Why US Home Market is Still Hurting

March 14th, 2011

Home market isn’t on rebound yet

Are we there yet? Is the U.S. home market on the upswing?

As Alan Greenspan would say, “there are shoots,” although a true spring in housing is still hampered by a chilly economic climate throughout most of the country.

One positive sign came from new mortgage applications, which jumped to the highest level in three months last week, according to the Mortgage Bankers Association.

As Congress and state attorneys general wrangle with a number of reforms to seed a housing rescue, most of the country is not out of the woods. Yale Economist Robert Shiller warned recently that housing prices could “slip another 15 to 25 percent”.

Foreclosures and defaults are continuing unabated. Most of the news concerning housing is still frosty. The S&P Case-Shiller Index (for the fourth quarter of last year), showed prices in 19 out of 20 markets surveyed down for December over November. Washington, D.C. was the only major market that rose.

Cities gob-smacked by the bust — Las Vegas, Miami, Phoenix and Tampa — all hit new lows in December. Even markets that weren’t inflated as much in the bubble saw new lows (Atlanta, Charlotte, Seattle and Portland, Oregon).

Although the percentage of distressed sales is still alarmingly high at more than one-third of all sales, according to CoreLogic, they are down from their peak in January of 2009.

Why would I be remotely optimistic that we’re not in a sustained double-dip housing recession? Unemployment has been improving of late. That’s always a plus for housing and figured in the meager spurt in mortgage applications.

The other hopeful sign is that Congress slowly seems to be moving to fix what’s broken in the housing market. The Obama’s Administration main housing aid program, known as “HAMP,” is targeted for elimination.

Good riddance. HAMP has been so ineffective that Elizabeth Warren, the new consumer financial bureau adviser, likened it “bailing out the boat with a teaspoon as it takes on gallons of water.”

An even more aggressive — and potentially helpful — proposal is being discussed by major banks and state attorneys general trying to settle over alleged “robo-signing” mortgage abuses.

The states’ proposal would allow homeowners to write down principal balances while renegotiating mortgage terms. Although it’s too early to tell, this one measure could prevent a large number of foreclosures. It’s only fair since homeowners attempting to refinance were unable to negotiate lower payments based on home values that crashed. Congress has failed to allow mortgage holders to write down balances in bankruptcy court, so this could provide some buoyancy for the ever-sinking housing market.

There are millions of foreclosures in the pipeline that create a shadow inventory of homes. Banks can still dump these properties on the market, which will further depress housing prices.

Only keeping people in their homes and stimulating sales could forestall a full double dip. Back in Washington, policymakers are sluggishly attempting to restructure the debt-besotted mortgage insurers Fannie Mae and Freddie Mac, which were seized by the Treasury Department in late 2008. The companies now account for more than 80 percent of the U.S. mortgage market.

One item that the Fannie/Freddie reconstructive surgery team needs to consider: Softening the rule that credit scores be nearly perfect for home buyers.

In recent years, the mortgage insurers have raised the standards so high that only a few qualify for loans now. One mortgage broker friend of mine says her business is so dismal (citing the credit score problem) that she’s getting out of it.

If the states and Feds can get on the same page, maybe they’ll figure out that keeping people in their homes is still a good idea — and one way to buoy the market. Otherwise, expect the long winter in U.S. housing to continue. Better to be a hedgehog than a groundhog.

Larry Swedroe Praises Cul-de-Sac

February 21st, 2011

This is a review from Larry Swedroe’s Moneywatch.com column:

Book Review: The Cul-de-Sac Syndrome

By Larry Swedroe

Millions of Americans overbought homes and were totally unprepared for the consequences of the bust -as homes were supposed to be safe investments. For millions of others who lived within their means, it meant a destruction of the equity they built up and perhaps were relying on to help fund their retirement. For many, the American dream of home ownership was gone.

What drove the irrational exuberance that eventually ended in the worst financial crisis since the Great Depression? Was it simply greed from speculators, mortgage brokers and investment bankers? Or did the true cause lie somewhere else? John Wasik tries to provide the answer in his well-written and well-researched book The Cul-de-Sac Syndrome, an interdisciplinary study of the true cost of today’s American dream. As one reviewer put it: “It’s an unflinching look at the recent period when homeownership actually made many people poorer as they tapped their home equity, went into debt to finance their lifestyle and contributed little to retirement investing because of the misguided assumption that home appreciation would fund their future years.”

Wasik’s focuses much of the blame on the “spurb,” his term for automobile-dependent sprawling suburbs whose only connections to cities are multi-lane highways. He shows how the American dream of moving further from a city to buy a bigger house and find better schools was a costly proposition, which was an underlying cause of the crisis. For me, it was a totally new look at the American dream and its costs. Wasik also provides some prescriptions.

Axe the Home Mortgage Break

February 14th, 2011

Kill the mortgage deduction and give it to entrepreneurs
By John F. Wasik (Reuters)

This is a subject I discussed in my book The Cul-de-Sac Syndrome, which is now in paperback and ebook.

Prospective home buyer Jessica Doctoroff (C) visits a condominium for sale with her real estate agent Brenda Bremis in Medford, Massachusetts April 2, 2009. REUTERS/Brian Snyder Somehow I don’t think President Obama had the home-mortgage interest deduction in mind when he mentioned the U.S. tax code before the U.S. Chamber of Commerce this week.

Yet winding down and eliminating this write-off for homes would be good for business. It’s unfair, doing nothing to revive the housing market and can be put to better use shifting it to entrepreneurs to create jobs.

Most of the job creation in the U.S. economy comes from small businesses, which typically have no public shareholders to sate and are not primarily interested in fattening pay packages of overpaid executives.

The home mortgage deduction needs to go because it doesn’t make housing less expensive, either. If anything, it makes homes more expensive because the subsidy inflates prices. Most homebuyers don’t even itemize to take advantage of it. Nixing it would make homes more affordable.

As Alan Mallach, senior fellow at the Center for Community Progress, wrote in this space: “It is one of the most regressive parts of the tax code, since it affects all house prices, including the price of houses bought by lower-income home buyers, who rarely itemize and get little benefit from the deduction.”

Mallach cites one study found that “barely 10 percent of homeowners earning less than $30,000 take the deduction, but they pay higher prices for their homes to benefit more well-off homeowners. On top if this, it is projected to add $120 billion to the federal deficit next year.”

Will getting rid of the write-off deep-six the already flagging U.S. home market? Mallach noted that Italy pared its residential housing deduction in 1992 and maintains a higher home ownership rate than the U.S.

Why give a break to entrepreneurs? Won’t they squander it? True, many businesses won’t make it out of start-up mode, but those that become profitable become employment engines. Small and medium-sized enterprises account for 60 to 70 percent of most jobs in industrialized countries. Why not give those that are struggling to survive a tax break if they can create more employment?

According to Robert Litan of the Kauffman Foundation in Kansas City, between 1980 and 2005, nearly all U.S. net job creation was produced by small firms.

When President Obama exhorted corporations to spend the “$2 trillion sitting on their balance sheets” to bring down the 9-percent unemployment rate, he was preaching to a tone-deaf choir. Although they wanted to hear that the corporate income tax would be reduced — and that message was delivered — he should have talked about how he was going to help small and medium-sized businesses.

Big public corporations have long relied upon anti-social incentives when it comes to employment. They can fatten their bottom lines when they lay off people, cut benefits, take over other companies and sit on cash. The market often rewards them for doing so and executive stock options go up in value.

The White House should be studying what Singapore, Hong Kong and New Zealand are up to, which were rated as the three best places for the “ease of doing business” by the World Bank. And instead of talking before the mega-corporate club of the U.S. Chamber of Commerce, he should talk to some innovative entrepreneurs around the country.

A more socially responsible tax code needs to reward people for productive activity. Giving Americans a huge break to buy an overpriced home has already gotten millions into trouble. It’s the one part of the American Dream that has turned into a nightmare.

New Review on UK Edition

January 6th, 2011

This is the latest from Play.com on the UK edition of The Cul-de-Sac Syndrome:

An incisive look at the consequences of today’s costly and damaging suburban lifestyle In The Cul-de-Sac Syndrome, Bloomberg News’ John Wasik exposes the economic, cultural, environmental, and health problems underlying life in suburbia. Wasik provides powerful insights into how the U.S. suburban lifestyle has become unsustainable and what can be done to salvage it. His observations are firmly grounded in exclusive on-the-ground research, interviews with thought leaders, and the latest studies and statistics. The book * Exposes the untold truths about suburban home ownership: green isn’t always so green, life isn’t cheaper after accounting for gas, water, and taxes, and modern suburban living isn’t so idyllic considering the toll it takes on our health * Includes exclusive research and analysis by experts in the field that debunks the many myths associated with suburban living * Explores innovative solutions being developed in cities across the country The American Dream of moving further from a city to buy a bigger house and find better schools has become a costly nightmare. The Cul-de-Sac Syndrome examines why and what can be done.

When the Kids Move Out, Should you Sell Your Home?

December 14th, 2010

This is an interview I did for a blog about whether you should sell your home when you become an empty-nester.

http://www.workgoesstrong.com/planning-downsizing

Halt HAMP

December 10th, 2010

Cut the government’s home modification program

By John F. Wasik, author of The Cul-de-Sac Syndrome

A house for sale is pictured in Alexandria, Virginia March 22, 2010. REUTERS/Molly Riley The government’s Home Affordable Modification Program (HAMP) should be scrapped. It was flawed from the beginning and is not going to get much better in helping people keep their homes. It’s time to start over.

This is not a Scrooge-like gesture, and it certainly won’t decrease the surplus population of foreclosed homes on the U.S. market. The HAMP should be put out of its misery because it’s ill conceived and can be replaced with some more effective measures.

If the White House was truly serious about preserving homeownership, it would have never designed HAMP the way it did. It was loaded with laughable incentives for lenders to lower rates on troubled mortgages, including a $1,000 payment to servicers and lenders. What was the White House thinking? Just getting a decent lawyer to open a file could cost a bank $1,000.

Although the government said it has started more than 3.7 loan modifications, it ignores a stark economic reality: in many cases it makes more sense for the bank to continue to foreclose than to work with the borrower. And the people who are in the worst trouble still can’t afford the loan even at a lower interest rate or are jobless.

Bankers won’t say this, but may prefer foreclosure to modification. Then they can get defaulted loans off their books and eventually lend more money. They can also resell the property once it passes through foreclosure. And during the process, they can assess even more fees for late payments.

The most egregious flaw in HAMP and related programs is that it’s voluntary. In far-too-many cases, banks don’t have to do much of anything except show up in court with their team of lawyers, knowing that homeowners are broke and can’t afford decent representation. Banks don’t even have to return phone calls.

Little wonder that Darrell Issa (R-California), the incoming chairman of the House Oversight Committee, wants to dump HAMP. Let’s say that the government has succeeded in obtaining 500,000 permanent loan modifications where mortgage rates are reduced.

If you round up the number of foreclosures from 2008 to the present to about 6 million, that means that more than 90 percent of defaulted loans go into foreclosure. That’s an appalling record if you’re a government agency trying to save homes. Even if the banks manage to survive federal and state probes into allegedly “robo signing” dodgy loan documents, HAMP still won’t be of much help to struggling homeowners.

Persistent unemployment — at 9.8 percent nationally — is going to push even more homeowners into foreclosure. Even the Fed’s $600 billion QE2 easing of long-term rates isn’t going to stem this ongoing tragedy.

Yet killing HAMP without replacing it with a better program is irresponsible. At least three alternatives loom:

Rent-to-own. Let’s say mortgage servicers are granted the property’s title subject to agreement of the borrower and other interested parties as an alternative to foreclosure. Homeowners are not evicted and become renters at a lower monthly payment. They can rebuild equity and can repurchase at a new market value in the future.

Unemployment Forbearance. While these programs are already offered by some lenders, make them widespread and flexible. Lose your job? You can skip principal payments and only pay interest until you or a spouse/partner are re-employed.

Bankruptcy Write-Off. What if you file to reorganize your debts? There needs to be a provision to write down mortgage balances in some way. You can do that with every other kind of debt.

Any change in HAMP will have to acknowledge that the program does nothing to square a home’s mortgaged value with its current market value. In the hardest-hit areas, home prices have dropped from one-third to one half.

Corporations revalue and dispose of downgraded assets all the time and take write-downs every quarter based on various forms of depreciation. Why can’t homeowners do the same? Turnabout is fair play. After all, didn’t the Fed dole some $3.3 trillion in aid to banks during the meltdown, including some $1.25 trillion in distressed mortgage-backed securities?

Congress has imbued the tax code with multiple tax breaks to promote homeownership. You can deduct everything from mortgage interest on first, second and home-equity loans, escape capital gains taxes in most sales and even write off property taxes (if you itemize).

The biggest break of all would be to legally trigger the right to re-negotiate a home mortgage if a property declines in value. If the American dream is still important to Washington, this is a game changer.

Cheap Electricity Can Power Grid

October 15th, 2010

This is a talk I gave in Northbrook, Illinois, on the dream of electrical genius Nikola Tesla to broadcast power:

http://www.chicagopublicradio.org/Content.aspx?audioID=44922

Why Home Prices are Stuck in the Ditch

October 12th, 2010

By John F. Wasik (Reuters)

Don’t hold your breath on home appreciation

FINANCIAL/MORTGAGESYou may see two full moons in a month before home prices start rising again across the U.S. The rip tide of a huge home inventory, increasing foreclosures, unemployment and more bank woes continue to roil the housing market in most regions.

If you think you’ll see a profit from selling your home or hope to get a home-equity loan based on recent appreciation, you may have to wait a while — maybe a few years.

A host of demons continue to bedevil the U.S. home market. The worst of these gremlins is unemployment. Home sales and prices are directly linked to the number of people working. A jobless rate around 10 percent doesn’t spur home sales.

Nobody is in a hurry to buy homes. According to a recent report by Ned Davis Research, housing prices may not begin to appreciate until the jobless rate goes to 7 percent or lower.

Once the jobless rate gets to about 6 percent, the firm estimates that home prices may begin to rise roughly 2 percent annually or track the historical level of inflation.

“Yes, there is a light at the end of the dark housing tunnel,” writes Joseph Kalish, the report’s author, “but it will take at least two years and possibly more to get there.”

Complicating any housing rebound scenario is the fact that there are millions of unsold homes on the market and more are being acquired and resold by banks through foreclosures.

Kalish estimates that this “excess supply” is between 1.4 million to 2.5 million units. Even with record-low mortgage rates, in a slack economy, those homes don’t sell, so new homebuilding makes no economic sense.

The huge home inventory also puts pressure on banks to sell the homes they own at below-market prices just to get them off their books. Remember, banks are not in the real estate business; they don’t want to own and rent homes.

This tsunami of foreclosures and vacant homes is likely much worse than what most big bankers are willing to admit. Christopher Whalen, a financial analyst with Institutional Risk Analytics in Torrance, California, told the conservative think tank American Enterprise Institute on October 6 that “non-payment by borrowers and mounting foreclosure backlogs are creating the conditions for the collapse of some of the largest U.S. banks in 2011.”

In Whalen’s view, the biggest banks should have been broken up in 2008-2009 instead of propped up with TARP and Federal Reserve funds. Ironically, megabanks like Bank of America got bigger during the crisis by absorbing troubled subprime mortgage-gorged firms like Merrill Lynch.

The recent halt to foreclosure processing by major banks, Whalen noted, was an indication that banks are up to their necks in bad debts that are only getting worse. “The use of loan modification to make bad credits appear ‘current’ is an economic fraud perpetrated by Washington that is already becoming apparent via foreclosure moratoria,” Whalen stated.

Banks are being swamped with defaults put on overdrive by massive unemployment. The so-called “underemployment” rate of those still looking for full-time jobs but working part-time or who have abandoned their search is 17 percent. These folks can’t afford mortgage payments.

There is one silver lining to all of this mayhem. It’s likely that mortgage rates will remain low for at least another year, possibly longer. Refinance if you can. If you need to repair or add onto your home, now’s a good time.

On the savings side, your only consolation is that you can find thousands of FDIC-insured institutions that are not having financial problems. Credit unions are another strong option. There’s plenty of no- or low-fee competition for your checking, credit card and savings accounts.

You won’t get rich from investing in insured certificates of deposit or other savings accounts, but you won’t lose any money, either. Now is the time to reduce your debts as the megabanks struggle to stay afloat.

John F. Wasik is the author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.

Photo: REUTERS/Rick Wilking

Restoring the Busted American Dream

October 5th, 2010

This is a press release based on my book.

Restoring the Busted American Dream: “The Cul-de-Sac Syndrome” Shows Which Housing Markets Will Prosper, Which Won’t

Market Wire, July, 2009

Despite recent good news on housing prices and sales, something has got to give or the U.S. housing meltdown will worsen.
Millions owe more on their mortgage than what their home is worth. There
may be more than 3 million foreclosures this year. What will it take to
restore the American Dream?

In “The Cul-de-Sac Syndrome,” the #1 book on suburbia on amazon.com, author
John Wasik takes a penetrating look at the housing crisis and is optimistic
on how it can be resolved. As a result of his incisive research, Wasik can
comment on which markets will recover and which won’t and can tell you why
he’s optimistic about Boston, New York, Chicago, Philadelphia, Los Angeles,
San Diego, Dallas-Fort Worth, Seattle, Denver and Portland, Oregon.

In his controversial book, Wasik skewers the American dream and questions
whether the typical suburban home is sustainable. He asserts that home
prices were unaffordable even before the boom — a factor that grossly
inflated the bubble.

“Despite what’s being reported, several housing markets will recover, while
others — like Las Vegas, Phoenix, South Florida and Central California –
may take a generation to come back,” Wasik says in this groundbreaking
book.

“The government has been like a blind ostrich in stopping foreclosures,”
Wasik adds. “Without a clear bottom, nobody will want to buy.”

Corporate Dollars and Campaigns a Toxic Brew

September 20th, 2010

The quickest way to bruise your brand
Sep 16, 2010 10:58 EDT
brands

USA-RETAILSALES/

Corporate dollars and political campaigns are like oil and water for well-established retail brands.

Despite the troubling flexibility provided by the Supreme Court case Citizens United, which allowed more direct corporate and union contributions to political campaigns, this freedom can be perilous.

Target learned first-hand how political donations could damage its brand. A public relations disaster followed its contribution to a group backing Tom Emmer, a Republican candidate for Governor in Minnesota, where Target Corp. is based.

According to a study by Brandweek, a trade publication, Target’s reputation was hurt in early August when the donation was revealed — and still hasn’t recovered. The publication’s BrandIndex report showed the company lost one-third of its “buzz” score in 10 days last month, recovered modestly, then fell again during a media backlash. Target’s stock price fell to under $51 a share by Aug. 30, but has since recovered to close above $53 recently.

Not only did the contribution result in a blizzard of op-eds, blogs and negative publicity, it seeded a boycott campaign from the well-funded progressive organization MoveOn PAC.

Brand damage can be severe when corporations muddy their image by backing campaigns.

In Target’s case, shoppers who liked their clean, well-lit discount stores generally expected Target’s image to be apolitical. You don’t have to wander far from a Target checkout to see how the company supports a wide variety of community non-profits. Overt political leanings alienated an untold number of customers.

Direct political funding is bad for business because high-profile retail brands are expected to project this welcoming, multi-cultural image devoid of any agenda outside of free enterprise. They want your business, but they need to do it without a partisan message.

While we wouldn’t be surprised to see a gun manufacturer supporting a pro-second amendment politico, we would be appalled to see a fast-food chain back a pro-life or pro-choice candidate. It’s a horrible fit and sullies a company’s marketing message.

That’s not to say corporations can’t deliver their political dollars in other opaque ways. There are still more than 10,000 lobbyists on Capitol Hill and thousands more in state capitols. They can cloak their donations through trade groups, “527″ organizations or “Astroturf” groups that appear to be grassroots, but are seeded and organized by corporate dollars.

Jane Mayer’s recent New Yorker piece shed light on the Koch family’s various political groups and libertarian promotions.

Have consumers of Koch Industries’ Georgia-Pacific products such as Quilted Northern bath tissue and Brawny paper towels resented the Koch family’s funding of anti-Obama campaigns? Their right-wing bankrolling has largely flown under the radar of mainstream media, yet is constantly monitored by groups such as Sourcewatch.org.

No matter how many watchdog groups there are, corporations have far more money and ways to evade an ever-dimming media spotlight. Corporate-funded “Super PACs” are raising hundreds of millions for mid-term Congressional races.

Super PACs feature groups like American Crossroads, run by former George W. Bush adviser Karl Rove. The group has raised more than $17 million and includes donors like Dixie Rice Agricultural Corp.

Meanwhile, money keeps pouring into campaigns like a breach in an old dam. Political fundraising — now exceeding $2 billion in this cycle — according to the Associated Press, will probably break records this year.

In addition to unions such as AFSCME, IBEW, Laborers and SEIU, the “heavy hitters” in political contributions are AT&T, National Association of Realtors and Goldman Sachs. These groups represent more than $355 million in political donations, based on data through August 22, according to OpenSecrets.org.

As it stands now, it’s unlikely Congress will do anything to dampen the impact of the Citizens United ruling before the November election. Yet open disclosure of direct and indirect special-interest funding is essential, something the proposed Disclose Act attempts to mandate.

No matter what brand of politics you subscribe to, you should know which corporations are backing candidates and why. Corporations already have more than enough lobbying muscle – and those efforts should be fully exposed.

John Wasik is also the author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.”