The Buck Stops Here: Housing Price Trends and the Economic Outlook

Is the time finally right to get back into the residential real estate game? And what are the broader implications of trends in housing on the overall economy and financial markets? Let's take a look at the arguments and data.

The Case for Investing in Housing

Mortgage interest rates have come up some recently but are still near historic lows and appear attractive.

U.S. 30-Year Mortgage Interest Rates

Note: chart data only runs through early 2010; if updated through 2011
 the chart would show a recent increase in interest rates to around 5%.

We're also entering the comparatively slow home buying season and prices, after a post-bubble popping uptick, have been retreating recently.  There may be some sweet deals to be had over the next several months.

And perhaps most importantly are the following two considerations: a) the overall economy is showing increasing signs of life and b) the risk of deflation appears to be subsiding as commodity (e.g., oil) and food price inflation is taking off globally. Real estate has historically been considered one of the best ways to protect oneself against broad inflation.

Add it all up and it would appear that housing could in fact be a prudent investment right now. What would be reasons for holding off?

Continue reading the full article published on SeekingAlpha here.

David Brooks and Dick "Buy Lehman" Bove Perpetuate TARP Profitability Myth

David Brooks

Some myths just won't die. And if repeated often enough they can become legend.

Banking analyst and regular CNBC talking head Dick Bove is doing his part to keep the TARP was 'profitable' myth afloat. Joining this cause is NY Times columnist David Brooks, who on a recent episode of Charlie Rose made it abundantly clear that accounting is not his forte. Like Bove, Brooks mistakenly believes that TARP is 'profitable'.

To my knowledge Brooks, who based on appearances could easily be mistaken for an accountant, is no financial expert. So perhaps he can be forgiven for sending his proselytizing mouth into terra incognita. Bove, on the other hand, should definitely know better.

As discussed previously here, here, and here, the only way to claim that TARP is profitable is by viewing it in isolation of the entire government bailout, which in addition to TARP includes GSE conservatorship, Fed asset purchases, etc. Bailing out Fannie and Freddie alone could wind up costing taxpayers trillions, thereby swamping any gains seen by TARP.

The results of TARP are intimately connected and influenced by the other government bailout programs. Claiming that the relatively small TARP bailout sliver is profitable is intellectually dishonest and emblematic of the accounting shenanigans which continue to distort the balance sheet picture of our financial system and government.

Is there a political motivation behind the repeated claims of TARP profitability? Establishing this perception would certainly make the the banking sector look better in the eyes of taxpayers. It would also cast a more favorable light on the massive government intervention initiated by 'Government Sachs' and Treasury Secretary Hank Paulson and then furthered by the Obama administration.

Unfortunately this notion of TARP profitability seems to have gained a toehold in the mass media. As such we can expect to see future government bailouts justified on myopic, misleading accounting.

True Cost of Government Bailouts

Watch the full episode. See more Need To Know.

Goldman Sachs Says Fed's Next Money Printing Move is Imminent: "No Point in Doing Anything Less Than $1 Trillion"

Goldman Sachs chief U.S. economist Jan Hatzius yesterday said that the Fed is going to have to eventually print more money to tune of $1 trillion+.

In other words, the Fed's recently announced 'QE Lite' simply won't cut it. Hatzius figures are in line with estimates for QE 2.0 (the term that has become attached to the next massive round of Fed money printing) that I've been pointing towards for awhile.

In terms of the timing of QE 2.0, Goldman Sachs Chief Global Economist Jim O’Neill said "September might be a little bit soon, but by October I would say for sure if the data carries on being as disappointing as it’s been."

Given that market confidence is clearly deteriorating, why won't the Fed act sooner? I've recently wrote about my ideas on timing here. Ken Rogoff, the Harvard economist and author of the only economic history bestseller This Time is Different, recently appeared on Charlie Rose. He suggests that the Fed is hesitating because they're "nervous about overshooting". Aiming for 3% inflation, the Fed may miss their target badly and wind up with 30% hyperinflation. However, Rogoff states the "Fed will have to take that chance".

The U.S. dollar has held its ground so far, but concerns are rising about ongoing record budget deficits and what the government will do about the massive mortgage market problem that is Fannie and Freddie. The terrible housing figures are coming in spite of record low mortgage rates, housing prices 33% off their peak, and federal government subsidized mortgages for even Manhattan condos that require only 3.5% down payment. Perhaps most importantly, the now all but certain QE 2.0 makes the future value of the dollar anything but certain.

From an investment perspective, any move by the Fed to print more money is bullish for gold.

Canada vs. U.S.: A Tale of Two Housing Markets

Americans are often accused of not looking beyond their own borders for sound policy ideas. This is unfortunate, in my opinion, because there is much that we can learn from other countries. Perhaps one such example is Canada's apparently successful approach to housing.

Oh Canada, How Did You Dodge the Housing Bomb?

As part of my week in Vancouver, B.C. at the Agora Financial conference I've been reflecting on the striking differences between the performance of the U.S. and Canadian housing markets the past few years. I wonder how many Americans are aware of the following:

1. Approximately 70% of Canadians own their own home (which is in line with U.S. home ownership).
2. Canada has not experienced a precipitous decline in housing prices.
3. It was unnecessary for Canada to bailout its banks (unlike the U.S.'s nearly $4.7 trillion bailout and counting).

Canada, not China, is the U.S.'s largest trading partner. The huge relative size of the adjacent U.S. economy certainly influences Canada's economic fortunes. One might naturally assume that as goes the U.S., so goes Canada. So why didn't Canada experience a similar housing crash? The answer may be found by reviewing the key differences between their respective housing markets.


Fundamentally Different

There are at least four major structural differences that help explain why the Canadian housing market has managed to remain afloat while the U.S.'s has sunk:

1. Canadian banks keep their mortgages. In the U.S. many mortgages were "securitized", meaning they were sold by the original lender to someone else. When a mortgage is sold the original lender can largely avoid any immediate financial cost if the borrower defaults. However, the new holder of the mortgage (say from Dusseldorf) suffers the immediate financial cost of the default. In contrast, if there is a mortgage default in Canada the original Canadian lender takes the hit. One can argue that the Canadian approach promotes greater mortgage lending accountability.
   
2. CHMC is no Fannie. While it may first appear that Canadian Mortgage and Housing Corporation (CHMC) is the equivalent of Freddie Mac and Fannie Mae, there are several key differences. First, CHMC does not own anywhere near the 50% of total domestic mortgage market that Fannie and Freddie hold. But perhaps more importantly, Fannie and Freddie were publicly traded for-profit enterprises with all the accompanying pressure to meet shareholders expectations. CHMC has one shareholder -- the Canadian government. Even though it also has a mandate to assist low income earners with housing, it took on lower risk than the formerly high flying Fannie Mae. (Legendary Fidelity Magellan manager Peter Lynch kept a photo of Fannie's HQ in his office and ironically suggested that "The stock has been so great they ought to retire the ticker symbol")
   
3. The U.S. has non-recourse states. In the U.S. homeowners in non-recourse states can walk away from their mortgage without any risk that the mortgage lender will come after their other assets. Perhaps not coincidentally states like Nevada, Arizona and California that have been hardest hit by the housing bust are also non-recourse. In Canada borrowers remain personally liable for their mortgage loans. If a Canadian were to strategically default then his/her car, savings, or other assets could be pursued by the bank.
   
4. Canada has no mortgage interest tax deduction. Prior to the crisis I often heard a number of Americans talk about how much they loved their mortgage tax deduction. What many Americans never realized is that this deduction served as a significant incentive to take on large housing debt. A bigger mortgage = bigger interest deduction = lower taxes. Financial reform did not contain any changes to the mortgage interest deduction. However, heavily leveraged America should perhaps think twice about whether the tax code should incentivize incurring huge quantities of mortgage debt.

Can the U.S. import any of Canada's policies? At present it seems unlikely. The securitization genie is completely out of the bottle. And while it may be logical to repeal an incentive to go into massive debt there is a very large constituency of home owners who would lobby hard against dropping the mortgage interest tax deduction. Any change to this tax rule, or a reduction in Fannie's and Freddie's mortgage holdings, would also put additional pressure on a still very fragile (and probably heading lower) U.S. housing sector.

American Myopia?

Returning to the criticism that led off this post, why don't American's take more interest in the policies of Canada or other countries for that matter?

The simple answer perhaps is that success breeds hubris. Americans have somewhat understandably felt that, when compared to the rest of the world, their country has done a lot right for a long time. But I think there is more to the story.

Another reason may be that Americans simply don't get around as much. While a growing number of Americans hold passports, according to a 2008 GAO study only 28% of Americans do so. I don't find it reasonable to compare American passport percentages with say Europeans, where a much higher percentage of citizens hold passports simply due to the fact that many Europeans live in immediate proximity (often within only an hour or two) of several different countries. Perhaps our closest comp is Canada where approximately 53% of Canadians -- or nearly twice as many as Americans -- hold passports.

However, there is some evidence that a more outward looking attitude is taking hold in the U.S. During healthcare reform there was public discussion of foreign approaches, such as the German and Swiss healthcare models which are generally considered to deliver equal or better overall healthcare at a substantially lower cost than the U.S.'s healthcare system. Perhaps more ominously, here at the Agora conference I was discussing Arizona's controversial immigration law with an Arizonian and he referenced ancient Rome and Cicero's writings about what can happen to an empire which fails to control its borders.

Today's Hooey: Claiming Bank Bailouts Are "Profitable" for Taxpayers

CNBC, Reuters, and other media outlets trumpeted Keefe, Bruyette & Woods claim that bank bailouts are profitable for the U.S. government (and hence the U.S. taxpayer).

If it weren't for the report's intellectual dishonesty this news would have made for a nice political headline and taxpayer feel good story.

The glaring problem with Keefe's Mr. Fred Cannon's "profitable" conclusion is that he arrived at it only by ignoring all the other government bailouts during the financial crisis.

Is the Fed About to Go Nuclear?

"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system and for the global economy. Think the unthinkable." 

- Andrew Roberts, Credit Chief, Royal Bank of Scotland (RBS)

(Note: this article is aimed in particular at individuals that are not as familiar with concepts such as quantitative easing, inflation, deflation, and what all this talk of 'printing money' means. These concepts can appear complex and intimidating, but they are not beyond reach of non-economists. Further, they are incredibly important to everyone. My hope is that you will take the time to learn more about this important topic and click through to some of the background info links I have included.)

The latest installments from the Telegraph's Ambrose Evans-Pritchard, who has been dutifully chronicling and predicting quite accurately the unfolding global financial crisis, suggest the U.S. Federal Reserve may be about to double down on its massive money printing campaign.

Housing: Could Strategic Default Turn Into a Full Blown Movement?

By now many people are aware that the housing sector is showing renewed signs of trouble.

In May, traditionally a time of the year when home purchasing activity picks up, both existing and new home sales tanked. And this is happening in spite of the fact that mortgage rates are at their lowest point since the 1950s.

Nearly one in four homeowners is "underwater" on their mortgage, meaning they owe more money than their home is worth. As detailed by the New York Times more and more homeowners are electing "strategic default", which is when a home owner quits making his/her mortgage payment even though s/he has the financial means to continue paying.