Monday, September 26, 2005
Greenspeak—Housing Bubble is a Concern
Don’t be fooled by the Fed Head’s sleight of hand (90% Cushion?)
A Reading Between the Lines tells the story
In an upcoming speech on "Mortgage Banking" to the American Bankers Association in Palm Desert, California Fed Head Alan Greenspan gave his strongest warning about the housing bubble.
http://www.federalreserve.gov/boarddocs/speeches/2005/200509262/default.htm
Housing Market Driving the Economy–From Greenspan None the less: "In my remarks today, I plan, in addition, to focus on one of the key factors driving the U.S. economy in recent years: the sharp rise in housing valuations and the associated buildup in mortgage debt."
Rise in House Prices has tempted borrowers–"[T]he associated run-up in housing values has left households with a substantial pool of available home equity."
Housing Bubble Driving Consumption: "[T]he implied increase over the past decade in consumption expenditures financed by home equity extraction, rather than by income and other assets, would account for much of the decline in the personal saving rate since 1995.."
"Nonetheless, it is difficult to dismiss the conclusion that a significant amount of consumption is driven by capital gains on some combination of both stocks and residences, with the latter being financed predominantly by home equity extraction."
NOTE WHILE I WOULD AGREE THAT SOMETHING OTHER THAN INCOME HAS BEEN DRIVING CONSUMPTION SINCE 1995, I SEE SOMETHING ELSE--FOREIGN CAPITAL. SINCE 1996 I HAVE BEEN CONSISTENTLY SAYING THAT MONEY HAS BEEN PUSHED INTO THE USA PRIMARILY BY FOREIGN CENTRAL BANKS TO PROP UP THE DOLLAR. SEE MY:
http://www.jubileeinitiative.org/Japan.htm , OR,
http://www.jubileeinitiative.org/BePrepared-CapitalAccountProblem.htm
Froth in housing spilling over into other markets: "The apparent froth in housing markets may have spilled over into mortgage markets."
Financial Derivatives in Housing Market Pose Risk: "[T]hese products could be cause for some concern both because they expose borrowers to more interest-rate and house-price risk than the standard thirty-year, fixed-rate mortgage and because they are seen as vehicles that enable marginally qualified, highly leveraged borrowers to purchase homes at inflated prices. In the event of widespread cooling in house prices, these borrowers, and the institutions that service them, could be exposed to significant losses.."
"Significant losses" take on added meaning for someone known for mincing their words.
The Numbers are not reassuring:"The results show that, as of mid-2005, less than 5 percent of borrowers had current LTVs (value of loan relative to the total value of the house) exceeding 90 percent"
The 90% figure is deceptive. Why? Because in a housing market that is experiencing rapidly rising prices the loan value to home value (LTV) ratio should be declining precipitously because of rising house prices making it a poor guage.
For example, consider that the median house price rose 15.8% for the twelve months ended in August.
Assume that a year ago you purchased a home for a price 100 with no down payment with an Interest Only loan. So your loan value to house value would be 100% (100/100) at the time of purchase. Now a year later housing prices have risen 15.8% and the value of your home would be 115.8 (100 X 115.8%) and your LTV would be 100/115.8, or 86.35%. So after one year of making no principal payments on your mortgage your LTV has declined to 86.35% simply because of rising housing prices. In fact your LTV would have been below 90% in about 9 months.
Basically anyone buying a house in the last 9 months should have an LTV less than 90%--even those taking our Interest Only loans with no down payments. In fact in some hot markets that have seen 20% or 40% price gains you would have a LTV less than 90% in a few months. These are the larger markets that represent a good chunk of the real estate market.
The fact is to have as many as 5% of borrowers with an LTV of 90% or more in a hot market of rapidly rising housing prices should be cause for concern, not consolation. It is a clear indication that turnover is high, as is leverage. High Turnover is a sign of speculation! That is what the LTV ratio is telling us.
The Fed Head’s conclusion is wrong:"In summary, it is encouraging to find that, despite the rapid growth of mortgage debt, only a small fraction of households across the country have loan-to-value ratios greater than 90 percent. Thus, the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices."
A Reading Between the Lines tells the story
In an upcoming speech on "Mortgage Banking" to the American Bankers Association in Palm Desert, California Fed Head Alan Greenspan gave his strongest warning about the housing bubble.
http://www.federalreserve.gov/boarddocs/speeches/2005/200509262/default.htm
Housing Market Driving the Economy–From Greenspan None the less: "In my remarks today, I plan, in addition, to focus on one of the key factors driving the U.S. economy in recent years: the sharp rise in housing valuations and the associated buildup in mortgage debt."
Rise in House Prices has tempted borrowers–"[T]he associated run-up in housing values has left households with a substantial pool of available home equity."
Housing Bubble Driving Consumption: "[T]he implied increase over the past decade in consumption expenditures financed by home equity extraction, rather than by income and other assets, would account for much of the decline in the personal saving rate since 1995.."
"Nonetheless, it is difficult to dismiss the conclusion that a significant amount of consumption is driven by capital gains on some combination of both stocks and residences, with the latter being financed predominantly by home equity extraction."
NOTE WHILE I WOULD AGREE THAT SOMETHING OTHER THAN INCOME HAS BEEN DRIVING CONSUMPTION SINCE 1995, I SEE SOMETHING ELSE--FOREIGN CAPITAL. SINCE 1996 I HAVE BEEN CONSISTENTLY SAYING THAT MONEY HAS BEEN PUSHED INTO THE USA PRIMARILY BY FOREIGN CENTRAL BANKS TO PROP UP THE DOLLAR. SEE MY:
http://www.jubileeinitiative.org/Japan.htm , OR,
http://www.jubileeinitiative.org/BePrepared-CapitalAccountProblem.htm
Froth in housing spilling over into other markets: "The apparent froth in housing markets may have spilled over into mortgage markets."
Financial Derivatives in Housing Market Pose Risk: "[T]hese products could be cause for some concern both because they expose borrowers to more interest-rate and house-price risk than the standard thirty-year, fixed-rate mortgage and because they are seen as vehicles that enable marginally qualified, highly leveraged borrowers to purchase homes at inflated prices. In the event of widespread cooling in house prices, these borrowers, and the institutions that service them, could be exposed to significant losses.."
"Significant losses" take on added meaning for someone known for mincing their words.
The Numbers are not reassuring:"The results show that, as of mid-2005, less than 5 percent of borrowers had current LTVs (value of loan relative to the total value of the house) exceeding 90 percent"
The 90% figure is deceptive. Why? Because in a housing market that is experiencing rapidly rising prices the loan value to home value (LTV) ratio should be declining precipitously because of rising house prices making it a poor guage.
For example, consider that the median house price rose 15.8% for the twelve months ended in August.
Assume that a year ago you purchased a home for a price 100 with no down payment with an Interest Only loan. So your loan value to house value would be 100% (100/100) at the time of purchase. Now a year later housing prices have risen 15.8% and the value of your home would be 115.8 (100 X 115.8%) and your LTV would be 100/115.8, or 86.35%. So after one year of making no principal payments on your mortgage your LTV has declined to 86.35% simply because of rising housing prices. In fact your LTV would have been below 90% in about 9 months.
Basically anyone buying a house in the last 9 months should have an LTV less than 90%--even those taking our Interest Only loans with no down payments. In fact in some hot markets that have seen 20% or 40% price gains you would have a LTV less than 90% in a few months. These are the larger markets that represent a good chunk of the real estate market.
The fact is to have as many as 5% of borrowers with an LTV of 90% or more in a hot market of rapidly rising housing prices should be cause for concern, not consolation. It is a clear indication that turnover is high, as is leverage. High Turnover is a sign of speculation! That is what the LTV ratio is telling us.
The Fed Head’s conclusion is wrong:"In summary, it is encouraging to find that, despite the rapid growth of mortgage debt, only a small fraction of households across the country have loan-to-value ratios greater than 90 percent. Thus, the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices."
There is very little cushion should housing prices fall. Don't be fooled by Greenspeak!!!
