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Two Hands In The Cookie Jar: Banks Are Getting Closer To Entry Into The Real Estate Business

February 28, 2006 | 10:45 am | |

I wonder if the NAR, in some respects is regretting the housing boom. With all the income the industry has generated, it has also generated attention that probably isn’t beneficial to the trade group in the long run. Commissions, multiple listing service data, statistical methodology, believability as a resource, etc.

In the article NAR: Pittsburgh Condo Deal Puts Banks into Residential Real Estate [RISMedia] the National Association of Realtors contends that banks are getting into real estate despite regulations that prohibit this activity.

In a letter delivered last week to the chief counsel of the Office of the Comptroller of the Currency, the president of the National Association of Realtors responded to the recent defense by the OCC of its approvals permitting national banks to engage in new real estate and commercial activities.

They are also fighting Wal-Mart Bank’s application Because It Mixes Banking and Commerce [NAR]. [They] will actively oppose the application for federal deposit insurance by Wal-Mart Bank, a proposed Industrial Loan Company (ILC) headquartered in Salt Lake City, and requested the opportunity to testify at upcoming hearings. The Federal Deposit Insurance Corp. has scheduled public hearings in April in the Washington, D.C., area, and the Kansas City, Mo., metro area on Wal-Mart Bank’s application.

Since 2000, Realtors have opposed a pending regulation by the Federal Reserve and Treasury that would allow national banks to broker real estate and perform property management. Since 2002, Congress has blocked the regulation. It seems to be a matter of time before banks will have this option since every year this debate comes before Congress.

The NAR contends that by banks entering the real estate business, the safety and soundness of the banking system is at risk since it is a speculative investment. The idea posed is the the concentration of assets would be higher making the failure of one bank more critical to the financial system. NAR contends that the top 5 banks hold 45% of industry assets [Mortgage News Daily] and has a series of arguements why banks are a higher risk.

_Number of firms:_
Real estate – 98,000 to over 200,000 (depending on who is counting)
Banks – 8,000 to 10,000.

_Barriers to Entry:_
Real estate – usually less than $1,000 and a few weeks of studying time to obtain a license and enter the field;
Banking – large capital requirement.

_Taxpayer Risk and Historic Experience of Government Bailout:_
Real estate – none;
Banking – yes (historic evidence, S&L failures and RTC bailout.)

_Influence of Foreign Governments:_
Real estate – no;
Banking – large multinational corporations are subject to foreign government regulation.

_Consumer Data on Buying Habits and Possibility of Price Discrimination:_
Real estate – none;
Banking, -vast, often based on data mining of credit card purchase information.

_Cooperation with Competitors in the Sale of Products:_
Real Estate – yes, through MLS;
Banking – no.

_Degree of Regulation:_
Real Estate – minimal;
Banking – heavy.

_Social Promotion of Entrepreneurship, Women and Minorities, and Small Business:_
Real Estate – yes in every category;
Banking – yes in every category bus assessment is limited to owners of community banks.

Here’s a blog post on this issue from a banking perspective: ALERT: NAR’s New Threat from Mega-Banks – There they go again? There who goes again? [Inman] All I read into this most recent industry warning by the NAR is the voice of a threatened professional association that insists upon denying the consumer the choice of any other ownership structure for real estate brokerage other than the status quo – Realtor-centric. Drill down and you will find a true fear that if banks were to be in the real estate brokerage business about the last professional association they would insist their operators belong to would be the NAR.

This is all very interesting and well-laid out on both sides except:

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NAR says that banks are not a good idea because they place a higher risk on the banking system by being more speculative.

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Banks (more than just the included post on Inman) say that NAR has a monopoly on home sales and keeping banks out of the process only extends broker control further.

Confused? Be glad you are not a regulator. Its tough to see through the spin. At the end of all this, I think the banking lobby will win out over the broker lobby. They seem to have the OCC and momentum on their side.

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And The Survey Said… Its Not How Much You Have, Its How Much You Can Borrow

February 24, 2006 | 12:03 am | |

In the Wall Street Journal today, they report the findings of the Federal Reserve in the article Typical U.S. Family’s Net Worth Edged Up Only 1.5% in ’01-’04 [WSJ].

Source: WSJ

Download the report [pdf]

A booming housing market boosted the typical American family’s wealth between 2001 and 2004, but stagnant stock prices and rising debt offset many of those gains.

The report, the most comprehensive survey of household wealth, also found a widening of the gap between households at the top and the bottom of the economic ladder. “While the typical American household basically ran in place, less affluent households actually lost ground,” said Stephen Brobeck, executive director of the Consumer Federation of America.

The net worth of the typical family in the richest 10% rose to $831,600, a 6.5% increase from 2001, adjusted for inflation. In contrast, the net worth of the typical family in the bottom 25% fell 1.5% to $13,300.

In CNN’s Fed wealth survey: How do you stack up? – Feb. 23, 2006 Americans’ net worth grew between 2001 and 2004, but not nearly as strongly as it did between 1998 and 2001, according to the Federal Reserve’s triennial Survey of Consumer Finances released Thursday.

All stats in the current study were based on the period 2001 to 2004

  • Net worth – up 1.5% versus 10.3% from 1998 to 2001. The increase in homeownership caused the current gains but much was offset by the increase in debt.

  • Income – wages fell 6.2% after adjusting for inflation.

  • Assets – increased 10.3%

  • Debt – increased 33.9%

In other words, the sharp rise in housing prices has done little to increase the net worth of individuals because the gains have been largely offset by the increase in debt. With incomes falling over this period, real estate price gains would be expected to be tempered. Going forward, this would be expected to limit further significant appreciation in the near term.

FOMC Sees Mortgage Rates Effect On Housing As A Conundrum-22

February 22, 2006 | 12:01 am | |

In Greg Ip’s article Fed Minutes Indicate Inflation Still a Worry for Some Officials [WSJ] he indicates that The Federal Reserve sees that the risk for future inflation could rise over the next few months influenced primarily by energy costs but that this effect was not considered to be long term and seem to have 1-2 more increases to go.

View the minutes [FOMC]

Bernanke did not attend this meeting but his testimony was consistent, except for housing where the FOMC seemed to have more concern about housing than he does.

The minutes showed a higher level of concern about the housing market than Mr. Bernanke indicated at his testimony last week. “In some areas, home price appreciation reportedly had slowed noticeably, highlighting the risks to aggregate demand of a pullback in the housing sector,” the minutes said. Some officials thought the effects of an end to rising house prices were “potentially sizable,” and could be compounded by rising debt-service costs as variable-rate mortgages are reset at higher rates.

The issue of housing and its significant impact on the overall economy is a Catch-22 since rising short term rates cool off the economy, and is largely being done through the housing market as a conduit. At the same time, if inflation is not kept in check, long term rates will rise, also cooling off the economy through the housing market.

Its a Conundrum-22 if you ask me.


It Kinda Grows On You: Population, Home Ownership Rates And Demographics

February 21, 2006 | 12:01 am | |

There has been a lot of discussion of homeownership rates and demographics lately. It has been of even more concern as the recent housing boom makes the transition to a more balanced market, and then we ask, whats next? The idea is that the mix of the population that is growing is more indicative of future housing needs than an overall growth rate or totals. Here’s a lot of info to digest but its good reading.

Homeownership Rates
In Berson’s Weekly Commentary Homeownership rates this decade are up most for the youngest age groups [Fannie Mae]. Warning: Berson’s link lasts one week. For an acrhive of stories including this one go here.

While homeownership rates remained flat in 2005, homeownership rates have increased substantially over the past five years. According to the U.S. Census Bureau, the national homeownership rate was 68.9 percent in 2005 — up from 67.4 percent in 2000. The small drop in the overall homeownership rate to 68.9 percent in 2005 from 69.0 percent in 2004 was well within the margin of error for sampling variability. The increase in homeownership this decade was not consistent among all age groups. While older households saw negligible increases in homeownership (and even declines in the last year), younger households saw large increases in their homeownership rates.

Younger Generations Expect Higher Income
Last summer’s article A simple model of the housing market by the Federal Reserve Bank of San Francisco looked at age distribution of homeownership and the elasticity of demand.

Even as discussion of the current run-up in house prices points to the extremely favorable demographic conditions for demand, little has been said (lately) about what will happen once these demand conditions ebb. The worst-case scenario for house price declines depends on three factors: an inelastic demand for housing, a fair degree of myopia when forming expectations, and an inelastic supply function. However, recent research in urban economics suggests that two of these factors—expectations formation and the supply response—are probably more flexible than once thought.

Basically the study concluded that:

The effect of the exiting baby boomers on house prices would be gradual, and the overall magnitude of price changes would not be great.

Furthermore, a negative demand shock like the aging and exiting of baby boomers is only one of many factors to consider in anticipating the future of house prices. The productivity gains in the 1990s can be viewed as a positive demand shock. To the extent that younger generations now expect higher permanent income, this increase in expected wealth should help support house prices.

Age And Mix Of Population More Important Than Total Growth
In this 10 year old USC School of Urban Planning and Development article Real Demographics of Housing Demand in the United States population growth has always been recognized as a primary force driving demand, but the new recognition has centered on the ages of potential home buyers–not simply their numbers. Ethnicity, family type, and immigrant or native-born status are also factors to consider, but the age of the population remains the single most important aspect of demographics.

NYC Forecasts Surge In Population
In fact, city planners in NYC expect the population to continue to rise by another one million people over the next 20 years [NYT]. With the suburbs at capacity, urban areas are not at the same competitive disadvantage as in years past.

Click here for full graphic [NYTimes]

Source: NYTimes

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Tuesday Night Stat-Link Fest

February 1, 2006 | 12:05 am | |

Its been a busy day…here are a few stat links of interest:

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Beige Turns Orange: Economy Expands at the end of 2005

January 20, 2006 | 10:15 am | |

Despite signals by the Federal Reserve that we may be nearing the end of their pattern of measured rate increases [Bloomberg], the economy expanded at the end of 2005.

Economic expansion, can prompt the start of inflation, which could mortgage rates to rise. Its not clear yet whether this should be a concern. There has been some speculation that the economic data in November/December is inflationary only because the economy played catch-up after the two hurricanes caused extensive damage to Gulf states.

The Beige Book is an anecdotal analysis of the economy by 12 regions [Fed]

Here’s the national overview for real estate. There is more detailed discussion in each regional analysis:

Many Districts reported moderation in residential real estate activity, although from a high level. Boston, New York, Cleveland, Richmond, Atlanta, Chicago, and Minneapolis reported some cooling in real estate markets. While some of the hottest markets in the San Francisco District have cooled–for example, Southern California and the San Francisco Bay Area–other areas, such as Oregon and especially Hawaii, have reportedly heated up further. Kansas City and Dallas continued to see strong housing markets. And construction and repair work remained brisk in Louisiana and Mississippi.

Conditions in Districts’ commercial real estate markets generally continued to improve. Vacancy rates fell in the San Francisco, Minneapolis, New York, Dallas, Richmond, and Kansas City Districts. Chicago reported a more mixed picture, with some areas of the District expanding but activity in the city of Chicago flat. Largely because of lower vacancy rates, rents rose in San Francisco and New York, while previous concessions were reduced or eliminated in Dallas. New construction activity was reported to be increasing in the San Francisco, Minneapolis, St. Louis, Atlanta, and Cleveland Districts, and many contacts expect this trend to continue in 2006.

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The Porridge Is Cooling: Making The Case For Goldilocks

January 17, 2006 | 12:05 am | |

Those who have been bullish on the economy seem to be making the case that it is entering Goldilock’s territory, not too hot, not too cold []. The U.S. economy grew at the slowest pace in nearly three years [Market Watch] in the just-concluded fourth quarter, economists estimate.

“Led by what could be the weakest consumer spending since 1991, the economy likely grew at about a 2.7% annual pace in the fourth quarter after 11 straight quarters of growth above 3%, economists say.”

“The slowdown is just what the Federal Reserve wants at this point in the business cycle. The Fed has boosted its short-term interest rate target 13 times since mid-2004 in a bid to put the brakes on the economy.”

“The Fed is expected to raise rates again on Jan. 31 and likely in March.”

“Housing was one of the few bright spots in the fourth quarter’s growth mix, along with inventory rebuilding.”

A couple of thoughts here… most think that the Fed will increase short term rates two more times and then wait and see what happens. We will also have to wait to see what Bernanke has in store for us (hopefully in the new bernankespeak) IMHO, the Fed usually goes 2 increases too far as it relates to housing.

It is a remote possibility that the Fed may actually lower short-term rates in 2007 if the economy begins to slide, thereby aiding the housing market if mortgage rates follow suit. However, the economy walks a fine line since tepid economic growth will keep a damper on mortgage rates but strong growth will create more jobs and demand, providing upward pressure on mortgage rates.

There has been a lot of concern that the handoff from a weaker housing market, which stimulates consumer spending, to an improved corporate profit picture will not result in a full economic offset. The slowing economic growth engine beginning to emerge seems to be proving this point.

Right now, the economy may be entering Goldilocks mode and that may prove to be a good thing for housing in 2006.


Bubble Talk Declines To A Soft Landing

January 5, 2006 | 12:01 am | |

For all the talk about a housing bubble this past summer, blog chatter continues to decline to the point it is approaching a soft landing.

Big Media’s use of “bubble speak” appears to be declining even faster and is switching to the use of “soft landing”, especially as the Fed has signalled it may be nearing its measured pace of federal funds increases. Wondering if we will see “soft landing” named blogs in response to this new change similar to the proliferation of “bubble blogs” last year.

Waiting for a Soft Landing [Washington Post]
…All this good news is, of course, bad for the news business. The sunny predictions suggest two familiar economic catchphrases: “soft landing” and “Goldilocks economy.” The Federal Reserve stops raising interest rates before it causes a recession; that’s the soft landing. Economic growth is then fast enough to keep unemployment low and not so fast as to trigger higher inflation; that’s the Goldilocks economy, not too hot or too cold….

A Soft Landing in the New Year [Barron’s]
… the economy was entering the early stage of a necessary adjustment process. Housing market indicators have shifted from being uniformly strong to showing a more mixed picture. This confirms that the housing sector has passed its peak, but leaves open the question of how much of a slowdown is likely and how it will impact consumer spending….

2006 economy looks solid [USA Today]
… it would take several major shocks, not just one, to send the global economy into a recession. For his part, he sees a soft landing for the housing market, rather than a plunge in home prices…

Real estate market is like a ‘balloon,’ says economist [Inman]
…The forecast, “Housing Market: A Slowdown, Not a Meltdown,” which is based on data from the California Association of Realtors trade group and the Office of Federal Housing Enterprise Oversight, concludes that “the housing market is headed for a soft landing.”…

Home sales’ fall seen as sign of soft landing [AP]
…either way, analysts read two economic reports yesterday as indicating a soft landing for the housing sector, which has been flying high in some parts of the country, and a smoother ride for the labor market…

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I’ve Fallen Down And I Can’t Get Up: The Fed Might Stop Rate Increases Soon

January 4, 2006 | 12:01 am | |

Source: WSJ

In Greg Ip’s Page One Article Fed Suggests It’s Close to Ending Run of Rate Rises: New Manufacturing Data Underpin Officials’ View Of Waning Inflation Risk [WSJ], “Federal Reserve officials are less worried about inflation and thus may raise interest rates just one or two more times in the next few months, minutes of their December meeting suggest.”

Meeting Minutes [Fed]

Language in the FOMC minutes suggests 1-2 more increases in the federal funds rate as economic data was weaker than expected.

The minutes said Fed officials’ inflation concerns had “eased somewhat” since the previous meeting Nov. 1. They noted that slowing housing-price gains would restrain consumer spending, and that officials had to be “mindful of the lags in the effect” of past rate increases on the economy. These factors all weigh in favor of the Fed halting its policy-tightening soon.

My chief complaint with the Fed in the Greenspan, that it always seemed to me that they go 1-2 more rate increases than actually warranted, and it up loosening economic policy within 18 months. Its refreshing to see concern that the effects of their strategy has not taken full effect on the economy yet. In addition, the weakening economy and lower inflation threat may actually influence long term mortgage rates to decline within the year, which would provide stimulus to the housing market. Then again, it may not.


Throwing The Housing Market A (Yield) Curve

January 3, 2006 | 12:01 am | |

In Daniel Gross’ The Dread “Inverted Yield Curve” – It makes brave economists cower [Slate] he counters the concerns made over the yield curve as the result of “rigid thinking.”

A) rising interest rates and higher energy prices are poison for the economy.
B) an inverted yield curve signals recession

The former was disproved in 2005. Short-term interest rates rose sharply as the Federal Reserve continued to hike rates at every opportunity it had, and energy prices continued to climb. Yet the economy grew at a healthy clip…

In theory, an inverted yield curve means that investors and the Federal Reserve are fretting about inflation in the short term, and that investors are pessimistic about long-term growth. The combination of slow growth and high inflation is often deadly.

“You have to look at a broad array of leading indicators and see if there’s a consensus,” he said. And the consensus—among economists and among leading indicators—doesn’t signal that anything close to a recession is in the offing.

As a group, for example, the 56 economists polled by the Wall Street Journal in November believe growth will average 3.2 percent over the course of next year. That’s a slowdown from the current rate of growth but nowhere near a recession…Not a single economist of the group forecasts negative growth for any quarter.”

Here is some other commentary on the Inverted Yield Curve.

The post Who’s afraid of the big bad yield curve? [Econbrowser] explains why we did get an inversion.

The short rate has been rising rapidly because the Federal Reserve is concerned about inflation and has been raising rates to slow the economy. The longer term yields fell this month because investors’ expectations of both inflation and the level of economic activity likely slipped a bit, along with a possible decline in the term premium. All of these factors usually suggest the likelihood of a slowdown in economic activity.”

Source: WSJ

The WSJ article Examining an Inversion discusses this issue with three noted economists, two of them from Swiss RE provided these comments on housing as it relates to the inverted yield curve.

An inverted curve tends to be associated with economic weakness. But there are few such signs right now. Industrial production is rising, manufacturing activity is expanding, business spending on capital equipment is up; housing permits are climbing and unemployment is falling, among other strong trends.

Strong corporate balance sheets today provide enough funds for investment even if consumer spending softens because of a moderating housing market.

As far as the housing markets go, if you subscribe to the argument that the brief inversion of the yield curve does not assure a recession, then all is sort of ok. The economy is expected to drag this year no matter what you think of the inversion, which would be expected to keep mortgage rates in check or see modest gains at best as long term rates remain historically low. However, the wild card is jobs and corporate profits. If the economy slows too much, then personal incomes and job creation will suffer and housing will not provide the offset to keep the economy moving due the potential for rising mortgage rates.


Cool It Already: Housing Costs Are Only Slightly Above Historic Norms

January 3, 2006 | 12:01 am | |

According to Don’t Buy the Bubble Talk [] “housing costs are now only a bit above historic norms, and are not extreme even in boomtowns like Miami and San Diego.”

According to a study completed this fall by Todd Sinai of Wharton School, University of Pennsylvania, Chris Mayer of Columbia Business School and Charles Himmelberg of the Federal Reserve Bank of New York, homeownership costs are near the long-term average, relative to rents and incomes.

Download the study [pdf]

Traditional measures of housing values, such as the rate of appreciation, or the house-price-to-rent ratio, are misleading.

“The study by Sinai and his colleagues examined 46 housing markets from 1980 to 2004, estimating the true one-year cost of owning a house and comparing it to rental costs and income levels. Naturally, the low interest rates of recent years have offset high prices by keeping mortgage payments down. Variable and interest-rate-only mortgages have also lowered the annual dues of homeownership.”

“It’s tricky; economists think about bubbles differently from how lay people think about bubbles. [Rapidly increasing prices] is not the definition of a bubble… You could have a big price change without it having been a bubble. “

This study reflects the way people have been viewing housing as an asset class. People have been purchasing based on payment, not price in this latest boom.

What has bothered me about the real estate market and whether or not there is a bubble seems to have two camps:

From one extreme: there is a bubble:

Prices are rising so fast that housing is going to crash. This is what I was referring to last week with my post on bubble blogs [Matrix]. These are well written blogs and are based on the basic principal that prices are going to high too quickly.

To another extreme: there is no bubble:

Prices have been showing such strength over the past few years and demand so high that there is no bubble. This is a classic case of using historical to prove current conditions when the past does not take into consideration what is happening right now.

Extreme conclusion: there are many that are passionate about both arguments.
Are we sure that there has to be an extreme conclusion to all of this, or does it simply make for better reading?

When Economic Metaphors Are More Exciting Than Reality

December 27, 2005 | 12:01 am | |

In the Lewis and Parrish article Economic Addiction [Barron’s] their premise is that “for decades, desparate people have turned to 12-step programs to overcome their addictions to alcohol, drugs, overeating or even sex.”

The question facing incoming Federal Reserve Chairman Benjamin Bernanke is how many steps will it take to recover from an addiction to easy money?

“Like many addictions, America’s current problem came from the overuse of a good thing, in this case monetary stimulus. Like many addictions, its consequences pervade all aspects of daily living, as prolonged low interest rates are reflected in rising inflation, the frothy — if not bubbly — housing sector and the low savings rate. And like many addictions, the self-destructive behavior has been facilitated by enablers, in this case the traders and investors in the bond market.”

They contend that the bond market is tempting the Fed to ignore warning signs of inflation. The Fed has limited options if inflation does appear because of such low rates. They content that Bernanke, because of his “inflation targeting” will be more focused on inflation than Greenspan.

The authors suggest that energy prices will affect core inflation [MarketWatch] and housing too.

Higher housing inflation is a certainty: Owners’ occupied-housing costs, nearly 30% of the core consumer-price-index basket, are calculated using rents, which are moving up as higher rates dampen the ownership boom.

Thats an interesting take and a bit gloomier than I would have thought. While rents are likely to move up as mortgage rates rise, mortgage rates have been largely docile for the past two months. The authors seem to assume that housing prices must fall if they are not rising, with no option for more modest increases or even a sideways move. The dramatic metaphors make for an interesting read as well (just mention sex in the same sentence as economics and I pay attention).

This all or nor nothing stance has been one of the characteristics of the housing commentary and media coverage which has been more pronounced than in the last cycle.

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