This Is Where We Are -- And Headed

Since many of you are too eager to jump on the inevitable bottom in Hoboken RE prices, here's some context to temper your impatience...

Three more years anyone?

Stronger Banks = Weaker Consumers

Strengthening the financial system was believed to be a necessity - but for who?

The latest FICO data show that about a QUARTER of all American consumers are now removed from any possible eligibility to buy a home. The pundits who keep preaching that household formation is creating a backlog of homebuyers better check their facts.

Of course, Uncle Sam could start giving away homes instead of tax incentives!

The accompanying chart shows that a quarter of consumers — 43.4 million — now have a credit score below 600, marking them as poor risks for lenders. They can't get credit cards, auto loans or home mortgages under the lending rules banks use.

As consumers relied on debt to fuel their spending in recent years, their inability to access credit is one reason for the slowing economic recovery.

NJ's New Governor Comes Clean On Discretionary Ownership

If Hoboken property owners are that different in their situation from others in the state, then they should separate! But the reality dictates that prices will adjust - sooner rather than later, if we want to join any eventual upcycle in prices. My unfortunate prediction is that we will stagnate because the majority of property owners in this town are professionals in the business of real estate. Their (lost) fortunes are tied to it!

So, if you can't heed the advice of the Governor himself, then consider how you are going to protect your family's future:
“They should be talking about treating people like adults and telling them the truth: we’re in huge trouble,” he said. “And it’s going to mean cutting back on a lot of things that folks either have become used to or in a perfect world would like to have.”

All you adults know what's at the top of that "like to have" list.

DEFLATION was always the trend

With the latest economic data in mind, RE.ality is beginning to take hold - yes, it took a while due to government intervention with people's minds and home prices; both of which should continue breaking down for the rest of this year.

Our general price opinion on Hoboken properties points to another decline of 20% or so, similar to the first phase of declines over the past couple years. Rentals are not holding up either as supply from the sale side continues to compete with existing lease renewals.

Household formation (in Hoboken) has always been falling in the face of rising optimism, so a mini bubble was brewing before this next leg down.

The cry from the realtor business?
"It's never been more affordable and it's a great time to buy!"
Somehow they have forgotten to justify why it won't continue to be that way - even more "affordable" - for the foreseeable future.

Today's Case-Shiller numbers were good nationally, but down for NYC. That's because the high prices of homes here benefited the least from any interest in the government stimulus.

The NAR lobbyists are screaming for the country's staple diet right about now. Any common sense on this issue would allow the inventory to flush out sooner rather than later. But that's a longer story.

New Source of Home Sellers

The growing angst in Trenton is about to create an unforeseen group of property sellers, joining the ranks of financial services employees. Figure 1 attached.

Another Slap For Political Intervention In Markets

The Commerce Department said sales dropped a record 32.7 percent to a 300,000 unit annual rate, the lowest level since record keeping started in 1963, The fall unwound two months of gains inspired by a government tax credit. Enough said!

If this is east of Manhattan, what about...

Another picture says a thousand words. Queens is on the eastern front to the big city. Income and savings demographics are very similar to those of Hoboken where the population is tiny and more sensitive to economic changes in comparison.
The western frontage onto Manhattan has more dire municipal and state consequences, so there is no good ending in store for Hoboken.

The Back End of the Bubble

The FBI is preparing to arrest hundreds of people across the country as early as next week for offenses including:
- encouraging borrowers to falsify income on mortgage applications
- misleading home owners about foreclosure rescue programs
- inflating home appraisals.

The FBI is scheduled to release its 2009 mortgage report on June 17.

Let's see if any of Hoboken's finest transactions have brought any notoriety to the party.

FICO Survey: Credit Supply Unlikely to Meet Consumer Demand

FICO Survey Indicates Credit Supply Unlikely to Meet Consumer Demand

The survey, conducted in March 2010 found that while bankers generally expected consumers to pursue more new credit as well as spend more against their existing credit lines, most lenders are likely to keep a close eye on risk management.

Of the 127 bank risk professionals surveyed, 92 percent said they don’t expect to see an easing of lending standards in this quarter, 95 percent expected interest rates for consumer credit to stay at current levels or move higher, and 83 percent expected the average credit limit for new credit cards to be lower than in the past.

Why is this especially important in a property market like Hoboken and the new "core" category?
Because there is a total mismatch between local annual incomes (typically around $100,000) and property prices (current median around $750,000).

Single family homes which are typically $1 million+ are completely out of this realm.

Cash buyers are the only qualifiers in such a mispriced situation, but that makes them the next hit from depreciation regardless.

Hoboken's adjustments in price are not yet reflecting the mispricings of the past despite adjustments already underway in Manhattan. The bottom line: prices are simply declining at a slower pace over what will be a longer and more protracted time --> another 20% over the next four years.

Which ONE Of These Buys Hoboken Real Estate?

One in every 10 Americans missed a mortgage payment in the first quarter of this year, a new record.
One in 10 Americans' credit-card usage is being written off, also a new record.
One in six Americans are either unemployed or underemployed.
Over four in 10 of those jobless Americans have been out of work for at least six months and there are five unemployed workers competing for every job opening.
One in four Americans with a mortgage have negative equity in their homes.
One in eight Americans feel the current government policy is actually helping the economy.

Only one in 50 Americans plan to buy a home in the next six months.

Yes, It's Still A House Of Cards

The trend has barely budged, so this is getting repetitious.

Nationally, mortgage purchase applications plummet:
The Refinance Index increased 14.5 percent from the previous week and the seasonally adjusted Purchase Index decreased 27.1 percent from one week earlier. This is the lowest Purchase Index observed in the survey since May of 1997. The unadjusted Purchase Index decreased 27.0 percent compared with the previous week and was 24.1 percent lower than the same week one year ago.

Purchase applications plummeted 27 percent last week and have declined almost 20 percent over the past month, despite relatively low interest rates. The data continue to suggest that the tax credit pulled sales into April at the expense of the remainder of the spring buying season. In fact, this drop occurred even as rates on 30-year fixed-rate mortgages continued to fall, and at 4.83 percent are at their lowest level since November 2009. Refinance borrowers did react to these lower rates, with refi applications up almost 15 percent, hitting their highest level in nine weeks.

What this means is that there is very little holding this market up. The tax credit has stolen future sales which will result in a serious drop in sales. More disturbing is that this is happening as mortgage rates are 4.83%, or historically very low.

There is a lot of data to suggest that the shadow inventory, homes that are in or close to default, will continue to depress home prices, especially without the tax credit. The MBA also reported that mortgage delinquencies increased to a seasonally adjusted rate of 10.06 percent of all loans outstanding as of the end of the first quarter of 2010, an increase of 59 basis points from the fourth quarter of 2009, and up 94 basis points from one year ago .

The percentage of loans in the foreclosure process at the end of the first quarter was 4.63 percent, an increase of five basis points from the fourth quarter of 2009 and 78 basis points from one year ago. This represents another record high.

Existing Home Sales Report: March 2010

It’s important when reflecting on the sales results to consider that over 71.2% of all sales were for properties priced below $250,000 while just over 7.3% were priced at or above $500,000.

The results indicate that the government’s tax gimmick (second and final expiration is upon us) is driving a surge of phony demand and bringing a renewal of speculative animal spirits but the effect will likely be temporary.

Such stimulus is far more relevant to property prices of low level than those in areas like Hoboken where shadow inventory is bulging and buyers have completely disappeared.

Without Wall Street employment, where is Hoboken RE.ality?

Wall Street Work Force Falls to 16-Year Low
Reuters - Apr 16, 2010

NEW YORK - Wall Street shed 1,200 jobs in March, in a third straight month of job cuts that pushed employment in New York City's key banking and investment industry to its lowest level since October 1993, the New York state Department of Labor said on Thursday.

The city's jobless rate managed to edge down in March, easing 0.02 percentage point to 10 percent, while the state's jobless rate fell the same amount to 8.6 percent, the Labor Department said.

Total employment on Wall Street, New York City's most important industry, fell to 156,000 in March from February, James Brown, an analyst with the state's Department of Labor, said by telephone. Employment in the city's banking and securities industry in October 1993 had been at 155,000.

Wall Street employment had peaked in December 2000 at 200,300 jobs.

Wall Street is the bedrock industry for both New York City and New York state.

Securities and commodities companies generate about 12 percent of the city's taxes. Those companies account for 15 percent of the state's tax collections, down from 20 percent before the credit crunch, state officials say.

Brown said the three-month string of declines may reflect the end of severance payments, because workers are not counted as unemployed until their severance runs out.

"It's reasonable to assume that at least some of it is people coming off severance," Brown said, noting companies often time layoffs for the end or beginning of a year.

In the previous downturn, Wall Street bottomed out with a headcount of 159,000 in April 2003, Brown said.

Despite the job losses on Wall Street, banks and credit intermediation companies added 500 jobs, perhaps driven by the rise in refinancings and debt work-outs, Brown said. (Reporting by Joan Gralla; Editing by Leslie Adler)

Copyright 2010 by Reuters. All rights reserved.

The Richer Can Only Delay Longer - Not Avoid!

If Wall Street delayed the foreclosure process in Greenwich, Hartsdale and Short Hills, somebody forgot to tell the owners of those stately real estate properties.

The argument that the well-to-do continue doing well just doesn't hold a lot of water. They are about to file bankruptcies en masse.

Meanwhile, we have rose-colored RE professionals who vouch that Hoboken is on much sturdier footing with state support that has all but disappeared, schools being shut down for "renovation," property taxes that have yet to be standardized and a rent-to-buy ratio that continues to drop.

I want a front row seat in state court when they are pulled into one of the largest lawsuits to hit the NRA... oops, that should read NAR. Maybe there's little difference between the two!

10-Year Swap Spreads - Go negative!

A benchmark for the US mortgage market has gone AWOL! The difference between the 10-year LIBOR and 10-year US Treasury yields is NEGATIVE. The enormous issuance of debt and persistent agenda of using it to revive the dead patient is about to bite back. The 10-year yield will go higher.

As I've forecasted long ago, I do not expect mortgage rates to follow. Not for long. The disinflation is transforming into the ugly deflation threat now and that will kill any inflationary attempt. That means the real estate market gets hit at both ends of the affordability curve. And that is a correct response due to supply being held back from sale by banks as well as owners. The shadow inventory is estimated at THREE TIMES the listed number for the past two years now.

Spring will be but a blip, and quickly a bust! So all you fair weather fans who are just itching to get into your own home (aka INVESTMENT), start talking to your strategic default adviser before you sign at closing.

In Hoboken, fair value will now be deemed at a comp equivalent to mid-2003, down from early 2004 just a few months ago. The so-called recovery in prices has been a talking point aimed at marketing traffic. I wonder how many real estate professionals are being taken to court these days? Well, watch for that phenomenon soon. Far too many with advice rather than information and clarity on a property's financial history.

This bounce will try for one last gasp as spring approaches... and fail miserably. Peak to trough prices will start approaching the magic 40% mark for the metro NYC area. Is it any wonder that we have one-family homes racing to market right now?

Price it right! Or look for a lifesaver later.

Geithner's Testimony Leaked Night Before

The Treasury Secretary is making it clear to all those holding real estate assets: conditions have not improved to warrant stabilization in the residential market. In (mistakenly leaked) written testimony for the House Committee on Financial Services tomorrow morning, Geithner opens with the following:

"Private capital has not yet returned to provide the amount of funding that would be needed to allow families to get a mortgage to buy a new home or to sensibly refinance the house they already live in. Without the continued activity of the GSEs and the Federal Housing Administration (FHA) in the current environment, mortgage rates
would be higher and homeowners would have a significantly harder time obtaining credit. While conservatorship, undertaken by the Federal Housing Finance Agency (FHFA) during the Bush Administration, pursuant to Congressional authorization under the Housing and Economic Recovery Act (HERA), and continued under the Obama Administration, was necessary, together we must begin the process of fundamental reassessment and reform.

The failure of Fannie Mae and Freddie Mac was part of a broader crisis that revealed structural flaws in the entire housing finance system. Housing markets are subject to booms and busts – a key issue is whether the system of housing finance acts to dampen such cycles or to worsen them.
In this case the verdict is woefully clear. For many years, the housing finance system provided credit to households in a reliable and stable manner, setting appropriate standards for mortgage origination, and attracting diverse sources of capital though securitization. However, insufficient regulation and enforcement was unable to check increasingly lax underwriting, irresponsible lending and excessive risk taking. Increasing usage of complex products led to a growing misalignment of incentives facing mortgage brokers, originators, credit investors and borrowers.
This fueled unsustainable debt levels and house price appreciation. The risk of a fall in home prices was ignored by most and there was too much leverage in every part of the system. These problems were worst in the least regulated non-bank sectors that fed private-label securitizations.
Over time, problems associated with the absence of prudent underwriting standards and effective consumer protection migrated from these sectors to the more highly regulated channels of mortgage origination, including the banking sector."

If you haven't understood our discussions here surrounding deleveraging, Mr. Geithner is reading the definition to all who want to hear the truth. In due course, expect changes to the financing markets that parallel the real estate markets as well. You are being forewarned.

Don't Confuse Larger Picture With Noise!

The attached chart shows the state of the MBA Purchase Index.

The issue to consider is what lower rates HAVEN'T BEEN ABLE TO DO to this trend. The 4-week average takes us back to 1997 levels so far!

Affordability my ass!

The Kitchen Sink - Literally!

By JAMES R. HAGERTY

Pressure is growing on U.S. banks to ease terms for distressed homeowners on home-equity loans and other second-lien mortgages.

Rep. Barney Frank, chairman of the House Financial Services Committee, last week sent a letter to the four biggest U.S. banks demanding "immediate steps to write down second mortgages." The Massachusetts Democrat sent the letter to the chief executive officers of Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. Meanwhile, the Obama administration is preparing to launch long-planned initiatives aimed at addressing these obstacles.

Frank's Letter

Read Rep. Frank's letter to the four biggest U.S. banks

Rep. Frank said banks' reluctance to write down second mortgages is blocking efforts to reduce the first-lien mortgage balances of many borrowers who owe far more on their loans than the current values of their homes. Because such "underwater" borrowers often feel little incentive to keep paying, "homeowners are increasingly deciding to walk away and thus foreclosures continue to mount," he said.

View Full Image

Bloomberg News

A for-sale sign in front of a Newport Beach, Calif. home in December.

Many second liens have little value because of the plunge in home prices, Rep. Frank wrote, adding: "Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans."

A Bank of America spokesman said that bank is "committed to working with all interested parties to develop additional solutions to help homeowners modify first and second mortgages." A J.P. Morgan spokesman declined to comment. Representatives of Citigroup and Wells provided no immediate comment.

Lack of cooperation from holders of second liens also can block short sales, in which the first-lien lender agrees to allow the home to be sold for less than the loan balance due to avoid a foreclosure. If the second-lien holder continues to press its claim against the borrower, the sale can fall through. The ensuing foreclosure is likely to be more costly for all the parties than a short sale would have been.

Under an Obama administration program due to begin in the next few weeks, borrowers who get reduced payments on their first-lien mortgage through the administration's Home Affordable Modification Program automatically would get a break on their second-lien mortgage. Bank of America Corp. already has agreed to take part in this program, and other big lenders are expected to follow suit.

In April, the administration is due to launch financial incentives to encourage alternatives to foreclosure for people who don't qualify for a loan modification. The alternatives include short sales and so-called deeds in lieu of foreclosure, in which the borrower voluntarily gives up title to the home and often gets cash to help with moving expenses.

Under this Home Affordable Foreclosure Alternatives program, holders of second-lien mortgages would be eligible to be paid 3% of the unpaid loan balance, up to a maximum of $3,000, for giving up all claims in the event of a short sale. Unclear is how many second-lien holders would participate.

Most first-lien home loans are held by the government-controlled mortgage companies Fannie Mae and Freddie Mac or by other investors in mortgage securities. By contrast, banks hold most of the seconds and other junior-lien mortgages. About $1.05 trillion of junior-lien home mortgages were outstanding as of Sept. 30, according to the Federal Reserve. Of those, $766.7 billion were held by commercial banks; most of the rest were owned by savings banks and credit unions.

If banks are forced to write down or write off large amounts of those second mortgages, many would suffer major dents in their capital. Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP, said regulators may need to allow banks to recognize losses on second-lien loans over an extended period to avert a disastrous immediate hit to their capital.

One reason banks are reluctant to write off second mortgages is that some may still have value even after a foreclosure. Though the foreclosure wipes out the lien on the home, the consumer still has a legal obligation to repay the second mortgage debt in some cases. If the borrower has no significant assets remaining, banks generally don't bother trying to collect that debt. But they do retain that option and some say they will pursue it in cases where the borrower has significant assets or income, or may later have the ability to repay.

Write to James R. Hagerty at bob.hagerty@wsj.com

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

Mortgage rates - Are we headed higher?

The attached chart is a technical "fix" on how pundits are betting on spreads in the mortgage market.

I've long held that deleveraging and its deflationary forces will allow for lower prices with continued lower rates. This is not uncommon during such types of recessions.

As you can see in the chart however, a divergence in the technical underpinnings is causing a lot of anxiety about a jump in mortgage rates. Whether or not my scenario holds, it would now be viewed as a BEST CASE situation let alone any hope for optimism in RE prices!

The clue is in the smart money activity but there are plenty of fools who will allow emotion to override such clues.

Even the NAR data does not match its own optimism!

Look closely at the enclosed data series. Does it show you aberrations from seasonal adjustments or a reason for optimism?

The latest Existing Home Sales numbers for January surprised to the downside at 5.05 million, a 7.2% drop from December's 5.44 million, which in turn was 16% lower than November's 6.49 million. January's consensus was for 5.5 million.

Regionally, the biggest drop was in the northeast (-10.9% sequentially). Total houses sold (-11.1% sequentially). Supply increased from 7 to 8 months and the decline in both median and average price came in at -3.4% and -3.1%, respectively.

Keep in mind that all this is taking place in an environment of unprecedented stimulation through Treasury and Federal Reserve policies. Property taxes have only one way to go over the next decade.