Shanghai consides levying annual property tax on 2nd homes -- This is important!

This is big folks. 
Up until now there has not been any sort of annual property tax on housing so there was no annual cost (beyond a loan) to owning a home.  IF this proposal becomes law I predict a massive change in the perception of housing in China as well as a large number of 2nd (and 3rd, 4th, 5th?) homes behind dumped on the market.

May 12 - China Daily

Shanghai will reveal the details of its tightening real estate policies as early as the end of this month, including its long-debated property-ownership tax on multiple homes, Shanghai Securities News reported today.

The property ownership tax is a tax on property based on its ownership and is usually charged yearly based on the estimated value or rental income of the property. In China, the tax currently targets only commercial properties.
In the draft plan, Shanghai will say that multiple residential properties owned by one household will be regarded as commercial properties, and thus subject to property ownership tax, the paper reported.

[edit: It looks like this will not happen, look at a more recent post of mine for the details.  ]

Another update on China housing -- price and transaction volume falling

The Chinese government continues clamping down on housing rules and regulations.  If the final new article in this post is accurate the results are quite impressive.

May 6 - China Daily

Chinese developer Evergrande Real Estate Group on Thursday started to offer a 15 percent discount on prices of its 40 property projects across the country to promote sales amid government tightening measures to cool down the red-hot sector, Shanghai Securities News reported.

May 5 - China Daily

Average daily transactions of completed apartments in Beijing dropped to two units during the three-day holiday, down 96 percent year-on-year, and that of homes yet to be constructed fell 35 percent to 205 units, according to Beijing Real Estate Transaction website. Compared with April, the transaction volume decreased more than 80 percent.

May 7 - Imarketnews

BEIJING (MNI) - China's housing market is reeling from a government effort designed to clamp down on rampant speculation and surging house prices, with potential buyers running to the sidelines as the level of uncertainty rises.
The sales center for C-King Towers should have been teeming with life last Sunday, with potential buyers cramming the room to snap up units in the mid-to-high end residential development on the north side of Beijing's Third Ring Road. That would certainly have been the case before the middle of last month.
But on Sunday it was a virtual ghost town; two receptionists chatted above the hum of the rap music being pumped into the room to entice non-existent buyers. Rows of tables draped in brown velvet, which should have been the setting for dealmaking, stood unoccupied.

And finally, after volume slows to a stop prices start falling:
May 11 - China Daily

According to Yahao Real Estate, a Beijing-based property brokerage firm, the city's residential housing cost averaged 16,898 yuan per square meter from May 3 to 9, fell 9.60 percent from a week earlier and declined 31.43 percent from the week ( April 4 to 11) before the policy has been taken, the newspaper said.

While this is only 'anecdotal' evidence on a certain level it certainly is powerful reading if accurate.  As my previous posts have alluded to the Chinese government wants to clamp down on housing speculation.  Considering their capabilities it is going to happen.  Whether in an elegant or destructive manner is yet to be determined. 

I'm starting to watch rebar and wire rod prices in China.  I'll give you an update once I have enough data.

Delinquent home loan update -- Still grinding higher

The percentage of delinquent home loans appears to be close to finally cresting.  Well, hopefully. 

There are some lags to the data and while the growth of seriously delinquent loans at Fannie Mae are slowing down the bad inventory is moving into foreclosure (and then back onto the market)

I'll be a little less pessimestic about the housing business and home prices after both of these graphs start moving downwards.

ht Paper Economy

ht Calculated Risk

More on Strategic Defaults

The blogosphere has been discussing strategic defaults for a while now.  It appears the concept is hitting the major media outlets now which will only increase the percentage of strategic defaulters out there.


Watch CBS News Videos Online

(ht Creditwritedowns)

As I have mentioned before this may be one reason consumer spending appears higher than it 'should be'

Some evening linkage

Glad to see Mr. Faber is coming around to my opinion on China's coming bubble popping. :)

http://www.creditwritedowns.com/2010/04/marc-faber-symptoms-of-a-bubble-building-in-china.html


A video on strategic defaults from pbs.org



HT  -- http://www.ritholtz.com/blog/2010/04/strategic-defaulters/

Greek rates go crazy
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7621289/Escalating-Greek-default-fears-rock-Europes-debt-markets.html

A contrary opinion on HELOC's and banks

I recently posted an article about the concern HELOC's may have on bank capital positions. Here's a contrary opinion from another blog I follow, Calculatedrisk

The following report is from housing economist Tom Lawler:
In a House Financial Services Committee meeting today on “Second Liens and Other Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program, spokespersons from BoA, Citi, JPMorgan Chase, and Wells Fargo explained the potential dangers of broad principal reductions, as well as tried to dismiss the silly claim that many second mortgages have “virtually no value” because so many borrowers with seconds have total mortgage balances at or exceeding the value of the home collateralizing those mortgages. Below are some observations on BoA’s and Chase’s testimony.

I'd read the whole article as it provides some counter points to my previous post. 

Some Friday Links -- Fun for all. A physics lesson tossed in as well.

Been busy with tax day but here's some links and comments . . .

Greece 10 year bond yields keep rising and are very close to piercing pre bailout yields. 
Some German profs are preparing a lawsuit.  -- Telegraph.co.uk
Has Greece hit the Chandrasekhar limit and just doesn't know it yet?  Once you go passed the limit there is no turning back.

Some back and forth on strategic defaults fueling consumer spending:
Pro Tinfoil: Creditwritedowns
Anti Tinfoil: The Big Picture

Creditwritedowns pulls together a lot of subjects and puts a nice bow on top describing a theory I agree with:  We are in a balance sheet recession that will not produce a strong rebound and will take a long time to reconcile.  I posted the Koo and Chanos videos recently but Mr. Harrison does more work tying it all together. 

Total copper inventories have now risen for 2 weeks straight and are close to penetrating their recent peak level; LME inventories have dramatically slowed their decline and Shanghai inventories hit new highs today.  Copper's getting smacked today.  I'll write more about this soon(tm).

Popular media discovering where all those delinquent mortgage payments are going

I was going to blog about this yesterday afternoon but fundmymutualfund yet again scooped me on the entry and added his usual commentary to the matter.  As I have implied before the money NOT going to paying a mortgage is just being spent by Joe and Jane Consumer. 

Diana Olick of CNBC:

Okay, so 7.9 million Americans are not paying their mortgages.

Are we really thinking about the implications of that?
I've already reported studies that show Americans are now far more likely to pay their other bills first before their mortgage (which is a big turnaround historically speaking.)
That means they pay off their credit cards, cable bills, car loans in place of their home loans. Some are forced to, while others are doing so strategically. Don't get me started again on strategic defaults...
Paul Jackson, publisher of Housingwire.com, wrote a fascinating article last week that put this into real cash perspective.
First he describes a case study of someone who applied for the government's Home Affordable Modification Program.
The person had an $1,880.00 monthly mortgage payment on which they'd defaulted, but said person's monthly bank statement showed payments to a tanning salon, nail spa, liquor stores, DirecTV bill with premium charges, and $1,700.00 in retail purchases from The Gap, Old Navy, Home Depot, Sears, etc.
Writes Jackson:
Even if you assume that just half of the current 7.4 million currently delinquent mortgages fit this sort of ’spending profile’ (that is, they are spending their mortgage) and you assume a $1,000 median monthly mortgage payment for most U.S. homeowners — you get a $3.7 billion boost per month to consumer spending. It’s certainly enough spending to matter in the overall scheme of things.

To sum up the program as described by fundmymutualfund:

So for newer readers here is the 'game' as I've outlined many times.


1.Home'owners' default.. many of which are owners only in practice (not putting a dime down on their home).
2.That money once used to pay mortgages can now go into the economy as a form of permanent stimulus via consumption. Back in November I figured the number to be akin to the spring 2008 Bush stimulus - but instead of a 1x benefit, it's a permanent stimulus.
3.The banks drag feet on foreclosures because to make their balance sheet look good they will only take so many foreclosures over in any 1 quarter. Since the FASB (accounting board) rule change, they can do this since they don't have to mark the mortgages to reality - they can pretend... until of course the actual foreclosure. So the majority of mortgages on their books are still at "their discretion" and only the % they foreclose on, do they have to mark to "market" (i.e. reality). Hence the 6 months foreclosure now turns into the 18+ month foreclosure.
4.The market could care less about losses for large banks or the reality of the balance sheet because the US government stands behind all major banks... they are too big to fail. So the banks have nothing to worry about. Buy financial stocks - they are risk free, like Treasuries.
5.In the meantime Ben Bernanke will keep rates at 0% so the banks can "out earn" the losses. [Apr 20, 2009: How Banks Will "Outearn" Their Losses] Borrow from Fed at 0%, invest in anything (stocks, bonds...heck even do some loans), and make the spread. Use that 'free money' to offset foreclosure losses.
Presto magic!

So tell me what you think will happen to consumer spending when those 10% of people with late mortgages finally get kicked out of their homes and the banks are finally forced to realize the loss on the loan?  You wonder why the banks are not lending?  Extend and pretend only works so long. . .

Home loan delinquencies keep rising

From Calculatedrisk  Home loan delinquency rates keep going up.   As I have mentioned before this may be one reason consumer spending keeps slowly rising as people are just not paying their home loans. . .  

All these late paying homes represent a serious overhang of 'shadow' inventory hinted at by several blogs and news outlets. As you can see some portions of the 'shadow' can be quantified.  When this data series finally starts falling we'll hopefully start to see an end of the inventory overhang .  I'm not holding my breath.

Will HELOC's toast the banks?

Ouch... I read this several days ago and after turning it over in my head it jived with my previous tinfoil allegation the banks are managing their losses over time  . . .

From Creditwritedowns:

About a month ago I wrote a post called “The coming wave of second mortgage writedowns” the gist of which was that the big four banks (Citi, JP, BofA, and Wells) had a shed load of exposure to now worthless second mortgages. With many first mortgages now hopelessly underwater, it stands to reason that second mortgages on those same properties have zero value. . . .

So the original loss from second-liens, as reported by the stress tests, was $68.4 billion for the four largest banks. If you look at those numbers again, and assume a loss of 40% to 60%, numbers that are not absurd by any means, you suddenly are talking a loss of between $190 billion and $285 billion. Which means if the stress tests were done with terrible 2nd lien performance in mind, there would have been an extra $150 billion dollar hole in the balance sheet of the four largest banks. Major action would have been taken against the four largest banks if this was the case.

Please go over and read the whole thing. I stopped following the bank several quarters ago. Any additional facts on this possibility would be appreciated.

This would explain the banks' dragging their feet foreclosing properties.  Not only would they have to mark down their first mortgage but the 2nd lein would be marked to zero instead of the 15-20% loss as described in the 'Stress Tests' of early last year.

Home loan delinquencies continue hockey sticking

Here's some additional news to reiterate what I mentioned yesterday....

Both the percentage of people behind on their mortages and the number of homes owned by the GSE's continues to climb.   I was hoping that some of these data points would start to at least level off but alas I'm too optimistic.

To quote calculatedriskblog:

Even with all the delays in foreclosure, the REO inventory has increased sharply over the last two quarters, from 135,868 at the end of Q2 2009, to 153,007 in Q3 2009, and 172,357 at the end of Q4 2009.


Fannie Mae reported last week that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 5.38% at the end of December, up from 5.29% in November - and up from 2.42% in December 2008.

Until both of these data series start to actually decline real (inflation adjusted) home prices will not appreciably go up. 

Living Rent Free

Trader Mark from fundmymutualfund.com had a great post about the apparent disconnect between income and spending -- it's not adding up.  I had my own suspicions about this but TraderMark does a much better job skewering several sacred cows so I'll defer to his rapier and wit:

I was looking through the avalanche of economic data today, and it struck me how once again Americans are spending well over their income growth.  

I've written about this in the past in conceptual terms but never put it into an analysis. The true stealth stimulus plan in America is letting so many of its people live "rent free" as they sit in defaulted homes not making a mortgage payment. This "cost savings" allows them to shop and spend, and otherwise support the American consumption society.

From anecdotal stories (many of them) it is now taking at minimum 9-12 months to get evicted, and that's in states without super high foreclosure rates. I read the other day some Florida locations are 2+ years now. So 9, 12, 15, 18 months of not having to make a $1200, $1500, $1800 payment. And it can go longer now if you enroll in the trial modifications offered by government, then redefault. If you are really good at playing the system you might be able to go through two whole default cycles with the trial modification in the middle. 3 years of rent free living? Nirvana.

Further, with the new accounting rules that were the nexus of the market rally in March 2009, the banks no longer had to mark value of assets on their balance sheet to market... so they can now mark to what they see fit. Hence this system works for them too. All these foreclosures they should be closing on are things they are in no hurry to do... because doing so would mean they need to stop pretending about the true valuation of these defaulting mortgages and start admitting reality. Don't you love what 1 change in accounting rules can do for a country? ;)

My suspicion is the banks decide how much of a loss they want to take on home loans each quarter and then foreclose enough homes to make that quarter.  (The easiest number for a bank to hit for the next several years!)  The Feds are turning a blind eye as they are terrified of another drop in home prices and want to keep the banks 'solvent'  All the mortgage modification programs give cover to the banks to delay foreclosures and regulate the supply of homes hitting the market. 

How does that saying go??? Owe the bank $10,000 and they own you, owe the bank $50 million and you own the bank.  In America we can do it better:  Own a trillion in mortgages and you own the US Government.

Mortgage Delinquencies -- A real hockey stick graph

Mortgage delinquencies keep rising nationwide as reported by Freddie Mac & Fannie Mae (via Calculatedrisk blog)

Until the delinquency rate starts to fall I seriously doubt home prices or new home construction will do anything beyond stumble along.

One hidden benefit from all the loans going bad is pre payment speeds have sped up for various mortgage backed securities.  I have noticed a bump in principal paydowns beyond normal and I think its all the mortgages being purchased out of pools by the GSE's.  Considering I own a wad of leveraged inverse floaters at below par I'm happy with that.

Home mortgage delinquency rates keep rising

Delinquency rates keep rising for home mortgages. Calculatedrisk blog provides the details and they are universally not good.  As you can see from the chart, delinquency rates have skyrocketed and are not slowing down. 

If you have sensed a bit of bearishness throughout my blog entries so far, this hockey stick graph is one of the reasons. (I'm not always a pessimist, really)  Rising delinquency rates are one of the impediments to a healthy growing economy.

Contrary Copper talk part 2

I recently blogged about the rising copper inventories worldwide.   Copper inventories keep growing at an accelerated pace.

So why are prices rising as well?  I see a few items driving prices higher right now, those being the dollar, an expectation for a recovering worldwide economy, and strikes at copper mines in South America.

The recovering world economy and China specifically has been the standard mantra for why asset prices are rising, whatever the asset.  If China is rebounding, why are Chinese copper exports rising?  If China has a desperate need for copper right now why are the traders sending copper out of the country?  Don't know, but this does not coincide with the bullish copper thesis. 

There have been several strikes in South America at copper mines and several large copper mines have their work contracts ending in the next two months (Reuters list) .   So far all the striking mines have gone back to work and contracts at some mines have recently been concluded. The long running (40+ days) BHP / Spence mine copper strike just ended.  (Bloomberg)   Spence mine produced about 500 tons of copper a day so you can add that to the 2000+ tons / day of excess inventory already going into inventories.

A recovering housing market has been the hope of copper bulls as well, but as you will note from my numerous housing posts I do not think new home construction will come roaring back in America any time soon.  I suggest you go to Calculatedriskblog for the full details on American housing.

I don't have any short positions on copper or copper miners as the momentum upwards is just too strong and it fits with the worlwide reflation theme.  When this theme ends I fear copper prices could revert lower if inventories keep rising.

Home loan foreclosures keep rising

From Calculatedriskblog a great post and several charts on how the home foreclosure and delinquency rates keep rising.  Go over and read the entire post.

I agree with Calculatedrisk, until the deliquency rates start dropping we won't see any meaningful recovery in home prices.

Housing starts -- looking through the noise

Much has been said regarding the nascent recovery in housing and home prices due to rebounding prices and activity.   Unfortunately I think the popular media is only looking at the very seasonal activity and extrapolating the data incorrectly.  The Big Picture blog (2009, October 25)  astutely shows the details of this seasonality.  As you can see from their graph, it is much better to look at the 12 month moving average of housing starts to extract the true trend.  The average continues to drop, although the rate of decline is slowing. 

In short, don't go hopping up and down like a bunny on one month's housing data, you need to look at the 12 month average to divine what is really happening.

Subprime housing mess 2.6

As I have previously posted, the FHA (Federal Housing Administration)  is making loans that are rapidly going bad. 

Here are some more details and snarky commentary from my favorite bunny cannon shooting blogger, Fund my Mutual Fund:  10/14/09 NYT: FHA Problems Raising Concern of Policy Makers


TraderMark provides some additional detail and of course colorful description of the current political and economic situation regading falling home prices and the government's attempt to prop them up.

The graphic at right shows rising default rates for FHA loans made recently as compared to a couple of years ago.  Please read the article, but here's a few juicy bits.

Let's stop right there. 1 in 5 loans made in 2008 via FHA are ALREADY IN TROUBLE. 1 in 4 loans made in 2007 via FHA are ALREADY IN TROUBLE. We are not even 3 years into these mortgages. This is EXACTLY the same data we were presenting in 2007 about subprime loans! And Alt A's! And Option ARMs!

The number of F.H.A. mortgage holders in default is 410,916, up 76 percent from a year ago, when 232,864 were in default, according to agency data.

It's some good stuff...

Mortgage delinquencies continue to rise

I was going to work up a nice graph and some commentary regarding mortgage delinquencies, but Calculated Risk beat me to it.  A picture is worth a 1000 words and the graph tells an ugly story.

Unfortunately the data it describes is millions of people losing their homes and it is getting worse.  It can be hard to remain analytical when you think about that.  Maybe that is another reason to call economics the dismal science?

Subprime Housing Mess 2.5

Why is this version 2.5? Because we should have learned.  This one is brought to you with the usual actors only this time they are sitting in slightly different chairs.

The Buyer is the same as before, but instead of exceedlingly loose credit standards, the consumer is helped along by an $8,000 first time home buyer tax credit.

The Provider of the loans is not Wall Street this time, but good old Uncle Sam.  From WSJ Opinion (2009 September 29)

The reason for this financial deterioration is that FHA is underwriting record numbers of high-risk mortgages. Between 2006 and the end of next year, FHA's insurance portfolio will have expanded to $1 trillion from $410 billion. Today nearly one in four new mortgages carries an FHA guarantee, up from one in 50 in 2006. Through FHA, the Veterans Administration, Fannie Mae and Freddie Mac, taxpayers now guarantee repayment on more than 80% of all U.S. mortgages. Sources familiar with a new draft HUD report on FHA's worsening balance sheet tell us that the default rates have risen most rapidly on the most recent loans, i.e., those initiated or refinanced in 2008 and 2009.

All of this means the FHA is making a trillion-dollar housing gamble with taxpayer money as the table stakes. If housing values recover (fingers crossed), default rates will fall and the agency could even make money on its aggressive underwriting. But if housing prices continue their slide in states like Arizona, California, Florida and Nevada—where many FHA borrowers already have negative equity in their homes—taxpayers could face losses of $100 billion or more

So who is buying the mortgages? The very banks in trouble, with a little 'encouragement' from the FDIC. (WSJ, September 10,2009)

Holding Ginnie bonds help banks look better because federal bank-capital  guidelines give the Ginnie securities a "risk weighting" of 0%. That means banks don't have to hold any cash in reserve to protect against losses. By contrast, securities backed by Fannie Mae and Freddie Mac, the two mortgage giants seized by the government, carry a 20% risk weighting, meaning some cash needs to be set aside to hold them, even though most banks and investors think there is scant risk of Fannie or Freddie securities defaulting. Privately issued mortgage-backed securities can receive risk weightings of 50%, while many other types of debt carry 100%.

Because of the different risk weightings, bankers say they are selling relatively safe assets like Fannie securities and replacing them with Ginnie securities. The move doesn't shrink banks' balance sheets or remove their troubled assets. But it reduces their total assets on a risk-weighted basis. That is important because risk-weighted assets are the denominator in some key ratios of bank capital.

"With the pressure for capital, that's really made the Ginnie Maes more attractive," said John C. Clark, chief executive of First State Bank in Union City, Tenn. The bank's holdings of Ginnie securities jumped to $66 million at June 30 from less than $4 million a year earlier.

Like some peers, First State bankrolled those purchases partly with taxpayer dollars that were intended to stabilize the banking industry and jump-start lending. The 32-branch bank used a "significant portion" of the $20 million it received through TARP to buy Ginnie securities, Mr. Clark said. Mr. Clark credits the strategy with helping First State preserve its capital ratios even as loan defaults swelled to $9.5 million on June 30 from $1.6 million a year earlier. During the same period, its total risk-based capital ratio climbed to 11.3% from 10.7%. That gave First State some breathing room above the 10% ratio regulators require for banks to be deemed "well capitalized."

So my friend, whom I'll call Mr. Green and is a banker:  I have my eyes on some nice short term GNMA mbs paper.  (Fortunately your last name makes Mr. Green easier, otherwise I'd use a different color)  Let us load you up on the GNMA's and forget commercial lending.  Good rates, no 'risk' and you can be out to the links even earlier!  As a nice bonus your risk based capital ratios will improve as well.  I can even provide some additonal low cost margin leverage on my end as well.  The banking regulators and your boss will love you!  </end sarcasm>

Unfortunately this party will end like the last one, but we all will be paying the bill again and it will be much larger.  Too late, the bills are already coming due:  Calculated Risk (September 18,2009) -- FHA Cash Reserves will drop below requirement

Ironically, the Federal Reserves focus on purchasing mortgage backed securities from GNMA, Fannie Mae, and Freddie Mac compresses the spread between mortgages and treasury rates.   An artifcially compressed spread crowds out any private market competition, forcing more loans into the gentle loving arms of Uncle Sam.

If I sound a bit annoyed in this post, you are correct.  Collectively we are not learning from our very recent mistakes.