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The Geithner/Obama plan to ‘help’ home owners called the “Homeowner Affordability and Stability Plan” and the guidelines – Text Version – that spell out how it is to be executed called the “Making Home Affordable” Guidelines have some holes big enough to drop a country (the size of the United States) through.

Problem 1 – Not Big Enough

The program is only designed to cover 7 – 9 million Americans despite the fact that there are between 50 – 80 million Americans holding mortgages.  In 2008 over 2 million people went through foreclosure and 2 million+ more are expected to go through foreclosure in 2009 by the most modest estimates.  8.3 million people currently owe more on their homes than those homes are worth, which means they can not sell their homes and relocate if they lose a job or even get a promotion requiring a move.  Furthermore, if home prices drop just another 5% (and rates have been going down that much every month in 40% of states in the US (not just California as the problem is spreading) then 2.2 million additional borrowers will be underwater.  Plus, almost 2 million people left the United States and moved to Central America last year as jobs evaporated, which also helped to fuel the evaporation of new home buyers capable of buying a home.

This drop in home prices works like an avalanche.  As it drops more, it picks up more snow and increases in speed consuming more and more formerly safe, stable and financially secure Americans that are in its path.  There are only about 40-50 million American homes that are owned free and clear with no mortgage.  But even these are at the risk of lower prices, increasing property taxes, and rising incidences of property crime as suburbia is turns into gang infest ghost towns.

Problem 2 – Wrong Focus

Then there is the issue that after paying $2 trillion to bail out Wall Street this plan only offers up $75 – %80 billion to actual home owners.

$2 trillion if divided amongst 75 million mortgage holders could have provided $26,000 to each home owner to revalue those mortgages, write down principle, and lower mortgage payments or even payoff mortgages all together!  This could have enabled people to tighten their finances, fix their budgets, and if they need to move, sell or buy a home, they could have done it.  And that is 75 MILLION households, not 7 million that just happen to be covered by 2 failed institutions (Fannie and Freddie).

Instead the government has put good money after bad in a never ending hole for capital currently nick named the financial markets.  They complain about the hocus pocus of hedge funds while poring more money into the banks that own, run and invest in hedge funds instead of the people that own real assets (homes).

Problem 3 – Too Little Too Late – Incentive to Foreclose or go Bankrupt

Essentially the government is simply creating an incentive for homeowners to go through foreclosure or bankruptcy.  The real estate market is not in the tank it is going down and down into the tank.  We are NOT at the bottom yet.  Throwing money on the fire does not stifle the flames, it causes it to burn more.

More and more homeowners that are underwater are realizing that their only real option is to sell their home to the highest bidder, their bank holding the mortgage. 

When that isn’t enough the other option is to walk away from their debt all together in bankruptcy.  Through a bankruptcy consumers can dismiss tens of thousands of dollars in debt on their unsecured credit cards, renegotiate their mortgage rates, their mortgage principal, their car loans and more.  Even if they go through Chapter 13 – Reorganization, they stand a better chance of renegotiating their credit card interest rates down to single digits at a time when credit card companies are racing to raise rates up to 30% before new laws go into effect in July 2009.

Plus, the credit card companies are eliminating credit limits for card holders left and right.  They are dropping credit lines, canceling cards and more.  For those people that worked very hard to keep their credit up and pay their credit cards on time, they are seeing their credit rating sabotaged by banks cutting their limits for no reasons that have to do with that consumer.  They might as well already be in bankruptcy!  Their credit rating goes in the tank, their interest rate goes up to 30%, their cards are canceled, Chapter 13 starts to look like a blessing because all the perils of bankruptcy have already been experienced by people that pay their bills on time!

Problem 4 – Government Reinvention of Sub Prime Loans

So after subprime loans supposedly got us into this mess, the government plan relies heavily on sub prime tools to get people ‘out of this problem’.

• ARMs
• 40 Year Loans

Those ‘evil’ adjustable rate mortgages(ARMs) that trapped millions of people are essentially exactly what the government is offering.  They are enabling people to finance at interest rates of 2-4% for 1-4 years to make their homes ‘more affordable’.

Hello! That is exactly what mortgage brokers did with sub prime loans.  They even went one step better offering 0% mortgages. 

The government is essentially prolonging the problem.  This does enable people to live and fight another day from one perspective.  It also enslaves them to their homes, to the banks and now to the government (with a loan that might not be able to be forgiven in bankruptcy) from another perspective.  Would you rather be enslaved to your home, the bank and the government, or rather sell your home back in a foreclosure or escape the bondages of your debt in a bankruptcy and be on the path to healing your finances (with your full income that you have now).

The second thing that the government is offering is a 40 year mortgage.  There is a historical reason why 40 year mortgages have not been offered to the masses.

40 Year Mortgages are a rip off and they do not make homes more affordable. 

A 40 year mortgage will force a person to pay far more on a mortgage than a 30 year mortgage.  The interest like a credit card where a person pays a minimum payment, almost never stops.  After the first 10 years, you might as well have rented your home, because you will not have much more principle built up in your home.  The banks will earn significantly more interest from you during that time.  In fact you will pay for your home multiple times over in interest even though you will still owe the principle!

This isn’t change we can believe in this is just a really bad idea.  That pretty much sums up all of the plans offered so far in fact.

Not counting Florida, the real estate crisis has been raging at its worst in California, Nevada and Phoenix, but last month the growing real estate and financial crisis which was proving very problematic for the rest of the country accelerated its correction in the north east. 

The index of pending home resales fell 7.7 percent after a 4.8 percent gain in December, the National Association of Realtors said today in Washington.

…..

A lack of credit and record foreclosures that are pushing property values even lower may keep prospective buyers out of the market for much of 2009.

Three of four regions dropped, led by a 13 percent slump in the Northeast and a 12 percent slide in the South. Pending sales increased 2.4 percent in the West.

Bloomberg

As you can tell from the numbers, the decline in January was more than the surprise gain in December, which indicates that the December gain reflected people cramming deals in before year end.  To average the 2 months together, we come up with 1.45 percent decrease both month or a net of 2.9 percent decline.

The decline is not the news.  The news is that the decrease is now being fueled by correction in the Northeast and the southeast.  Many homeowners around the country still feel that they live in pockets where the boom was not that big and the correction should therefore not be so big either.

The reality is that even in those areas where the boom was not that big, those areas might have experienced decreases had it not been for the boom at the time.  So the correction will likely bring slow growing areas down significantly just like it brought fast growing areas down significantly.  This is a bubble and the bubble does not care which part of the plastic on the bubble grew the most, when it pops the entire bubble is junk.

Ironically, the Northeast is one part of the country that will likely face tax increases in home heating taxes that will go to the federal government to pay for the bank bailouts and the bailout of local economies in California and Nevada, two states that won big in the Stimulus package.

Government bailouts are making it possible for people to sell their homes and make 20 – 50% more on the price than what the market is offering.  For many people this can help them get out from underwater on their mortgages.  The federal bailout of banks is making this possible.  In some cases people are even able to unload their homes at prices not seen since before the real estate bubble.

That might be welcome news to people witnessing a rate of existing home sales that just dropped in January nationwide.  It might also be welcome news because existing home sales prices dropped in January from from $199,800 in January 08 to $170,300 in January 09 (down from $175,700 in December 08 the month before).

So how might those people sell their home at $199,800 or even $210,000 instead of taking in $170,300? 

What’s the Catch????

They have to sell their home back to the bank. Its called foreclosure. 

For a person that paid $240,000 for a home in 07, and financed $210,000 through the bank only to watch their home go under water when the market price dropped to $170,300 last month, they may have no other choice.

If they happen to be lucky enough to still have a job but are being relocated, they may not be able to afford to pay out $40,300 to pay off their mortgage, even if they can find a REAL buyer that will pay $170,300 for their home.  Not to mention the $13,000 in realtor fees, and $4k in closing costs.

Just giving their house back to the bank (that is getting bailed out by the government with billions of dollars) may be their only option.

Sure Barack Obama’s plan might enable them to refinance at 2% a month and shave $8k off their mortgage principal, but that still leaves them underwater by more than $32k on a house they have to move away from just to keep their job!

The government has engineered a market where the best option for homeowners is foreclosure.  That’s not hope you can believe in, that’s a nightmare come true.

The US Home Price Index as computed by S&P/Case-Shiller® dropped by 18.2% in the fourth quarter of 2008 as compared to the level of the market in the 4th quarter of 2007.  This reflected a drop of 26.7% since the peak of the real estate market in the second quarter of 2006.

The sharpest declines from the previous year were in Phoenix (down 34%), Las Vegas (down 33%), San Francisco (down 31%), Miami (down 29%) and Los Angeles, which includes Orange County, (down 26%).

Las Vegas, Phoenix, Miami and San Francisco home prices were down more than 40% from their market peaks, which occurred at different times. Los Angeles-area home prices ended 2008 down 37% from their late 2006 peak.

"Most of the nation appears to remain on a downward path, with all of the 20 metro areas reporting annual declines," said David M. Blitzer, chairman of the index committee at Standard & Poors.

U.S. home prices continue record slide – Los Angeles Times

There are a number of factors that determine when and where someone will buy a home. Lately, there has been an increasing trend of homeowners looking to relocate to “Dream towns”. Dream towns are eerily similar to the “bedroom” or “commuter” communities that gained popularity over the last 25-30 years as people escaped the big cities and swarmed the suburbs.

With many Americans sharing their preference of small town over big city living, it is no wonder why places like Lebanon, VT and Concord, NH are enjoying an influx of new residents due to the availability of foreclosure opportunities as well as fully developed infrastructure with a small town feel. The top ten dream towns have many differences while sharing a common theme of being either geographical regions (New England and the Midwest) or maintaining relative proximity to the ocean.

People are retiring, approaching retirement, looking to be closer to family again, and some are even cutting the tethers and working from home.  All of these factors are enabling people to choose their perfect location to live.  They don’t want to settle for a cheap plastic watch when they could choose gold watches with just the right fit.  They want it all and as they look at the pitfalls in the mortgage system, their probably thinking that if they have to risk so much to buy a home in this economy, they might as well do it in their dream town.  It might just be the last opportunity they have to move.

Source: MSNBC

Top Ten List of Dream Towns for 2008

1.    Torrington, CT
2.    Bozeman, MT
3.    Lexington Park, MD
4.    Lebanon, NH-VT
5.    Helena, MT
6.    Kalispell, MT
7.    Mankato, MN
8.    Oak Harbor, WA
9.    Stevens Point, WI
10.    Concord, NH

Let’s get the bad news out of the way.  Since April 2007, home values as measured by average selling prices have dropped 3.7 percent.  It was actually 3.1 percent for the last 12 months but if you go back another 30-45 days the decrease added another 0.6 percent.

U.S. home prices fell a record 1.7 percent in the first quarter and the number of workers on jobless benefit rolls held at a four-year high, underscoring the economy’s woes, data on Thursday showed.

The continued slump in housing prices in the first quarter pushed them 3.1 percent below their year-ago level, the Office of Federal Housing Enterprise Oversight said. Like the quarter-to-quarter drop, the decline was the biggest in the 17 years the housing regulator has tracked the data.

Reuters

That was the bad news, the good news was hard to find.  30 year fixed mortgage rates did continue to dip a little bit, even as ARM rates increased.  As kids get out of school for the summer, people that might have wanted to move this summer are going to find themselves stuck living where they are and possibly skipping vacations too.  That trip to Disney World and a new house might be replaced with a barbecue in the back yard around new hundred dollar swing sets from Wal-Mart.

Home Prices continue to drop significantly.  They dropped 7.7 percent in 140 of 149 metro cities surveyed.

Part of that drop is being fueled by foreclosures which are still on the rise.  It is projected that 1 million additional homes will foreclose in 2008.

 

Foreclosure filing rates surged 65% in April according to the AP:

More U.S. homeowners fell behind on mortgage payments last month, driving the number of homes facing foreclosure up 65 percent versus the same month last year and contributing to a deepening slide in home values, a research company said Tuesday.

Nationwide, 243,353 homes received at least one foreclosure-related filing in April, up 65 percent from 147,708 in the same month last year and up 4 percent since March, RealtyTrac Inc. said.

AP Article

Its going to be a long road out of this housing market crisis for the US.  One that is going to be about as painful for US households as drug rehab is for heroin addicts.

That is the perception by some recent surveys.  Home prices declines could accelerate just like stock price declines accelerate during a crisis.

Prices in areas such as Las Vegas and Miami dropped more than 20 percent, while Charlotte, NC alone stood out with an increase in the top 20 US cities in the survey.  But living here in Charlotte, it would appear to me that even the Charlotte hold out is a bit of a fluke.  The numbers for Charlotte a month after the survey seemed to indicate that Charlottes hold out increase was more about a delay in change and a slower moving bubble.

That said, this survey and the new idea that home prices could drop this fast is bad news for mortgages.  If a property considered ‘real property’ does not have ‘real stable’ value, then as an asset it can not necessarily back itself.  That means that the risks that banks take on real estate is actually higher.  Higher risk always translates into higher interest rates.  That means higher buying prices, slower sales rates and slower demand, which also drives down home prices even more. We are looking at a situations that is almost like hyperdeflation.  In the past the Federal Reserve has always tried to put a corset on inflation, but in this situation we almost need a tourniquet on deflation.

As the real estate market starts to settle out, and as inflation starts to enter into the picture, it is very likely that America will see a period in real estate very similar to what we experienced in the 70s and early 80s.  Fewer people will own their own home and more people will write.

The equation has not changed in that there are still many many people looking for places to live.  The population across United States is expected to increase by 100 million people over the next 15 to 20 years.  Those people have to live somewhere in those places do not exist today.

Some people would point to the Federal Reserve and state that the Federal Reserve is lowering interest rates and that mortgage rates should follow soon.  The problem is that inflation has entered into the equation.  The Federal Reserve cannot control inflation especially when the United States has a massive debt that is building on a regular basis.  That inflation essentially adds percentage points to the real mortgage rates banks can offer.  Let’s say that the Federal Reserve sets rates at 3%, and inflation is running at 3%, and banks need to make a profit of 1 1/2 percent to keep operations going in to lure in investors to buy securitized mortgages.  That would mean that the real interest rate for a person with excellent credit would start off at 7 1/2 percent.  If that person has less than stellar credit the interest rate is going to be even higher.

If inflation increases, then interest rates in total will also go up no matter what the Federal Reserve does.  Now as those interest rates go up that points towards the need for many people looking for a home to live in to consider renting.  It also means that people that are sitting on homes today with low interest rates are likely to become landlords very soon.  If they are locked into an interest rate is lower than what can be had on the market, they may not make their money back in equity in the house but they could make it back in rent.  In doing that we are going to see a nation change from being a flip that house nation into a rent that house, sublet the apartment, where sublet that room.

For a similar example, you can look at what is going on in city centers around the US or even in the United Kingdom or Europe.  We all face the same inflation and the same rising population centers.  All those baby Emily crib sets have to go somewhere.

Investors around Wall Street were acting positive yesterday.  Many of them rallied because they thought they could see the bottom in the housing market.

Investors have a unique perspective about things when they are at their worst that is a little refreshing.  They see ‘the worst’ or ‘the bottom’  as the beginning of improving times.  If we are at the bottom, there is no where to go but up!

Investors found a sliver of hope to line the dark clouds of the housing slump on Monday.

Investors latched onto the National Association of Realtors’ upbeat tone Monday, sending the U.S. stock market higher in direct contrast to the stark data in the report, which said that sales of single-family homes and condominiums dropped by 0.4% in January to a seasonally-adjusted annual rate of 4.89 million units, the slowest pace on record since 1999. Despite this dire news investors seemed optimistic that the housing market may be bottoming out and that the increase in loan limits could lead to a rally in home sales toward the end of 2008.

Surprise! Home Sales Spark Hope

I personally do not know if we have hit bottom yet, and I suspect that we have not.  California, Florida and other places such as that may have found bottom, but I suspect that many places that were less inflated, have not yet begun to correct.

Until they do correct or at least get real about home values the bottom of the pit may not quite be in site, but at least we can hear the pebbles hitting the bottom from our current perspective.

So who wants to invest in a tankless water heater first to raise the value of their home so that they can flip it?

That’s what I thought!