Michael Clarkson

Folks:

I am far from a populist. I am Reagan Republican. However, you knew you would see this coming with the banks.

When working a short sale, I ensure the bank puts the non-recourse in writing, or make sure the clients document I advised them to seek a lawyer's opinion about the potential risks of recourse (or that they willingly chose not to).

Well, here comes the first of the deficiency judgments...

http://finance.yahoo.com/news/Mortgage-lenders-pursue-cnnm-3107909798.html?x=0

Michael

DEMAND OBAMA REPEAL THE PROCRASTINATION TAX!!! (Say what?!?!)

Are you paying "The Procrastination Tax"????

In these times of economic hardship, there is a tax so many pay WILLFULLY!!! I can never understand why, but they do: The Procrastination Tax.

You pay it, and don't even realize it! And it's likely the biggest discretionary tax you will pay! It's a tax paid for with trade-offs.

Everyday trade-offs that people of my generation might do differently include:

• Pet Rocks

• Lava lamps

• Swatch Watches

• Zoobas Pants

• Members Only Jackets - I am proud to say, I am the last member - how EXCLUSIVE IS THAT?!?!?

If had all the money I spent on that stuff and invested it in Apple Computer, Bill Gates would be bummin' money off me now!

Well, many people are afraid right now to buy a home because their core belief that real estate will always appreciate has been shaken to the core. Their fear is justified. However, they are paying the Procrastination Tax - the tax which is borne of fear BUT paid for EVERY MONTH in REAL MONEY!!!

Apprehensive buyers are overlooking a key trade-off:

• What WILL happen for...

• What MIGHT happen...

What WILL happen is that rates, theoretically, cannot go lower and will only go higher.

However, if prices are going higher (including the price of money), does it make sense that housing prices will fall forever? (Sure, they can over the short-run, but over the long-term, unlikely.)

So, for people looking to live in a home 5, 10, 30 years, locking in CHEAP, LONG TERM MONEY is the more important consideration.

Did you know that a change of interest rates as LOW AS ½% WILL INSULATE CLIENTS FROM PRICE DROPS OF 11% TO 12%? If interest rates go from 5% to 7% or to their historical averages, of 8.5% to 9.0%, the savings for a 30 year loan ONLY GOES UP!!!

As an aside, I believe prices will drop in the near term due to unemployment, tight credit and lack of meaningful jumbo and self-employed lending facilities, but when you see the math, the MORE IMPORTANT CONCEPT is that locking in long term money will save you more!!

Prior to showing you the charts that illustrate the concept, let me share how mortgage rates can be estimated. The equation is fairly simple, though the finance behind the number is complex:

1. Take the 10 year treasury note coupon

2. Add 170 basis points (1.7%) for risk, called a risk-beta

3. And that is pretty close to what your 30% mortgage rates will be...

Today, per Bloomberg (http://www.bloomberg.com/markets/rates/index.html ), the 10-year coupon is 3.375%, add 1.7%. Voila! The average 30 year mortgage rate of 5.075% is just about where the market is at - on average.

Don't ask me the actuarial science behind the risk-beta, I don't know and could care less. (That's for the "nerd-herd" to worry about.) However, that's a rule of thumb I have learned.

So, how does this relate to housing? It's really quite simple.

Money is cheaper that it's ever been and ever will likely be again!

Using the Federal Reserve Board of Governors Data (http://bit.ly/a6kUUM ), rates are the following for the Average 30 Year Mortgage (data back to 1971):

• Average 30-Year Mortgage Since 1971 - 9.00% (or 79% higher than they are now)

• Median 30 Year Mortgage Since 1971 - 8.50% (or 69% higher than they are now)

Yes, those numbers are correct...historical rates have been nearly DOUBLE where we are now, 5.03%, per the latest FED data.

Locking in cheap long-term money will more than offset a potential loss of $5000, $10000, or $20000 over the course of a home's ownership for a $200000 home.

At every price point, ½% differentials in interest rates will offset up to about 11%-12% price drops in terms of savings to the purchasers over 30 years of ownership.

Run the math. See it for yourself.

So, unless you plan on selling sooner than the average home buyer, there has never been a better time to buy!

That's what home affordability is! That is what NAR should be pushing - DATA.

I just did a simple table to exemplify how this plays out, along with the breakeven point analysis assuming there is a price drop AND NO BOUNCE BACK. If pricing stabilizes and/or increases, these numbers get better.

ActiveRain has poor table formatting, so a PDF copy of this report will be a downloadable PDF from my website, http://www.MileHighHomeHunter.com at the "Procrastination Tax" link at the top of the page.

Equity Consumed Due to Incremental Payments Resulting from Interest Rate Change Based On Estimated Loan Balance of $ 200000

	Interest Rate	Pmt per $100000	Based on Est Loan Balance	Per Month	1 Yr	5 Yr	10 Yr	30 Yr
	5.00%	$536.82	$1,073.64	$0.00	$0.00	$0.00	$0.00	$0.00
	5.50%	$567.79	$1,135.58	($61.93)	($743.22)	($3,716.09)	($7,432.17)	($22,296.51)
	6.00%	$599.55	$1,199.10	($125.46)	($1,505.49)	($7,527.47)	($15,054.94)	($45,164.81)
	6.50%	$632.07	$1,264.14	($190.49)	($2,285.91)	($11,429.57)	($22,859.14)	($68,577.41)
	7.00%	$665.30	$1,330.60	($256.96)	($3,083.54)	($15,417.70)	($30,835.41)	($92,506.23)
	7.50%	$699.21	$1,398.43	($324.79)	($3,897.43)	($19,487.15)	($38,974.29)	($116,922.88)
	8.00%	$733.76	$1,467.53	($393.89)	($4,726.63)	($23,633.15)	($47,266.31)	($141,798.92)
Median 30 Yr Mortgage	8.50%	$768.91	$1,537.83	($464.18)	($5,570.20)	($27,851.02)	($55,702.05)	($167,106.14)
Average 30 Yr Mortgage	9.00%	$804.62	$1,609.25	($535.60)	($6,427.22)	($32,136.12)	($64,272.24)	($192,816.72)

Source: Federal Reserve Board of Governors, Economic Research from the Federal Reserve Bank of St. Louis

Break Even Analysis Table

$5000 $10000 $20000

	Interest Rate	Pmt per $100000	Based on Est Loan Balance	Per Month	Break Even Point In Months	Break Even Point in Years	Break Even Point In Months	Break Even Point in Years	Break Even Point In Months	Break Even Point in Years
	5.00%	$536.82	$1,073.64	$0.00	$0.00		$0.00		$0.00
	5.50%	$567.79	$1,135.58	($61.93)	81.00	6.75	161.00	13.42	323.00	26.92
	6.00%	$599.55	$1,199.10	($125.46)	40.00	3.33	80.00	6.67	159.00	13.25
	6.50%	$632.07	$1,264.14	($190.49)	26.00	2.17	52.00	4.33	105.00	8.75
	7.00%	$665.30	$1,330.60	($256.96)	19.00	1.58	39.00	3.25	78.00	6.50
	7.50%	$699.21	$1,398.43	($324.79)	15.00	1.25	31.00	2.58	62.00	5.17
	8.00%	$733.76	$1,467.53	($393.89)	13.00	1.08	25.00	2.08	51.00	4.25
Median 30 Yr Mortgage	8.50%	$768.91	$1,537.83	($464.18)	11.00	0.92	22.00	1.83	43.00	3.58
Average 30 Yr Mortgage	9.00%	$804.62	$1,609.25	($535.60)	9.00	0.75	19.00	1.58	37.00	3.08

Source: Federal Reserve Board of Governors, Economic Research from the Federal Reserve Bank of St. Louis

THIS BLOG WAS UPDATED FOR 30-YEAR NUMBERS IN THE TABLE BELOW.

To all those economists, bankers, policy makers, media types, and NAR folks who are surprised housing sales are down nearly 20%: DUH!

Alex (Trebek), I will take the totally obvious for $1,000, please.

I hear all over the media today that you're all surprised that the housing sales have dropped? REALLY?!?!

Here's why you should HAVE realized that this tax credit (and its spawn) will do NOTHING to increase aggregate sales, only pull them forward.

The home sales drop is a two-fold story: The Stimulus only rearranged sales (pulled them forward), it didn't increase aggregate demand. This was expected and I am proud to say I called it back in June/July (just ask anyone who follows my blogging).

People are fearful to buy, which is understandable. The tax credit pulled up sales, but did little to change aggregate demand due to:

•· Perceived depreciation yet remaining in the market (which I agree with), causing buyers to hesitate

•· Higher unemployment causing people to be cautious

•· Tightening lending standards

•1. Reduced M3 money supply (a large money aggregate indicator) dropped at record rates from July onward, inhibiting bank lending

•2. Banks jacking up interest rates on credit cards, imposing increased minimum payments from 2% to 5% and jacking up interest rates on even A-credit consumers (from 10% to 30% in some cases).

•§ This reduces the potential home purchase pool by reducing the borrowing capacity of all consumers affected with a change to their minimum payment or interest rate. In short, the banks are self-eliminating a segment of highly qualified purchasers along with the risky credit risks.

•§ Additionally, cramming down credit lines drops people's credit scores and turns good risk into poorer risk due to consumers' increased "percentage of credit utilization", even though outstanding balances are relatively static or are going down - as is the national trend.

Banks are cannibalizing their own markets!!!

•3. FHA tightening their lending standards

Secondly, this is the MOST important point: THERE IS LITTLE TO NO LENDING FACILITY IN THE MORTGAGE MARKETPLACE TO ACCOMMODATE THE SELF-EMPLOYED.

•· Self employed people (doctors, lawyers, business owners - all who may be proprietors or S-corps or LLCs) comprise 20.7 million of the 155.1 million workforce, or 13% of the workforce over 16 years of age. The 20.7 million is comprised of:

•1. 10.4 million true self-employed

•2. 10.3 million contract workers

•3. Unless they have a W-2, the only way they will get money from a bank is at gunpoint, ask 99 or 100 lenders.

•· So, there is 13% of the market that is just sidelined. Period.

•1. Find a way to bring them back into the fold and the market demand increases 13%. Even assuming only the top ½ of self-employed income earners qualify for the median (50% of the market) priced home, that's still a 6.5% increase in demand, which would offset the 17% drop stated in the following story in a meaningful way. http://finance.yahoo.com/news/December-home-sales-down-apf-2729493334.html?x=0&.v=6

•· Due to the paucity of jumbo lending, homes above $400k are stalling in the marketplace, at least in Denver.

•1. This precludes the ability to move up, which will stall any housing recovery and put higher end homes at higher risk for being foreclosed, which starts a downward spiral just like subprime, but 4-5 times the financial exposure on each home.

•· Just as an example, comparing home purchases (in Denver) prior to the crisis in 9/08 up until 12/09, (the most recent data I have at hand):

•1. Homes below $200k - Sales up 14%

•2. Homes $200k - $400k - down 13.5%

•3. Homes $400k - $1m - Down 14.25%

•4. Homes over $1m - Down 32.2%

•5. So, all we are getting is a feeding frenzy around the median price point and below. But, there is no natural market expansion into higher priced homes, which creates a sustainable recovery.

So, it was reasonable to believe that the tax credit wouldn't STIMULATE demand, but merely REARRANGE it.

As people expect cars to depreciate right off the lot, The Cash for Clunkers program had a higher probability of sustaining demand.

•· It took inventory out of the system - disposing of used cars (the equivalent of razing a home), so the numerator (demand) goes up and the denominator (available cars) goes down at the same time. For example, using simple fractions: 7/10 is 70% vs the increased demand, smaller supply 8/9 is 89%. Same concept, larger numbers.

•· Most importantly, there is little sense of value retention with a car in the consumers' mind, so the credit is an offset to the loss the buyer knows they will take the second they drive off the lot. It just about breaks ‘em even.

Housing is different.

I believe people - correctly - perceive that homes prices will soften further. (Shadow inventories in Denver nearly double the available inventory on the MLS.)

Personally, I believe there is another 10% depreciation out there in the pipeline (which is somewhat off-topic). The point is that people expect housing to appreciate - even today. It's "ingrained" in the USA's DNA: housing is supposed to appreciate.

But it's not. That's why strategic foreclosures (20% to 25% of foreclosures are now this type) are such a concern - people losing faith in housing having intrinsic, accretive value

So, why is it that housing is soft, despite record low interest rates? People are short sighted and NAR has FAILED MISERABLY IN ITS LEADERSHIP AND INSIGHT INTO THE OPPORTUNITIES THAT ARE OUT THERE.

Here's what would stimulate demand on the margins (given we can't control the economy or Washington policy but once every two years), and, I believe would increasingly drive demand when momentum of the following were implemented:

•1. NAR should be holding banks accountable through tracking how easy they are to work with in a formal Realtor-driven database, that the public can view.

This database should track: 1) Ease of business to facilitate short sales (if applicable) or ease of business for a non-distressed transaction, 2) Quickness, promptness, courtesy and accuracy to close per the terms and timelines of the negotiated contract by the CLIENTS, and 3) Client feedback about their experience with each lender.

As good lenders had their positive behavior reinforced with more business directed via the feedback, those good lenders would pull the poor lenders along -- or cause them to fail and get out of the market's way.

On a personal aside, it always amazes me that there is ONLY ONE CONTRACT PRIOR TO THE CLOSING BETWEEN THE PARTIES: THE REAL ESTATE PURCHASE CONTRACT!!!!! Yet, banks act like it's an inconvenience and annoyance. AMAZING!!!!

•2. A MEANINGFUL CAMPAIGN to educate buyers...more than "homes are affordable" is appropriate. Seriously, what the hell does "homes are affordable" mean to the average Joe and/or Jane?!?!?! It's wimpy and indecisive...and data less.

Let me explain: What policy makers and NAR failed to convey is that buyers will save more from lower interest rates even if they lost another 10% on the value of their home in the short run.

In short, the lower interest rates will save buyers MORE money over a 30 year loan than losing $20k, were the median priced home ($200k) to drop another 10%, or $20k.

Locking in long-term money at historically low rates is the key to making/gaining a larger equity stake in a home!!!

Let me demonstrate what I term for several years now as "The Procrastination Tax" - the tax people pay worrying about the front end purchase price and ignoring the financing envelope in which the home purchase sits.

Let's use a home purchase price of about $200k, near the present median price in Denver. Let's say that prices drop 10%, but rates jump from 5% to 7% when the Fed stops buying mortgages (which 7% is STILL historically low).

Someone who bought but at $200k with a 5% loan and lost $20k in appreciation (but later recouped it) from further market softness, BUT would have saved $92,506 OR $3,084 per year compared to someone who bought the same $200k home with a 7% loan OVER THE LIFE OF THE LOAN!!!!! (see chart below at the end of this blog)

This short term vision for a long-term investment is what I call the Procrastination Tax. Ya' snooze, you lose - even more!!!

Put a calculator on the NAR website for people to calculate their own "PROCRASTINATION TAX". When people see they are losing real money vs paper money (short term valuation), a portion of the more primed, educated, informed, serious buyers will move off the dime. It works for me ALL THE TIME!

The general failure for this to be more promulgated - as opposed to a near maniacal fixation on the price alone - is what is suppressing aggregate demand in a self-fulfilling prophecy, in conjunction with the aforementioned problems.

So, it isn't surprising demand is down. Why would you prior to reading this blog?

Term of Loan - Increased Payments Due to Rate Change from 5%

Loan Size	$100,000	$200,000
				12	36	60	120	360
Interest Rate	Pmt per $100k	Payment Based on $200k Loan	Incremental Monthly Payment	1 Yr	3 Yr	5 Yr	10 Yr	30 Yr
5.00%	$536.82	$1,073.64	$0.00	$0.00	$0.00	$0.00	$0.00	$0.00
5.50%	$567.79	$1,135.58	$61.93	$743.22	$2,229.65	$3,716.09	$7,432.17	$22,296.51
6.00%	$599.55	$1,199.10	$125.46	$1,505.49	$4,516.48	$7,527.47	$15,054.94	$45,164.81
7.00%	$665.30	$1,330.60	$256.96	$3,083.54	$9,250.62	$15,417.70	$30,835.41	$92,506.23
8.00%	$733.76	$1,467.53	$393.89	$4,726.63	$14,179.89	$23,633.15	$47,266.31	$141,798.92
9.00%	$804.62	$1,609.25	$535.60	$6,427.22	$19,281.67	$32,136.12	$64,272.24	$192,816.72
10.00%	$877.57	$1,755.14	$681.50	$8,178.00	$24,534.00	$40,889.99	$81,779.99	$245,339.96

Sources:

10.4 million
Number of self-employed workers.
Source: Statistical Abstract of the United States: 2009, Table 585 <http://www.census.gov/compendia/statab/>

10.3 million
Number of independent contractors.
Source: Statistical Abstract of the United States: 2009, Table 588 <http://www.census.gov/compendia/statab/>

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It's a great way to turn your website cost into an income source.

Michael Clarkson

Market Conditions - As of August 1, 2009

In July, the national unemployment receded back to 9.4% from 9.5% in the prior month. This is a positive sign that the bottom of the recession appears to be close at hand, if not already past, as unemployment is a trailing indicator.

Denver's market continues to demonstrate some indications of stalling - the absence of move-up buyers.

Let's start with the facts:

Remembering that 6 months is the tipping point between Seller's markets (below 6 months) and Buyer's markets (above 6 months), here is how Denver is faring:

•· Nationwide - 9.4 months of inventory, down from 9.8 months the prior month

•· Denver - 5.82 months of inventory (seasonalized over the past 12 months), up from 5.72 the prior month

Denver's sub-markets by price were the following:

•· $0- $200k (up to the median price) or 50% of the market - 2.3 months of inventory (strong seller market) - This improved by 0.1 months from the prior month; below $100k, the months of inventory is 1.1 months and between $100k and $200k, there are 2.74 months of inventory.

•· $200k to $400k (median to the $100k annual qualifier) or 50% to 88% of the market - 5.9 months of inventory (seller market) - This is up slightly from last month and continues a trend from the past 8 months; this segment is up from a low of 4.3 months in December 2008.

•· $400k to $1m - 14.4 months of inventory (heavy buyer market) - There has been no change since last month

•· $1m and up - 48.7 months of inventory - Though the rate of deterioration is slowing, the deterioration is continuing - up from 47.5 months last month.

So, 88% of our addressable market is seller to strong seller market and remaining firm with a composite of 3.93 months of inventory.

Listings are static at 20,890. This has not materially changed since January and has been nearly exactly the same for eight straight months.

The 5 years' average is 28,609 listings, meaning listings were down 22.8% from historic levels.

Sold listings were 4,440. Though up from last month, the 5 years' average is 5,083, meaning 12.7% fewer homes were sold.

As a result of the failure of the market to close sales, Denver's market strength is weakening and, prices are moving down.

•· Median sold price - $230k down from $238k last month

•· Average sold price - $277k up from $283k last month

•· As a result of high end homes listing, but not selling, the average list price was $539k down from $540k last month. The lack of high end mortgages precludes them from being sold readily, and increases the risk of higher end foreclosures in the near to intermediate term.

Days on market (DOM) is 100 days, the same as the prior month.

Now, the problem:

Denver continues to suffer from homes that contract for multiple months, but fail to close. This month, 1,899 homes were under contract for more than a month, up slightly from the prior month's total of 1,899 homes.

Here's the logic:

•· Up until the financial crisis last October, about 5059 homes per month were active up to the $200k price point; now only 3550 are active. This means a 30% reduction in inventory.

•· Solds per month at that same price point over that same period were up from 1219 homes sold to 1383 homes sold. That is a 13.5% increase in activity.

On the face of it, that's a good thing. However, the average buyer moves up 50%. That move up activity is not being seen in the market. In fact, sales activity is down 12.3% in the $200k to $400k market, the next higher price bracket.

•· Solds were down to 1220 (after the crisis) from 1391 per month (before the crisis), meaning one would expect that pipeline of sellers in the sub $200k market would normally be a pipeline of buyers moving up-market to the $200k to $400k market. That is not occurring.

Indeed, the diverging of the $0-$200k (decreasing months of inventory) and the $200k-$400k (incrasing months of inventory) segments shows that people are not buying up - a requirement for a sustained recovery.

This leads this author to believe that Denver's market is stalling now. To be direct, the market's failing to fill the sales pipeline in the buy up segments indicates that the gained success will be elusory.

Indeed, if interest rates continue to climb, things will soften more quickly than alluded to here.