Matrix Blog

I gave some thought to what the long term impact of a nationally-covered local tumultuous event on a local housing market might be…

The Aug. 9th shooting death of unarmed black teenager Michael Brown by a white police officer has roiled Ferguson, Missouri, thrusting it into the national spotlight. But what happens to the town of 21,000 outside of St. Louis after the turmoil ends — more specifically, what happens to property values?

Read my latest Bloomberg View column
The Myth of Real Estate Stigma. Please join the conversation over at Bloomberg View.

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Tags: Superstorm Sandy, Zillow, 9/11, Hurricane Katrina, Ferguson MO, Michael Brown, Stigma, Tuscon AZ, Gabrielle Giffords, Sanford FL, Trayvon Martin, Aurora CO, Newtown CT, New Orleans, fundamentals

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The WSJ presented a series of charts on US distressed properties based on information from the St. Louis Fed (most proficient data generators of all Fed banks) and LPS.

Here are the first and last maps of the series. To see all of them, go to the post over at Real Time Economics Blog at WSJ.

A few thoughts:

• The distress radiates out from New Orleans 7 months after Hurricane Katrina hit. There was relatively tame distressed sales activity in the US in 2006, the peak of the US housing boom.
• The article makes the observation that distressed activity is seeing some improvement in 2010. However the “robo-signing” scandal hit (late summer 2010) and distressed activity entering the market fell for the next 18 months as servicers restrained foreclosure activity until the servicer settlement agreement was reached in early 2012. This is likely why the distressed heat maps show some improvement.
• The music stopped when people couldn’t make their payments en mass circa 2006, the US national housing market peak. It’s quite astounding how quickly credit-fueled conditions collapsed across the US.

Tags: Hurricane, Federal Reserve Bank of St. Louis, Hurricane Katrina

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One of the dire predictions (that pesky conventional wisdom thing again) of the post-Katrina US was the soon to be lack of homeowner’s insurance or at the very least, hard to get and very expensive post-war homeowner’s insurance.

But then a funny thing happened… (Peter Coy, in Businessweek’s Hurricane Ahead, But Lower Insurance:

In most of the country, property insurance rates for homeowners and businesses are actually lower than they were before Katrina. And amazingly, insurance rates have been falling recently in many parts of Florida and the Gulf Coast that stand to suffer severe losses from hurricanes, encouraging continued construction in low-lying areas.

Why?

• No major hurricanes hit in 2006 and investment returns by the industry set a record.
  
• Private equity firms, in search of returns, have poured money into bonds, betting on whether a hurricane will hit.
  
• Florida government is keeping rate increases in check.
  
• Insurance firms have fled Florida, driving up competition in other states, thereby lowering costs.
  
• New companies have entered Florida, gambling there won’t be a major storm anytime soon, offering new and lower priced products.
  

Tags: Hurricane, Hurricane Katrina

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After the nation was able to make it past the annual Sports Illustrated swimsuit edition, we were faced with an SI cover story on global warming.

One of the lessons from Hurricane Katrina and made official recently from climatologists, is that we are influencing to a certain degree, the weather. In fact, if we all go green right now, its probably too late to undo the damage. I had read somewhere that every mile of lost wetlands around New Orleans results in one foot of additional storm surge. The loss of wetlands over the past 50 years escalated the damage of Katrina…it wasn’t all about the levees.

A few degrees of warmer weather and a few inches of water can cause havoc in the housing market, especially with the surge (no pun intended) of second homes, of which a significant portion are located on coastal waterways and shoreline. There was an interesting cover story by Teri Rogers called The Real Riddle of Changing Weather: How Safe Is My Home? in last Sunday’s New York Times Real Estate section about consideration given to these changes in a high density urban market like New York City.

Click here for full sized graphic.

One of the take aways from the article for me was the potential underground damage to transportation and utilities and the rise in the use of glass in architectural design.

Incidentally, the FEMA flood zone maps for New York City haven’t been updated since 1983 and Battery Park City, which is a neighborhood created on the Hudson River from a landfill using the earth from the World Trade Center site isn’t even on the FEMA map. The maps still show the pre-existing piers. FEMA flood zone maps rate areas as zones of risk such as A5, B and C, usually in one hundred year increments. Perhaps, the time frame might need to be rethought.

Tags: Hurricane, Hurricane Katrina, FEMA

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Source: Wachovia

According to the recent press release by the Mortgage Bankers Association Some Delinquency Measures Tick Upwards in Latest MBA National Delinquency Survey:

2Q 06 delinquency rates fell 2 basis points to 4.39% from 1Q 06 and were up 5 basis points from 2Q 05. The decline from the prior quarter was attributed to the surge in delinquency after Hurricane Katrina.

“In previous quarters we indicated a number of factors including the aging of the loan portfolio, increasing short-term interest rates, and high energy prices have been putting upward pressure on delinquency rates. To this point, generally healthy economic growth and labor markets have kept delinquency rates from rising. However, we are seeing increases in delinquency rates for subprime loans, particularly for subprime ARMs. It is not surprising that subprime borrowers are more susceptible to these changes.”

Foreclosure rates, the next stage of the delinquency process were 0.99% in 2Q 06 up from 0.98% in the prior quarter. The RealtyTrac foreclosure rates that are released each month infer much higher foreclosure levels which I discussed in an earlier post. Overall foreclosure rates are still considered low but a weakening economy is bringing additional concerns.

Source: Wachovia

A Wachovia Corporation Economics Group report [pdf] (via FXstreet) suggests that the delinquencies are concentrated in a few states yet the projected income growth in these states is above the national average. The article suggests that the growth in income will temper some of the problems as mortgage rates reset over the next 12-18 months. Since the delinquencies seem to correlate in markets known for investor and flipping purposes, the numbers don’t show a national problem, yet.

In David Berson’s weekly commentary post, he wonders Mortgage Delinquencies remain low, but will they stay that way? [FNMA]

First of all, the behavior of home prices is an important determinant of serious delinquency rates. If a household has enough equity in a home it could either sell the home or extract some equity, so a delinquency resulting from a negative shock to a household (e.g., job loss, serious illness, etc.) should not lead to a foreclosure. The rapid home price growth seen over the past few years in much of the country should mitigate the risk of foreclosure. However, we expect national home price appreciation to slow this year and next, and some areas of the country could see declines. In those areas, a decline in home prices could leave some households with a mortgage balance significantly in excess of the value of the home. Increases in interest rates that would cause payments on adjustable-rate mortgages (ARMs) to rise sharply relative to incomes could also lead to increases in the serious delinquency rate. While only about 30 percent of prime conventional mortgage originations last year were ARMs, the ARM share was significantly higher in the subprime market. Many of these subprime ARMs have short fixed-rate periods and will be adjusting in the next year, which could lead to rising serious delinquency rates.

Note: Berson’s link lasts one week. After 9/24/06, go here and search for his 9/18/06 post.

I think the overall problems related to the mortgage delinquency rate will be strongly influenced by how quickly mortgage rates move upward. Right now mortgage rates are projected to be stable as the economy continues to weaken and inflation is held in check. However, mortgage rates are already higher than when many adjustable rate mortgages (approximately 30% of the all mortgages) were issued.

Rising personal incomes may serve to contain the problem since the areas with the highest real estate investor concentrations are located in areas with the largest personal income upside. I wonder if good job prospects in these areas helped fuel the speculative characteristics of local markets.

Tags: Hurricane, Hurricane Katrina, Sub-Prime

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The U.S., Mexico End Dispute Over Cement [LA Times].

“Under the pact, Washington would slash punitive tariffs on Mexican cement while Mexico would grant U.S. firms access to its market, now dominated by a few companies that charge consumers here some of the highest prices in the world.”

“Thursday’s deal appears to resolve a trade spat that dates to 1990, when a group of 31 U.S.-based cement makers brought a successful anti-dumping case against Mexican producers that sold their product at prices far below those paid in Mexico.”

In an article by the New York Times, U.S. Cuts Duty on Cement From Mexico which is aimed at easing cement shortages caused by a building boom in Asia and rising demand for cement to rebuild after Hurricane Katrina.

Tags: Hurricane, Hurricane Katrina

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Theory of Negative Milestones

Explained

I was writing another post about the housing situation in New Orleans and I kept coming across the phrase “post-Katrina” as in “post-Katrina policy landscape” [NYT] and it struck me how much negative economic or natural disasters help define a new period for the real estate market.

It gives people the ability to sweep away everything that occurred prior to the event and see things in the current market with a little more clarity. At that moment, history plays a lesser roll in defining how the current market is behaving.

It can also be a stressful period because, like most markets, buyers don’t like the unknown. When economic parameters change or are likely to change because of an event, it takes a while for participants to get used to the new rules. Its a delicate moment in time when buyer/seller psychology is at its weakest or most raw and the potential for misinformation is most high.

I find this whole concept this akin not to asking when it comes to real estate, “what were you doing when Neil Armstrong stepped on the moon?” but rather “where were you when the plane hit the north tower on 9/11?”

The irony is that the whole idea of real estate exudes optimism, hope, success, growth, shelter, safety and opportunity, but the events that define it are most often negative.

Here’s a list that helps define my interpretation of the real estate market after 20 years in the business. Some are more specific to New York City because that is where I work and there are certainly other milestones to consider. It also seems to me that the milestones are getting closer together, but that might just be only because they are fresher in my thinking.

Negative Milestones

• October 19, 1987 stock market crash
  
• 1990-1991 recession
  
• August 1998 stock market correction
  
• February – March 2000 NASDAQ correction
  
• June 2001 entering the recession
  
• 9/11
  
• March 2003 – start of the Iraq War
  
• June 2004 – Fed starts raising federal funds rate
  
• August – September 2005 – Hurricane Katrina and Rita
  

Tags: Hurricane, Hurricane Katrina

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In David Berson’s weekly column Berson’s Weekly Commentary [FNMA] he asks the question:

Mortgage delinquencies rise in the third quarter — special factors or a trend?

“According to data just released by the Mortgage Bankers Association (MBA), mortgage delinquency rates climbed by 10 basis points to 4.44 percent in the third quarter — the highest level in a year. Since peaking in the third quarter of 2001, delinquency rates had been trending downward. Does this increase suggest that the downward trend in mortgage delinquencies is over, or is it simply a blip on the way to even lower rates?”

Fannie Mae looks at 3 factors that play an important role on these rates:

• Unemployment rates: relates to jobs and incomes
  
• Age of the mortgage stock: – as time passes, there is a greater chance of some sort of interruption of income.
  
• Mortgage characteristics: The type of mortgage influences delinquency rates. ARM’s are more risky than fixed, etc.
  

The job market is expected to expand, the age of the mortgage stock is unusually low but the type of mortgages have been more risky than in years past.

FNMA thinks that these factors suggest that delinquencies will edge up but it is highly dependent on what home prices do. The current rise in delinquincy are largely attributable to the after-affects of Hurricane Katrina and may keep delinquency rates slightly higher than they otherwise would have been for a while.

Tags: Hurricane, Hurricane Katrina

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Source: WSJ

The Fed increased the Federal Funds rate to 4.25% [WSJ], the 13th increased since June 2004. However, for the first time since 2002, it omitted the word “accommodative” which means that rates are nearing the point where they neither stimulate or deter economic growth. The less restrictive wording will give Bernanke. Greenspan’s replacement, a little more flexibility.

For housing: If inflation is in check, then mortgage rates may be less likely to move a whole lot higher making the transition to a less frenzied housing market more attainable.

However, its not clear whether inflation really is in check. Barry Ritholtz of the Maxim Group and webmaster of Big Picture clearly disagrees with this assessment:

“Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained.” Quite frankly, we do not believe them. We know that beyond the rises in food and energy prices, nearly everything — from healthcare to building materials to education costs to insurance to commodities — costs more. And gold, the world’s best inflation indicator, is well over $500 per ounce. Where ever we look, we see evidence that prices have limited stability and an upward bias.”

Barry adds in a comment:

Microeconomics concerns things that economists are specifically wrong about, while macroeconomics concerns things economists are wrong about generally.” – P.J. O’Rourke

The WSJ summarizes:

“Overall inflation recently topped 4%, at an annual rate, because of soaring energy prices. Excluding food and energy, it is only about 2%, but Fed officials worry that higher energy prices will eventually lead to higher wage demands and prices for other goods and services. Although gasoline prices have fallen back from their levels reached just after Hurricane Katrina struck the Gulf Coast, natural-gas prices have climbed, hitting a record yesterday as cold weather blanketed the Northeast.”

Tags: Hurricane, Barry Ritholtz, Hurricane Katrina, Alan Greenspan, Ben Bernanke

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Its been subtle, but there has been a change in housing market terminology over this past year. There have been several distinct segments to the trend, in terms of how what terminology is used to describe it.

Housing “Boom” [January to June]

In the first half of 2005, the media generally used the phrase “housing boom” to describe the vibrant state of the housing market. Several years of rising prices and success stories for brokers and builders seemed to fill the news.

Housing “Boom” = Housing “Bubble” [July to September]

Over the summer, during the barrage of bad news, including Katrina and Rita Hurricanes, spiking gasoline prices, worsening conditions in Iraq, political discord in Washington, growing inflation concerns and rising mortgage rates (wow, some major gloom and doom was abound) influenced the media to some sort of tipping point. Many of the articles during this period shifted from talk of a boom, with risk of a bubble, to if the bubble was going to burst.

Housing “Bubble” [October to November]

Lately, the housing discussion has firmly shifted to use of the word bubble as a key descriptor of the state of the housing market and the orientation became a matter of when the bubble will burst. This thinking seems to have its own momentum despite the significant change in many of the indicators that gave us reason for concern this summer.

For example, economic damage to the national economy from the hurricanes is now largely believed to have less significant implications. Mortgage rates have leveled off and have actually retreated lately. Gasoline prices have fallen sharply, core inflation has remained low and housing prices have not fallen.

Housing “Expansion” [December +]

Now the NAR is beginning to call the current real estate environment a housing expansion [Washington Post] Of course, a market characterized by more balanced conditions can not be characterized as an expansion.

Suggested dramatic titles for next phase (not necessarily correlated with actual events)

Housing “Bust” [?]

Housing “Black Hole” [?]

Housing “Katrina Effect” [?]

Housing “Rebound” [?]

Housing “Explosion” [?]

UPDATE January 29, 2006

Housing “Soufflé” [?] [See the Big Picture blog]

Tags: Hurricane, Hurricane Katrina, Big Picture Blog

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The spike in gasoline prices occurred before the wrath of hurricanes in late summer. After adjusting for inflation, rising gasoline prices pre-hurricane were still relatively low in historical terms and perhaps thats why inflation had remained low. At that time, bond investors viewed the sharp increase as more likely to provide a drag on the economy rather than stir up inflation concerns.

There has been a lot of speculation that high gasoline prices are stimulating inflation. However, for perspective, gasoline prices today adjusted for inflation are about the same as the 1950’s but real per capita income was less than half as much today [Boston Globe]. In other words, gasoline prices are not high relative to historic norms.

However, that can be a bit simplistic since the economic engine is built around lower price levels than we are currently experiencing. The persistence of high gasoline prices may be one of the primary inflation catalysts as as core inflation (excluding food and energy) is virtually flat. To make matters worse, oil companies are now posting record profits [Marketwatch] which is of particular concern to many since the gasoline prices have risen so much in such a short period of time.

Inflationary pressures are now beginning to influence a modest rise in mortgage rates.

Of note
Gregg says oil company profits should be taxed [Boston Globe]
Katrina & Oil Prices: The Perfect Storm [Matrix]

Tags: Hurricane, Hurricane Katrina

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Housing starts and permits surged despite forecasts of falling housing starts due to the impact of Katrina and Rita (I feel I am now on a first name basis with both of them). Permits are an indicator of the confidence of builders and the annual pace is at its highest level since February 1973.

Housing starts were strongest in the south and midwest and unchanged on the east and west coasts.

One possible misleading aspect of these stats is that builders generally only know how to build and have ignored negative economic signals in the past. Inventories are rising. [NY Sun]

Its not always a case of:

If you build it, they (homebuyers) will come.

Tags: Hurricane Katrina

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