On housing and the low cost of money

I'm often writing about the perils of the Fed's monetary policy, but there are obviously some bright spots to be found out there. I'm sure by now that you've read at least one glowing article this year about the "housing recovery", and for the most part it's legitimate (even if there are some strange dynamics under the surface).

The question, of course, is whether this recovery is sustainable, and what will happen to housing prices if interest rates begin to rise from their freakishly low levels. That's a topic that Tim Iacono took on in a recent blog post, and I thought his findings were absolutely worth sharing (emphasis mine).

I’ve about had it with how giddy a large portion of the U.S. population has become about rising home prices. 

Don’t get me wrong, when first thinking about this, I was about as happy as anyone else to learn that property values are now rising sharply again since, after renting for six years, my wife and I finally bought a house about two years ago. So, we stand to benefit as much as anyone else. 

But, when you look at what’s driving home prices higher and how unnatural and unsustainable those factors are, suddenly the headlines sound more ominous than optimistic...  

Yes, low inventory is a big factor behind the home price surge as the flood of foreclosures has slowed to a trickle while strong investor demand and growing confidence amongst American consumers have surely tipped the scales in favor of higher prices. But, it is today’s freakishly low interest rates – engineered by the Federal Reserve – that have clearly played the biggest role in pushing home prices higher, simply because most people buy a house based on the monthly mortgage payment, not the purchase price. 

And when you see the impact record low rates have on purchase prices, you might be as concerned as I am... 

Based on a constant mortgage payment of $1,100 per month (what seemed to be a good national average based on this story and others like it), today’s 3.31 percent 30-year mortgage rate will finance a house at almost double the price that the 40-year average mortgage rate would!

While there are clearly other factors involved, it is the Federal Reserve’s asset purchase program that is largely responsible for these freakishly low rates (it is one of their stated policy objectives) and, while the central bank has promised to keep rates low for a long time and to continue buying mortgage-backed securities indefinitely, those actions are by no means guaranteed. 

This is a dynamic that I've been well aware of for a long time now, but it's still striking to see it laid out graphically like in Tim's piece. In just the last 12 months, 30-year mortgage rates have come down from 4.2% to 3.4%. Using Tim's $1,100 monthly payment, that means that a buyer who waited a year can now afford to buy a $276,000 home, as opposed to a $250,000 home last year.

That's an increase of 10.4% year-over-year because of the low cost of money, and yet home prices are only reported to have increased by 5 or 6% over the last year, even according to the rosiest estimates. Therefore, in any realistic terms, the price of housing has continued to decline this year, rather than rebound sharply as the headlines would have you believe.

If interest rates are really going to stay this low forever, then you shouldn't have much to worry about, and you can go ahead and buy real estate to your heart's content (just don't read these three posts before you do so). But as Wells Fargo is always reminding me in their constant mailings, "Interest rates rarely stay put for long!"

And if Wells Fargo is indeed correct, well then... Tim's chart tells us that housing's got another pretty significant leg down (like, 30 or 40%) to get back to those historical average rates. And that likely won't be pretty for anybody hoping to sell property at any point in the next few decades. Good luck!

[Iacono Research]

Shipping container homes

This bit of creative awesomeness comes courtesy of my man Killagroove: turning expired shipping containers into housing projects. It's resourceful, it's creative, and it's actually pretty attractive stuff, considering the source material. Pretty cool. Let's call it "recession chic".

The first U.S. multi-family condo built of used shipping containers is slated to break ground in Detroit early next year. 

Strong, durable and portable, shipping containers stack easily and link together like Legos. About 25 million of these 20-by-40 feet multicolored boxes move through U.S. container ports a year, hauling children’s toys, flat-screen TVs, computers, car parts, sneakers and sweaters. 

But so much travel takes its toll, and eventually the containers wear out and are retired. That’s when architects and designers, especially those with a “green” bent, step in to turn these cast-off boxes into student housing in Amsterdam, artists’ studios, emergency shelters, health clinics, office buildings. 

Despite an oft-reported glut of unused cargo containers lying idle around U.S. ports and ship yards – estimates have ranged from 700,000 to 2 million – the Intermodal Steel Building Units and Container Homes Association puts the number closer to 12,000, including what’s sold on Craigslist and eBay. 

Joel Egan, co-founder of HyBrid Architecture in Seattle, which has built cottages and office buildings from shipping containers for close to a decade and coined the term “cargotecture” to describe this method of construction, warns that although containers can be bought for as little as $2,500, they shouldn’t be seen as a low-cost housing solution. 

“Ninety-five percent of the cost still remains,” he says.

Cost-effective or not, it's definitely a novel way of re-using our scarce resources, and there's definitely value in that. Here's a quick look at some of the projects, all of which I've captioned.

Rosa Parks; Detroit, MI

The Box Office; Providence, RI

Aprisa Mexican Cuisine; Portland, OR

The Shipping Container House; Nederland, CO

[ABC News]

Gas stations vs. department stores

I thought this chart here from the Illusion of Prosperity blog was pretty telling, and I think it says just about everything you need to know about what Fed policy has done for and to our economy over the last decade-plus (obviously the internet has a role to play here as well, but that dynamic alone cannot and does not account for a tripling of the ratio in a dozen years). Regardless of the reasons behind the spike in this chart, it's clear that inflationary monetary policy is powerless to restore lost retail jobs, but certainly ensures that we all spend more and more of our paychecks at the pump and the grocery store.

Pretty awesome, right? Hooray, Bernanke!

And hey, while we're at it, let's share another semi-terrifying chart from the same blogger.

Good times. Sooner or later, nobody will have any home equity at all, and then we'll all be living on Easy Street. Which will be good, because gas will be so expensive that we won't be able to afford to drive to any other streets. I can't wait.

Ponzi financing in California

I don't have a lot to add to Mish Shedlock's take on this situation—this post of mine basically covered the issues at hand—but suffice it to say that by now, just about every government in California is bankrupt and desperate. Given my previous post, though, I thought I had to pass this item along. From Mish (italics are quotes from this article, bolding is mine):

Poway California, population 47,811 as of 2010, has placed an enormous bet on rising home prices and tax revenues. Poway borrowed $105 million but will not start to pay that amount back until 2033 at which time they will owe $877 million in interest. 

Clearly this would be fiscal insanity anywhere, but it is especially true in California given Proposition 13 that caps property taxes... 

Last year the Poway Unified School District made a deal: It borrowed $105 million from investors to fund a final push in its decade-long effort to revamp aging schools. 

Without increasing taxes, the district couldn’t afford to borrow money in the conventional way. So, instead of borrowing from investors over 20 or 30 years and paying the debt down each year, like a mortgage, the district got creative. 

With advice from an Orange County financial consultant, the district borrowed the money over 40 years in a controversial loan called a capital appreciation bond. The key point for the district: It won’t make any payments on the debt for 20 years. 

And that means the district’s debt will keep getting bigger and bigger as interest on the loan piles up... 

As well as being expensive, capital appreciation bonds work by tapping future growth in property values to pay today’s debts, a concept considered by many in the school bond business to be both risky and inequitable. In 1994, the state of Michigan banned school districts from issuing bonds like this, deeming them too toxic to taxpayers. 

Nevertheless, California’s ever-strapped districts have increasingly looked to capital appreciation bonds to raise money for improvements without increasing taxes on current residents. Across the state, districts have borrowed billions this way, using exotic financing to shift the burden for paying for today’s school construction to future generations of Californians. 

"This is way worse than loan sharking," said Michael Turnipseed, executive director of the Kern County Taxpayers Association in central California, which has lobbied the state Legislature to tighten laws on school district borrowing. "And Poway is the poster child. What they have done is absolutely insane." 

Think growth will bail out Poway? Think again. 

From Poway City Data the population of Poway shrank by .5% between 2000 and 2010. 

The current upfront cost of this $1 billion proposal would be $2196 per every man, woman, and child. 

By the time Poway starts paying the bill, the cost will be $20,916 per every man, woman, and child. 

Given the average household size is 2.9, the cost per household when the debt is due will be $60,656... 

This scheme is not insane, it's well beyond insane. Unfortunately, I cannot come up with a stronger word to describe it. 

Bear in mind that 20 years from now it is highly likely the school district will need still more money for school maintenance.  What then? Will property taxes rise 10-fold to pay back this loan?

Mish's last point is right on. The problem with taking on massive amounts of debt—thus shifting the burden of current expenditures onto future generations, with interest—is that future generations will still have to find a way to finance the expenses that come up in their time, in addition to paying off the previous generations' bills.

For an analogy, imagine trying to pay down a mortgage on your own house while also still paying down your parents' mortgage on a house that you no longer live in but that has been accumulating interest for decades without a single principal payment—yeah, doesn't sound too feasible, does it?

Sooner or later, the debt writedowns (defaults) will come, because they must. If you can't find the money now, you can't just wave your hands and assume that your kids will have it in 20 years' time. They won't. They'll be too busy paying down their own student loans, not to mention fixing the crumbling infrastructure that you left for them.

But hey, that's not your problem, right? Hey, somebody give J.G. Wentworth a call... we've got some bridges that need some fixing.

[Mish Shedlock]

The downside of homeownership

In an article this week, The Economist wonders whether the decreasing labor mobility in the United States—which I've covered here before—is a result of a "more efficient market". They write,

The drop in mobility shows up almost exclusively in gross migration, the total number of interstate household moves... The trend predates the housing boom and bust; the crisis cannot explain it.

Some reckon the decline is caused by demography. Young workers, at the start of their working life, have most to gain from moving. An ageing population may therefore be less mobile. Growth in two-earner households could also play a role. When both partners work, it is harder to move if one of them loses his job or is offered a post somewhere else. New research by Greg Kaplan of the University of Pennsylvania and Sam Schulhofer-Wohl of the Federal Reserve Bank of Minneapolis casts doubt on these explanations...

The authors analyse census data gathered monthly between 1991 and 2011, and find that the pattern of falling mobility persists across all parts of the workforce. Mobility is down across “all education levels, for people of all marital statuses, and for both single-earner and multiple-earner households.” Ageing is a red herring: mobility rates have dropped most for young workers. It isn’t so much the American worker that is changing, they argue, but the American economy. Reduced mobility largely reflects two shifts in the nature of economic activity...

The first is that the mix of jobs offered in different parts of America has become more uniform. The authors compute an index of occupational segregation, which compares the composition of employment in individual places with the national profile. Over time, their figures show, employment in individual markets has come to resemble more closely that in the nation as a whole. 

This homogenisation reflects the rising importance of “non-tradable” work. As the name suggests, non-tradable goods and services are not traded across long distances. Californian dentists tend not to clean Floridian teeth; every city has its own dentists. Cars, by contrast, are tradable, so not every state has its own car plant... With more of the country’s employment mix present in each state, it is less necessary to move to find work.

... The authors suggest another force is also reducing migration: the plummeting cost of information.

Young workers in particular used to have to move to gather information: to see whether they could stand a Boston winter, say, or cared enough about the Californian climate to pay Californian rents. In recent decades, however, it has become much easier to learn about places without moving house. Deregulated airlines and innovative online-travel services have slashed travel costs, allowing people to visit and assess different markets without moving. The web makes it vastly easier to study every aspect of a potential new home, from the quality of its apartment stock to the surliness of its baristas, all without leaving home. Falling mobility isn’t simply caused by labour-market homogenisation, the authors argue, but also by greater efficiency. People are able to find the right job in the ideal city in fewer hops than before.

These explanations are, in theory, quite compelling. It's certainly interesting that labor mobility is falling the most among younger workers, and this does indeed seem to beg an explanation beyond just the housing bust and underwater mortgages.

Nevertheless, I can't help but think that the housing dynamic—or, at least, the wider debt bubble that fueled it—has a significant role to play here, if only indirectly. Might it be that young workers, overly burdened with student loan debt and unable to afford places of their own (either to rent or to buy), are shacking up with their (perhaps underwater) parents so as to avoid rent costs? Clearly these two dynamics can play off of each other, given that they both stem from the same basic problem of overwhelming debt, leading workers of all ages to stay closer to home.

In thinking through these problems, I was reminded of this blog post from Tyler Cowen from last month. Citing a study in El Pais, Cowen writes:

Here are the European countries with the highest owner occupancy rates:

1. Romania, 97.5%

2. Lithuania, 93.1%

3. Croatia, 90.1% 

4. Slovakia, 90.0%

How about the lowest rates?

1. Switzerland, 44.3%

2. Germany, 53.2%

3. Austria, 57.4%

Get the picture?

Cowen's point is clear. For years—decades, even—we heard politicians and economists touting homeownership as an integral part of the American dream, and a huge key to our future economic success as a nation. Now, we're starting to see the flip side of that coin, and we're not alone. The most prosperous nations in Europe in fact have very low homeownership rates, while the nations with high rates flounder. This absolutely cannot be a coincidence, and it must have at least something to do with labor mobility.

That, or a high homeownership rate is just a great indication of a society with a lot of debt, a lack of flexibility, and therefore a general lack of entrepreneurship. I hope that we won't some day be reading statistics similar to Cowen's list there regarding levels of college education, but I certainly have to wonder. Debt is an ugly beast, and we can't very easily explain it away by spitballing theories about "lower costs of information". It's a good effort by The Economist, but I remain unconvinced.

[The Economist]
[Tyler Cowen]

Still looking good, Arizona

Sure, I pick on Arizona here a lot, but let's be honest... they sort of ask for it. At any rate, when I looked at this map from Zillow showing the concentration of "underwater" mortgages in the country (remember, it's a lot easier to end up with negative equity when you hardly have any equity to begin with), Arizona really jumped out at me.

I expected to see a sea of red in California and Florida on this map, as well as in the Las Vegas area, but I was surprised to see the entire state of Arizona outlined so nicely for me, particularly when many of the surrounding states are almost perfectly clean. But so it is in Arizona, where they're seemingly still determined to scapegoat the immigrants for all of their problems.

The un-death of Suburbia

Given how often I rant about bad journalism on this blog, I really, really, really want to turn my wrath on this incredibly misleading article from Institutional Investor, which was the subject of one of my tweets this morning. But honestly, I don't want to give this joker any more airtime than I've already given him, so let's move along.

Instead, I'll refer to what is in fact a very well-written and well-researched article (from Forbes) on the drastically over-reported death of Suburbia. In short, reports of Suburbia's demise have been greatly exaggerated.

This past weekend the New York Times devoted two big op-eds to the decline of the suburb. In one, new urban theorist Chris Leinberger said that Americans were increasingly abandoning “fringe suburbs” for dense, transit-oriented urban areas. In the other, UC Berkeley professor Louise Mozingo called for the demise of the “suburban office building” and the adoption of policies that will drive jobs away from the fringe and back to the urban core.

Perhaps no theology more grips the nation’s mainstream media — and the planning community — more than the notion of inevitable suburban decline. The Obama administration’s housing secretary, Shaun Donavan, recently claimed, “We’ve reached the limits of suburban development: People are beginning to vote with their feet and come back to the central cities.”

Yet repeating a mantra incessantly does not make it true. Indeed, any analysis of the 2010 U.S. Census would make perfectly clear that rather than heading for density, Americans are voting with their feet in the opposite direction: toward the outer sections of the metropolis and to smaller, less dense cities. During the 2000s, the Census shows, just 8.6% of the population growth in metropolitan areas with more than 1 million people took place in the core cities; the rest took place in the suburbs. That 8.6% represents a decline from the 1990s, when the figure was 15.4%.

Nor are Americans abandoning their basic attraction for single-family dwellings or automobile commuting. Over the past decade, single-family houses grew far more than either multifamily or attached homes, accounting for nearly 80% of all the new households in the 51 largest cities. And — contrary to the image of suburban desolation — detached housing retains a significantly lower vacancy rate than the multi-unit sector, which has also suffered a higher growth in vacancies even the crash.

I've definitely been on the record here before predicting that there will be a bit of a shift back to our nation's non-urban roots, as options for telecommuting make co-location of employees and their employers less and less important (and also less and less profitable--why would a company pay top dollar for commercial real estate when its employees can work just as effectively from their own homes?).

Many pundits have predicted that high gas prices will force commuters to move closer to their jobs (thus causing the shift from Suburbia back to the cities), but I argue that the opposite is more likely--their jobs will move closer to them. It doesn't make any sense for workers to move into the city to save on gas when it means they'll be paying twice as much in rent, as is often the case. In such a scenario, companies would essentially be faced with two options--pay their employees more, or allow them to work from home. Which one do you think is more likely?

I do understand that there is a certain social need (or at least preference) for living in big cities, and I fully appreciate the increased cultural options that cities provide. But the incredible density that a city like New York provides isn't necessarily... well, necessary. Over the next century or so, I definitely expect a shift away from the densest cities as telecommuting takes hold. This may lead to an increase in density in Suburbia, or it may just lead to a plethora of smaller cities around the country.

The Forbes article does admit that this very shift occurred during the pre-2007 housing boom--when cities like Phoenix, San Antonio, and Las Vegas grew rapidly--only to come crashing back in the other direction when the bubble burst. But I think this trend will revive itself in the coming decades, not because of another housing bubble but simply because the biggest cities simply aren't quite as relevant or as necessary as their huge rent price tags would suggest. Sooner or later, the people will realize this. That said, we could be waiting a while...

Either way, don't write off Suburbia just yet. The statistics show that the world outside the city limits is very much alive.

[Forbes]

The new immigration?

I sincerely doubt that this bill will get any traction, given the overall political trend against immigration (and toward protectionism), but it seemed almost inevitable that something like this would come along.

The reeling housing market has come to this: To shore it up, two Senators are preparing to introduce a bipartisan bill Thursday that would give residence visas to foreigners who spend at least $500,000 to buy houses in the U.S.

The provision is part of a larger package of immigration measures, co-authored by Sens. Charles Schumer (D., N.Y.) and Mike Lee (R., Utah), designed to spur more foreign investment in the U.S.

Foreigners have accounted for a growing share of home purchases in South Florida, Southern California, Arizona and other hard-hit markets. Chinese and Canadian buyers, among others, are taking advantage not only of big declines in U.S. home prices and reduced competition from Americans but also of favorable foreign exchange rates.

To fuel this demand, the proposed measure would offer visas to any foreigner making a cash investment of at least $500,000 on residential real-estate—a single-family house, condo or townhouse. Applicants can spend the entire amount on one house or spend as little as $250,000 on a residence and invest the rest in other residential real estate, which can be rented out.

The measure would complement existing visa programs that allow foreigners to enter the U.S. if they invest in new businesses that create jobs. Backers believe the initiative would help soak up an excess supply of inventory when many would-be American home buyers are holding back because they're concerned about their jobs or because they would have to take a big loss to sell their current house.

This kind of bill would only speed up the dynamic that we've already begun to see in Texas, where the "new immigrant" is not a day laborer but an opportunistic investor. This shift may change the way we view immigration and immigrants in our country as we enter into a new century with new economic realities.

Either way, I'm always amused to see how far our politicians will go in their attempts to prop up old regimes. Here, they're basically willing to pull out all the stops in order to prevent a further deterioration in the housing market. Generally speaking, these sort of desperate attempts fail miserably, and serve only to create all manner of unintended consequences that we will later regret.

This kind of policy, when combined with ultra-low-interest-rate policy from the Fed (that serves to weaken the dollar against other currencies) will ensure that our primary "export" over the coming decades will not be any sort of product or service, but the very land that we live on. If more and more of our country is actually physically owned by foreigners, are we really even a country any more? And does it even matter?

Welcome to the 21st century, I guess--and welcome to the strange, existential questions that we never thought we'd have to ask ourselves.

[Wall Street Journal]

Brilliant

Sometimes I come across things that are too cool not to share. This video is one of those things. Using the Case-Shiller home price index for data, a couple of creative and enterprising individuals put together a video that shows what a roller coaster ride would look like if home prices were a roller coaster (covering the period 1890-2010).

This particular video is an update to the original "Speculative Bubble" video, which only included data up to 2007--things haven't been pretty since the original left off. If you don't have the patience for the whole 4 minutes, skip ahead to the 2:24 mark (or click here) to see just the last 30 years, which is the real punchline to the story. Seeing the speculative bubble (and the pop) in this manner is pretty much jaw-dropping.



Props to Barry Ritholtz for the heads-up.

Changing living patterns in America: an update

Earlier this summer (side note: how is it almost September, what happened to my summer?), I ran a post discussing the rise in homes with dual master bedrooms in the U.S. The CNN article that inspired the post talked about dual masters being a solution to "mediocre marriages", but I took the rise to be indicative of a broader change in American living habits. I wrote then:

For one, the housing crash that precipitated the financial crisis of 2007-2008 has eroded a long-standing belief that housing is a stable investment and that home ownership is a laudable goal for all Americans. An increasing number of younger people (including well-regarded journalist and hedge fund manager James Altucher) have begun to question the wisdom of owning real estate at all, and have turned to renting instead. A dual master setup would seem to lend itself particularly well to a renting situation, where two people could share the rent on a house without having to share a bathroom or a primary living space.

Furthermore, economic realities affecting two important groups of people may force a trend toward co-habitation over the coming years. The first of these groups is the elderly--while they likely don't have to worry about suspensions of Social Security payments any time soon, it is clear that the Federal Reserve's low-interest rate policy has made life very difficult for "savers", those who rely on interest payments to generate income. Many of the elderly are of course in this category, and without a steady stream of income, they may be forced to move in with their children, as was commonplace in previous generations.

The second such group is on the other end of the spectrum, but no less impacted by the economic recession. With an ever-increasing number of college graduates unable to find adequate employment upon graduation--and many others accepting much lower-paying jobs out of necessity--young professionals may be forced to move back in with their parents on a semi-permanent basis as they try to whittle away at their mountains of student loan debt. This dynamic has of course already begun, and homebuilders may just be trying to get ahead of the curve.

Now, this article from Bloomberg seems to agree with me, and provides some statistics to lend my argument some weight--always a good thing.

The U.S. is experiencing a surge in the multigenerational households that were once a common feature of American life, and Hispanic and Asian families are driving the trend, according to U.S. Census Bureau data released this month. The number of such households, defined as those with three or more generations living under one roof, grew to almost 5.1 million in 2010, a 30 percent increase from 3.9 million in 2000, the data show.

They hit 2.9 million in 1950 and didn’t top that again until four decades later, according to the Washington-based Pew Research Center. At the 1980 low, multiple-generation homes represented just 2.9 percent of all U.S. households, down from 7.8 percent in 1900.

Although the term multigenerational invokes images of grandma churning butter on a pioneer farm or turn-of-the-century immigrants crammed into tenements, today’s extended families are more likely to live in suburbs. Among large cities, the one with the highest percentage of multigenerational households, at 16 percent, is Norwalk, California, a collection of largely single- family homes 15 miles (25 kilometers) south of Los Angeles.

“Many conservatives are locked into this 1950s paradigm of the nuclear family,” said Joel Kotkin, author of “The Next Hundred Million: America in 2050,” a book about demographics. “Boomers are aging in place. Immigrants move in with their cousins. The suburbs are changing.”

Job losses and the difficulty of purchasing a home make young people more likely to live with their parents, according to D’Vera Cohn, a senior writer with Pew who has studied the trend. Longer life spans and growth in the Hispanic and Asian populations keep older folks in the house.

So, in addition to the economic reasons I listed in my original post, you can now add a demographic argument to the list. If we continue to see the Mexican immigration and homebuying that we've seen in recent months, this shift could become even more pronounced.

Either way, the trend toward cohabitation and homes with dual master bedrooms is bad news for the overall housing market, especially new construction. But then, that's a market that's just about dead anyway, whether or not we'd like to admit it.

[Bloomberg]

Changing living patterns in America

On his Freakonomics blog, Stephen Dubner cited an interesting and thought-provoking statistic (well, more a projection than a statistic, but so be it) about the housing market from this CNN.com article.

The National Association of Homebuilders predicts that by 2015, 60% of new homes will be designed with "dual master bedrooms."

The CNN article brings up the statistic--and Dubner analyzes it--in the context of "mediocre marriages", indicating that the predicted growth in dual master setups is a response to increasingly loveless marriages and couples who don't want to share a bed. I think that may have something to do with it, but there certainly aren't enough mediocre marriages out there to justify that many new dual master homes (are there?).

More likely, the NAHB projection is reflective of a changing mindset and economic reality among those in the upcoming generations. For one, the housing crash that precipitated the financial crisis of 2007-2008 has eroded a long-standing belief that housing is a stable investment and that home ownership is a laudable goal for all Americans. An increasing number of younger people (including well-regarded journalist and hedge fund manager James Altucher) have begun to question the wisdom of owning real estate at all, and have turned to renting instead. A dual master setup would seem to lend itself particularly well to a renting situation, where two people could share the rent on a house without having to share a bathroom or a primary living space.

Furthermore, economic realities affecting two important groups of people may force a trend toward co-habitation over the coming years. The first of these groups is the elderly--while they likely don't have to worry about suspensions of Social Security payments any time soon, it is clear that the Federal Reserve's low-interest rate policy has made life very difficult for "savers", those who rely on interest payments to generate income. Many of the elderly are of course in this category, and without a steady stream of income, they may be forced to move in with their children, as was commonplace in previous generations.

The second such group is on the other end of the spectrum, but no less impacted by the economic recession. With an ever-increasing number of college graduates unable to find adequate employment upon graduation--and many others accepting much lower-paying jobs out of necessity--young professionals may be forced to move back in with their parents on a semi-permanent basis as they try to whittle away at their mountains of student loan debt. This dynamic has of course already begun, and homebuilders may just be trying to get ahead of the curve.

Ultimately, I think that the housing-led recession of the early 2000s will have a long-lasting effect on the way that Americans view housing and homeownership. I've already written here before about how I think the culture of homeownership is limiting economic flexibility, and this dynamic seems bound to reverse itself.

After the Great Depression, a generation of workers shunned banks, unwilling to place their deposits with them or take loans out from them. I think it's possible--if not likely--that the next generation will have a similar response with respect to homeownership, shunning the traditional American dream in favor of a more mobile (renter's) lifestyle. This, combined with the economic factors that I discussed above, will have a dramatic impact on how homebuilders and real estate agents approach their jobs.

If not, then there's gonna have to be a lot more mediocre marriages to fill all those second master bedrooms...

[Freakonomics]

Important foreclosure update (hooray!)

In yesterday's post about the foreclosure mess, I made a brief late note to keep an eye on the Massachusetts Supreme Court case (the so-called Ibanez case) regarding the validity of certain foreclosures. I wrote:

Keep an eye on this case in the Massachusetts Supreme Court, which could potentially void certain foreclosures and score a "win" for homeowners' rights in this mess. We can't allow our rights to be trampled in order to ensure short-term economic (and housing market) stability. The rule of law and due process must be preserved at all costs, period; let's hope that's what happens here.

It seems that my prayers have been answered, and quickly at that.

US Bancorp and Wells Fargo & Co. lost a foreclosure case in Massachusetts’s highest court that will guide lower courts in that state and may influence others in the clash between bank practices and state real estate law. The ruling drove down bank stocks.

The state Supreme Judicial Court today upheld a judge’s decision saying two foreclosures were invalid because the banks didn’t prove they owned the mortgages, which he said were improperly transferred into two mortgage-backed trusts.

“We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure,” Justice Ralph D. Gants wrote.

Wells Fargo, the fourth-largest U.S. lender by assets, dropped $1.10, or 3.4 percent, to $31.05 at 11:41 a.m. in New York Stock Exchange composite trading. US Bancorp declined 28 cents, or 1.1 percent, to $26.01.

The 24-company KBW Bank Index fell as much as 2.2 percent after the decision was handed down.

Claims of wrongdoing by banks and loan servicers triggered a 50-state investigation last year into whether hundreds of thousands of foreclosures were properly documented as the housing market collapsed. The probe came after JPMorgan Chase & Co. and Ally Financial Inc. said they would stop repossessions in 23 states where courts supervise home seizures and Bank of America Corp. froze U.S. foreclosures.

This ruling is almost certain to be appealed, but that's hardly important. With this decision now on the books establishing precedent, you can reasonably expect a flood of similar "wrongful foreclosure" lawsuits to be raised around the country.

Other states' courts obviously do not need to agree with, honor, or abide by the Massachusetts decision, but the precedent is no less important. The banks are in for a very serious sh**storm, and a well-deserved one at that. It doesn't matter if the homeowners in question were in fact in default on their mortgages (and in this case, they were). The rule of law and due process is what matters, and it must be protected.

The only (and I do mean the only) thing that ultimately separates first-world economies from third-world economies over the long run is viable protection of property rights. For more on that point, I encourage you to read here; the gist of it:

• Not only will a weakened structure lead to a consequent lack of trust in the legal property system, which further encourages informal market activity (black markets), but it also negatively influences investment decisions by an investor or multinational interest for fear of a lost return.
• The degree to which intellectual property is protected also highly influences a country's inventive character as it shapes the flow of innovative ideas and products that are developed, which in turn affects creative and economic wealth.

In essence, if people don't have legitimate reason to believe that they will own (and continue to own) the fruits of their labor, they will be less likely to produce any fruits at all. They'll be even less likely to engage in any type of research and development activity that leads to innovation, lest they invest heavily in a new technology and then see it stolen from them (whether by other individuals, corporations, or the government) before it can become profitable. This is the essence of U.S. patent law.

Housing rights are the most fundamental of all property rights--chip away there, and you'll undermine the economy at large. We can't afford to trade short-term economic stability for long-term economic viability. That's why this ruling is so important.

[Bloomberg]

Housing goes exponential

Ever since the housing bubble burst (and took our economy with it), debate has raged as to whether prices have "bottomed out". With regard to the aggregate, my honest opinion is that I don't know. My best guess has been (and continues to be) that certain markets are oversold, while others have room still to go. Charts like this one (courtesy of the Zero Hedge blog) do an excellent job of illustrating why I feel that way.

It's striking to see how absurdly high the very top end is above the rest of the curve. That to me looks like something that's just begging to get a haircut.

Also of note is the list of top 10 "richest" markets in the nation, as ranked by average home price (they are also the only 10 that clock in at over $1 million).

1. Newport Beach, CA         $1,826,348
2. Palo Alto, CA                     1,479.227
3. Rye, NY                             1,325,550
4. San Francisco, CA              1,325,103
5. La Jolla, CA                        1,210,300
6. Greenwich, CT                    1,195,614
7. Wellesley, MA                     1,080,458
8. Pasadena, CA                     1,043,683
9. Honolulu, HI                        1,026,821
10. Santa Barbara, CA            1,024,661

Big shout out to my hometown of Wellesley...I had no clue it would still be up there. Note that 6 of the top 10 (and 12 of the top 17) markets are in California. Take this how you will, but with that state's budgetary situation as dire as it is, a haircut to the top end of the housing curve could be devastating. We shall see...

[Zero Hedge]