Matrix Blog

On the same day last week, Wednesday to be precise, presentations touching on the housing market were given by two influential financial leaders: Fed Chairman Ben Bernanke and James B. Lockhart III, Director of OFHEO, which oversees Fannie Mae and Freddie Mac (GSE’s). Both are accomplished individuals whose jobs influence the housing market to a certain degree. I am not sure which one I would have liked to have heard in person so could only hope for a double header.

Fed Chairman Ben Bernanke (Its been a year and a half, so I feel like I can refer to the Fed Chair as Ben) spoke in front of Congress, before the Committee on Financial Services, U.S. House of Representatives. He is required by law to do this twice per year and I kind of feel sorry for him. I listened to his live testimony on CNBC and was struck by how smart he is and how weak most of the questions posed to him were. After 2 minutes of thank-you’s from each member of the committee, they asked him to explain things like core inflation and how he was going to protect subprime borrowers in the future. The media coverage of the testimony was extensive and rather than spending much of the time talking about the economy, the bulk of the questions from Congress was spent on protection of borrowers, the problems with hedge funds, lax underwriting and why didn’t the Fed see this coming. Bernanke’s macro perspective seemed a little out of sync with the questions posed. I was struck by his references to the housing market, which suggest more weakness to come:

The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards and the recent increase in mortgage interest rates. Sales should ultimately be supported by growth in income and employment as well as by mortgage rates that–despite the recent increase–remain fairly low relative to historical norms. However, even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further as builders work down stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth shoul

…and subprime, which was more dire:

For the most part, financial markets have remained supportive of economic growth. However, conditions in the subprime mortgage sector have deteriorated significantly, reflecting mounting delinquency rates on adjustable-rate loans. In recent weeks, we have also seen increased concerns among investors about credit risk on some other types of financial instruments.

James B. Lockhart III, Director of OFHEO (Its been a year since he took over OFHEO and my rule of thumb for someone with roman numerals after their name is to avoid nicknames so I’ll refer to him as James) gave a year in review speech in Washington DC. He referred to unexpected challenges: housing and subprime. In other words, it was a surprise that the housing market is currently experiencing problems. How could an agency that deals with two large mortgage bemoths be in the dark about the housing market? However, he makes the observation that the GSE’s should be “fulfilling their mission of stabilizing the housing markets.” He refers to the “triple-witching” of the subprime market because of the tripling of subprime originations, the shift to non fully amortizing mortgages and the drop in lending standards. His emphasis was on subprime lending and how the GSE’s can help:

Despite the many problems in the subprime mortgage market it has made a positive contribution toward getting low-income individuals into their first homes. (#12)
Hopefully, the changes I have been talking about today will be continued to help place people into affordable housing without putting them and their neighborhoods into high- risk situations.

It is my belief that Fannie Mae and Freddie Mac can do even more to help in what is one of their key mission areas – affordable housing. It is also my belief that to do so they must be fully remediated with strong systems to address the credit issues in this sector and that they need a strong regulator to help ensure that they are healthy, well-managed companies.

To recap both speeches

We have both banking and mortgage oversight institutions caught unaware of the growing problems with subprime, we have a government agency responsible with the oversight of government sponsored enterprises (GSE’s) saying that it should be dissolved and a new oversight agency formed that would be more effective and we had lending standards drop sharply without reaction from regulators.

So I think I am impressed with everyone’s intentions of fixing things, but don’t we need to understand what went wrong? How can we fix it if we didn’t see it coming? I think Congress was really asking questions of Ben that it could have been answered by James. The whole thing is backwards.

Tags: CNBC, GSE, OFHEO, Ben Bernanke, Sub-Prime

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Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Click here for an interactive graphic.

In the national market, inventory increased this month [WSJ] (free version) according to ZipRealty, which is normally “normal” except that this time, the increase was unusually high. Of course, I have no idea what the actual inventory levels are from ZipRealty because there are no numbers in this article. The reader has no sense of the size of the sample or how representative ZipRealty is of the market.

These stats are 100 percent, ahem, percent-driven.

NAR reported 3.748M houses for sale in February, up 5.9% from January so 6.5% in March by ZipRealty doesn’t really seem that inconsistent with what we are already seeing.

If we accept that ZipRealty represents the market as a whole (which I am pretty sure it doesn’t), the reasoning was given that consumers feel it may take longer to market a property with higher inventory (very logical) so the houses are coming on the market a little sooner. However the Credit Suisse 22 year average of 1.7% increase over this period would contradict this theory since there have been plenty of periods with excess inventory over the past two decades. Something has got to be wrong with the CS stats – they strike me as severely understated.

Of course the other side of the coin to this argument is that sluggish sales levels are allowing inventory to back up. I am on the fence on this one, perhaps leaning toward the former and “buy” into the argument that sellers are anticipating longer marketing times.

In Manhattan, the situation is the opposite as of late as indicated in my market survey, with inventory levels slipping, despite the fact the market is entering the spring selling season.

Tags: Getting Graphic, GSE, NAR, National Association of Realtors

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The hoopla over this issue occured last week but I have been trying to wrestle with it.

The agency who was responsible for oversight of Fannie Mae and Freddie Mac, who had essentially evolved in rubber stamp agency for the GSEs (government sponsored enterprises).

These enterprises seemed to have free reign in their dealings with the mortgage markets. The risk taken by these government enterprises started to balloon and the reported earnings were being manipulated to enhance compensation by their officers. I guess that means that the competitive advantage these enterprises have over their secondary market competitors breeds this sort of behavior. GSE’s have been a stabilizing factor in the mortgage markets in general. Thats why mortgage rates are relatively uniform across the country by property type.

After the Fannie Mae accounting scandal evolved a few years ago, OFHEO started to wake up and re-take control. One of their first public actions was initiated, after a miscalculation was made by Fannie Mae in calculating conforming loans limits, OFHEO took over this role as well (as well they should). It was off by a few thousand dollars, which is probably not a significant issue, but the symbolism of OFHEO’s actions was what I found important to maintain the trust and integrity of the US mortgage market.

Last week, OFEHO (incorrectly presented by the LA Times as Fannie and Freddie making the decision) kept the loan limit of conventional mortgages unchanged [LA Times]:

The conforming loan limit, perhaps the most intently watched number in the mortgage business, will remain unchanged next year at $417,000.

The limit is the legislatively set ceiling on the size of loans that can be purchased or guaranteed by Fannie Mae and Freddie Mac, the two government-sponsored financial institutions that keep local lenders awash in cash for home loans.

Because the enterprises bring a certain amount of standardization to the market, and because investors throughout the world believe the government-sponsored enterprises’ securities are backed by the full faith and credit of Uncle Sam, rates charged on loans at or below the limit are often 0.25% to 0.5% less expensive than so-called jumbo loans above the ceiling.

The official loan limit sizes for conventional mortgages in 2007 [SOSD] are:

• $417,000 for mortgages on single-family properties
  
• $533,850 for mortgages on two-family properties
  
• $645,300 for three-family properties
  
• $801,950 for four-family properties
  

Its interesting that the decline of national median housing prices per OFHEO would have resulted in a $667 drop in the limit to $416,333, but OFHEO director James Lockhart said he would not order a lower limit next year “so as not to disrupt the end-of-year pipeline.

I don’t follow his reasoning, but nevertheless, I think its a good idea to keep investors from getting jittery, especial given the role the housing market plays into our economy, with the risk of recession rising for 2007.

OFHEO ESTABLISHES PROCEDURES FOR 2007 CONFORMING LOAN LIMIT [OFHEO (pdf)]
2007 CONFORMING LOAN LIMIT TO REMAIN AT $417,000 [OFHEO (pdf)]

Tags: Jumbo Mortgage, Conforming Mortgage, Fannie Mae, GSE, OFHEO, Freddie Mac

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In Carol Lloyd’s Surreal Estate column last week Bubble Trouble? What to make of all the real estate trend news [SFGate] she explores the vast outpouring of real estate information and its interpretation available to consumers.

Some economists — typically, those who have staked their professional reputations on being dark-horse skeptics — are predicting nothing short of a global economic apocalypse. Others — often those on the take from the real estate industry — scoff at such dire visions. Don’t listen to the doomsayers, they say, “we’re in for a soft landing.”

But what does all this news mean to the average home buyer and seller? Not much other than to signify that things have changed since last year, at least up to this point.

Across the country, it is generally been reported that, prices are flat or up, yet volume is down.

Yet we eagerly await more data. The Walk-through announced two days ago that OFHEO is releasing their quarterly stats which is used by many government agencies and the numbers may be negative for the first time since its history, as speculated by the well-reguarded blog Calculated Risk (who subsequently put strike-throughs in all references to depreciation).

Economists and market commentators eagerly await new material to discuss (self-included), but the usefulness of the OFHEO report is questionable in a changing market.

Today’s OFHEO report release at 10am contains:

• the first quarter 2006 (its now June)

• only closed sales (a 30-60 day lag so it includes November-December contracts)

• a significant amount of non-sale data (ie appraised value of refinances)

• only data from conventional mortgages (UPDATE: less than or equal to $417,000), which therefore omits a large swath of data from the east and west coasts.

• data provided by the agency that is directly responsible for oversight of the GSEs (Fannie and Freddie) of which Fannie has serious issues with accounting violations.

• UPDATE – only includes 1-family houses

Not a lot of reliability here to feel comfortable about.

Carol correctly summizes about whether to buy or not:

I think the best answer is it that it all depends on what you’re buying or selling and how it’s priced.

Thats sounds like a completely caveated answer but its the only one that can be made and still have integrity. In other words, whats happening in San Diego, CA or Fargo, ND doesn’t necessarily (or likely) correlate with national housing statistics.

Are national statistics helpful? I think they are but only when used for general discussion. For me, its fun to see what goes into the process of collecting the information and the national ramifications. On a local level, the commentators need to connect the relevance, if any, to local conditions.

The analogy I can draw from are the local reports I prepare in New York. My reports can’t be taken down to the baseline level for pricing a specific property. Thats what an appraisal is for. In other words, market reports provide the aggregate of all sales. All 2-bedroom condos in Manhattan are not identical, therefore, the 2-bedroom Manhattan condo stats I provided are merely a starting point and a general indicator of trends. Sub-markets of this 2-bedroom category can be broken up into many smaller segments such as building type, location, size, etc.

Yesterday, a few early comments were made to my weekly Three Cents Worth post on the real estate blog Curbed were critical of my stats, saying they tell us nothing, that I can’t look at historical by going back in time, I can’t use a short term window because it doesn’t show a trend. Therefore this leaves me one remaining option, to chart the future. I haven’t figured that out yet.

In the Inman article Why housing forecasts are (almost) worthless [subscr], writer Marcie Gefner draws this conclusion about predicting the future:

Forecasters, prognosticators, pundits, analysts and others of their ilk are able to predict the future — or so they would have real estate professionals and the home-buying and home-selling public believe. It’s bunk, of course.

I agree with her. The simple fact is that there are many people who do not seem to grow tired of the topic, and are looking to absorb as much information as possible, whether reliable or not, until the next hot topic come along.

Tags: Three Cents Worth, GSE, OFHEO, 3CW

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[apology in advance – this post has more acronyms than you deserve.]

HUD says GSE reform would not affect housing prices [MW]. U.S. Housing and Urban Development Secretary Alphonso Jackson said Tuesday that the cost of housing would not change if Congress created a new regulator for Fannie Mae and Freddie Mac.

“HUD is supporting legislation that allows a regulator to limit the GSE’s portfolio to those investments necessary to carry out its mission, without trying to cripple or put it out of business,” Jackson said in a speech to the National Association of Mortgage Brokers.

Firstly, how can anyone say that with such confidence, especially a housing-related government employee? Even if you believe what he says, it makes me suspicious at the naivete.

You are tinkering with the GSE’s investments and that can have a potential affect on mortgage rates. Availability, pricing and volatility are all fair game.

This is a very delicate path to walk, I would think. Its not clear why OFHEO would not have this repsonsibility since they are responsible for the GSE’s. Although they were asleep at the wheel when former Fannie Mae executives supposedly did some things they were not supposed to, the last thing we need is another federal agency.

Why not gut, revamp or empower OFHEO to provide meaningful oversight to the GSE’s?

Tags: Fannie Mae, GSE, OFHEO, Freddie Mac

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David Leonhardt’s Don’t Fear the Bubble That Bursts [NYT] attempts to pop the housing bubble myth. Apparently, we need to chill out a little. He says:

• Many people are unaware of a housing crash if they aren’t trying to sell their home, so why are we so uptight about it?

• The high value of your home makes you feel good but its not liquid.

• Potential victims of a sharp price decline are only about 10% of homeowners.

• 30% of the country rents and they are not significantly affected.

I love David Leonhardt’s articles on housing issues but this one seems to be a little too simplistic (or I am too simplistic).

He argues that removal of the mortgage interest tax deduction would be prudent since we don’t need to be motivated to buy into the American dream. However, this is not really fair since the Federal government has had this tax structure in place for years, GSE’s like Fannie Mae have pushed homeownership and this deduction is a core basis of value. I could imagine a 10% correction overnight in the housing market if this were enacted which would place many people in financial difficulty who are already highly leveraged. Plus the housing market generates jobs and income which I would speculate a loss in significant numbers, at least in the near term.

I also have issues with the stereotypes placed on brokers in this piece. The real estate brokers we have been speaking to for the past few years would feel a lot better about the real estate market if prices would level off or drop back down a bit. Concerns about affordibility losing traction with values mean less future income unless there is a correction in pricing. The reduction in the number of sales already appears to be happening.

Tags: GSE

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National Geographic has a really cool image gallery that compares New Urbanist and Sprawl suburbs [NG]. Wait a sec…National Geographic? Here’s a cheesy interactive page of the same info [NG].

• New Urbanism – promotes the creation and restoration of diverse, walkable, compact, vibrant, mixed-use communities composed of the same components as conventional development, but assembled in a more integrated fashion, in the form of complete communities [newurbanism.org].

• Sprawl – A haphazard and disorderly form of urban development [COA].

Here’s more discussion from the City of Austin:
-Residences far removed from stores, parks, and other activity centers
-Scattered or “leapfrog” development that leaves large tracts of undeveloped land between developments
-Commercial strip development along major streets
-Large expanses of low-density or single use development such as commercial centers with no office or residential uses, or residential areas with no nearby commercial centers
-Major form of transportation is the automobile Uninterrupted and contiguous low- to medium-density (one to six du/ac) urban development
-Walled residential subdivisions that do not connect to adjacent residential development.

I was specifically interested in National Geographics definition of the residential components and how they differ between the two types of suburban growth:

New Urbanism

• Different housing types—apartments, row houses, detached homes—occupy the same neighborhood, sometimes the same block.

• People of different income levels mingle and may come to better understand each other.

• A family can “move up” without moving away—say, from a row house to a single-family home.

• Property values don’t necessarily suffer when housing types are mixed. New-urbanist neighborhoods are generally outselling neighboring subdivisions, and some of the United States’ most expensive older neighborhoods—Washington, D.C.’s Georgetown, Boston’s Beacon Hill, for example—are marvels of mixed housing.

Sprawl

• Developers often fill whole subdivisions with one type of residence—say, $300,000 ranch houses.

• Zoning often outlaws apartments and houses in the same development.

• Sequestered in a narrow sliver of society, people may develop or maintain intolerance of those outside their ilk.

It seems logical that New Urbanism is more appealing (to me on first glance anyway) based on the points made above, but look at the discussions raised Suburban Dystopia[Polis]. Suburbs are experiencing a renaissance [LA Times]. Actually I think nearly every fad or movement in housing is being seen now. When the market is as strong as it has been, more expensive alternatives gain in popularity. Here’s another California pro-Suburb article that came out on the same day. [SF Chron]

The correction of a 50 year old housing pattern is not so easy. In addition, restrictions on use, such as zoning, transportation, building codes, etc. tend to drive the prices up. The move toward New Urbanism means a potentially better living experience but at higher prices.

Tags: GSE

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Redux of post on [Soapbox]

One of the byproducts of rising housing prices is the fact that government agencies and GSE’s (government sponsored enterprises) have had to keep pace too. The conforming loan limits are based on federal data on mean (average) home prices from the Office of Federal Housing Enterprise Oversight (OFHEO). Starting with Fannie Mae in November and Freddie Mac in January, all have changed their loan limits to be in compliance. Mortgage rates and options are usually less expensive with a conforming loan (under the loan limit).

Here’s my question:
If the loan limit is raised to keep pace with the market, why would Fannie Mae state in their press release that this could add as many as an additional 466,326 homeowners who would be eligible for a conforming loan?

Doesn’t that imply a higher tolerance of risk for the federal government? Since the OFHEO increases are based on market data (well not really) [Matrix], then the limit should rise and fall with the market. If more people qualify because of the increase, then wouldn’t the increase have to outpace the market? Hmmm, I’ll have to chart this one – more to follow.

Here’s the summary of each of the main 4 agencies or GSE’s that the OFHEO affected:

Fannie Mae
2006 Single-Family Mortgage Loan Limits [FNMA]

Single-Family Mortgage Loan Limits effective January 1, 2006:

First mortgages
One-family loans: $417,000
Two-family loans: $533,850
Three-family loans: $645,300
Four-family loans: $801,950
Note: One- to four- family mortgages in Alaska, Hawaii, Guam, and the U.S. Virgin Islands are 50 percent higher than the limits for the rest of the country.

Second mortgages
$208,500 In Alaska, Hawaii, Guam, and the U.S. Virgin Islands: $312,750

Freddie Mac
Freddie Raises Loan Limits [OT]

“Freddie Mac announced it will implement an increase in its single-family mortgage loan limit from $359,650 to $417,000 effective January 1, 2006. This increase in conforming loan limits is based on the October-to-October changes in the average house prices, as published by the Federal Housing Finance Board (FHFB), and on Supervisory Guidance issued by the Office of Federal Housing Enterprise Oversight. The FHFB figures come from its monthly survey of lenders. Both new and existing homes are included in the survey.”

Veterans Adminstration
VA Loan Lending Limits [VA]

“The Veterans Benefits Act of 2004 was signed by the President on December 10, 2004. The law changes the maximum guaranty amount of $60,000, for certain loans in excess of $144,000, to an amount equal to 25 percent of t he Freddie Mac conforming loan limit determined under section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act for a single family residence, as adjusted for the year involved.

To illustrate, the maximum guaranty for 2006 would be $104,250. This is for 25 percent of the 2006 Freddie Mac conforming loan limit for a single family residence of $417,000.”

HUD
HUD Announces Higher Loan Limits For 2006 [Originator Times]

“Effective January 1, 2006, FHA will insure single-family home mortgages up to $200,160 in standard areas and up to $362,790 in high cost areas. The high cost amount is almost $50,000 more than last year. The loan limits for two-, three- and four-unit dwellings also increased.”

“The new loan limits are part of an annual adjustment HUD makes to account for rising home prices. Under federal law, loan limits are tied to the conforming loan limits of Freddie Mac and Fannie Mae, federally chartered corporations that buy and package mortgages.”

“Higher FHA loan limits don’t cost the government any money, because the FHA Insurance Fund is fully supported by premiums paid by borrowers who receive FHA insurance.”

Tags: Conforming Mortgage, FHA, GSE, OFHEO

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Largest U.S. House Price Increase In More Than 25 Years [Note: Reg.]; OFHEO House Price Index Shows Annual Rise of 13.4 Percent.

Download a full copy [Note: PDF]

Signficant Findings of the House Price Index (from their press release)
1. Nevada continues to have the highest appreciation of all states; house prices increased 28.1 percent over the past year and 5.5 percent for the quarter. However, for the first time since the fourth quarter of 2003, Las Vegas is not on the OFHEO list of the 20 fastest growing MSAs.
2. The second greatest annual price growth was in Arizona. Over the second quarter alone, Arizona house prices grew 9.7 percent – far surpassing every other state. Arizona’s annual growth rate rose from 20.4 percent in the first quarter of 2005 to 27.8 percent in the second quarter of this year.
3. Thirty of the 265 ranked Metropolitan Statistical Areas (MSAs) had four-quarter appreciation exceeding 25 percent.
4. For the first time, Naples-Marco Island, Florida topped the list of ranked MSAs with the highest appreciation. Bakersfield, California was second.
5. Florida, California, Nevada, and Arizona are no longer the only states represented in the top 20 MSA list. MSAs in Idaho and Utah have now entered the list.
6. Twenty-five states (including the District of Columbia) exhibited double-digit annual price growth and eight states had price increases exceeding 20 percent.
7. Four-quarter appreciation rates in Maryland and Virginia (along with Arizona and Florida) were at their highest levels over the 30-year history of the OFHEO HPI.

What does OFHEO do and where do these numbers come from?

• From OFHEO’s web site: “OFHEO’s primary mission is ensuring the capital adequacy and financial safety and soundness of two government-sponsored enterprises (GSEs) — the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). “

Concerns of having OFHEO as the bedrock for national housing statistics is:

• OFHEO was basically asleep at the helm before the outbreak of the recent Fannie Mae scandal, but eventually did what it needed to do when pressured by Congress.

• OFHEO actually uses refinance mortgage recordings as part of the data set in this repeat sales index. If they exclude refinances (which are NOT sales transactions, by the way), the index is actually 10.99%, or 2.44% less than the results that include refinance transactions.

Question: What is the rationale for including refinance data?

Answer: I suspect it would drop the number of transactions in the data set significantly but with $30M+ total transactions, there should be plenty left over to analyze.

• OFHEO only uses conventional mortgage information from Fannie Mae and Freddie Mac. The conventional mortgage limit is currently $359,650.

Question: How does a data set based on conventional loan limit data influence the results of the report?

Answer: The lack of non-conforming mortgage data (loans in excess of the conventional threshold) basically eliminates the upper end of the housing market.
This paints an incomplete picture of the overall housing market.

Don’t get me wrong, its certainly useful to have these stats generated by OFHEO, just don’t bet the farm on them.

Tags: GSE, OFHEO

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Making Sense of Manhattan @ the 92nd Street Y

After the positive feedback received for last year’s panel discussion of the same name, Braddock & Purcell (Kathy Braddock and Paul Purcell) are again hosting the same panel members at the 92nd Street Y this fall.

Last year Paul Purcell asked tough questions of all three panelists: Pamela Liebman, Alan Rogers [former Chairman of Douglas Elliman] and yours truly. I have learned a lot from Pam, Alan and Paul over the years and anticipate that this second edition of the panel will be equally, if not more informative.

Apparently the 92nd Street Y did as well because they booked a larger auditorium!

Tags: GSE, 92nd St Y, Corcoran

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