FHA Market Share: Will the Government Sell Bread, Orange Juice, and Mortgages?

Mike Shedlock explains why HUD Secretary Alphonso Jackson’s proposal to “win back” FHA Market Share is a horrible idea, and explains several reasons why the real estate market could go into a prolonged freefall, no matter what your real estate agent may be telling you.

What would you think if the government decided that that the price of bread was way too high and decided to open up a chain of bakeries to sell bread at the “correct” price? What if the government decided that Florida orange juice was priced too high and started selling orange juice by the barrel? If either of these things happened, would you be standing on top of a mountain and screaming with all your might about the insanity of it all? So would I.
So how come there is no screaming about this?
The Washington Post reports that Housing and Urban Development Secretary Alphonso Jackson has a message to subprime lenders: “‘We need to reach out’ to African-American, Hispanic, and other first-time buyers with better loan concepts, more flexible guidelines, and quicker service, said Jackson in an interview. ‘I am absolutely emphatic about winning back our share of the market’ that has slipped away to subprime lenders.”
Excuse me! Since when is it the business of the federal government to “win back” market share on housing loans? How is this any different that the federal government opening up bakeries to compete against the outlandish price of bread baked by private bakeries?
Jackson has reasons for wanting first-time buyers to get FHA loans. FHA-insured mortgages made up 11% of the U.S. home market as recently as 1995, but bottomed out to 4.3% in 2003 and 3.3% in 2004.
Gee, that’s nice, but as for me, I do not want the government assuming market risk, especially after this run-up in housing. All of a sudden, with some areas appreciating 100% in as little as five years, the FHA thinks that the subprime sector is gouging. One way to take care of that problem would be to cap interest rates, but no!
Instead, we see Congress pass the Deflation Guarantee Act of 2005
, otherwise know as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This supposed “consumer protection act” does not cap interest rates, does not cap fees, and does not make allowances for loss of jobs, medical expenses or anything else. It is, in fact, the most anti-consumer act in the entire history of Congress. Rest assured whenever this Congress passes a law stipulating “protection” of anything, if you assume the opposite, you are 98% likely to be correct. If ever there were a case for needed reform, it would be in usury laws that might restrain the insane growth in credit. Instead, we see the FHA deciding to compete against private industry in a bloated housing market.
If that were not enough, President Bush is now urging tax credits for homebuilders!
“To boost housing sales even more, Congress needs to pass my single-family homeownership tax credit,” Bush told a meeting of the National Association of REALTORS on Friday. Bush said the credit would increase the supply of affordable single-family homes by as many as 50,000, with the aim of increasing the supply of affordable homes by 7 million over the next 10 years.
President Bush said surging real estate could be enhanced even further if Congress passes a tax credit to encourage homebuilders to target the middle class. The credit would be for around $2.5 billion over five years. In the speech, Bush said that homeownership set a record in 2004, with 69% of American families owning a home. “There are 74 million homeowners in America today. And that’s the most ever in our nation’s history,” he said.
Just when you thought things could not get any sillier, they get sillier, much sillier. According to the Commerce Department’s most recent data, U.S. new home sales jumped 12% in March, to a record 1.431 million at seasonally adjusted annual rate. That figure smashed the previous record of 1.304 million homes, set in October. It was the largest percentage gain in nearly 12 years. Is that an industry that needs tax credits?
Let’s see. New home sales are at an all time high, 69% of American families own a home, prices have gone parabolic, but…the FHA wants to compete against subprime lenders, and the president wants to give tax breaks to an industry that has been setting record profits for the last four years. Is this blatantly stupid or what?
Rest assured that housing would be more affordable if it were not for our “ownership society” policies that encourage Fannie Mae and Freddie Mac to grant 125% mortgages to anyone who can breathe. Combine that with loose lending practices based on the pure faith that Fannie and Freddie are too big to fail, and it is no wonder that home prices are going through the roof. Credit lending standards are in the gutter, but society says no matter how little economic sense it makes, we will try to give you the credit to make your purchase. Subprime lenders seem a bit worried (not worried enough, in my opinion), so they have raised their fees.
FHA Market Share: The Deflation Guarantee Act of 2005Now the government comes along and wants to compete with private industry. Is this a bad dream, or do we really have a Republican president with a Republican Congress doing these things?

For what it’s worth, I think the government has zero clue about how to get corporations to hire U.S. workers, so it is attempting to goose the one and only thing (housing) that is holding this whole ball of wax together. In the meantime, it is getting more and more costly to “own” anything.

But 2% of new mortgages in California were interest-only in 2001. By 2004, this number hit 49%. Obviously, the only way newcomers can “afford” housing is with the age-old trick of “how much monthly payment can you afford?” Were it not for the GSEs’ willingness to lend money to anyone, the government promoting “ownership,” and absurdly low interest rates that intensified the housing bubble, we would not be in this mess in the first place. Now the FHA and Bush want to keep the insanity rolling by selling bread (home loans) at the “correct price.”
Since there is no conceivable way this can possibly end well, I have a fail-safe prediction: It won’t.
FHA Market Share: Are Falling Interest Rates Always Good for Real Estate?
1) Prices always go up.
2) There’s never a better time to buy. Don’t be left behind.
3) Low or falling interest rates are always good for housing.
Let’s take a look at some charts to see if we can distinguish fantasy from reality. The following shows interest rates generally falling from 1982 all the way up until today. The shaded area in pink shows price declines in California:
Next is a close look at real estate prices in Southern California. Notice that someone buying real estate in California in late 1989 was likely under water on in it for eight years:
This next chart is courtesy of my good friend the fictitious Professor Piggington, who does a great job tracking the housing bubble in San Diego. I inserted the comments in blue. Notice that San Diego real estate prices have gone parabolic since 2000. Does anyone really think this is a sustainable trend? Unfortunately, many people do, or they would not be paying such absurd prices:


Enquiring readers might be wondering, “Is it just a California thing?”
Let’s take a peek at the following chart:


Several things stick out. Prices fell very sharply in New England from 1985-1990. Prices fell sharply in the Middle Atlantic from 1986-1994. Prices in the west Southcentral fell from 1978-1987. Except for brief periods in 1987-1989 and 1994-1995, interest rates were falling.
Anyone buying those peaks waited as long as 8-10 years just to get back to even. Thus, contrary to popular belief, it pays to have some semblance of an idea whether or not housing is overheated in your area before you go rushing in on a belief that you can’t lose.
The charts dispel three great myths about real estate:
As we have clearly seen, prices do not always go up. Prices generally do go up over time, but there are indeed periods where it’s better to be left behind. Falling interest rates do not guarantee rising real estate prices, either.
Across the board, prices have been rising in most areas of the country for close to 14 years now. In some areas, like Florida, California, Las Vegas, Boston, and Chicago, prices have gone parabolic. This makes it a national bubble, as opposed to the cascading and offsetting swings we saw from 1980 through, say, 1996. When things are very overheated in multiple simultaneous areas, it is time to be very, very cautious.
Following is a chart of Japanese land prices from 1980-present. Real estate prices in Japan have actually fallen for 15 consecutive years now:
FHA Market Share: Arguments and Counter-Arguments
Is it absolutely impossible for real estate prices to fall here for prolonged periods of time? Let’s take a look at some of the arguments:
1) “You need somewhere to live.” You needed somewhere to live in Japan as well, but that did not stop prices from falling for 15 straight years.
2) “They don’t make land anymore.” Are they making land in Japan anymore?
3) “It’s better to own and be building equity than to pay rent.” No, not always. It depends on how much the rent is compared to how much your mortgage payment would be. In addition, as we have shown above, in periods of decline, you will not be building any equity at all.
4) “Homes are not overvalued. If they were, prices would not keep going up.” The greater fool theory in the stock market kept prices going up and up and up. People were calling the Nasdaq a bubble in 1998. The fact that stock prices went up for two more years did not mean there was no bubble in 1998. All it meant was the bubble got bigger. People learned the hard way when the stock bubble burst in 2000. People will learn their lesson a second time when the housing bubble bursts.
5) “Prices may flatten out for a while, but they won’t go down.” Housing prices are so far above rental prices and so far above wages that one of two things will happen. Wages will rise, or home prices will fall. Given falling real wages, the fact that we have lost private sector jobs under the Bush administration, and increased outsourcing and losses of jobs in mergers, wages are under pressure, and will remain under pressure. Once prices start to fall, the psychology will change, and we will then see about this “flattening” theory. I do not know about you, but I do not believe in “permanently high plateaus.”
6) “Interest rates are low and will likely remain low.” That argument has already been proven to be fallacious.
7) “People can’t dump houses like stocks.” Agreed, but all that really means is that the decline will be long and drawn out, as opposed to a quick slam. It also means that anyone stuck in a mortgage with negative equity will have a very difficult time selling or moving to take a better job somewhere else. The consequences of being stuck will be big and many. Thanks to Bush’s new “Bankruptcy Reform Act,” there are going to be a lot of people trapped for a long time when this bubble pops.
“The fed will bail us out if the economy gets in trouble.” I agree they will try. However, Japan tried cutting interest rates to zero, but it did not stimulate demand one bit. Once psychology changed, it changed for good. Furthermore, it was actually the mass cutting of interest rates, together with war stimulus and a re-election campaign stimulus in conjunction with absurdly loose credit standards, that created the bubble in the first place. Once the bubble pops, the same policies that created it in the first place are unlikely to work again. Japan found that out, and we will too.
9) “The United States is not Japan.” Yes, true. In our favor are population growth and immigration growth. However, there are other factors. Our consumer debt levels are much higher than they were in Japan. We also have 125% loans, zero down payments, immense credit burdens, and people living well beyond their means. House flipping is rampant, and credit standards are poor. House prices are enormously above both rental prices and wage growth. House affordability is at historic lows. And 35% of all homes sold in the United States in 2004 were for investment or as second homes. I seriously doubt we saw much if any of that in Japan in 1980. Job growth is not keeping up with population growth, and real wage growth is actually negative. Fundamentally, the conditions here seem as bad as, if not worse than, when Japan’s bubble burst. The negative impact of debt burdens here, and the fact that a huge portion of our economy is totally dependent on real estate, will make matters far worse once the bubble does pop.
FHA Market Share: Supporting the Housing Bubble
Is there any other evidence supportive of the bubble claim? The evidence is everywhere. Consider all the books on how to buy with no money down and all the real estate seminars telling people how to make a quick $50,000 flipping. Read the newspapers and look for articles on real estate fraud. Bubbles and fraud go hand in hand. Consider condo-mania in Florida, where people are standing in line to buy units that no one will live in but supposedly will sell later for a profit to someone from Mars or wherever. Remember the euphoria back in 2000 in the stock market, and look at the euphoria over housing now. Look at the rise in foreclosures in Ohio, Michigan, and Texas. Is seems to me we are rotting from the inside out, starting with Detroit. Finally, scroll up one more time and look at that Japanese real estate chart again. If you are into flipping properties and that chart doesn’t scare you, then nothing will.
Just yesterday someone asked me, “Maybe someone can explain to me how a deflationary scenario would make the housing market crash. Deflation means lower interest means no pressure on existing homeowners to sell…What am I missing?”
The prices of homes have outstripped people’s ability to pay for them.

Real wages are declining, and other costs have been going up. Add anemic job growth (mostly in the low-paying service sector) and virtually no wage growth, in spite of mammoth raises for upper-echelon workers, and you have the recipe for disaster. How will people keep up with rising taxes? What happens when consumption is no longer supported by cash-out refis, because no equity is left? Look ahead, and the writing is on the wall. With so many people leveraged to 100% loans, there is going to be a disaster. Not necessarily for those who bought five years ago, but for those who bought recently and for those who keep extracting equity. Whether it takes two years or seven years to play out (I am inclined to believe five years is

the minimum), some real lessons about debt are about to be learned.

FHA Market Share: And Can the Government Sell Roads?

The bipartisan highway bill

currently moving through the Senate would break new ground in creative financing by establishing federal transportation construction bonds that would not fall under traditional definitions of federal debt. These new bonds would be called “Build America Bonds.”
Jim Talent (R-Mo.) and Ron Wyden (D-Ore.) all but proclaim the next free lunch. “For every $1 billion invested in federal highway and transit infrastructure, an estimated 47,500 jobs are created…For every $1 billion invested in federal transportation infrastructure, an estimated $5.7 billion in economic activity is generated…The Build America Bonds proposal looks beyond the bleak budget headlines and taps the big potential of bonds to create more than a million jobs and improve our country’s transportation system at the same time,” says Wyden’s Web site. “By investing in Build America Bonds, Americans can put their money to work building and improving critical infrastructure like roads, bridges, transit, rails and ports, while helping to create jobs, spur the economy and ultimately save lives.”
The legislation would set up a federally chartered nonprofit that would issue $39 billion in bonds, $30 billion of which would be used to fund new transportation projects.
Does anyone seriously think it would stop there if this monstrosity passes? Do we really need another quasi-government corporation messing things up? Don’t we have a big enough mess with Fannie Mae, Freddie Mac, Farmer Mac, and Ginnie Mae? Apologies to lovers of the childhood game with a similar name, but I think its time to put a complete stop to another round of Mother May (Mae) I? before it gets started.
Supposedly, Build America Bonds would usher in a mini-New Deal for the age of globalization, using seed money to help create new jobs and economic activity.
It seems to me that getting Wall Street involved in more creative off-book financing schemes is the last thing we should be doing.
Here is the gist of it: To pay off $30 billion in principal, the government would put $9 billion in a “sinking fund, using reliable choices such as Ginnie Maes and Freddie Macs.” Senate estimates say it would take 30 years for the initial costs to be recovered, but because their issuer would be a nonprofit, the bonds wouldn’t be put on the deficit’s bottom line.
According to the bill’s sponsors, the proposed legislation would reduce congestion, correct deteriorating road conditions, save 12,000 lives each year caused by inadequate road conditions, enhance long-term economic growth, and create millions of job opportunities. Is this the ultimate free lunch, or is there an even better creative financing scheme around the corner?
As long as we are being creative, why stop with roads? Why not “Build Iraq Bonds” to fund the war and keep that debt off the books? Oh wait, aren’t we already keeping Iraq funding off the books somehow? Let’s go for something big. Why not fund Social Security or Medicaid this way? Since we get nearly a six times payback on this free lunch investment, why not just sink $5 trillion into it and solve all of our problems at once? Imagine how nice it would be to completely remove huge budget items from the books. After all, that’s one way Bush can meet his goal of cutting the budget deficit in half. As the Church Lady says, “How convenient!”
How many more creative-finance, buy-now-pay-later schemes can we stand before we have a debt implosion accompanied by an enormous credit crunch?
Once you start down the slippery slope of creative financing, where does it stop? Consider Enron. How many investors were totally wiped out when that company imploded? More recently, consider the shenanigans at Fannie Mae. Fannie Mae has to restate earnings, because it was hiding billions of dollars of losses off the books. Greenspan and Congress are now up in arms warning about financial risk, denying that Fannie Mae is too big to fail, and generally trashing the accounting practices at Fannie Mae that let it keep $9 billion dollars in derivative losses off its balance sheet. In fact, its books are so screwed up that it still is months delayed in filing up-to-date quarterly reports. It might be as long as a year before the mess at Fannie Mae is straightened out. Congress now wants to rein in lending at Fannie Mae before it implodes.

The point of this is not to bash Fannie Mae (even though it truly deserves it), but to point out the stupidity of creating yet another nongovernment agency for the explicit purpose of keeping debt off the U.S. government’s books. If anyone’s books are more screwed up than Fannie Mae, it’s the U.S. government’s.

Meanwhile, the president’s Office of Management and Budget said the bond mechanism “disguises the true costs to taxpayers.” If Bush vetoes this bill, it will be his first veto ever. The fact that Bush is actually threatening to veto something like this tells you how extreme this Republican Congress has gotten in its spendthrift ways and about its foolish creativity in attempting to hide it.

Enough is enough. It seems to me that we already have had way too much creative financing. Instead of more free lunch proposals, what we really need is some semblance of fiscal sanity in conjunction with generally accepted accounting principles for federal finances. But don’t hold your breath.

Mike Shedlock
May 18, 2005

“It’s an evolution in transportation funding,” said U.S. Chamber of Commerce spokesman Ed Mortimer, another supporter on Capitol Hill. “With limited dollars in Washington, we’re going to see the trends go more toward getting Wall Street and investors involved in funding these types of projects.”