Archive for the 'Real Estate' Category
Posted by Kevin Villani on 24th September 2016 (All posts by Kevin Villani)
When testifying in 2010 before the Financial Crisis Inquiry Commission into the financial crash, then Federal Reserve Board Chairman Ben Bernanke recommended only one reference, Lords of Finance: The Bankers Who Broke the World (2009), presumably for the narrative that insufficient money printing in the aftermath of the Great War lead to the next one. Right idea, wrong narrative!
The US homeownership rate peaked at a rate well above the current level almost a half century ago mostly funded by a system of private mutual savings banks and savings and loans. The historical justification for federal “secondary market” agencies was political expediency – exemption from now obsolete federal, state and local laws and regulations inhibiting a national banking and mortgage market. Now government-run enterprises account for about 90% of all mortgages, with the Fed their primary funding mechanism, what the Economist recently labeled a de facto nationalization.
The Historical Evolution
How did the private US housing finance system repeatedly go bankrupt? To quote Hemingway: Gradually, then suddenly. The two competing political narratives of the cause of financial market crises remain at the extremes – either a private market or public political failure – with diametrically opposite policy prescriptions. The politician-exonerating market failure narrative has not surprisingly dominated policy, with past compromises contributing to the systemic financial system failure, the global recession of 2008 and subsequent nationalization.
The Great Depression stressed the S&L system, but the industry’s vigorous opposition to both federal deposit insurance and the Fannie Mae secondary market proved prescient as the federally chartered savings and loan industry eventually succumbed by 1980 to the federal deposit insurer’s perverse politically imposed mandate of funding fixed rate mortgages with short term deposits and competition from the government sponsored enterprises.
The S&Ls were largely replaced by the commercial banks. To make banks competitive with Fannie and Freddie, politicians and regulators allowed virtually the same extreme leverage, in return for a comparable low-income lending mandate – CRA requirements leading to a market dominating $4 trillion in commitments to community groups to whom the Clinton Administration had granted virtual veto power over new branch and merger authority.
The Financial Crisis of 2008 and the aftermath
The Big Short by Michael Lewis and more recent movie portrayed not just banker greed but the extreme frustration of those shorting the US mortgage market stymied by a housing price bubble many times greater than any in recorded US history that refused to burst. The reasons: 1. the Fed kept rates low and money plentiful, and 2. whereas banks would have run out of funding capacity, the ability of Fannie and Freddie to continuously borrow at the Treasury’s cost of funds regardless of risk and their HUD Mission Regulator requirement to maintain a 50% market share kept the bubble inflating to systemic proportions.
The Obama Administration fully embraced the alternative private market failure narrative in Fed policy, regulation and legislation:
- To partially ameliorate the effects on the real economy of disruption to the global payments mechanism the Fed had to bail out the banking system. QE1/2/3/4 and ZIRP (zero rates), now NIRP, did this by re-inflating the house price bubble, postponing defaults while allowing banks risk-free profits. The Fed – and taxpayers – would lose more than the entire S&L industry did should rates rise by a comparable amount if it marked its balance sheet to market.
- Regulators had to appear to punish the banks. In response to paying hundreds of billions of dollars in what the Economist labeled “extortion” – some of which ironically went to populist political action groups – and the subsequent oppressive regulatory regime, U.S. commercial banks are exiting the US mortgage market in spite of ongoing profits enabled by extreme leverage.
- One legislative centerpiece, the Dodd Frank Act passed in July 2010 in direct response to the financial crisis, doubled down on political control of financial markets without addressing the future of Fannie and Freddie. The other, Obamacare, enacted four months earlier, was similarly premised on regulating private health insurers to make health insurance simultaneously cheaper and more widely available.
The Long Term Consequences
Bernanke’s focus on choosing the narrative was useful, but the political choice of the market failure narrative appears to reflect convenience rather than conviction. The direct taxpayer costs of implicit or explicit public insurance and guarantees come with both a whimper – tax savings amounting to tens of billions annually due to the deductibility of interest costs – and a bang – future taxpayer bailouts generally delivered off-budget.
Fannie and Freddie conservatorship deftly avoided debt consolidation while dividends reduced reported federal deficits. The student loan market has also been de facto nationalized, with potential unbudgeted losses totaling hundreds of billions. Obamacare was similarly premised on regulating private health insurers to make health insurance simultaneously cheaper and more widely available, but under-budgeted health insurance subsidies predictable caused massive losses and health insurers are now withdrawing from the market.
Monetary policies caused household savings to stagnate as returns to retirement savings evaporated. Defined obligation public pension funds were all rendered technically insolvent when funding is valued at current market returns rather than the assumed rate as much as ten times that. The failure of the economy to grow per capita was explained as the “new normal”. But politicians made no attempt to reflect the implied technically insolvency of public pensions or Social Security and Medicare.
Private firms fail, but private markets rarely do. Public protection and regulation makes firms “too big to fail” until markets fail systemically. The current and projected future public debt bubble is unsustainable, and financial markets will eventually ignore the accounting deceptions and pop it. The relative weakness of other sovereign debt is delaying the inevitably, making The Really Big Short a good title for a Michael Lewis’s sequel. Politicians and central bankers will again say “nobody saw this coming”. What then?
Kevin Villani, chief economist at Freddie Mac from 1982 to 1985, is a principal of University Financial Associates. He has held senior government positions, been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath. This article was originally published at FFE.org
Posted in Big Government, Economics & Finance, Markets and Trading, Predictions, Public Finance, Real Estate, Systems Analysis | 19 Comments »
Posted by Jonathan on 28th July 2016 (All posts by Jonathan)
Millennials cause homeownership rate to drop to lowest level since 1965:
The drop in homeownership is largely due to a delay in homebuying by the millennials, who have the lowest ownership rate of their age group in history. Millennials are not only burdened by student loan debt, but they have also delayed life choices like marriage and parenthood, which are the primary drivers of homeownership.
Why have today’s young people, as compared to young people in the recent past, delayed buying property, marrying and having children?
“While the millennial homeownership rate continues to decline, it’s important to note that the decrease could be just as likely due to new renter household formation as it is their ability to buy homes,” wrote Ralph McLaughlin, chief economist at Trulia. “Certainly low inventory and affordability isn’t helping their efforts to own, but moving out of their parents’ basement and into a rental unit is also a good sign for the housing market.”
Why are many of today’s young families choosing to rent rather than buy their homes?
Read the rest of this entry »
Posted in Big Government, Economics & Finance, Real Estate, Society, Systems Analysis, Urban Issues | 8 Comments »
Posted by Sgt. Mom on 11th June 2015 (All posts by Sgt. Mom)
Some time since (Oh, heck was it in 2005, ten years ago? So it was.) I mused on the concept of public space, both in the general sense – of a large city – and the smaller sense, of a neighborhood … that is, the place that we live in, have our gardens and our households, where we have neighbors who know us, where we jog, walk our dogs, take an interest – from the mild to the pain-in-the-neck over-interested and judgmental. If our homes are our castles, then the neighborhood is our demesne.
And unless we are complete hermits, home-owners will take an interest in the demesne. I state that without fear of contradiction, and it does not matter if that demesne is in a strictly-gated upper-middle or upper-class community with real-live 24-hour security, a private and luxurious clubhouse with attached pool and attractively-landscaped park or a simple ungated, strictly crisscrossed-streets and cul-de-sacs development of modestly-priced starter houses without any HOA-managed extras like golf courses, swimming pools, fitness centers, jogging paths – indeed, anything beyond a little landscaping around the sign denoting the entrance to the development. This is where our homes are, and at the lower end of the economic scale of things, likely to have consumed a major portion of disposable income on the part of the householder. A good portion of our material treasure, in other words, is committed to those foundation, walls, roof and yard.
Read the rest of this entry »
Posted in Big Government, Business, Civil Liberties, Current Events, Law Enforcement, North America, Real Estate | 7 Comments »
Posted by Carl from Chicago on 29th December 2014 (All posts by Carl from Chicago)
In the 2007-9 real estate boom and debacle here in Chicago there was a wave of newly built condominiums that swamped the market in River North, River East, the South and West Loop, and even Downtown. For a while the new buildings could do no wrong and then that disappeared into a pool of foreclosures and difficult times for condominium associations as they had to deal with vacant units and those that refused or were unable to pay assessments.
In the 2012-5 period, that same area of Chicago has seen an enormous influx in new buildings, but this time it is different – they all seem to be rental units. Everyone seemed to learn the same lesson; condominiums can be hard to unload in a down market and the prices are highly variable (units sold for fire-sale prices during the nadir and condominium developers lost their shirts if they were holding inventory during that time), so let’s go with renters instead, who derive consistent returns for the building owner and lender.
For a bit I even thought I’d try to put my condo on the market since prices have gone up. I figured I’d just rent for a while and not be exposed to future downturns. But as I looked around for equivalent value to my current condo in terms of location, views, bedrooms and bathrooms, I noted that I’d be paying $4500+ / month for an equivalent space, if I could find it at all (inventory of larger condos in modern buildings in good walkable areas was in fact very low). That just seemed crazy.
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Posted in Chicagoania, Real Estate | 10 Comments »
Posted by Carl from Chicago on 21st July 2014 (All posts by Carl from Chicago)
In River North, during the many years we’ve lived here, the skyline has been transformed with the addition of new high-rise buildings. Construction slowed after the 2008-9 crash, but is back now with a vengeance. A new apartment building is being built near my condominium. This is a view of the building while the construction workers were pouring concrete on the roof (you can see the concrete pouring arm) the same night of the “Derecho” storm which hit Chicago at the end of June.
I’ve always wondered how they take down the crane and we got a chance to see it up close and personal. The process took all weekend, and they closed down a nearby street on Saturday and Sunday while they dismantled the crane. They put the metal “box” (it is steel colored) with three sides around a vertical crane “segment” and then the crane pulls that segment out through the gap. You can see the crane holding the segment if you look closely – which it then lowers to the ground.
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Posted in Chicagoania, Real Estate | 2 Comments »
Posted by Sgt. Mom on 15th April 2014 (All posts by Sgt. Mom)
I’ve been surfing my usual internet hangouts over the last week or so – in between working on various editing, formatting and sales projects for the Tiny Publishing Bidness – so although I did surf, and read and observe reports on a number of different and rather disturbing events – I didn’t have time to write anything about them until after I had finished the biggest of the current projects on my plate.
The biggest of them was the new-old range war of the Bundy ranch. I suppose that technically speaking, the Fed Gov had some small shreds of technical justification in demanding grazing fees … but the longer one looked at the whole of L’affaire Bundy, the worse it looked … which is doubtless why the Fed Gov backed down. A tactical retreat, of course; The optics of a shoot-out between the minions of the Fed Gov and the various Bundy supporters would not have been good, for Harry Reid and his clan and friends most of all, although they may eventually act – seeing that they have a position which will be at risk by tolerating defiance.
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Posted in Americas, Blogging, Business, Civil Liberties, Deep Thoughts, Just Unbelievable, Media, North America, Politics, Real Estate | 19 Comments »
Posted by Carl from Chicago on 2nd November 2013 (All posts by Carl from Chicago)
As a long time city of Chicago resident I have seen the immense growth of new buildings and new residents in areas near downtown which previously had been office buildings, warehouses, dilapidated structures, or simply abandoned. From time to time when I am in an architectural bookstore I glance at books about “new urbanism” or various similar concepts that authors and “urban planners” use to overlay atop the actual growth of a city (or decline, in the case of other parts of Chicago).
If you are from a smaller town or relatively slow moving US city and haven’t been overseas to see “real” growth somewhere like Hong Kong, China, or India, then Chicago’s growth over the last decade or so that I’ve lived near down is pretty astonishing. In River North, where I live, literally dozens of high rise buildings > 15+ stories have been built and are filled to the brim with owners and renters. The entire South Loop has been renovated not only with town homes and large buildings, but huge retail spaces like Target, Costco, and giant movie theaters. While there were many restaurants in River North when I first moved here, we had to walk far and wide to find even a place open for a decent breakfast; now we have a dozen to choose from within 6-8 blocks.
Since there are train tracks downtown for the Metra commuters which arrive from suburbs from all directions (except East, where the lake is) and many of these tracks are on ground level, the streets are cut up and there are sidewalks I used to take under viaducts with few people around. Now, however, immense apartment buildings have popped up (over 40+ stories) and in the morning there is a huge population of well dressed professionals walking along these routes and sidewalks, where previously there was just debris and parking lots. If I go to work late it is either single women walking dogs or nannies pushing single babies in strollers.
There must be 50,000+ well heeled urban residents packed into this place, all arriving from somewhere else whether it is a suburb, another state, or another country. None of them are poor – you can’t be – since rents are in the thousands and move up rapidly, and every new building coming up has more amenities than the competitors in order to attract residents. The demography is very fluid because many of the condominium owners rent out their units, and then the newer buildings have been built as apartments since the real estate crash of 2008.
Read the rest of this entry »
Posted in Chicagoania, Real Estate, Urban Issues | 5 Comments »
Posted by Carl from Chicago on 29th May 2013 (All posts by Carl from Chicago)
Real estate property prices in London are astonishing. This is not an atypical “listing” in the centrally located district of Marylebone.
The cost of this flat is 975,000 pounds. At our current rate of approximately $1.50 USD to each GBP, that comes out to about $1,500,000.
The flat is 620 square feet. Let’s repeat that again – 620 square feet. It is possible that there are upscale dorm rooms in the US larger than this for affluent college kids. That works out to about $2400 a square foot.
You also don’t “own” the land underneath your flat. In this area of town the Portman Estate owns land and there are other companies, as well. You buy a “lease” and as your lease gets closer to its termination date the cost to “renew” the lease goes up substantially. “Ground rent” is a pittance (a few hundred dollars a year) but the renewal of the lease can be very costly especially as it nears its term. I am far from an expert and picked up my information from online sources and brief conversations but this article in the Telegraph has additional data if you’d like to research further. On top of the costs to extend the lease which can be as high as $100,000 dollars there are fees for surveyors and others just as in the US when you need to employ various professionals for your mortgage financing.
There are other places in the world where the cost per square foot is $3000 or more – but these are generally penthouses or high profile properties, not a small flat in a great neighborhood in London with likely not much of a view at all. This sort of price, however, is not out of the norm in this neighborhood.
Who can pay these sorts of prices? For the most part, foreigners can. According to this article 60% of the buyers of real estate in central London were from overseas. They were driven by the lower value of the pound (which makes their currency go further), the favorable tax regime, and the security and stability of living in London (compared to their often dodgy governments).
For UK citizens paying tax rates in the 50%+ range (as opposed to wealthy foreigners who pay little as a percent of their income), you would need to make an astonishingly high amount of earnings to pay for a high quality residence in an exclusive part of London. Remember that not only are real estate costs high, personal taxes are high, and everything you buy from cars to furnishings to services such as a nanny are sky-high, as well. I had a discussion where a friend mentioned someone who had to make 2 million pounds / year in order to live at what he considered to be an acceptable level in this part of town.
Cross posted at LITGM
Posted in Britain, Real Estate | 8 Comments »
Posted by Carl from Chicago on 30th March 2013 (All posts by Carl from Chicago)
Recently I saw this sign in River North, indicating the start of another large high rise project, with an optimistic start date of 2016. Apparently there is plenty of money sloshing around to fund the construction of large buildings, because cranes are up in the sky all over the downtown area. I don’t know if lessons have been learned from the last and most recent bust in 2008, where developers who put in only a bit of equity defaulted and handed the projects back to the creditors, who also took big losses. The most obvious lessons would be 1) require developers to put significant equity into the project 2) don’t fund too many projects competing for the same tenants. These projects don’t seem to be condominiums for the most part; I am only speculating but perhaps the failure of so many condominium projects rattled the banks (those that are still standing, at least).
I would consider it a victory if they finished a few of the half-built structures that have stood idle for five or more years without any progress. This hotel in River North is now restarting; I have been looking at this ugly mess for years so it is great to see some sort of actual effort to complete the hotel.
The real issue is whether or not the structures being built right now, at what is likely the apex of the boom, will be seen through to completion. I certainly hope so, because it is depressing to see half-built structures marring the skyline for years. The famous “Chicago Spire” didn’t get far (only a hole in the ground) which is a good thing because it would have been sad to see the “Stub” along the lake shore for years to come.
Cross posted at LITGM
Posted in Business, Chicagoania, Economics & Finance, Real Estate | 3 Comments »
Posted by Carl from Chicago on 10th March 2013 (All posts by Carl from Chicago)
Recently I was reading how a professor at the University of Illinois at Chicago was arrested for bringing an unloaded handgun to work, and that it made the news media. I reflected briefly on the fact that you can bring a loaded, concealed gun with you in most places in many states in the US and it wouldn’t be news, it would in fact be normal activity, for instance in the adjacent state of Indiana.
Meanwhile, in California, it is common for people to smoke marijuana openly as is discussed here. Needless to say, this behavior would get you immediately arrested in many states particularly in the south and midwest.
Taxation is also highly variable on a state and city basis. New York and California have some of the highest taxes, particularly on income beyond a particular level (progressive taxes). On the other hand, states like Florida and Texas have a much lower level of taxation and a much freer business climate in terms of regulation.
Without getting into the hottest of hot-button issues, clearly there are differences in the types of marriages and reproduction rights / right to life on a state by state basis. These differences are narrowing in some areas and getting wider in others.
Some states have “right to work” laws which massively limit union power, and have flourishing and expanding manufacturing economies as a result. Visit Alabama, South Carolina, and Texas to see where all the former manufacturing might in the midwest and Northeast and West Coast migrated to (if it didn’t go to China or overseas). The enacting of “right to work” laws obviously sends an important signal to business leaders whether or not a state is a friendly place to do business for incremental investment (along with taxation).
The “fracking” revolution has unleashed vast wealth in some states, and in other states it has been banned or severely curtailed. Meanwhile, California is going in on its own with carbon regulations and highly aggressive “green” energy targets, while other states are heavily reliant on traditional (and cost effective) technologies.
The differences on a state-by-state level on these different dimensions seem large and growing. They are much more subtle (though often correlated) with the Red / Blue analysis. An attempt to classify these vectors could be done as follows:
Energy Freedom – the ability to extract and use cost effective technologies (like natural gas, fracking, and coal) and a state’s willingness to invest more for reliability or the requirement to use expensive (green) technologies and curtail energy use even at the expense of industry competitiveness and reliability. California is likely on one end and Texas is on the other side, although many others have large freedom including Pennsylvania.
Safety Freedom – the right to defend yourself at home, in transit, at work and during study or whether that is assumed by the state. Sadly the most restrictive is Illinois and there are many candidates on the other side throughout the south and midwest (Indiana).
Personal Substance Freedom – the right to smoke, the right to drink, and the right to use various drugs or stimulants. Some odd states (like Colorado) are leading the way on this, it isn’t always the traditional Red / Blue divide.
Freedom to Work & Hire – the right to work and not be forced to join a union, and this is also tied with local laws and practices that limit the ability to hire and fire and direct hiring or limit firing in various dimensions.
Freedom to Build / Live / Rent – Houston is famous for having very limited zoning while other states and municipalities have highly restricted zoning practices. The New York co-op concept also severely limits new entrants along with rent control. These laws can also include whether you can work or have a business in your home. While subtle, these practices can have a large impact on prices and how the region functions.
Freedom From Excessive Taxation – Some level of taxation is necessary for government to function but high tax levels have severe intended and unintended consequences of under investment and evasion. Taxation includes state, local, city, sales, estate, property, and “sin” taxes. These vary significantly by area but are highest in California and the East Coast and likely the lowest in the South.
Freedom of Marriage Choice – A larger portion of states are recognizing marriages beyond the traditional marriage, and this varies by state
Freedom of Reproductive Rights – There are a wide variety of approaches and trends on a state level and then there are practical impacts, as well. This is highly variable by state in practice
Freedom on Medical Rights – an emerging model will be how each state approaches new medical practices and funding methodologies, along with the practical availability of doctors that subscribe to the state’s controls and funding methods. This area will grow exponentially in the near future
I believe that these sorts of analyses on a state by state level are much more useful than the traditional Red / Blue view (although they are often correlated) and when you start to dig in to the differences on a state and municipal level they are staggering, particularly when you view the extremes.
It would be interesting and useful to begin to put together the various data sets to analyze states and municipalities along these continuums, and others that I’ve likely missed.
Cross posted at LITGM
Posted in America 3.0, Big Government, Business, Civil Liberties, Economics & Finance, Energy & Power Generation, Health Care, Law Enforcement, Real Estate, RKBA | 9 Comments »
Posted by Jonathan on 28th June 2012 (All posts by Jonathan)
Miami residential real estate prices are holding firm and even increasing despite the weak economy. The recovery appears to result in significant part from capital inflows from French, Venezuelans and other foreigners whose governments are ramping up their attacks on private wealth. With low interest rates, a weak dollar and relative safety from confiscation, residential property in the more cosmopolitan US cities is a financial haven for Europeans and Latin Americans.
Read the rest of this entry »
Posted in Big Government, Economics & Finance, Real Estate | 9 Comments »
Posted by Sgt. Mom on 23rd March 2012 (All posts by Sgt. Mom)
One of the best things about buying a house and retiring from the military was being able to feel free to actually get serious about a garden. I went through a phase of planting roses – many of which have thrived and survived – and a long project to rip out the existing lawn, back and front, and put in xerioscape plants. The back yard was the place that I put the most into, though. Because of the layout of the rooms and the windows in them, the back was the part I looked at the most. And because of the peculiar soil composition – a foot or so of heavy, dense clay laid down over an impermeable layer of caliche which apparently goes all the way to the core of the earth – getting certain things to thrive and grow in it has been a challenge. Read the rest of this entry »
Posted in Environment, North America, Photos, Real Estate | 4 Comments »
Posted by Lexington Green on 4th December 2011 (All posts by Lexington Green)
James C. Bennett, author of The Anglosphere Challenge (Rowman & Littlefield, 2004), and Michael J. Lotus (who blogs at Chicagoboyz.net as “Lexington Green”), are proud to announce the signing of a contract with Encounter Books of New York to publish their forthcoming book America 3.0.
America 3.0 gives readers the real historical foundations of our liberty, free enterprise, and family life. Based on a new understanding of our past, and on little known modern scholarship, America 3.0 offers long-term strategies to restore and strengthen American liberty, prosperity and security in the years ahead.
America 3.0 shows that our country was founded as a decentralized federation of communities, dominated by landowner-farmers, and based on a unique type of Anglo-American nuclear family. This was America 1.0, as the Founders established it. The Industrial Revolution brought progress, opportunity and undreamed-of mobility. But, it also pushed the majority of American families into a new, urban, industrial life along with millions of unassimilated immigrants. After the Civil War, new problems of public health, crime, public order, and labor unrest, on top of the issues of Reconstruction, taxed the old Constitution. Americans looked for new solutions to new problems, giving rise to Progressivism, the ancestor of modern liberalism.
America 3.0 shows that liberal-progressive solutions to the challenges of America 2.0 relieved some problems, and kicked others down the road. But they also led to an overly powerful state and to an overly intrusive bureaucracy. This was the beginning of America 2.0, the America we grew up with, which dominated the Twentieth Century.
America 3.0 argues that the liberal-progressive or “Blue State” social model has reached its natural limits. Even as it continues to try to expand, it is now dying out before our eyes. We are now living in the closing years of the 20th Century “legacy state.” Even so, it has taken the shock of the current Great Recession to make people see the need for change. As a result, more and more Americans are calling for a return to our founding principles. Freedom and individualism are on the rise after a century-long detour.
America 3.0 shows that our current problems can be and must be transcended with a transition to a new America 3.0, based on modern technology, decentralized communities, and self-reliant families, and a reassertion of fiscal responsibility, Constitutionally limited government and free market economics. Ironically the future America 3.0 will in many ways be closer to the original vision of the Founders than the fading America 2.0.
America 3.0 gives readers an accurate, and hopeful, assessment of our current crisis. It also spotlights the powerful forces arrayed in opposition to the needed reform. These groups include ideological leftists in media and the academy, politically connected businesses, and the public employees unions. However, as powerful as these groups are, they have become vulnerable as the external conditions change. A correct understanding of our history and culture, which America 3.0 provides, shows their opposition will be futile. The new, pro-freedom, mass political movement, which is aligned with the true needs and desires of Americans, is going to succeed.
America 3.0 provides readers a program of specific “maximalist” proposals to reform our government and liberate our economy. America 3.0 shows readers that these reforms are consistent with our fundamental culture, and with our Constitution, and will make Americans freer and more prosperous in the years ahead.
America 3.0 provides a “software upgrade” for the Tea Party and for all activists on the Conservative and Libertarian Right. It provides readers with historical evidence and intellectual coherence, to channel the energy and enthusiasm of the rising mass political movement to renew America.
America 3.0 shows that our capacity for regeneration is greater than most people realize. Predictions of our doom are deeply mistaken. We are now living just before the dawn of America’s greatest days. Within a generation, positive changes beyond what we can currently imagine will have taken place. That is the America 3.0 we are going to build together.
(Cross-posted from the America 3.0 blog.)
Posted in America 3.0, Anglosphere, Announcements, Arts & Letters, Big Government, Book Notes, Conservatism, Economics & Finance, Entrepreneurship, Health Care, History, International Affairs, Politics, Predictions, Public Finance, Real Estate, RKBA, Science, Society, Taxes, Tea Party, Tech, Transportation, Urban Issues, USA | 18 Comments »
Posted by Carl from Chicago on 16th October 2011 (All posts by Carl from Chicago)
I know a lot of people who rent and recently overheard how difficult it is to find an apartment. This is anecdotal but they said that you needed to sign a multi-year lease and / or offer MORE than the requested rent to guarantee that you get one as soon as it is open.
The New York Times today had an article titled “The Lease is up, and now so is the Rent” describing the situation in New York City:
Across New York, rents have not only rebounded from the depths of two years ago, but are also surpassing the record high of 2007 during the real estate boom, according to figures from Citi Habitats, a large rental brokerage, and other surveys. That means a perennially frustrating process has become almost frenzied. Brokers say prospective renters need to come prepared to close a deal on the same day — ready to write a check for thousands of dollars to cover the first and last month’s rent, and the broker’s fee. For desirable apartments, forget about open houses — the best places are snapped up within a few days, or less, through private showings by brokers.
In the comments section on that post they mention what the article (typically) fails to do; New York’s problems are exacerbated by their ludicrous rent-control laws, which distorts developers’ behavior and forces some renters to subsidize their neighbors and creates a “shadow economy” of sublets.
In Chicago it is (comparatively) easy to build new rental stock to take advantage of the situation; in my River North area there are giant new rental only buildings going up everywhere. At this site where a bank used to be there is another hole for a 20+ story apartment building at 501 N Clark.
I remember back in an economics class in college a professor discussed the real estate boom in Arizona in the ’80s… he said that since the builders were all small, they didn’t know when to exit the market. Individually they weren’t large enough to have market intelligence (such as in an industry with a few large players, like chemicals) so they just kept overbuilding and doubling-down their chips until they were wiped out. Only a few were smart enough to take their cards off the table rather than try to chase the last win, only to fall short and get caught when the market tanked.
It will be interesting to see who will take the brunt of the collapse in the higher-end rental market that is likely to occur in a few years. Someone is financing these rental projects; while they are not as subject to failing as a similar condo project (since sales are binary while you can adjust rents in a falling economy) they are still risky and require lots of up front debt financing as well as being hostage to rising real estate taxes (especially in Chicago, where we are in dire financial straits). A lot of the banks that funded the condo buildings went under and were taken down by the FDIC; perhaps the banks that are financing these new buildings will take the brunt, too.
As these buildings get constructed downtown, expect the more marginal rental units in the outskirts to take a big hit later when the number of renters falters. I anticipate that the big buildings would cut rents rather than remain empty (since it is essentially a fixed-cost operation, like an airplane, so getting any tenant is better than letting it sit vacant), and then they would prove to be tough competition for the less-modern rental buildings. Watch and see it all unfold.
Cross posted at LITGM
Posted in Business, Chicagoania, Real Estate | 12 Comments »
Posted by Sgt. Mom on 7th October 2011 (All posts by Sgt. Mom)
On the south side of San Antonio there are the ruins of a turn-of-the-last century spa resort called Hot Wells. Once there was a luxury hotel, and a splendid bathhouse, featuring hot mineral baths. It’s in ruins now … but splendidly evocative ruins. Read the rest of this entry »
Posted in Architecture, Book Notes, Diversions, History, Photos, Real Estate | 8 Comments »
Posted by Carl from Chicago on 16th July 2011 (All posts by Carl from Chicago)
Today the US government basically controls the US mortgage market for housing. Per this article in the WSJ “Government Stays Glued To Mortgage Market” in the WSJ:
The government took over Fannie and Freddie in 2008 to prop up the housing sector, and taxpayers are on the hook for $138 billion…Together with the Federal Housing Administration and federal agencies, Fannie and Freddie are behind nine in 10 new mortgages.
The US government increased the limit on the dollar amount that these agencies can issue in order to keep housing prices from collapsing; now, much to the bewailing of the real estate industry, they are looking to tighten those limits.
Unfortunately, if the US government stops supporting loans, there aren’t going to be many new loans at all. If you attempt to get a mortgage that isn’t covered by one of these Federal agencies, expect to see a very large down payment, a higher interest rate, and to have sterling credit in order to close the loan.
Some regions are moving to cash in order to “clear the market”. In Miami 64% of transactions were “all cash”, with foreign buyers comprising the majority of the sales.
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Posted in Real Estate | 4 Comments »
Posted by Michael Kennedy on 6th January 2011 (All posts by Michael Kennedy)
I thought I would add a photo of my house at Lake Arrowhead on New Years weekend. The road going down the hill is an access road, sort of an alley but the only access for some homes up here. My house is in the far distance in line with the road, which makes a left turn at my fence. I was walking my basset hound who loves the snow but has to jump like a sled dog breaking a trail in anything more than 6 inches of snow.
The main road is to the right and the house backs up to it but faces the access road. I have a third of an acre, all level, so the dog is content. It was 14 degrees that morning so he was not eager to go out until a bit later in the day. I’ve been coming up here for weekends for 35 years. It’s nice to be home now. It’s two hours to my previous home in Orange County and about two hours to the beach.
Posted in Diversions, Holidays, Photos, Real Estate | 1 Comment »
Posted by Kevin Villani on 29th November 2010 (All posts by Kevin Villani)
This is a summary of a working paper available at the links for which comments are welcome. (An earlier post on related topics appeared here.)
Download the paper (500KB pdf).
The Administration will soon propose legislation to address the future of the US housing finance system, and it’s a sure bet that this will include re-incarnating Fannie and Freddie in some form. Prominent Republican politicians have also recently called for “privatizing” these entities. This is sheer folly. The problem with keeping Fannie and Freddie or an alternative government sponsored capital market hybrid that seeks to limit and/or price government backing is that policymakers have always done just that! It was investors, not policy-makers, who conferred “agency status” on Fannie and Freddie in spite of their prior ill designed privatizations.
Regardless of whether you believe they were leaders or followers in the sub-prime lending debacle—and the evidence overwhelmingly favors the former view–they have always represented a systemic risk and are inherently inconsistent with a competitive financial system. There are significant roles for government in a competitive market oriented housing finance system, but this isn’t one of them.
Public deposit protection is here to stay. Nobody is suggesting getting rid of the Federal Deposit Insurance Corporation, but public protection requires appropriate regulation.
Whether homeownership subsidies such as the mortgage interest deduction are appropriate is an ongoing debate. Nobody is suggesting getting rid of all homeownership subsidies, but credit subsidies for low-income borrowers and other politically preferred groups should be budgeted, targeted and separated from finance.
Discrimination in lending that is not based on the ability to pay is illegal. Nobody is suggesting relaxing current anti-discrimination laws and regulations, but competition often mitigates all forms of inappropriate lending discrimination better than regulation.
Capital market financing will remain necessary. Nobody is suggesting getting rid of the FHA/Ginnie Mae program or the almost equally massive Federal Home Loan Bank System, but reforms of these programs are necessary after the housing markets recover.
Private label mortgage securitization contributed to the sub-prime lending debacle. Nobody condones the abuses, but private label securitization worked well until regulatory distortions encouraged securitizers to bypass the private mortgage insurance industry, the traditional gatekeepers responsible for preventing excessively risky lending.
A competitive market oriented system serves qualified home borrowers and lenders best but has few political constituents. Politicians much prefer the deferred off budget costs of Fannie and Freddie but the long run costs of delivering subsidies that way far exceed the benefits.
The four steps necessary to restore a stable competitive market oriented housing finance system are:
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Posted in Economics & Finance, Politics, Public Finance, Real Estate, Urban Issues | 4 Comments »
Posted by Carl from Chicago on 8th October 2010 (All posts by Carl from Chicago)
The FHA used to only represent a small portion of the US mortgage market. FHA buyers were perceived to have poor credit and use this government program (essentially a subsidy) to enable them to purchase a house that they would live in, thus increasing the “social mission” of increased home ownership in the USA. However, after the meltdown in securitized mortgage lending in 2008, the market for non FHA loans essentially evaporated and the FHA has moved from a small percentage of the mortgage market (maybe 5%) up to as high as 90% in some regions among eligible residences. There are limits on FHA buyers, mainly that the house / condominium can’t cost more than $369,000 (or $729,750 in some high cost markets like CA and NYC) and that the owner needs to live in the house (not for 2nd homes).
In Chicago many of the condos are below the threshold where FHA financing makes sense and so the issue of whether or not a particular unit is eligible for FHA financing is becoming more important in the marketplace. Buildings advertise in large letters if their condominium is eligible for FHA financing (on units that qualify under the cost threshold above, of course). At some point it is possible that buildings that cannot get FHA approval (they have other criteria regarding reserves, commercial tenants, etc…) would be at a severe loss when trying to sell out for the first time to owners or for existing owners to resell to new buyers.
There has not been a lot of discussion on whether or not it makes sense for the Federal government to essentially nationalize the mortgage industry, but that is what is occurring today. FHA loans are now the only loans in town since their low down payments and rock bottom interest rates drive out competitors at their price levels. And it is only a matter of time before the FHA raises their cost limits which would further their dominance in the market, leaving only the high end for other types of mortgages.
I also believe that wise developers will tend to “cluster” their pricing right around the FHA limits. If you have a $450k condo, that is a bad price point if only $384k can be financed, so shrink them down a bit or reduce amenities to hit that price point. As soon as the FHA raises their limits, then the mid-tier condo market will move closer to that pricing point, over time, as developers realize the power of FHA and the limited market for non FHA loans. This will take a while and be subtle because development is dead now so little is coming onto the market, but I’ll bet you’ll see this in the next wave.
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Posted in Real Estate | 8 Comments »
Posted by Kevin Villani on 9th August 2010 (All posts by Kevin Villani)
This is a summary of a working paper available at the links for which comments are welcome. (A later post on related topics appears here.)
Download the paper (1 MB pdf).
That the US financial system crashed and almost collapsed in 2008, causing a globally systemic financial crisis and precipitating a global recession is accepted fact. That US sub-prime lending funded the excess housing demand leading to a bubble in housing prices is also generally accepted. That extremely imprudent risks funded with unprecedented levels of financial leverage caused the failures that precipitated the global systemic crash is a central theme in most explanations. All of the various economic theories of why this happened, from the technicalities of security design (Gorton, 2009) to the failure of capitalism (Stiglitz, 2010) can be reduced to two competing hypotheses: a failure of market discipline or a failure of regulation and politics.
While still sifting through the wreckage and rebuilding the economy in mid July, 2010, the Congress passed the 2,315 page Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to prevent a reoccurrence of this disaster. The disagreement in the debates regarding the appropriate policy prescription reflected the lack of a consensus on which of these two competing hypotheses to accept. The risk was that, following the precedent established in the Great Depression, politicians will blame markets and use the crisis to implement pre-collapse financial reform agendas and settle other old political scores. By having done just that, this Act worsens future systemic risk.
That there was little or no market discipline is obvious. Contrary to the deregulation myths, regulation and politics had long since replaced market discipline in US home mortgage markets. Regulators didn’t just fail systemically to mitigate excessive risk and leverage, they induced it. This didn’t reflect a lack of regulatory authority or zeal, as politicians openly encouraged it.
The politically populist credit allocation goals that promoted risky mortgage lending, whether or not morally justifiable, are fundamentally in conflict with prudential regulation. The system of “pay-to-play” politically powerful government sponsored enterprises (GSEs) was a systemic disaster waiting to happen. The recent advent of the private securitization system built upon a foundation of risk-based capital rules and delegation of risk evaluation to private credit rating agencies and run by politically powerful too-big-to-fail (TBTF) government insured commercial banks and implicitly backed TBTF investment banks was a new disaster ripe to happen. Easy money and liquidity policies by the central bank in the wake of a global savings glut fueled a competition for borrowers between these two systems that populist credit policies steered to increasingly less-qualified home buyers. This combination created a perfect storm that produced a tsunami wave of sub-prime lending, transforming the housing boom of the first half decade to a highly speculative bubble. The bubble burst in mid-2007 and the wave crashed on US shores in the fall of 2008, reverberating throughout global financial markets and leaving economic wreckage in its wake.
By the time the financial system finally collapsed bailouts and fiscal stimulus were likely necessary even as they risked permanently convincing markets that future policy will provide a safety net for even more risk and more leverage. Given this diagnosis, how to impose market and regulatory discipline before moral hazard behavior develops is the most important and problematic challenge of systemic financial reform.
The public policy prescription is simple and straightforward. Prudential regulation remains necessary so long as government sponsored deposit insurance is maintained, which seems inevitable. Prospectively the traditional regulatory challenge of promoting market competition and discipline while safeguarding safety and soundness remains paramount. But the prudential regulation of commercial banks needs to be de-politicized and re-invigorated, with greater reliance on market discipline where public regulation is most likely to fail due to inherent incentive conflicts. This means sound credit underwriting and more capital, including closing the off balance sheet loopholes typically employed by big banks and eliminating the incentives for regulatory arbitrage. Universal banking should remain, but divested of hedge fund and proprietary trading activity. In addition, firms that are “too big to fail” (TBTF) are probably too big to be effectively controlled by regulators and should either be broken up or otherwise prevented from engaging in risky financial activities by reducing or eliminating their political activities.
Most importantly, the two main sources of TBTF systemic risk and subsequent direct government bailout cost, Fannie Mae and Freddie Mac, no longer serve any essential market purpose. The excess investor demand for fixed income securities backed by fixed rate mortgages that fueled their early growth is long gone and now easily met by Ginnie Mae and Federal Home Loan Bank securities alone, as fixed nominal life and pension contracts have largely been replaced by performance and indexed plans. Fannie Mae and Freddie Mac should be unambiguously and expeditiously liquidated subsequent to implementing an adequate transition plan for mortgage markets.
Download the paper (1 MB pdf).
Kevin Villani is former SVP/acting CFO and Chief Economist at Freddie Mac and Deputy Assistant Secretary and Chief Economist at HUD, as well as a former economist with the Federal Reserve Bank of Cleveland. He was the first Wells Fargo Chaired Professor of Finance and Real Estate at USC. He has spent the past 25 years in the private sector, mostly at financial service firms involved in securitization. He is currently a consultant residing in La Jolla, Ca. He may be reached at kvillani at san dot rr dot com.
Posted in Economics & Finance, Markets and Trading, Politics, Public Finance, Real Estate, Urban Issues | 17 Comments »
Posted by Carl from Chicago on 17th October 2009 (All posts by Carl from Chicago)
One of the broad assumptions behind recessions and recoveries is that during the “boom”, excess capacity is built into the system as manufacturers & service providers expand to meet increasing needs (today, and in the future). During the recession, manufacturers & service providers pare back, leaving capacity idle.
Part of the reason that the recovery (typically) gains steam is that bringing back this idle capacity (both in physical and human capital) is cheaper than building (or training) new, and it allows the economy to “roar” back into high gear. In some high level sense WW2 leveraged all of the physical and human capital that was idled by the great depression; while huge plants were built and millions of workers mobilized much of the initial lift was caused by leveraging what we had that was unused at the time.
When I look at this “boom” and recession, however, from the point of view of the USA, it doesn’t seem that we over-invested in productive capacity. Much of the investment was in residential real estate and commercial real estate for distribution, retail and services.
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Posted in Chicagoania, Economics & Finance, Real Estate | 12 Comments »
Posted by Carl from Chicago on 5th October 2009 (All posts by Carl from Chicago)
I recently was walking down LaSalle avenue in River North and saw some new construction. Aside from the usual accoutrements such as more bathrooms than bedrooms and everything made of granite, one item REALLY caught my eye:
Low assessments – $200 / 2009
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Posted in Chicagoania, Humor, Real Estate | 14 Comments »
Posted by Carl from Chicago on 19th September 2009 (All posts by Carl from Chicago)
Today the FHA, the Federal Housing Administration, is a gigantic player in the residential mortgage business. The FHA guarantees mortgages against default, and allows purchases of homes with only a 3.5% down payment, and provides a rock bottom interest rate of near 5%. These lenient terms apply to virtually everyone, even those with poor credit scores and little equity in the home, which are highly correlated with default. This is in addition to the $8000 tax credit the US Government is issuing to first time buyers, which is boosting demand for these sorts of loans.
This article describes the measures that the agency is taking to reduce the odds of a bailout, but they don’t hit on the core issues of low down payments and not adjusting the interest rates to better reflect the risks on lower credit quality mortgages. These half-hearted measures require a tiny base of assets for mortgage originations (up to $1m from $250,000) and some changes to appraisals… the core issue here is that there were massive amounts of fraudulent mortgages that flooded into the system during the boom and when they went awry the brokers that backed them vanished into the night.
Many have pointed out that the FHA looms as a likely candidate for government bailout, such as this article from the Washington Post, titled “FHA’s Refusal to Seek Bailout Met With Skepticism”
FHA Commissioner David H. Stevens said Friday that the surplus fund set aside to cover unexpected losses on mortgages backed by the agency will fall below the 2 percent threshold required by Congress when the next fiscal year starts in October.
Although the reserves had remained well above the minimum required level during the housing boom, the audit last year showed they had shrunk to 3 percent as of Sept. 30, compared with 6.4 percent a year earlier. The fund’s value was estimated at $12.9 billion, down from $21.2 billion the previous year.
Many stories note that most of the loans that are being done today are backed by the FHA. From this article in the Wall Street Journal titled “No Easy Exit for Government as Housing Market’s Savior”
The Denver home lender sees every day how dependent the housing market has become on the government. At the height of the boom, just 20% of Universal’s mortgages were backed by the Federal Housing Administration, an arm of the government that guarantees loans to borrowers who can’t afford big down payments. Today, the FHA accounts for more than 80% of his business.
Also note that the US Government is buying most of the securities that are backed by the FHA. Private banks are not interested in purchasing securities with low returns and thus the government secures the loan on the front end, and then repurchases the securities on the other end.
At the Fed, the question of whether to start dismantling the scaffolding is a dominant one. Since the beginning of the year, the Fed has purchased $836 billion of mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, the federal body that securitizes FHA loans. The purchases have helped push down interest rates on mortgages guaranteed by the firms from more than 6.5% last October to 5.15% today, according to HSH Associates, which tracks the mortgage market.
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Posted in Real Estate | 1 Comment »
Posted by Carl from Chicago on 25th April 2009 (All posts by Carl from Chicago)
As I walk to work in the morning I pass right by the headquarters of General Growth. General Growth is a corporation that owns over 200 shopping malls throughout the United States, along with other commercial properties. General Growth recently declared bankruptcy, stating that this filing will not impact operations at its properties. From their press release:
The decision to pursue reorganization under chapter 11 came after extensive efforts to refinance or extend maturing debt outside of chapter 11. Over many months, the Company has endeavored to negotiate with its unsecured and secured creditors to obtain the time needed to develop a long-term solution to the credit crisis facing the Company. Unable to reach an out-of-court consensus, the Company reluctantly concluded that restructuring under the protection of the bankruptcy court was necessary. During the chapter 11 cases, the Company will continue to explore strategic alternatives and search the markets for available sources of capital. The Company intends to pursue a plan of reorganization that extends mortgage maturities and reduces its corporate debt and overall leverage. This will establish a sustainable, long-term capital structure for the Company.
I am not an expert on the commercial property industry but am starting to learn more about it since it has an integral impact on the skyline of Chicago and many other cities around the country. Essentially the commercial property industry purchases properties mainly with debt, puts in a bit of equity, runs the properties, and then plans to sell them at a profit to another commercial property company. With low interest rates, easy lending terms, and many buyers, there has been an immense run up in commercial property, and companies like General Growth were flying high. GGP’s stock traded near $80 over the last couple of years, before collapsing near zero as the debt markets seized up.
The downfall of the commercial property industry, however, is the fact that many of the loans need to be “rolled over” every few years. On your home, for instance, you may have a 30 year mortgage. The debt on the commercial property industry, on the other hand, rolls over usually within 5 years. Given that a typical company has many projects, in the next 12-18 months many of these sorts of companies are finding loans coming due and they have no way to raise the money (except at punitively high interest rates, if they can find money at all), so they are all starting to go bankrupt and fall like dominoes. It doesn’t help that many of these enterprises bought properties in the go-go years of 2005-8, when prices were rising all the time and there were bidding wars – it is likely most / all of those properties today are worth less than they were purchased for which makes obtaining new financing even more difficult (try to refinance your home loan for more than the current market value of your home… it isn’t happening).
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Posted in Business, Chicagoania, Real Estate | 2 Comments »
Posted by Carl from Chicago on 8th February 2009 (All posts by Carl from Chicago)
Since the weather here in Chicago is usually so unfavorable, people love to go outside as soon as there is a break in the gloom. One of my favorite pastimes is to sit outside and have a drink, catch a little sun, and watch the world go by. It is even better if there is at least semi-edible bar food (I am not too picky).
When I lived in Wicker Park / Bucktown there is a local bar called “Northside” that has a great front deck near a busy intersection and it was fun to sit out there on a Friday afternoon or Saturday and just relax. Here in River North there are some outdoor spaces but I liked to take a walk up to a place called “Melvin B’s” that had a nice deck outside in the V*agra Triangle.
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Posted in Chicagoania, Real Estate | 4 Comments »