Reforming “bankruptcy reform” for housing-bubble victims

If people have to walk away from their homes as the bubble bursts, let them walk away. Don’t make them keep paying for housing they’re no longer living in.

Most of the damage that’s going to be done by the bursting of the real estate bubble can’t, now, be prevented. Lots of people are going to take a financial beating. Some are going to lose their homes. (And, on the other hand, housing prices in hot markets are going to come down from the stratosphere, which means that some people who couldn’t afford a house at the old, insane prices will now be able to afford one.)

But some of the damage still avoidable. In particular, some people who lose their homes are going to find themselves still stuck with some of the debt, and thanks to “bankruptcy reform” it will be difficult and expensive for everyone, and impossible for many, to discharge that debt through bankruptcy.

It shouldn’t be hard to craft legislative language to fix that problem (without giving relief to the people who have been using refinancing and lines of credit to, in effect, spend the housing equity they didn’t earn on SUV’s and other toys).

From the viewpoint of Democrats, and especially Democratic Presidential candidates, this is just about the perfect issue. It will help lots of people, and not just those who actually go bankrupt. Changing the bankruptcy rules would give all eligible debtors better bargaining position with their creditors. Even those whose own homes aren’t at risk are likely to side with the homeowners against the lenders on this one. And of course Republicans will reflexively oppose it.

The one downside: Democrats as well as Republicans feed at the trough of the financial-services industry. (I’m looking at you, Max. And you, Joe. And you, Chuck.) But money isn’t our problem this year; it’s time to start working for the voters instead of the donors. My guess is that the leadership will see it that way.

Update Apparently the securitization process is both making it harder for homeowners in over their heads to renegotiate their mortgages and making it difficult or impossible for those who were cheated to get recourse through the courts. (What would sleazy companies do without the good old “holder-in-due-course” doctrine?) This strengthens the case for extending bankruptcy protection to the victims, but it also suggests legislative changes to make sure that the CMO buyers have to buy whatever fraud liability goes with the deal.

Buying a house? You’re just throwing money away!

The NYT deconstructs real-estate-agent investment hype.

.. or so says the NYT, in a splendid deconstruction of real-estate agent hype about house-buying as a “no-lose investment.”

Note the positive-feedback loop; as house prices level off or dip, people who could only convince themselves that the house they wanted was affordable by assuming steadily rising prices discover that they can’t, in fact, afford to own it. That realization (along, of course, with the meltdown in other-than-prime mortgage availability) ought to drive down prices further, at least out here in HousingBubbleLand.

Footnote A person who sells houses for a living is a real estate agent, or real estate broker. “Realtor” is a made-up word, and a registered trademark of the real estate cartel, which does an excellent job at preventing the falling transactions costs enabled by improving computer and communications technology from being available to home-sellers. Why do reporters insist on using that silly label? Is the guy who sells bedroom sets a Furnitor?

Positive feedbacks and the subprime meltdown

Rising defaults lead to tighter credit lead to more defaults lead to distress sales lead to lower housing princes lead to still more defaults and still tighter credit lead to falling homebuilding and consumer spending lead to an economic slowdown which further depresses housing prices.

Both the New York Times and the LA Times have stories on the subprime meltdown. There seems to be a positive feedback loop at work now: rising default rates have led to credit tightening, and credit tightening (by making it harder for people to refinance their way out of loans whose teaser rates are about to reset) is going to further increase default rates.

Lurking in the background is another positive-feedback possibility: defaults lead to distress sales, distress sales force down prices, falling prices lead to even more defaults. Lurking behind that is the BIG positive-feedback threat: falling home prices plus a tighter market for refinancing puts a crimp in consumer spending while also depressing homebuilding, leading to an economic slowdown which further increases default rates and depresses home prices.

So far, I couldn’t buy back in to the LA housing market at a profit. But I’m glad I sold out in the summer of ’05 and get to watch this one from the sidelines. Seems safer here.

Footnote “Creative” mortgage finance seems sure to be the next big financial scandal. But the Times story has a reminder of the previous financial scandal, the one about “sell-side” securities analysis.

Why hasn’t Bear Stearns fired the analyst who was touting New Century Financial just before its lenders cut it off? Does that have anything to do with the fact that Bear Stearns was one of the outlets for mortgage-backed securities based on New Century’s loans? And if, as seems likely, New Century turns out to be insolvent, leaving the buyers of those MBS’s stuck with the bad loans New Century made, will Bear Stearns do anything to make its customers whole? No, I don’t think so, either.

The option-ARM crunch and the housing crunch

Homeowners with option-ARMs may not be able to wait out a housing-price “correction.” If they start selling in large numbers, we could see a chain-reaction crunch.

Note that the option ARM crunch (see previous post) has the potential to make the housing-price landing a good deal harder.

Usually, when house prices go down, sellers pull back; you could describe this as speculative holding or as loss aversion, but either way transaction volume drops because homeowners don’t want to sell their places for less than they think them to be worth.

But people who can’t make their suddenly “adjusted” option-ARM payments and don’t have any equity to refinance may have no alternative to a distress sale except foreclosure, and the banks aren’t going to want to sit on piles of houses either. So we might see the sort of “selling climax” that characterizes the end of a stock-market dive.

The difference is that big institutions don’t generally buy individual houses as investments, so it’s hard for big pools of speculative money to come in if a selling panic leaves houses underpriced compared to some external standard of value such as the capitalized value of the rent. Being ready to step up and buy in the face of that sort of crisis is an excellent way to get either rich or broke in a hurry.

Look out beloooooooowwwwwww!

What soft landing? A house in Herndon, Va., goes on the market for what seems like a realistic $1.1 million, sells for $530,000.

A soft landing for the housing market?

I don’t think so.

Note that the drop in average sales prices understates the weakness of the market; owners get married to an inflated idea of what their houses are worth, and simply refuse to sell. When a house that was listed for $1.1 million sells after an auction for $530,000, that suggests more than a single-digit decline in values. (That’s a problem for the designers of housing-price futures markets, and for those who try to hedge using those markets.)

David Bernstein of the Volokh Conspiracy, who has been a housing-market bear for more than a year now, has more.

Footnote It seems only fair to warn the reader that I’m not an impartial observer. Not only did I make my own bet by selling my house and moving to a rental unit, hoping to buy back cheaper, but I’m profoundly convinced that high housing prices represent a huge social problem. Moreover, I figure it would take about a 40% drop in Westside real estate to make UCLA competitive in the market for fresh Ph.D.’s.

Is housing finally on the way down?

The CME housing futures contracts are now trading, and they predict a drop of about 5% over the next nine months in ten cities with hot markets. That expectation isn’t sustainable. The bubble could be about to pop rather explosively.

It’s sure starting to look that way.

The Chicago Mercantile Exchange now has housing futures contracts, one each for ten cities plus a national average. The May 2007 composite (the furthest-out contract) is 5% below the August 2006 composite. That’s right: projected appreciation in those ten cities over the next 9 months is -5%. Admittedly, the CME list is of especially “bubbly” cities: Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington.

If housing prices in those ten markets are really going to drop at an annual rate of almost 7%, then the effective price of homeownership &#8212 a 7% capital loss, plus the interest cost of the mortgage, the opportunity cost of the equity, and running expenses &#8212 is more than virtually any homeowner can really afford to pay; living in a million-dollar house will wind up costing more than $150,000 per year. (When I sold my house last year, it was because I’d done that calculation based on flat prices and decided that I couldn’t afford to keep owning.)

So a drop at the projected rate is unsustainable if people come to expect it, because almost no one is going to pay today’s hot-market housing prices, or anything near them, if prices are seen to be sliding. That’s how a bubble bursts.

More opinion on the subject:

Mark Trahant in the Seattle Post-Intelligencer

Bill Gross, managing director of PIMCO bond fund, writes in his August Outlook: “It’s not looking good, folks — housing that is. PIMCO’s on-the-ground analysts, who for nearly a year have roamed the country with random real estate agents in search of local housing trend information, report that prices in many areas are actually declining, which has significant implications for the economy, inflation and interest rate trends.”

Vikas Bajaj and David Leonhardt in the New York Times.

“It hasn’t slowed down a little bit — it has slowed down a lot,” said Doug McCraw, a developer who has scrapped his plans for a 205-unit condominium tower in a neighborhood just north of downtown Fort Lauderdale, Fla. “Anybody who did not have a shovel in the dirt has chosen to wait till the market settles.”

Rachel Beck in the Newark Star-Ledger

As if investors in home-building stocks need more to worry about. They’ve already watched their shares get hit by the slump in home sales and the weakening economy.

Now add this concern to the list: Companies writing down their land values because they aren’t worth what they paid for them.

Patrice Hill in the Washington Times

The housing slump reached a new milestone this spring as home prices that were soaring at double-digit rates only a year ago reached the break-even point and started to decline in many once-booming areas, recent reports show.

Footnote The guy who bought my place last June fixed it up and put it back on the market for a quick flip. No luck so far; it’s still sitting there, and the asking price has been reduced by half a million dollars. At the current asking price, he’d about break even after renovation expenses, commissions, and carrying costs. But that’s the asking price. It looks more and more as if I dodged a bullet.

Reporting on real estate; another model

About a month ago, Mark deplored timid reporting in newspapers about the imminent deflation of the housing bubble. This seems not to be a problem in France: in this article in Le Figaro the publisher of a real estate industry journal is quoted as predicting a fall of 30 to 40% (!) in French house prices within five years. His advice is quite flatfooted: don’t invest [in real estate] now; if you still want to, choose and finance very carefully; if you are selling, do it now:

«Si on veut spéculer, ce n’est pas le moment d’acheter» et «si on veut faire un investissement locatif, il faut faire très attention au choix et au montage financier», estime-t-il.

Quant à celui qui veut vendre son bien immobilier, il a intérêt à le faire «tout de suite».