What the Future Holds in Store

Check this out over at the Seeking Alpha site.

Earlier this week, the Chicago Mercantile Exchange (CME) extended the futures market on the S&P Case-Shiller Home Prices Indexes from one to five years. Now, futures investors can make bets on where home prices will be as far out as 2011.

For all of you who think a 15-25% pullback in the real estate market can't happen, I suggest you take a look at the CME pricing Web site.

The market is new and illiquid, so price discovery may be imperfect. But futures traders are putting real money on a major pullback in real estate prices. The table below shows the estimated percentage change in real estate prices in 10 cities based on the most recent futures sale on the CME. The data starts with the November 2007 contract and runs annually through November 2011.

NAR Pushes for Increases in FRE and FNM Portfolio Caps

Update: And make sure you read this. If the financial raping and pillaging of the American people doesn't inspire you to revolution, nothing will.

* * *

First the National Association of Realtors (NAR) pushed for exotic loans to keep prices rising. Then they redefined the way affordability is calculated so that housing looks more affordable than it really is. Then they demanded that the Fed lower interest rates. Then they backed the asinine Bush housing bail-out proposal. And now they are pushing for raising Freddie Mac's and Fannie Mae's portfolio caps:

After working overtime to initiate Bush's preposterous mortgage bailout, the NAR (National Association of Realtors) asked themselves what else they could do to artificially prop up overblown home prices. And then it hit them: why not ask the OFHEO (Office of Federal Housing Enterprise Oversight) to increase portfolio caps for Freddie Mac and Fannie Mae.

Under current caps, Freddie and Fannie can only buy mortgages valued at less than $417,000. Proposals are floating around to increase the size of the mortgages the two companies are allowed to buy and sell. Freddie and Fannie each hold more than $700 billion worth of mortgages in their respective investment portfolios already. The new proposals would allow the companies to expand their portfolios to dangerous proportions.

...In our demoralized world, we allow real estate agents to push a personal profit agenda and influence the decisions of policymakers. The NAR is not a trusted authority on banking and risk, yet they are allowed to personally address and pressure Congress and the Director of the OFHEO.

Does anyone else see something wrong with this picture?!

Although not unexpected, it still sickens me nonetheless. When will We The People take back America from special interests?

Write to your representatives. Get out on the street and make some noise.

Some Charts

The Bureau of Economic Analysis updated some of their data (and revised some data points) so I decided to update one of my favorite charts in response.

Here is the average price of a Marin single family residence (SFR) divided by average per capita income for the years spanning 1969 to 2005. The data has been normalized to 1969.

Here is the same data as above except expressed as a percentage deviation from the base trend line (not shown).

Here is the average price of a Marin SFR in terms of the number of ounces of gold you could get in exchange for it for the years spanning 1969 to 2007 (the 2007 data point is based on today's spot price whereas all the others are the average for the year).

Truth or Dare?

I keep trying to understand how it can be that Bernanke's lowering of interest rates last week by 50 bps can be the cure when it was too low of interest rates for too long that caused the problem to begin with. How can a course of action be both the cause of a problem and its cure?

Or was it all about saving the banking system (by giving them more time to unload over-leveraged positions in toxic holdings) and ensuring Wall Street's Christmas bonuses this year? That should make some of the Marin elite happy. But the general public, savers, the middle-class be damned. The Bernanke Fed abandoned inflation and the dollar just for a short-term bailout. Shameful.

What I like about the following video is that it suggests that Americans just might be starting to wake up. The video ends with the following quote but it should really start with it:

"It is to be regretted that the rich and powerful too often bend the acts of government to their own selfish purposes." (Andrew Jackson)

If you want to see the full video clip of Rep. Sanders raking Greenspan over the coals, you can see it here.

San Rafael Advocates Moral Hazards

Apparently, the city of San Rafael wants a new fire chief and the income for such a position ($152,000) is too low for him to be able to afford a decent, middle-of-the-road house in Marin. So, the city of San Rafael has approved to offer him a special low-interest mortgage loan of $600,000 so that their new fire chief can purchase a $1.2 million house. They have also boosted his salary in a number of ways so that his total take-home pay is $179,200 per year. And the justification? According to the city, it is important for people to live in the community in which they work and to be close to family who are located in the area.

The San Rafael City Council has offered a $600,000 low-interest home loan to the city's new fire chief, Chris Gray. Gray, who started his $152,000-a-year job this week, is in escrow to buy a $1.2 million, four-bedroom home in East San Rafael's Villa Real neighborhood, just west of Loch Lomond Marina. Escrow is set to close in early October.

"We'd like the fire chief to live in San Rafael - homes are expensive in San Rafael," Mayor Al Boro said [in justification].

The council approved the home loan agreement at its meeting Monday.

The council also awarded Nordhoff a $350-per-month raise and an additional $2,000-per-year contribution to his deferred compensation account. Nordhoff's annual salary is now $179,200 per year, plus benefits.

Gray, 50, who was previously the fire chief in Glendale, said a big draw of the job was to be near family in the Bay Area. He said he says it's important to live in the community he serves.

This is wrong on so many levels. Look, one of the complaints people like me make about the affordability crisis that afflicts Marin, the Bay Area, and much of California is that public servants, like fire chiefs, teachers, etc., cannot afford to buy a decent house in the community they serve. But handing out special mortgages to a few people that we deem as special is not the answer.

I mean, what about the firemen and others who work for this fire chief? Should they all get special loans too? No? Why not? Why don't we insist that this guy make some hellish commute from Sonoma or the East Bay or the central valley like we do with so very many other people who work in Marin? What about you and me? I make about what this guy originally came in making, but I don't see any handouts coming my way? Why aren't we offering a $600,000 mortgage to this poor, blind, sick Marin resident facing foreclosure or to anyone else facing foreclosure for that matter? Oh, and 'it is important to be near family and to live in the community in which we work'? (Haven't I been saying the same thing?) Well then, what about all the people who grew up in Marin but who cannot afford to live here, be near their family and loved-ones? Why don't they get special handouts too? Why aren't we telling this new fire chief the same lame story realtors tell other folks -- go buy "the perfect starter home" which comes in at about 800 sq ft in a crappy part of town as that is about all your income can support?

The hypocrisy of this is almost too much to bear.

Look, despite the fact that we Marinites like to apologize for our ludicrous housing costs and hide behind the belief that we are so very special, the problem is that we are suffering from an affordability crisis -- a crisis no matter how much the real estate industry tries to redefine the calculation of affordability and the median sales price. House prices have become unhitched from certain, basic fundamentals such as income. The only healthy way out of this mess is for house prices to fall and fall a lot; not provide designer handouts. The sooner we as a community engage with this the better -- the less of a mess we have to clean up and the less likely someone will come in and force some unpalatable course of action upon us (like affordable housing which we, for some reason, are so vehemently against). What we should be doing is to do everything we can to make sure house prices are congruent with the income of the people who live here and that credit is given out based on proper assessments of risk (and not given out to "anyone with a pulse"). You Mr. Marin House Owner may not like the idea of your house value dropping, but that is exactly what must occur. And besides, if you bought your house to live in, you shouldn't even care.

The Fed, Congress, bailouts galore, and now Marin... moral hazards define our society it seems.

And why isn't the Marin IJ questioning this, even a little? There are issues here that even they should see.

Common Cents

Now, I thought this (in the IJ no less) just doesn't happen in Marin because we are all so financially savvy and wealthy:

Marc Savoy, a San Francisco mortgage consultant and real estate attorney who also is a former resident of Mill Valley, says for the past five years, the 5-year, interest-only loan was the most popular loan written. In other words, for the past five years, the most popular financing vehicle for property purchase in the North Bay was a loan that remained stable at a low interest rate for the first few years - typically three or five - and on which no principal was paid. At the end of the three or five years, however, the loan is "recast" to include payments that reflect (a) some of the as-yet-unpaid principal, and (b) today's higher interest rates.

When loans are recast, people find their monthly payments are suddenly much higher. These folks cannot refinance because the credit markets have tightened to a stranglehold, and they can't sell because there are few buyers who can obtain the nonconforming loan (or who have the whopping down payment) that's needed for most properties in Marin.

Cry me a friggin' river already. No one forced them to take out a suicide loan for their Marin POSs.

But no worries. If you can't sell your Marin POS now that your rates are resetting and you're still asking bubblicious pricing that, deep down inside, you just know is your God-given entitlement by virtue of being so damn special, then Christopher Thornberg has the answer for you:

Many home sellers, bogged down in a housing downturn, are now doing the only thing they can to sell, dropping prices. Only this time, the sagging market often means taking a loss if the home was bought in 2005 or 2006. Christopher Thornberg, the former UCLA Anderson Forecast economist who predicted the 'housing bubble' since 2002, said that sellers' only hope is to "price to sell."

"You want to get out of the market," he said. "There’s no point in holding out if you want to get out before the next three years."

'Lower the price'?! Now who would have ever thought of that? What a novel concept!

But I guess someone better explain said concept to this sorry Mill Valley seller as their POS still hasn't sold and has been on the market for nearly two years (despite what the misleading DOM says... 131 days). You have got to wonder how long the listing agent is willing to spend money on advertising this pig before they force the seller to admit that their flip flopped long ago and they ought to just face the fact and drop the price to where it needs to be to sell.

On second thought, I think the seller of the above mentioned POS serves as a valuable warning to our community -- "don't let this be you".

The Latest Out of the Mouth of Greenspan

Alan Greenspan was reported as saying:

US house prices are likely to fall significantly from their present levels, Alan Greenspan has told the Financial Times, admitting that there was a bubble in the US housing market... the decline in house prices “is going to be larger than most people expect”.

It's a good thing we are immune and special and not in a bubble, at least according to the experts. That way we get to continue living in a crushingly unaffordable market while the rest of the state becomes a comfortable place to live.