Economy Real Estate

Could Housing Fall Off The Fiscal Cliff?

Fiscal cliff fears are here. With nearly $500 billion in simultaneous tax hikes and spending cuts set to take effect in January, economists have been forewarning the devastating consequences the so-called “fiscal cliff” could cause if Congress fails to come to a budget agreement before the end of the year. The latest report hails from the Congressional Budget Office (CBO), warning that inaction could plunge the U.S. into a “significant” recession in the first half of 2013.

Economists have focused primarily on the impact to overall gross domestic product (GDP), the financial markets, and businesses’ bottom lines. But what about housing? The fragile sector is just starting to experience a nascent recovery, providing what countless economists have called a “bright spot” in an otherwise weak economy. How could a looming cliff affect the sector that triggered the Great Recession in the first place?

“Most consumers aren’t paying attention to the fiscal cliff. If the [local] housing affordability condition is good and they can get a mortgage, they are in the market,” says Lawrence Yun, chief economist of the National Association of Realtors (NAR). “However if the cliff was to be realized come January 1st and we do go into a recession, job losses could hamper the housing recovery.”

And housing has arguably begun to recover (albeit unevenly, with some markets still suffering losses). On Wednesday, July pending home sales were at their highest level in more than two years, according to NAR, and inventory continues to contract. The association projects home prices will increase 10% cumulatively over the next two years. Tuesday’s S&P Case-Shiller home price index for June showed similarly hopeful signs: the 20-city composite index showed prices up 1.2% in the first year-over-year gain since September 2010. And Fannie Mae economists estimate that residential investment in 2012 will positively contribute to GDP for the first time since 2005.

Yet the CBO projects a fiscal cliff could cost the U.S. two million jobs next year and cause the unemployment rate to stay stubbornly stuck above 8% through 2014. Fewer jobs could translate into less demand for new homes, possibly even a new wave of foreclosure filings as newly unemployed workers struggle to make mortgage payments.

While Yun asserts that buyers of U.S. homes currently pay little attention to what’s coming (perhaps thanks in part to a trove of foreign buyers?), if Congress continues to stall on a deal, that mentality could shift in the final months of the year. If 2010’s Bush Tax cut debate was any indicator, mounting economic and financial uncertainty could cause Americans — particularly Americans with higher levels of discretionary income — to pull back on consumer spending, holding off on major purchases like homes. At least until a resolution is realized.

“While there are underlying forces pushing growth in housing, it’s not going to be robust until the public gets comfortable with the idea there is going to be a growing employment and income environment,” Doug Duncan, chief economist at Fannie Mae, told the Wall Street Journal recently.

“The stability of people’s jobs does impact their confidence to spend moving forward,” adds Mark Cole, executive vice president of CredAbility, an Atlanta, Ga.-based nonprofit that offers credit and housing counseling services. CredAbility’s Consumer Distress Index indicates that housing led households out of financial distress in the second quarter for the first time since 2008. Yet Cole says average American families have been cautious about taking on new debt (if they can even qualify), choosing rentals over home purchases, according to the organization’s data.

Indeed the one area of housing that could gain from mounting economic uncertainty is the already-booming rental market. “Renting is the cautious alternative and I think that trend will be exaggerated a little bit more if there is a fiscal cliff — or even if we come close to one,” says Barry Hersh, a professor at New York University’s Schack Institute of Real Estate. Rents are already expected to increase an average of 4% nationally this year and 4% in 2013, according to NAR.

(Hersh also notes that commercial real estate could suffer negative effects more quickly than residential, since retail and office space are directly tied to overall consumer spending and businesses’ bottom lines.)

New home building will be hit hard if a recession is realized, too. “It will reverse the small gains we have made in home building thus far,” says David Crowe, chief economist of the National Association of Home Builders (NAHB). Small to mid-sized home builders have struggled to access credit, which is predominantly underwritten by the banks, and a recession could put a damper on what little lending is out there. New home starts remain about 50% down from the rate required in a healthy housing market. The lack of new supply is already causing an inventory crunch in some areas; a reversal could lead to larger inventory shortages in the coming years.

Despite the speculative doom and gloom, economists believe a fiscal cliff-spurred recession would not spark the kind of home price-hemorrhaging witnessed when the housing bubble burst five years ago. “Markets have already corrected from the bubble, and in some places, over-corrected,” asserts Yun. “Even if there is a fiscal cliff, I suspect Congress will rectify that situation within a few months so it will be a very short term negative before the problem gets resolved.” Here’s hoping the realtor’s right.

By Morgan Brennan, Forbes Staff
Photograph by Sasha Weleber/Getty Images

Economy Investment Real Estate

Three myths that sustain the economic crisis


The summer of 2007 was a run-of-the-mill affair. Tony Blair had stepped down as prime minister in late June and his successor Gordon Brown was enjoying a honeymoon period. It was a year without a football World Cup or an Olympics, while Roger Federer won the men’s singles at Wimbledon, and the cricket involved series against the West Indies and India.

Then, on 9 August, came reports that central banks had been active in the markets. The Guardian said the action involved pumping billions of pounds into the financial system to calm nerves amid fears of a credit crunch. The trigger for the panic was the decision by BNP Paribas to block withdrawals from three hedge funds because of what it called a complete evaporation of liquidity. A spokesman for the bank described the move as a technical issue and said he hoped it would be temporary.

Technical? Temporary? Within six weeks, it was clear the meltdown of August 2007 was no short-term blip when investors queued outside branches of Northern Rock for three days in the first run on a leading UK bank since the mid-19th century. Five years on, the global economy has yet to recover from the deep trauma caused by the hubris of the bankers.

Back then, though, there were few who imagined that 9 August 2007 would prove to be such a milestone in financial history. The Guardian carried the story on page 29 because there seemed to be no reason to believe this was any different from previous bouts of jitters in the markets. It took a few days to work out what the bankers had been up to, because the “masters of the universe” had their own esoteric language the rest of us were not supposed to understand. Talk of mortgage-backed securities, credit default swaps and over-the-counter derivatives was the equivalent of 12th century monks writing bibles in medieval Latin for peasants who only spoke English.

Stripped of the jargon, it is now quite easy to see what happened. Banks were taking large gambles with precious little capital in reserve if the bets went wrong. Individuals were borrowing at levels only sustainable if the value of their share portfolios and homes continued to rise year after year. Governments assumed that booming tax receipts were permanent and increased public spending.

In August 2007, the air started to escape from this gigantic bubble. It happened in three stages. The financial sector was the first to feel the impact, because while it was evident that almost every bank had been up to its eyeballs in investments linked to the American housing market, nobody knew for sure just how much money each institution stood to lose. The financial system grinds to a halt if banks refuse to lend to each other, as they did in August 2007.

It took more than a year for the second stage of the crisis to unfold. During that period there were a number of developments: the crisis in finance deepened, house and share prices fell, and inflationary pressures increased as a result of sharp jump in the cost of fuel. When Lehman Brothers went bankrupt in September 2008, the global economy was ready to blow and the next six months saw the biggest slump in output since the Great Depression.

Governments arrested the slide into a 1930s-style slump by concerted and co-ordinated action, but wrecked their own finances in the process. Bailing out the banks was expensive, particularly since much lower levels of output reduced tax revenues. Banks felt they had too much debt. Consumers felt they had too much debt. By mid-2009, most governments also felt they had too much debt. It was not a comfortable place to be.

Central banks tried to help out by making credit cheap and plentiful. They cut interest rates and used unconventional methods – such as buying bonds in exchange for cash – to boost the money supply. The hope was this would stimulate a private sector recovery and so provide a breathing space in which governments could repair their finances.

The attempt to solve a crisis caused by credit with even more credit has, predictably enough, proved a failure. It has been a bit like the motorist desperately pumping air into a tyre with a slow puncture: it works for a while, but eventually the tyre goes flat again.

Some countries have fared better than others. Australia, for example, was one of the few developed nations to escape recession, because it had well regulated banks and is a big supplier of raw materials to China.

Britain, by contrast, was more exposed than most. Lax regulation cultivated an “anything goes” culture in the City; equity withdrawal from rising house prices underpinned consumer spending; inflationary pressures were stronger than elsewhere. The level of activity in the economy is close to 15% below where it would have been had growth continued at just over 2% a year since output peaked in early 2008.

For the global economy as a whole, things may get worse before they get better. The summer of 2012 has seen signs of a generalised slowdown, with knock-on effects from Europe’s sovereign debt problems felt in North America and Asia. The eurozone is heading for a nasty, double-dip recession, the US is growing far less slowly than has been the norm after previous downturns, while China’s economy is feeling the impact of previous policy tightening deemed necessary to curb the inflationary effects of the stimulus injected in 2008-09.

There is no real comparison between the events of the past five years and the half-decade that followed the Wall Street Crash in October 1929. In the 1930s, a quarter of the American workforce was out of work and industrial production fell by 50%. A better historical parallel may be the Great Depression of the 19th century, a broad-based slowdown in growth coupled with deflationary pressure that lasted from 1873 to 1896.

The reason the crisis has been so long lasting comes down to three myths. The Anglo-Saxon myth is that big finance is essentially a force for good, rather than dangerous, rent-seeking and – in too many cases – corrupt. The German myth is that you can solve a problem of demand deficiency through universal belt tightening and export growth. The right policy mix involves putting tough curbs on the banks, international co-operation so that creditor countries increase domestic demand to help out debtor countries, and a more measured pace of deficit reduction governed by the pace of growth rather than arbitrary targets.

The chances of this happening appear slim. Why? Because there is a third myth – namely that there was not much wrong with the global economy in 2007. But the old model was financially flawed in that it operated with excessively high levels of debt, socially flawed in that the spoils of growth were increasingly captured by a small elite, and environmentally flawed in its assumption that all that mattered was ever-higher levels of growth. It is possible to move on, but only when it is recognised that the genie will not go back into the bottle.

A lot from Lehman Brothers: sale of artwork and ephemera from the failed investment bank at Christie’s of London in September 2010, on the second anniversary of the bankruptcy. Photograph: Linda Nylind for the Guardian

Three myths that sustain the economic crisis
By: Larry Elliott

Economy Personal Finance Real Estate

Americans brace for next foreclosure wave

(Reuters) – Half a decade into the deepest U.S. housing crisis since the 1930s, many Americans are hoping the crisis is finally nearing its end. House sales are picking up across most of the country, the plunge in prices is slowing and attempts by lenders to claim back properties from struggling borrowers dropped by more than a third in 2011, hitting a four-year low.

But a painful part two of the slump looks set to unfold: Many more U.S. homeowners face the prospect of losing their homes this year as banks pick up the pace of foreclosures.

“We are right back where we were two years ago. I would put money on 2012 being a bigger year for foreclosures than 2010,” said Mark Seifert, executive director of Empowering & Strengthening Ohio’s People (ESOP), a counseling group with 10 offices in Ohio.

“Last year was an anomaly, and not in a good way,” he said.

In 2011, the “robo-signing” scandal, in which foreclosure documents were signed without properly reviewing individual cases, prompted banks to hold back on new foreclosures pending a settlement.

Five major banks eventually struck that settlement with 49 U.S. states in February. Signs are growing the pace of foreclosures is picking up again, something housing experts predict will again weigh on home prices before any sustained recovery can occur.

Mortgage servicing provider Lender Processing Services reported in early March that U.S. foreclosure starts jumped 28 percent in January.

More conclusive national data is not yet available. But watchdog group, which helped uncover the “robo-signing” scandal, says it has turned up evidence of a large rise in new foreclosures between March 1 and 24 by three big banks in Palm Beach County in Florida, one of the states hit hardest by the housing crash

Although foreclosure starts were 50 percent or more lower than for the same period in 2010, those begun by Deutsche Bank were up 47 percent from 2011. Those of Wells Fargo’s rose 68 percent and Bank of America’s, including BAC Home Loans Servicing, jumped nearly seven-fold — 251 starts versus 37 in the same period in 2011. Bank of America said it does not comment on data provided by other sources. Wells Fargo and Deutsche Bank did not comment.

Housing experts say localized warning signs of a new wave of foreclosure are likely to be replicated across much of the United States.

Online foreclosure marketplace RealtyTrac estimated that while foreclosures dropped slightly nationwide in February from January and from February 2011, they rose in 21 states and jumped sharply in cities like Tampa (64 percent), Chicago (43 percent) and Miami (53 percent).

RealtyTrac CEO Brandon Moore said the “numbers point to a gradually rising foreclosure tide as some of the barriers that have been holding back foreclosures are removed.”

One big difference to the early years of the housing crisis, which was dominated by Americans saddled with the most toxic subprime products — with high interest rates where banks asked for no money down or no proof of income — is that today it’s mostly Americans with ordinary mortgages whose ability to meet payment have been hit by the hard economic times.

“The subprime stuff is long gone,” said Michael Redman, founder of “Now the folks being affected are hardworking, everyday Americans struggling because of the economy.”


Until December 2010, Daniel Burns, 52, had spent his working life in the trucking industry as a long-haul driver and manager. When daily loads at the small family business where he worked tailed off, he lost his job.

Unable to cover his mortgage, Burns received a grant from a government fund using money repaid from the 2008 bank bailout. That grant is due to expire in early 2013 and Burns is holding out on hopeful comments from his former employer that he might get his job back if the economy recovers.

“If things don’t pick up, I will be out on the street,” he said, staring from his living room window at two abandoned houses over the road in the middle-class Cleveland suburb of Garfield Heights, the noise of traffic from a nearby Interstate highway filling the street.

Underscoring the uncertainty of his situation, Burns’ cell phone rings and a pre-recorded message announces that his unemployment benefits are due to be cut off in April.

A bit further up the shore of Lake Erie, Cristal Fell, who works night shifts entering data for a trucking company in Toledo, has fallen behind on her mortgage a second time because her ex-husband lost his job and her overtime was cut.

“Once you get behind it’s so hard to catch up,” she said.

Fell, a mother of four, hopes the economy will gather enough speed to help her avoid any risk of losing her home. Her ex-husband has found a new job and she is getting more overtime, so she hopes she can catch up on her mortgage by the fall.

Burns and Fell are the new face of the U.S. housing crisis: Middle class, suburban or rural with a conventional 30-year fixed mortgage at a reasonable interest rate, but unemployed or underemployed. Although the national unemployment rate has fallen to 8.3 percent from its peak of 10 percent in October 2009, nearly 13 million Americans remain jobless, meaning many are struggling to keep up with their mortgage payments.

Real estate company Zillow Inc says more than one in four American homeowners were “under water” or owed more than their homes were worth in the fourth quarter of 2011. The crisis has wiped out some $7 trillion in U.S. household wealth.

“We’re seeing more people coming through who have good loans with reasonable interest rates,” said Ed Jacob, executive director of non-profit lender Neighborhood Housing Services of Chicago Inc, which provides foreclosure counseling. “But in many households only one person works now instead of two, or they had their hours cut.”

“The answer to the housing crisis now is job creation.”


Zillow expects the resurgence in foreclosures this year, combined with excess inventory of unsold, bank-owned homes will contribute to a 3.7 percent national decline in prices before the market hits bottom in 2013 and stays there until 2016.

“The hangover from this crisis will far outlast the party of the boom years,” said Zillow chief economist Stan Humphries.

Getting through the remaining foreclosures and dealing with the resulting flood of homes on the market in the wake of the bank settlement is a necessary part of the healing process for the U.S. housing market, he added.

According to leading broker dealer Amherst Securities, some 9.5 million homes are still at risk of default and in February it said it expected to see the uptick in foreclosures start to hit in March and April.

There is other evidence that many of the foreclosures that did not happen in 2011 will happen this year.

A January report by the Neighborhood Economic Development Advocacy Project in New York found that in the first half of 2011 the number of 90-day pre-foreclosure notices in New York City outnumbered court foreclosure actions by a ratio of 14 to one, indicating that while proceedings were initiated against many homeowners, they were left incomplete.

“Now the banks have a settlement, foreclosure numbers for 2012 are going to be high,” said NEDAP co-director Josh Zinner.

A recent survey by the California Reinvestment Coalition, an umbrella group of nearly 300 non-profit groups in the state, of member agencies found 75 percent of respondents expected increased demand for their foreclosure prevention services in 2012 but more than a third had to scale back services because of funding cuts.

“Funding is a major concern given what our members expect for this year,” said associate director Kevin Stein.

All this has non-profits intensifying calls for the Federal Housing Finance Agency to drop its opposition to allowing the government-backed mortgage giants Fannie Mae and Freddie Mac it regulates to reduce principal for underwater homeowners.

Principal reduction involves reducing the amount borrowers owe in order to make a loan modification affordable for struggling homeowners. Republicans and the FHFA oppose principal reduction because of the risk of “moral hazard”- that homeowners who do not need help will seek to abuse largesse and have their mortgages reduced too.

ESOP in Ohio engages in “hits” on Chase branches — they say Chase is the least accommodating major bank when it comes to working with struggling homeowners — where they try to hand letters to bank mangers calling on chief executive Jamie Dimon to lobby FHFA head Edward DeMarco for principal reductions. A Chase spokeswoman said the bank has made “extensive efforts” to work with homeowners, helping 775,000 borrowers stay in their homes since early 2009, avoiding foreclosure “more than twice as often as we have had to foreclose.” Housing groups like ESOP maintain, as they have throughout the housing crisis, that unless the FHFA embraces widespread principal reduction, many more under water borrowers face losing their homes.

“Until banks engage in meaningful principal reduction as a matter of course,” ESOP’s Seifert said after a recent protest at a Chase branch in Cleveland, “this crisis will not end.”

(Reporting By Nick Carey; Editing by Martin Howell and William Schomberg; Desking by Andrew Hay)

By Nick Carey

Economy Real Estate

House Prices: Window of Opportunity Beginning to Close

WindowsThere have been conflicting opinions as to where housing prices are headed. We want to give our opinion on this subject for the short term. We believe sellers have a window of opportunity for the next 90-120 days in most parts of the country in which to sell their homes for maximum price. We believe there will be increased downward pressure on home prices throughout the rest of the year.

Why renewed downward pressure?

Any item’s price is determined by ‘supply and demand’. In many parts of the country, existing housing inventory has dropped to historic norms in the last few months. However, an inventory of distressed properties (foreclosures and short sales) will be coming to market this year. This inventory has been delayed for over a year as the Federal and state governments crafted an agreement with the five largest banks and mortgage servicers to establish a roadmap for how a foreclosure must be properly completed. That agreement, the National Mortgage Settlement, was reached two weeks ago.

What Impact Will the Agreement Have on Foreclosures?

Brandon Moore, chief executive of RealtyTrac, explains:

“The settlement sets forth clear guidelines for lenders and servicers to follow when foreclosing, which should allow them to push through some of the delayed foreclosures from last year.”

How Many Foreclosures Could We Be Talking About?

Mark Vitner, a senior economist at Wells Fargo Securities tells us:

“The settlement helps the housing market in the long run because it allows banks to proceed with millions of foreclosures that have been stalled.”

What will this mean to home prices?

As this inventory comes to market, it will impact prices in two ways:

1) It will bring to market discounted competition for buyers
2) It will impact the appraisal values of all homes in the area

Which States Will Be Impacted the Most?

The states that have the largest backlog of properties currently in the foreclosure process will be the states that will see the greatest price depreciation.

Bottom Line

There is a window of opportunity currently which sellers should take advantage of. Waiting until later this year will not guarantee a higher sales price. If anything, in many regions of the country, it probably guarantees the exact opposite.

House Prices: Window of Opportunity Beginning to Close