Matrix Blog

I was on hiatus for no particular reason last week, other than having a little too much going on. Some big announcements coming soon, but unfortunately, my first foray into lobster fishing last week was a bust (translation: no lobsters). It was painful not to enter the Matrix last week, but I think there is something that can be said for taking a break every so often.

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One of the significant effects of the housing boom was the rapid response in employment of real estate agents as well as the surge in membership in NAR in recent years. The barrier to entry and exit is low and makes the profession vulnerable to competition, namely to gains in innovation, as agents move from information gatekeeper to information interpreter. It is incumbent upon real estate brokerage firms to adapt to the growing openness of information available to consumers. Some firms will get it and some will not.

I created the above chart to show correlation between housing prices using OFHEO and NAR membership just for fun. While housing prices are more volatile, the trend is similar over the past 20+ years.

I suspect that with the sharp drop in the number of housing sales across the country, a sharp drop in NAR membership will follow, in fact it already has begun. Actually, I am surprised the membership fall off has not been more significant to date, but I suppose, like housing prices, membership contraction is “sticky on the downside.”

The New York Times article As Housing Market Cools, Far Fewer Become Agents covered the topic quite well. The numbers of licensed agents are falling with the number of transactions. In fact I noticed that the article seemed to focus on markets that saw heavy speculative activity and I’ll bet the run-up in the number of agents was especially pronounced there.

In many ways, the decline in the number of agents is probably good for good agents as well as the consumer. The market has undergone significant changes in the past 2 years, including rising inventory, falling transaction counts and falling prices in many markets.

Agents that are able to adapt to the new market may actually thrive and be able to service their customers in a more professional way. The ability to grab the low hanging fruit of the last five years has resulted in a lot more competition among agents and I suspect the image of most real estate agents making money hand over fist in the past five years was really isolated to the top 5-10%.

I don’t wish unemployment on anyone, but the market ultimately decides.

Tags: lobster, OFHEO

4 Comments

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

David Leonhardt of the New York Times, does a very cool breakdown of the Nation’s housing markets, to prove incorrect the mainstay argument that housing prices, based on OFHEO numbers (the official government stats), have not shown an annual decline since their inception in 1950. Because OFHEO excludes all transactions with non-conforming mortgages (currently over $417,000), a large swath of data is excluded, especially in the coastal cities where housing prices are higher.

It should be pointed out that OFHEO also includes the appraised value of refinance transactions, which can be the majority of the sales data captured by Fannie Mae and Freddie Mac in a certain period of time.

He instead relies on the numbers provided by Case Shiller which do not exclude non-conforming loans like OFEHO does (however, Case Shiller does exclude new construction, condos and foreclosures, which have been key components of the housing market boom of the past 5 years).

David does a wonderful job at explaining the methodology in the video and the interactive graphics are amazing. He emphasizes using inflation in the presentation of housing prices.

Click here for interactive graphic and short video on the US housing market.

Tags: Case-Shiller, OFHEO

4 Comments

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

Comments Off on Givin’ Speeches About Mortgages And Housing: No Answers, Only Solutions

S&P released their Case-Shiller April 2007 index today A Hodgepodge of Declining Growth Returns in Home Prices According to the S&P/Case-Shiller® Home Price Indices [pdf] showing further housing market weakness.

A review of the decline in home price returns on a regional level shows no region is immune to the weakening price returns,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC.

[question: is “hodgepodge” a macro econ term? I’ll check with Yoram Bauman.]

The index showed the fourth straight drop and the biggest decline since the index started in 2001. An index of 10 metropolitan areas fell by the most in at least 16 years. The Bloomberg article also has a heading that describes the index as most accurate. One gets the impression that a lot of effort is being spent by the S&P public relations machine to sell the credibility of the S&P/Case-Shiller index. News coverage tends to include something like what was presented in the Bloomberg piece:

The S&P/Case-Shiller index and another gauge by the Office of Federal Housing Enterprise Oversight track individual homes through repeat sales and more accurately reflect price trends, economists say. The measures from Commerce and the Realtors group can be influenced by changes in the types of homes sold. Higher sales of cheaper homes relative to more-expensive properties will bias the figures down.

OFHEO may feel threatened by the S&P/Case Shiller Index full court press and felt the need to substantiate their validity through a [pause while holding breath and say slowly] white paper called “A Note on the Differences between the OFHEO and S&P/Case-Shiller House Price Indexes [pdf]” written by Andrew Leventis dated June 22, 2007.

(Hap tip to a colleague who has lost more Blackberries than anyone on the planet.)

The fact that a government agency would go on the offensive to dress down a private sector competitor is unprecedented. Since the S&P/Case Shiller Index hasn’t done anything wrong, I can’t come up with a reason for this strategy.

Of course OFHEO is likely feeling the heat on several fronts, ranging from suggestions that they be replaced by another agency, their lack of oversight during the Fannie Mae accounting scandal and large bonuses just announced to their executives. They have been releasing other research works lately as well.

OFHEO basically says they are better than Case-Shiller because:

• Case-Shiller excludes 13 states, including three of the fastest appreciating: Idaho, Montana and Wyoming data
  
• Case-Shiller has incomplete coverage in 29 states and doesn’t clarify what specific areas are omitted.
  
• OFHEO has more complete data.
  
• Case-Shiller does not fully disclose their methodology.
  

Case-Shiller is a monthly index and OFHEO is a quarterly index, plus OFHEO only includes transactions with mortgages less than $417,000 (include values of refinance mortgages) and excludes a large swath of metro area prices.

Case-Shiller and OFHEO Indexes are similar because:

• They are both repeat sales indexes.
  
• They exclude new development, co-ops, condos and multi-families (CSI excludes foreclosures and flips)
  

Its a battle between government (OFHEO) and academia (Case-Shiller). I am hoping for a response from Case-Shiller although I doubt there will be one.

The benefit to the real estate consumer in all this whining and grandstanding exercise is more awareness of what these indexes actually offer and possibly allow for more transparency in the future. In other words, a hodgepodge of possibilities.

Tags: Case-Shiller, OFHEO, NAR, National Association of Realtors

2 Comments

Well, the Matrix Zeppelin has been in storage lately, its owners trying to figure out whether to rent or buy a garage for it. In the meantime, Matrix readers have been busy trying to touch up their photos of the market, trying to decide whether it looks better or worse than before:

• We’re all familiar with the rapid escalation of home prices over the last 10 years. For most Americans, their homes have been the best and in many cases the only investment that they have made in their entire lives. Some have gone so far as to invest in several homes and have endured ‘negative carry’ on the cash flow in anticipation of leveraged capital gains a few years down the road. But where does it stop? Can housing continue to increase at twice the Consumer Price Index for the next 10 years?

• According to Steven Roach, the dot com stocks only made up about 6% of the markets when they crashed, but sub-primes made up about 10% of last years real estate market.

• As a Realtor and a professional photo retoucher/photographer, I would NEVER alter a photograph in such a way that it could be perceived as misrepresentation. I am very careful about such things. In the past I have adjusted the color, contrast, brightness etc. (say if I took the image on a cloudy day). I have removed trash cans from front yards, laundry and toys from bedroom floors, even a risque calender or two from office walls…but never ever have I given the impression that the house was in better repair, the yard was more manicured or the neighborhood was more desireable. We have to be very careful about doing anything that could come back and get us later.

• I live and work in 10021 and would hate to see any changes. It’s not status (I swear)it’s just that as I age (mature?) I find myself less and less tolerant of these kinds of upheaval. My home and office phones are 212 (I rule!) but my cell has gone from a 646 to the foreign sounding 347. An agent I work with, an otherwise fine gentleman, has a 212 cell number. he is hated office wide for this.

• As a broker when dealing with condos i use the square footage given in the offering plan and then say approximately. Reasoning being the offering plan to me is the official number and as you said everyone else who comes in to measure will get a different number. When buyers quibble my response is that all square footage is not the same or more clearly 1000 sf in one property will seem larger than 1000 sf in another. It comes down to usable space, how the space presents etc and then, what are you buying square footage or a home?

• Whenever I appraise a condo, I always measure. Most times the official measurement is very close. I presume this is because the architect has to certify the plans…Nonetheless, I generally use the official measurement when doing the sales comparison approach. Why? Because that is what the typical buyer will consider. But I always include both measurements and explain to the bank the reason for the discrepancy (e.g., they included exterior walls, different method).

• You fail to realize that “homeownership” can only continue if employment does. What it sounds like you’re really saying is “I have a job and a house so I don’t care about other people.” Having higher employment is WAY more important for this country than high home “ownership.” People can always rent a place to live, but it’s more important that they be able to eat and clothe themselves than buy a house.

• Repeat sales method takes each sale and compares the price paid versus its prior sale and then you combine the change in aggregate over a specific period – shiller apparently adjusts or factors for changes in the house – ie an extension. I’m not sure how this is done and it won’t consider an extensive renovation, for example nor does this index consider foreclosures or new development (its the first time sold so there is no repeat).

• Case-Shiller picks up foreclosure sales between the bank and the market, not the mortgagee and the lender. From the methodology paper: “… Although identified foreclosure transfers are excluded during the pairing process, subsequent sales by mortgage lenders of foreclosed properties are candidates to be included in repeat sale pairs.” New developments are not included because the methodology requires at least two recorded transactions prior to admmission into the index. Since Case-Shiller and OFHEO are repeat sales based indexes, there is “slippage” in the sense that untraded iventory is not absorbed in the indexes. (As correctly noted above.) If there was an appraisal method, then a value could be guess-timated. However, over the long run, all these properties will eventually transact and will then be accounted for in the indexes.

• There is a Case-Shiller index that tracks national housing prices. The index symbol is SPCSUSA. It updates quarterly instead of monthly. It is being traded as a forward over-the-counter (OTC), not as a listed futures contract. The forward market for expiration February 2010 is -12% bid, -4.25% offered. The derivatives market views nationwide housing prices as expressed by this Case-Shiller index as substantially lower looking out three years.

Tags: Case-Shiller, OFHEO, Sub-Prime, NAR, National Association of Realtors

2 Comments

The Economist magazine has compiled its latest global housing stats [subscr]. The magazine, which I subscribe to and enjoy, has been calling for a sharp housing correction in the United States since about 2003. This compilation showed a slowdown in the rate of appreciation in 50% of the markets surveyed.

America is one of them. In the year to the fourth quarter of 2006, the price index compiled by the Office of Federal Housing Enterprise Oversight (OFHEO), a regulator, rose by 5.9%, the lowest annual rate for seven years. The OFHEO index gives a more accurate picture than more timely series, because it tracks the value of the same houses when they are resold or remortgaged. As a result the index is not pulled this way and that by changes in the mix of houses sold.

The housing slowdown has already made itself felt in the GDP statistics, as homebuilders have cut back on construction. So far, it has not hurt consumption, the principal engine of the American economy. But that may yet happen. Flatter prices may encourage homeowners to rein in their spending. And troubles in the subprime mortgage market may spread, inhibiting lending to borrowers in better standing, and thus feeding back into prices.

The Economist places great faith in the OFHEO for the US stats because the use of repeat sale indicators, which I think is very naive.

American homeowners may take heart from the experiences of two other once-booming markets: Australia’s and Britain’s. Both stalled in 2005, yet both have clocked up house-price inflation of around 10% in the past year.

I am struck by the fact that most of Europe seems to be appreciating faster than the US market and how Japan showed a decline even though their central bank recent increased interest rates.

Tags: Europe, OFHEO, Sub-Prime

2 Comments

Online real estate’s posterchild for pricing inaccuracy (warning: I have been overusing posterchild lately) has been working hard to combat that image with the release of their [4th quarter market report](http://www.zillow.com/quarterlies/QuarterlyReports.htm). [Zillow](http://www.zillow.com/) has been the subject of scrutiny for the wide range of inaccuracies in their pricing of specific properties called [Zestimates](http://www.zillow.com/howto/Zestimate.htm) (and their incompatibility with Mac’s Safari browser – must use Firefox). But hey, its still in beta [a year after launch](http://www.zillow.com/corp/Timeline.htm).

Hint to Zillow: if a Zestimate is priced to the dollar, even with a range, it infers accuracy to the dollar. I wrote about expectations of precision last week in [Values: Being Precise About Precision Expectations (aka Good Enough)](http://matrix.millersamuel.com/?p=1062).

But market reports are a different animal. The attempt to value amenity differences (ie sq ft, room count, lot size, etc.) confuses many consumers and has been controversial due to inaccuracy issues. They buy national data feeds, not unlike many online service providers, and use this to come up with their Zestimates. The use of this data to attributes of a specific property is what has been tough for them (or anyone) to figure out to date.

Zillow has used this same data [to crunch numbers for the quarter](http://www.zillow.com/quarterlies/QuarterlyReports.htm). However, their market studies use pricing as the main data point and there is limited consideration of amenity differences (other than location). This simplicity allows the reports to appear to be accurate, although I can’t vouch for every market.

When you consider the options for national data sources like [NAR](http://www.realtor.com), which is a trade group and [OFHEO](http://www.ofheo.gov) which includes refi data in their results, you don’t have a lot of pure choices. That sounds like a cheap shot to Zillow but its not meant to be.

The report is a whole lotta spreadsheets by MSA, broken down by median sales price (Zindex). In the markets I am familiar with, the results seem to make Zense.

Tags: Zillow, OFHEO, Realtor.com, Zestimate, NAR, National Association of Realtors

5 Comments

I think there has always been a real disconnect between housing statistics being presented nationally and their perception of accuracy to local markets.

On one hand, you’ve got the consumers who read, watch or listen to this information being provided everyday. They live their life and those facts are absorbed for later use.

And then there are the people that are currently trying to sell or buy a property and their personal experience does not connect with the national numbers they are reading about.

In Les Christie’s [Housing market pain not revealed by stats [CNN/Money]](http://money.cnn.com/2007/01/11/real_estate/housing_pain_statistics/index.htm?postversion=2007011114) the piece explores real world feedback and how local housing situations have no real relationship with national statistics and its confusing and upsetting many as the market deteriotates in some parts of the country.

We have had a few years of handwringing about a bubble or market correction.

One one end of the spectrum, there are real estate trade groups like NAR are trying to downplay the negative implications of the latest information for their constituents (hey, thats a trade group’s job), yet it will ultimately provide the trade group with a disservice by weakening their credibility.

At the other end, there are pundits in the blogosphere who trying to call the crash and its drives traffic to their sites for Adsense dollars (hey, thats their passion and belief plus their right to make a living), yet eventually the message is said so often that it becomes white noise.

The consumer is stuck in the middle trying to figure out which way is most accurate for their situation or market, when it is often neither.

The blogoshere has made its impact by rooting out problems with the way national stats by the government, real estate trade groups and others are calculated or interpreted. Thats good. It has opened our eyes to stats like the wild deviations in [new housing starts from the Commerce Department](http://matrix.millersamuel.com/?p=649), [CPI calculations](http://matrix.millersamuel.com/?p=677), [OFHEO’s use of refinance data in their median sales price](http://matrix.millersamuel.com/?p=95) and many others.

[NAR](http://www.realtor.com), [NAHB](http://www.nahb.org) and other trade groups provide useful information for us to digest plus there is something reassuring about knowing the the whole country’s housing market is not going down the drain like a particular market may be. Thats good.

We have more information than ever to filter and absorb. The real problem is the lack of understanding as to what statistics and other information relate best to their particular market. So remember these rules in the spirit of rinse, lather, repeat.

• Rule 1: National housing statistics DO NOT apply to your local housing market.
• Rule 2: Restate Rule 1 to all those who are scratching their heads wondering why national statistics do not apply to their property.

Tags: NAHB, OFHEO, Realtor.com, NAR, National Association of Realtors

6 Comments

Priceless…

I got the idea for this post after trading emails with David Leonhardt of the New York Times the other day as he worked in his interesting Economix column: [The Hidden Truth About Home Prices [NYT]](http://www.nytimes.com/2006/12/06/business/06leonhardt.html) and the companion article [More on Housing Prices [NYT]](http://www.nytimes.com/2006/12/05/business/06leonhardt-side.html?_r=1&oref=slogin)

Its very difficult for most consumers, government officials, academia and real estate professionals to get a real world gauge on how a real estate market is actually doing. Tried and true methods all seem to have some sort of flaw and when a market is in transtion, the changes become even more pronounced. And then throw in the source of the information, with the presence of spin, makes the effort even more daunting. Those covering the market, whether it be Big Media and the blogosphere tend to gravitate towards whatever is released that day.

There are two schools of thought on housing stats:

• Price indexes– These are generally based on repeat sales of the same property over time or an aggregate analysis of housing prices, with some adjusted for seasonal changes and/or inflation.
  
• Housing prices – These results are based on an aggregate summary of the sales that transferred during the period and can be skewed by the mix.

You’ve got producers of indexes telling you that prices are less meaningful, yet users of the indexes often view them as a “black box” and don’t grasp how the information was calculated (do we hear “seasonally adjusted?”) Indexes tend to be created for macro markets because the data set needs to be large. Cycnicism has been a detriment to reliance on indexes.

Those that rely on housing prices tout that they are the real thing yet most resources for housing prices tend to be non-economist types, trade groups and real estate firms, because they tend to be easier to generate and report than an index. There are a growing number of market studies put out in the public domain by local real estate brokers and agents (and of course, appraisers) to try to bridge the gap between the national stats and local markets. However these reports are often limited by the size of the data, limited understanding of what the data really means and are clouded by their intentions.

There are generally four sources of housing stat interpretation:

• Government – namely Commerce/Census/OFHEO
  
• Economists – Chicago Mercantile Exchange (Shiller) and other “Starconomists” like Roubini, Zandi (Moody’s) and others.
  
• Real estate brokerage trade groups and firms – The National Association of Realtors (NAR) is the primary source of information on national housing and local brokerage firms. Regional MLS systems and brokerage firms are the other primary provider.
  
• Online services like [Zillow.com](http://www.zillow.com/), [RealtyTrac](http://www.realtytrac.com/), [ZipRealty](http://www.ziprealty.com/index.jsp) release housing stats but generally don’t provide historical trends to include for perspective.
• Real estate appraisers, consultants and analysts I would fall into this category as well as other housing stats from other markets presented on Matrix. We tend to relay on actual housing prices and interpret them without the trade group or incentivized spin, but its not without its faults either. The data is generally influenced by mix of housing stock that sells so its important that this group bridges the gap between the results and actual conditions.
  

Local, National and Internet:

• National housing stats are reported religiously by nearly all national media outlets yet don’t have a link to local markets. What happens in a neighborhood may or may not comparable to national markets and if the results are consistent, its really coincidence. NAR has touted national housing stats as an argument for real estate as a good investment but it doesn’t reflect local volatility.
  
• Local housing markets tend to have smaller data sets and are more affected by the mix of what sells. They can have a powerful affect on local moods but are often written by marketing departments as public relations pieces for trade groups and firms with a vested interest in the results and how it affects the bottom line.
  
• Internet is an important delivery mechanism for real estate stats, but are often less thought out than traditional sources because many producers of this information don’t have direct real estate experience, but rather have online experience from other industries. This isn’t necessarily a bad thing, because bad habits and bias may not be developed but often, inappropriate uses of month over month stats exagerate certain market conditions.

Pitfalls and/or spins betrays most sources:

• New home sales – Government stat quality is suspect and not necessarily unbiased. You just have to take a look at the widely quoted housing stats like [New Home Sales from the US Commerce Department [pdf]](http://www.census.gov/const/newressales.pdf). You just have to read an excerpt from the October release to see what I mean: This is 3.2 percent (±11.2%)* below the revised September rate of 1,037,000, and is 25.4 percent (±10.0%) below the October 2005 estimate of 1,346,000.
• Median sales price ([National Association of Realtors](http://www.realtor.com)) – There is an emphasis on the national numbers in their series of reports on new and existing home sales. They do break up the country into quadrants, but all real estate is local. They have such an opportunity to gain the public trust but usually provide hard spin to the results and are very inconsistent in the commentary from month to month.
• Sales price index ([OFHEO](http://www.ofheo.gov)) – The median sales price includes refinance data and excludes sales with non-conforming loans (mortgages greater than $400,000).
• Housing price index ([Chicago Mercantile Exchange](http://www.cme.com/)) – Robert Shiller’s repeat sale index lags the market by about 4 months and is targeted towards investors, not consumers. Trading volume is growing but is still too small to really provide a sense of market direction.

Since all politics real estate is local, but reporting of larger data sets is easier but less relevant, its very difficult for the consumer of real estate market information to know what, in fact, the truth is.

At the end of the day, real estate truth is open to interpretation.

Tags: Robert Shiller, Zillow, Commerce Dept, OFHEO, Census, Realtor.com, NAR, National Association of Realtors

Comments Off on Home Prices: To Tell The Truth, The Whole Truth And Nothing But the Truth (Sort Of)

For the next two days, my posts will be a bit sporadic. I am in San Francisco for business. Its one of my favorite places. The weather is perfect but I am desperately trying to stay on New York time. Its hard to get up at 3:30 am PST, no matter how you try to convince yourself.

Here’s a few links that may be of interest.

• [Bonfire of the Vanities: Novelist and Economist Smackdown Over Proposed NYC Development. [Businessweek]](http://www.businessweek.com/the_thread/hotproperty/archives/2006/12/tom_wolfe_takes.html)
  
• [Conforming Loan Limits Unchanged As OFHEO Wakes Up From Hibernation [Sac Bee]](http://sacramento.bizjournals.com/sacramento/stories/2006/11/27/daily11.html?jst=b_ln_hl)
  
• [Bank Problems As Easy Credit Forces The Into Beige From Black [NYT/Norris]](http://norris.blogs.nytimes.com/?p=93)
  
• [Case Shiller Index Shows Housing Goes Soft [S&P (pdf)]](http://www2.standardandpoors.com/spf/pdf/index/112806_HomePrice.pdf)
  
• [‘Cognitive Dissonance’: A Term Some Past Buyers May Want To Understand [WSJ]](http://online.wsj.com/article/SB116519790025639638.html)
  
• [Rhymes with “Treat”: Reits Are The New Contrarians [SFGate]](http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2006/12/01/carollloyd.DTL)
  

Tags: Case-Shiller, OFHEO

1 Comment

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]](http://www.latimes.com/business/la-re-limit3dec03,1,7881568.story):

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]](http://www.signonsandiego.com/news/business/20061129-9999-1b29conform.html) 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)]](http://www.ofheo.gov/media/pdf/PRConfLoan2007.pdf)
[2007 CONFORMING LOAN LIMIT TO REMAIN AT $417,000 [OFHEO (pdf)]](http://www.ofheo.gov/media/pdf/PRConfLoan07.pdf)

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

3 Comments

Silver linings ran amok this week – so I put ’em in the treads to get the tank off the beach.

• [Real estate spin gets exported to Central America: Former strongman and new president Daniel Ortega apparently is good for Nicaraguan real estate [Coldwell Banker]](http://www.cbnicaragua.com/daniel_ortega_and_investing.php)
  
• [Rates versus Prices [BW]](http://www.businessweek.com/bwdaily/dnflash/content/nov2006/db20061117_910051.htm?campaign_id=alerts)
  
• [No knockout blow yet in fight over Fed outlook [MW]](http://www.marketwatch.com/news/story/story.aspx?guid=CA0A3146105143D7A2274DB42F9740DF&siteid=mktw&dist=nbi)
  
• [A Season of Lofty Expectations [NYT Dealbook]](http://dealbook.blogs.nytimes.com/2006/11/22/wall-street-and-the-penthouse-effect/#comment-26245)
  
• [Liar’s Loans (No Doc Mortgages) [WaPo]](http://www.washingtonpost.com/wp-dyn/content/article/2006/11/24/AR2006112400503.html)
  
• [2/3’s of Economists Say the Worst of Bust Is Over in WSJ survey [REJ]](http://www.realestatejournal.com/buysell/markettrends/20061122-izzo.html?refresh=on)
  
• [Freaking out about WSJ’s survey, a broker’s perspective [Realty Times]](http://realtytimes.com/rtapages/20061124_journalecon.htm)
  
• [Conventional loan limits won’t change if prices decline [Calculated Risk]](http://calculatedrisk.blogspot.com/2006/11/ofheo-no-change-to-conforming-loan.htmll)
  
• [4 Things to Serve When a Central Bank Chief Drops By for Breakfast [NYT Norris Blog]](http://www.nytimes.com/2006/11/25/business/worldbusiness/25charts.html?n=Top%2fNews%2fBusiness%2fColumns%2fFloyd%20Norris)
  
• [Black Friday Becomes Cyber Monday [NRF]](http://www.nrf.com/content/default.asp?folder=press/release2006&file=CyberMondayweekend.htm)
  
  

Tags: OFHEO

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