circles and is causing spasms of anxiety in the established industries.
We are on the cusp of one of the fastest, deepest, most consequential disruptions of transportation in history.
Distressing to say the least but I am not sure that ALL Americans are ready to give up their gas powered vehicles. For those that disagree, go tell a biker he must give up his motorcycle…
There is no doubt that eventually, electric vehicles will become more prevalent. And self driving cars will also become more prevalent. I can deal with electric vehicles but self driving cars do not give me a warm fuzzy feeling.
Not that the skills of most human drivers impress me either….
The head of Bank of America Corp, the United State’s fourth-biggest mortgage lender, said on Thursday banks would be able to supply a bigger share of funding for home purchases if the standard down payment for buyers was cut to 10 percent from 20 percent.
The vast majority of mortgages are underwritten to strict standards set by the U.S. government or quasi-government entities Fannie Mae and Freddie Mac. While down payment requirements can vary, they offer fairly little latitude to lenders that do not want to take all the risk themselves. As a result, many prospective homebuyers who cannot come up with a 20 percent down payment are unable to get a loan.
Umm… this guy is the CEO of BofA and he thinks people have to put 20% down to buy a home? You do NOT have to put 20% down to buy a home in some cases.
I strongly suggest talking to several lenders and see what your down payment options are. You should be pleasantly surprised.
Regulatory restrictions on housing supply have been rising in recent decades in the U.S. and have become a major determinant of house prices. What are the implications of the rise in regulation for aggregate productivity, and for wage and house price dispersion across metropolitan areas?
In a policy experiment where the federal government provides monetary incentives to reduce regulation, I find that output would be 1.5% higher, wage differences 5% smaller, and average house prices 25% lower.
Very interesting stuff from a paper by Andrii Parkhomenko. There is no doubt that too many regulations hurt the housing market and often stifle the building of affordable homes.
More Affordable Homes Being Built?
While over regulation is hurting residential construction, the big problem in many areas is a lack of homes for sale. A normal real estate market should have a 6 month supply of houses for sale. Right now, that number is under 4 months (for the entire US).
This is the main reason house prices have continued to grow at faster pace than we have seen in the past. The good thing is that home builders are starting to build more houses in the lower price ranges.
Home Builder Confidence Is Up
The latest NAHB Housing Market Index said that home builder confidence improved last month. NAHB Chief Economist Robert Dietz explained the reason for the increase in home builder confidence:
The HMI measure of future sales conditions reached its highest level since June 2005, a sign of growing consumer confidence in the new home market. Especially as existing home inventory remains tight, we can expect increased demand for new construction moving forward.
Home Builders Shifting to Meet the Demand for Starter Homes
Home builders are doing a a lot better meeting the needs of today’s home buyers. Check out this snippet from a recent Wall Street Journal article:
Home builders are beginning to shift their focus away from luxury homes and toward homes at lower price points to cater to this burgeoning millennial clientele.
The chart below shows 2016 to 2017 new home sales by selling price. As you can see, home builders are gradually starting to shift to build homes that are more affordable for first-time and non-luxury buyers.
I would point out that we see many nice new homes in our area well below $200,000, this chart is for the entire US. Sometimes I am amazed at the prices of new homes in our area considering the size of the home and the high quality build level.
Everyone is painfully aware of the shortage of new homes in some areas of the US. The good news is that it appears home builders are starting to shift their production to meet the high demand for affordable starter homes!
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