W. Michael Cox is the Director of the O’Neil Center for Global Markets and Freedom at the Cox School of Business at SMU, and a Chief Economist for the Federal Reserve Bank of Dallas for the past 25 years. Cox, appraiser Brad Edgar, and economist Britt Fair (Hexter-Fair Title Company) spoke to a group of Realtors today about the Dallas market. Couple highlights:
No inflation is going on right now, the government is trying to stop de-flation. Almost all the experts agree that we may see eventual inflation because of the economic stimulus — that money pumping into our systems. We may have a window of about 12 to 16 months before interest rates will have to rise to control it. The Fed can and will monitor inflation tightly 24/7 and may in fact want to see a bit of inflation, say 2 to 4%, anything but hyperflation or deflation.
The banks still aren’t lending, what will it take to move them? Maybe higher interest rates. Cox doesn’t think you can pass laws forcing banks to lend money.
“When the risks and rewards are in balance, they will lend,” he says.
Our day of reckoning for the stimulus package will be when we convince China and Japan that treasuries are worth buying.
Why are the banks doling out TARP funds to the “troubled” banks rather than the solid banks, so the solid banks could lend the funds?
Good question, said Cox.
Unemployment is starting to affect everyone, even in the higher net worth classes. Though Texas thankfully lags the nation in unemployment, layoffs may not be over yet. Two solid businesses now: healthcare and education.
And these men think Americans’ spending habits have changed dramatically, maybe forever for a generation. Just as they did after the Great Depression, people are tightening their belts. Whether they keep them tight and how many years they live lean depends on how affected they are by this economic downturn, how long it lasts. We may not see mega leverage for another twenty years.
Higher taxes may force people out of states like New York and California, and we could see another wave of sunbirds heading here for our sensibly valued homes. Watch: commercial real estate failings. Be glad we live in a city that continues to attract business and generate jobs as well as technology (intelligent medical systems being developed at Texas Instruments) and varied corporate headquarters. Buffalo, New York was home to the largest number of wealthy individuals in the U.S… once upon a time.
I’m just saying here — looking ahead to how much house someone who earns $250,000 a year will be able to buy as we re-distribute the wealth. Not saying it shouldn’t be re-distributed, not saying it should. (Thain’s should.) OK, $250,000 in the 28% income tax bracket. That leaves $180,000. Or a monthly income of $15,000. Lots of money. We had a car lease of $1,000 on that Beamer, and maybe a little college loan out there. We are down to $13,000. We charge about $4500 a month — we pay that off. We donate and/or fritter another $1000. Did I forget anything? That leaves us $7500 for PITI — house payment, taxes and insurance.
I ask you: what price range home can you afford with $7500 a month?�
Vital point from a commenter:
“Regardless of political mudslinging, the crux of the discussion is this section
“Under Fannie Mae’s pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a
conventional, 30-year fixed rate mortgage of less than $240,000 — a rate that currently averages about 7.76 per cent. If the borrower makes
his or her monthly payments on time for two years, the one percentage point premium is dropped.”
So Candy, how many of the current defaulters used that program? I am sincerely asking the question. Is it 1% of the current defaulters, 10%, 50%, 0%? What is it?
Don’t go pointing fingers without having some answers.”
Anyone have the answers?
The Mortgage Bankers Association sees weaknesses in Obama’s real estate stimulus plan in the lending realm, like the upper limit of a 105% loan-to-value ratio required for refinancing, and the role of Freddie Mac/Fannie Mae as guarantors.
I know the reports are preliminary, but I am already getting ulcers over President Obama’s cure for our housing woes. Here’s my first report card:
A -$8000 tax credit for first-time buyers, l like very much. Assuming this will work like a section 179 deduction and come right off the taxes, not add 5 more pages or 6 hours of CPA billable hours to the tax return, essentially using tax dollars to help fund the home purchase.
F- Revamping U.S. bankruptcy rules, giving judges the power to reduce mortgage payments and set lower interest rates. Excuse me, but I think part of our problem was that banks got too big, unregulated and complex. So now we are going to let judges play banker? This will slow down lending and banks will have to recoup their losses from somewhere —charge more to the customers who pay their bills, or higher PMI or PMI for everyone or higher interest rates.
Not fair, folks.
C – The government will match reductions lenders make to keep borrowers home payments at 31% of their income. What income — stated income? Does that include alimony?
Incomplete – Flushing Fannie Mae and Freddie Mac with $900 billion.
Since Octu-mom does not have a house of her own to shelter her litter brood, she lives with her mom who is behind on her house payments by more than $23,000… this is just sick. Please, someone, psych examination for these people and the physician. Then, I guess, bail out?
Across the nation, home construction is down drastically – good news for buyers, bad news for builders and anyone in the construction industry. Yesterday, Steve Brown reported that Dallas-Fort Worth has a 6.9 month supply of new (that is, builder new) homes. Which he thinks is too much:
“A “balanced” market is considered less than a three-month supply.”
Hmm. I thought a six month supply was balanced, or does that apply only to pre-owned homes? Your thoughts?
Reader James Clutts over at CSW Home Loan fills us in the details of what actually passed to benefit homebuyers in the Economic Stimulus package:
It now appears the economic stimulus bill will deliver be some significant benefits to those wishing to purchase or refinance a home. These include:
Ø A true first-time homebuyer tax credit in the amount of $7500 available for a qualified purchase of a principal residence between January 1 and September 1, 2009. I say “true” since, this time, the “credit” will not have to be repaid by the homeowner!
Ø FHA, Fannie and Freddie loan limits will be revised. While specifics have not been released, reports indicate the 2008 limits will be reinstated for 2009 with certain limited exceptions.
Ø Foreclosure mitigation and neighborhood stabilization is forthcoming. In essence, this means that there will be some as-yet-undetermined method for funding state and local efforts to abate foreclosure and stabilize and redevelop neighborhoods. of abandoned and foreclosed homes are authorized.
Love the guy, but he’s definitely an academic. He thinks derivatives — risk management – can help cure the up and down of the real estate market.
Did PMI have PMS? I actually had a dream last night about P.M.I. — that is, private mortgage insurance. (The trillion dollar bail-out is so mind-boggling I am dreaming about it.) I recall when we bought our first house we had to buy P.M.I. which was a sort of default insurance that would pay off the mortgage loan in case we didn’t. The bigger our equity has become over the years, the less we have had to pay.
But what about people who bought with zero down? Didn’t they have to pay P.M.I? Or were they, instead, encouraged to get second mortgages so that instead of having an insurance policy on default, they would screw over two banks instead of one?
May I make a modest suggestion: whoever initiated the dumping of P.M.I. helped make a significant contribution to the mortgage crisis and current financial meltdown. Agree?
You haven’t heard from me because I spent half the day with travel delays –it’s cold and rainy in NYC, which matches the mood perfectly at this year’s Inman News Real Estate Connect. I tootled in just in time to hear Bob Shiller, the famed Yale economist who creates the benchmark SP/Case Shiller Housing Report. The heads — Bob Shiller wants to see us trade real estate securities like stocks, thinks the government should subsidize financial advisers for every family, and made liberal use of the D word — depression:
My prediction: glorious low rates in 6 months. Today was my last full day of class at Champion School of Real Estate before my elective and then — I take the state exam! I am getting my real estate license to be a better real estate reporter for the D Empire and our forthcoming new website. Learned a ton – have TOTAL new respect for agents and brokers. From remembering intermediary to sub agent to IABS forms always need to be in size 10 type to HB 489 to independent contractor status to TRELA and TREC, ostensible authority and agency by estoppel, MLS to agent with appointment, without appointment, all I know is HOW DO YOU AGENTS DO IT? And I need an appointment with a glass of wine!
But, while I was ensconced in academia, history was made in the interest-rate realm. Here a couple of takes on that, jump for one from Philip Walker, one of my favorite agents at Keller Williams Turtle Creek, who brought lunch to recruit the A-plus students. Mortgage rate comments are on and the meter is running:
And the banks we are bailing out looked the other way when warned that creative mortgages might lead to a meltdown:
“These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages,” David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history.”
Yet we are still offering home ownership to people who may not be ready for it right here at home.
Jud Pankey was kind enough to answer my questions about the Stoneleigh last week, then our blog was down, etc. etc. So here you have it. I am truly sorry The Stoneleigh has been caught in this credit mess. I would like to personally march all those Wall Street Rocket Scientists over to that shell and tell them where to stuff their financial algorithms…
DD: What are you going to do with the shell?
Jud Pankey: The shell is going to stay as is. It will be ready to go again once we close a loan. The garage will be ready next week, so we have made some progress. We will then turn our attention to the courtyard.
DD: The parking garage is completed for the hotel, so will you let the shell sit?
Jud Pankey: Not sure what else we would do. Do you have any creative ideas, as I am all ears?
DD: Was the crane really costing $30K a month?
Jud Pankey: Yes—close enough.
DD: Will you build a smaller, scaled back condo perhaps?
Jud Pankey: No—does not make sense.
DD: Do you have any financing promises at this point?
Jud Pankey: We are working with a couple of lenders. They do exist!!
DD: Is this why Paulson (last week) said he is aiming the bail out funds at the banks?
Jud Pankey: Not sure what he said but the banks are trying to figure out risk between banks and customers. I think it is confusing for everyone, hence there is no confidence. The banks are trying to price risk and they have plenty of capital, but they are not being paid to lend money just to lend money just yet. Plus, the regulators need to encourage them to lend versus contract. It is an interesting time.
With more real estate closings as banks get federal bail-out money and are pressured to make more mortgage loans, so says business development consultant Larry Bodine , a former editor and publisher of the ABA Journal.