Thursday, September 18, 2008
Credit Crunch Origin
Lots of folks know that the current credit crises exist b/c lenders gave loans to people that shouldn't have gotten them. What most don't know if why they did it. Everyone thinks it was just greed. This is true to some extent but there is an underlying reason for all of this. It turns out that there was about $35 trillion available around the world in 2000 to invest in fixed income investments. That number doubled by 2005. By 2005, there was $70 trillion dollars that needed to be invested in fixed income investments. The reason for the sudden rise in that amount was the fact that all of these small 3rd world companies had become much more wealthy b/c they were participating in the new global supply chain of computers and other technology. They went out seeking fixed income investments for their new money. The U.S. had one of the greatest investments of this type in the world. It was mortgage backed securities. These are bundles of hundreds of home mortgages that are sold as stocks on the stock market. The U.S. market quickly ran short on its supply of these investments. The 3rd world companies still had lots of money to invest, but we didn't have the supply to meet their demand. Slowly, at first, some banks starting loosening their restrictions on lending to try to meet this increased demand. As they did, other banks began to do the same in order to compete. Once the snowball started rolling, there was no stopping it. Restrictions were all but removed in order to feed this ravenous appetite of $70 trillion dollars. And the rest is history. Now the opposite is happening. The demand for mortgage backed securities has dwindled. With that reduction in demand, the banks have had to cut back on supply. This has led to what we call the credit crunch. Banks don't want to give anyone money b/c there is not enough demand for mortgage backed securities.
Tuesday, September 9, 2008
National Home Sales
Nationally, existing-home sales rose in July to the highest level in five months, although they continue to be well below the numbers from last year at this time, according to the NATIONAL ASSOCIATION OF REALTORS®. Existing-home sales – including single-family, townhomes, condominiums and co-ops – increased 3.1 percent in July to a seasonally adjusted annual rate of 5 million units from a downwardly revised level of 4.85 million in June. Sales were 13.2 percent lower than the 5.76 million-unit pace in July 2007.
The national median existing-home price for all housing types was $212,400 in July, down 7.1 percent from a year ago when the median was $228,600.Lawrence Yun, NAR chief economist, said home prices in some regions could soon increase. “Sales have picked up significantly in several Florida and California markets. Home prices generally follow sales trends after a few months of lag time,” he said. “Still, inventory remains high in many parts of the country and will require time to fully absorb. We expect more balanced conditions in 2009 and will eventually return to normal long-term appreciation patterns.”
Regionally, existing-home sales in the West jumped 9.7 percent in July to a level of 1.13 million and are 0.9 percent higher than July 2007. The median price in the West was $273,200, down 22.2 percent from a year ago.
In the Northeast, existing-home sales rose 5.9 percent to an annual pace of 900,000 in July, but are 11.8 percent below a year ago. The median price in the Northeast was $278,700, which is 4.9 percent lower than July 2007. Existing-home sales in the Midwest increased 0.9 percent to an annual rate of 1.12 million in July, but are 17.0 percent lower than July 2007. The median price in the Midwest was $175,400, up 1.0 percent from a year ago.
In the South, existing-home sales slipped 0.5 percent to an annual pace of 1.85 million in July, and are 18.1 percent below a year ago. The median price in the South was $179,300, down 3.5 percent from June 2007.
The national median existing-home price for all housing types was $212,400 in July, down 7.1 percent from a year ago when the median was $228,600.Lawrence Yun, NAR chief economist, said home prices in some regions could soon increase. “Sales have picked up significantly in several Florida and California markets. Home prices generally follow sales trends after a few months of lag time,” he said. “Still, inventory remains high in many parts of the country and will require time to fully absorb. We expect more balanced conditions in 2009 and will eventually return to normal long-term appreciation patterns.”
Regionally, existing-home sales in the West jumped 9.7 percent in July to a level of 1.13 million and are 0.9 percent higher than July 2007. The median price in the West was $273,200, down 22.2 percent from a year ago.
In the Northeast, existing-home sales rose 5.9 percent to an annual pace of 900,000 in July, but are 11.8 percent below a year ago. The median price in the Northeast was $278,700, which is 4.9 percent lower than July 2007. Existing-home sales in the Midwest increased 0.9 percent to an annual rate of 1.12 million in July, but are 17.0 percent lower than July 2007. The median price in the Midwest was $175,400, up 1.0 percent from a year ago.
In the South, existing-home sales slipped 0.5 percent to an annual pace of 1.85 million in July, and are 18.1 percent below a year ago. The median price in the South was $179,300, down 3.5 percent from June 2007.
Fannie Mae and Freddie Mac Bailout
I wanted to take a minute and try to summarize the news regarding the government’s takeover of Fannie Mae and Freddie Mac and how it may impact the mortgage and housing markets. In the short term, the rescue is likely to help bring mortgage rates down and should improve credit availability and affordability. While it will not solve all the problems the housing market is facing, it is a significant step.
As for specifics, Federal officials on Sunday announced the takeover of Fannie Mae and Freddie Mac, putting the government in charge of the twin mortgage giants and the $5 trillion in home loans they back. The government’s move extends as much as $200 billion in Treasury support to the two companies and represents a dramatic attempt to shore up the nation's housing market. It places the two companies into a "conservatorship" to be overseen by the Federal Housing Finance Agency. Under conservatorship, the government would temporarily run Fannie and Freddie until they are on stronger footing.
In simplistic terms, Fannie Mae and Freddie Mac are quasi government agencies which are run as private companies, but have operated with the implicit backing of the government. That guarantee has now become explicit. Their role, when created by Congress, was to help promote the flow of money in the mortgage market. An individual deposits money in a checking or savings account at a Bank. The Bank then lends that money to an individual who wants to buy a home and secures the loan with a mortgage. That mortgage is then, in many cases, purchased by Fannie Mae and Freddie Mac, allowing the Bank to make another loan to another homebuyer. Fannie Mae and Freddie Mac then package the loans into securities and sell them to investors or Wall Street. Fannie Mae and Freddie Mac then use that money to buy more mortgages from the Bank. And the cycle continues.
The problem is that, with the changes in the housing market and increasing levels of default, investors have been more hesitant to buy these mortgages or to lend money to Fannie Mae and Freddie Mac. Without this constant infusion of money, Fannie Mae and Freddie Mac are unable to continue to purchase the same number of mortgages from the Banks. That makes fewer loans available, increases mortgage interest rates and results in a squeeze on the credit and housing markets. With the Treasury Department now standing behind Fannie Mae and Freddie Mac and being willing to inject the necessary money, the capital markets, and the mortgage cycle I talked about above, should flow more freely.
The stock market responded well to the news yesterday and it should help stabilizing the credit markets which should, in turn, help the housing market as well.
As for specifics, Federal officials on Sunday announced the takeover of Fannie Mae and Freddie Mac, putting the government in charge of the twin mortgage giants and the $5 trillion in home loans they back. The government’s move extends as much as $200 billion in Treasury support to the two companies and represents a dramatic attempt to shore up the nation's housing market. It places the two companies into a "conservatorship" to be overseen by the Federal Housing Finance Agency. Under conservatorship, the government would temporarily run Fannie and Freddie until they are on stronger footing.
In simplistic terms, Fannie Mae and Freddie Mac are quasi government agencies which are run as private companies, but have operated with the implicit backing of the government. That guarantee has now become explicit. Their role, when created by Congress, was to help promote the flow of money in the mortgage market. An individual deposits money in a checking or savings account at a Bank. The Bank then lends that money to an individual who wants to buy a home and secures the loan with a mortgage. That mortgage is then, in many cases, purchased by Fannie Mae and Freddie Mac, allowing the Bank to make another loan to another homebuyer. Fannie Mae and Freddie Mac then package the loans into securities and sell them to investors or Wall Street. Fannie Mae and Freddie Mac then use that money to buy more mortgages from the Bank. And the cycle continues.
The problem is that, with the changes in the housing market and increasing levels of default, investors have been more hesitant to buy these mortgages or to lend money to Fannie Mae and Freddie Mac. Without this constant infusion of money, Fannie Mae and Freddie Mac are unable to continue to purchase the same number of mortgages from the Banks. That makes fewer loans available, increases mortgage interest rates and results in a squeeze on the credit and housing markets. With the Treasury Department now standing behind Fannie Mae and Freddie Mac and being willing to inject the necessary money, the capital markets, and the mortgage cycle I talked about above, should flow more freely.
The stock market responded well to the news yesterday and it should help stabilizing the credit markets which should, in turn, help the housing market as well.
Coastal Insurance
The coastal insurance market has loosened up in the past two years as more companies write policies here and prices on some coverage has fallen. 12 new insurance companies have entered the state since 2007. Another three are expected to enter in the next 90 days.
Tuesday, September 2, 2008
How Much Has Your Investment Grown?
Want to see an example of why owning a home is one of the best ways to create wealth? Suppose you bought the average home in Charleston in January of 1998. It would have cost you $136,541. Based on a down payment of only $1000, your monthly payment would have been around $1000 and that would include your taxes and insurance. 10 years later in January of 2008, you would still owe $114,906 on that home, but it would now be worth $304,386, the average home sales price in January of 2008. That's a profit of $189,480. How else can you turn $1000 into $189,480 in 10 years?
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