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California Housing Market Bubble Set to Burst — Will America Be Next?

AEI’s National Mortgage Risk Index for Agency purchase loans hit a series high of 11.84% in December, with FHA and VA hitting their own series highs. The addition of about 215,000 loans brought the total number of risk-rated loans to 5.3 million.

Link to view the full January 2015 presentation.  Below is a summary.

All of the indices except Fannie/Freddie rose in December and hit series highs. If FHA were to adopt VA’s risk management practices, the composite index would drop to about 9%.

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Origination Shares and MRIs by Lender Type

A dramatic decline in purchase loan market share for large banks continued in December, offset by an equally dramatic increase in the nonbank share. Large banks are the only lender type with net MRI decline since November 2012; hence, we must look beyond large banks to asses credit trends.

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First-time Homebuyer Share of Purchase Loans*

The share for the combination of government-guaranteed and private-sector loans was estimated to be 50% in December, well above the comparable figure in the latest NAR survey of home buyers (36%).

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Additional Detail on Total DTIs

  • 37% of Fannie/Freddie loans have total DTIs > 38%, up from 14% in 1990 (based on Fannie random sample).
  • FHA and VA have a sizable share of loans with DTIs > 50%, an extremely high pre-tax payment burden. VA’s residual-income underwriting is key to limiting defaults.
  • High total DTIs crowd out participation in defined contribution retirement plans such as 401(k)s, most of which come with employer match. These provide a reliable and attractive means for private wealth accumulation, particularly for lower-income families.

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Range of SMRIs for Home Purchase Loans Across States

There is a wide range for the composite SMRI, and states at the extremes tend to have low or high concentrations of FHA/RHS loans. The variation across states for Fannie/Freddie SMRI is narrow. The SMRI for FHA/RHS loans is uniformly high – above 20% in 48 states—, while the SMRI for VA loans is roughly half that for FHA/RHS loans at both the low and high end.

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Housing Risk in Major California Metro Areas

House price risk in California is relatively high and has risen substantially since 2012.

Combination of elevated mortgage and housing cycle risk in historically volatile California market cause for concern, especially in lower income and minority areas such as Riverside-San Bernardino and Central Valley.

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Housing Risk in Major Texas Metro Areas

While not as high as in California, house price risk in the top four metros in Texas is generally well above the national average and has risen since 2012. The plunge in oil prices will increase house price risk in Texas.

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For more information, please view the full January 2015 presentation by clicking here.

The Great Housing Boom and Bust: Lessons Relearned

The Great Housing Boom and Bust: Lessons Relearned was a presentation made at last week’s Eastern Secondary Mortgage Conference sponsored by the Florida Mortgage bankers Association.

Below are three slides from The Great Housing Boom and Bust: Lessons Relearned.  The take-aways include:

  1. Real estate leverage (both nominal and intrinsic) are at historically high levels.
  2. The National Mortgage Risk Index remains at a higher level than is conducive to long-run market stability.

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To learn more visit the AEI International Center on Housing Risk.

Watch Out Florida Here Comes Our “Bubble Government”

Recently in a radio interview Robert Wiedemer co-author of America’s Bubble Economy and Aftershock and Edward J. Pinto, resident scholar at the American Enterprise Institute discussed the idea of the United States having a “bubble government”. Wiedemer stated that America has suffered through “a number of financial bubbles” and the “aftershock following each”. To date each of these bubbles, the most recent being the housing bubble, have burst and fallen onto two other looming bubbles. These two bubbles are the “dollar bubble” and the “debt bubble”.

These two bubbles are primed to burst and the pin is called inflation.

The Wall Street Journal headline for April 5, 2012 was “Markets Fear End of Stimulus” written by Jonathan Cheng and Charles Forelle. What is the great concern? According to Cheng and Forelle, “European Central Bank President Mario Draghi indicated he would be hesitant to undertake more monetary easing, citing concerns about inflation.” Monetary easing (a.k.a. government stimulus or quantitative easing) is governments printing money. Today American is awash in money due to our government printing it with no end in sight – the dollar bubble is upon us.

Congress has failed in their Constitutional duty to pass a budget in nearly four years. The U.S. government runs on continuing resolutions and Congress has raised the debt ceiling to an astounding $15+ trillion dollars. In 2011 Congress spent nearly 55% more than it collect in revenues. The debt ceiling will be breached yet again before the November 6, 2012 elections. This all has caused our government to borrow at an unprecedented rate of 40 cents of every dollar – the debt bubble.

What does that all have to do with Florida?

Florida is especially vulnerable to the aftershock of either a dollar or debt bubble burst. Florida’s barely recovering housing market and our large population of fixed income retirees are in the cross hairs should inflation increase even fractionally.

According to Edward J. Pinto, “One in four [Federal Housing Administration] FHA loans outstanding in Georgia and New Jersey are now thirty-days-plus delinquent, with eight additional states having delinquency rates above 20 percent. The national rate is 17.79 percent.” Florida has a delinquency rate of 23.07%. Pinto points out, “FHA is estimated to have a current net worth of -$16.923 billion, approximately $18 billion less than the ‘economic net worth’ set forth in FHA’s 2011 Actuarial Study.”

Pinto states, “The Government Mortgage Complex (GMC), consisting of FHA, Fannie Mae, Freddie Mac, the Veterans Administration and Federal Department of Agriculture, is bankrupt. The Government Mortgage Complex guarantees about $6 trillion in in home mortgages, yet has zero capital backing it. Fannie and Freddie do owe the government nearly $200 billion and counting.”

When inflation kicks in, as it is in Europe, the bond markets will tank, as they have in Spain, and Florida will be facing a double dip recession because many retirees have invested in bonds.

President Obama, the Federal Reserve and Congress will do everything they can to not let this collapse happen before the November 2012 elections. However, they may not be able to stop it, as the markets are already reacting to failed attempts at austerity in the EU and the rising cost of debt.

These two bubbles are coming home to roost in America.

When they burst the burden will fall most heavily upon the American taxpayer a rapidly diminishing species. There is not the political will to address either bubble until they burst and a national crisis occurs. As the argument goes “never let a good crisis go to waste” but this time the austerity solutions will be Draconian.

A possible scenario is a replay of the October surprise of 2008 – a meltdown of the financial markets. Are we being set up for another TARP or Stimulus III? Time will tell.