Home prices are rising according to the S&P/Case-Shiller Home Price Index. The index is a repeat-sales index, which has the advantage of tracking the price change for similar assets sold over time (and the disadvantage of overweighting houses that are sold frequently and omitting unmeasured changes in house quality). Note that the release advertizes that the price decline during the 12 months leading up to May is less negative than that in the 12 months leading up to April (and the same for April relative to March). This means the monthly changes are less negative than a year ago – in fact they are positive. House prices are increasing in most major cities (the exceptions are lead by Las Vegas, and include Los Angeles, Miami and Phoenix).
Archive for the ‘real estate’ Category
Recent commentators have suggested that house prices have a ways yet to fall, and that these further declines will lead to a further collapse in US output, potentially lengthening and deepening an already severe global downturn. But while this US recession was kicked off by the sub-prime crisis, even the large declines in housing wealth that we have seen are not enough by themselves to explain the severity of the current downturn. Let me explain why.
First, my comments are prompted by the following somewhat alarming figure (via Chad Jones):
In these turbulent times who doesn’t need additional capital to get through these cold winter months? Because of your strong record of providing banking services to me, I would like to offer you a special opportunity to raise capital and gain liquidity in one easy step. This offer is available only to you, and it is only available for a short time.
As you know, you are the proud owner of my mortgage. As a result you receive several thousand dollars a month from me. I am sure this helps your income statement! I am a great credit risk and this mortgage should be providing you with a great return. Sadly, I am guessing that you, like many banks in these hard times, have actually lost a lot of money on my mortgage. (Phooey on those mark-to-market rules.) We both know the troubling fact is that market values of mortgages have declined precipitously, and as you well know, my mortgage is a nonconforming mortgage. Even some AAA mortgage backed securities are trading at steep discounts, something like 50 cents on the dollar. This puts the market value of my mortgage at around half the outstanding balance.
But I am willing to buy my mortgage from you at above its market price! I am offering to buy that asset that is stuck on your books at about 50 cents on the dollar for 60 cents on the dollar. That’s right, you can sell an illiquid asset, gain hundreds of thousands of dollars in liquidity, and lower your risk of bankruptcy with one easy transaction.
In the future, you will of course not get my loan payments, but once you have sufficient capital, you can turn around and make a very similar mortgage loan at any point – rates are even currently very similar to my current rate.
So don’t sit around waiting for a government bailout! Make you and your stockholders happy. Call me now to take advantage of this exciting offer.
The Bush administration is working on a plan to help homeowners at risk of default.
This would be the second time this year that legislators intervene to help homeowners; in July, President Bush already signed legislation to help borrowers to refinance at more affordable rates. For an academic analysis of that legislation and the way it impacted taxpayers, homeowners, and the financial industry, see a recent paper by Mian, Sufi and Trebbi. Mian and coauthors argue that special interest campaign contributions from the financial services industry and local constituencies predict Congressional voting patterns when it comes to recent government interventions. (more…)