Lower taxes: Silver lining of falling home prices

Home price declines are causing tax assessors to revalue properties downward. Taxes will follow.

NEW YORK (CNNMoney.com) -- Your home value has sunk like a stone, and you're so far underwater you'll have to hold your breath for years. Can you at least get a break on your property taxes?
In some cases, yes. Many municipalities' tax bills are due in May, and the tab for 2009 could be lower.

As a rule, city and county assessors reappraise property values annually or biannually, using recent sales of comparable homes in the neighborhood to set values. So in areas that have seen significant drops in home prices, appraisals - and thereby property taxes - could also drop.

"Assessors have been flooded with requests from homeowners to reassess their home values," said Los Angeles County Assessor Rick Auerbach.

California is a special case, however, thanks to Proposition 13, a 30-year-old amendment to the state constitution that limited property tax increases to 2% per year. That meant that as California markets churned out double-digit price increases year after year, assessed values soon fell way behind market values.

As a result, only people who purchased homes at or near the market peaks are likely to have their homes revalued down. Those bought before 2003 likely have their assessed value still lagging market values.

For example, if you bought a home in Santa Monica in 1998 for $300,000, the home may still be worth $1 million - even after losing 25% of its value during the past two years. Meanwhile, its assessed valuation has only crept up about 25% to $375,000. No soup for you. As a matter of fact, your assessment should rise 2%.

However, recent buyers in areas such as Merced and Los Angeles, where prices have fallen more than 50% from their peak, should get tax breaks. Someone may have purchased a Merced house two years ago for $200,000, but the property is now valued at $100,000. The assessment, and the taxes, will be cut to reflect that decline.

In Los Angeles, the savings could be substantial; the average owner of those properties Auerbach is now reassessing should save an average of about $1,300 a year.

Less likely to get cuts
In other states, even if tax assessors reduce appraised values to reflect market conditions it still does not automatically mean a property tax cut. Localities could still raise their tax rates, the percentage of the home's value that is used along with the assessed valuation, to calculate the final bills.

"Taxes are based on property values times [the tax rate]. We could have declining values but make up for it by raising the rate," said Bill Donegan, the property appraiser for Orange County, Fla., which includes Orlando.

This year, though, the value drops are so steep that any rate rise will probably not offset the lowered assessments. Plus, governments usually can't just raise rates indiscriminately.
"In most places there's a statuary limit to rate increases," said Ken Wilkinson, the property appraiser for Lee County, Fla., where Cape Coral home values have plunged 44% from their peaks. "In Florida, they can't be raised more than 10%."

That should lead to substantial savings. In Orange County, the average taxpayer paid about 8% less last year, or nearly $130. "They may see a bigger drop this year," said Donegan.

The savings will be more modest, or non-existent, in states with lesser price declines. Many localities will raise rates enough to offset lower assessments, according to Joseph Henchman, the Director of State Projects for the Tax Foundation, a group that studies tax policy.

"The actual [revenue] collections could still rise or stay about the same," he said.
Governments may also raise fees on water, sewage and other services to keep up with looming budget deficits. They could even create entire new taxing entities, known as tax district, to fund fire departments, law enforcement, even libraries.

The local governments must keep revenues up to pay for programs they initiated during more flush times.

"We often see a ratchet effect," said Henchman. "Spending goes up when collections are strong but stay up even when collections go down."

Les Christie, CNNMoney.com staff writer, last updated: May 27, 2009: 2:25 PM ET
http://money.cnn.com/2009/05/27/real_estate/property_tax_breaks/index.htm?postversion=2009052714

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

Sussex County Home Sales - as of May 18, 2009

Whew! What a wet month it has been. It is nice to see the sun out and the temps in the 70's. I'm ready for Spring! The real estate market is in full swing. Homes are selling, buyers are buying and home prices are remaining fairly stable. Below is a breakdown of what has sold for the year thus far.

Single Family - 414
Condo / Town Home - 143
Mobile - 57
Multi-Family - 3
Lots / Land - 102
Farms - 2
Commercial - 15

The total closed real estate transactions for 2009 thus far is 736. The average list price as of April 30, 2009 was $314,740, and the average sales price was $293,773. Homes are selling at 93.3% of list price and are averaging 196 days on the market. We anticipate sales to remain strong and prices steady. There is light at the end of the tunnel, and we can see it!

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

Pending Home Sales Up 3.2% In March

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

Is Now the Time for Some Home Buyers to Make a Deal?

While housing prices are continuing to fall, prospective home buyers may not want to wait much longer for the market to hit bottom, experts say.

"Most of the big declines in home prices have occurred," says Lawrence Yun, the chief economist at the National Association of Realtors. "Any more will probably be minimal."

Part of the reason is that homeowners are becoming more realistic in listing their asking price.

"Home prices are where they should be," says Robert Abbott, co-owner and VP of Abbott & Caserta Realtors in northern New Jersey. "Sellers are accepting the current reality and are pricing more realistically."

The latest Case-Shiller report shows that home prices in 20 cities dropped 18.6 percent in February from a year earlier. But for the first time in 16 months, that rate of decline eased from the prior month.

A look at the median home prices across the U.S. shows that some prices have actually risen in recent weeks, according to the National Association of Realtors.

Region January '09 February '09
Northeast $227,000 $251,000 (up)
South $143,300 $146,700 (up)
Midwest $131,000 $131,000 (same)
West $215,000 $204,600 (down)

The median prices are still down from the same time in 2008, but that's more a reflection of what were over inflated prices, says Abbott.
"We're experiencing an adjustment in prices," Abbott says. "From my area, we've been in a down market since 2005 and I think we are now at a stabilized place."

The current price level of homes seems to be drawing more buyers into the market, says Jim Gillespie, CEO of Coldwell Banker.

"We are seeing a lot of activity across the nation," says Gillespie. "Of course we're in the Spring market, but we've seen more buyers in the market now than at this same time last year."

More people are not only 'kicking the tires' but actually buying right now, says Abbott.

"We are showing significant activity when it comes to sales," Abbott says. "The number of days for a house on the market are going down."

But not all levels of housing are seeing the benefit, according to Cindy McLellan, a real estate broker in Denver, Colorado.

"Lower levels of home prices are seeing more of the activity," says McLellan. "Higher priced homes, those in the $1 million range and above, are still taking some time to sell. High enders still have trouble getting jumbo loans and sellers are till trying to make a profit."

McLellan says it's the first time home buyers that are driving the market. "With the $8,000 tax break from the Obama Administration and lower interest rates, first time buyers really have an incentive to buy and they are."

Not everyone thinks housing prices have bottomed or might not even go lower. Fred Skolich, president of Skolich Real Estate in New Jersey says prices remain in flux.

"I think they are still going to come down," says Skolich. "We're in the middle of the Spring market. After we get away from that, I think you’ll see some further adjustments in price."

"There's no need to rush," says J. Andrew Hansz, an associate professor with the department of finance and real estate at the University of Texas at Arlington. "It's a buyer's market right now. If you need a place, it's a good time, but buyers are in control."

But home buyers waiting on the sidelines to time the market could be making a mistake, says Skolich. "You might wait for a lower price, but then interest rates could go up," Skolich says. "It's like a stock, you don't know if you're really buying at the bottom or not."

And those prospective buyers making low offers, might find themselves in a bidding war, says NAR's Yun.
"I think some buyers are trying to steal property by offering low prices," says Yun. "But even in those markets that plunge, buyers are coming back and making bids."

"We've seen some bidding wars" says Robert Abbott. "It's very competitive especially when the home is priced right."

Whether someone is in the market to buy, just looking or waiting for prices to drop even more, analysts say the current state of housing is the best it's been for some time.

"I'm not just saying this because I'm in real estate, but I think it’s as great a time to buy as I have seen in my 34 years in the business," says Coldwell Banker's Gillespie. "Houses are affordable, there are plenty of homes to choose from and you have record low interest rates on 30 year mortgages."

© 2009 CNBC.com, http://www.cnbc.com/id/30455148/

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

Real Estate Outlook: Indicators of Recovery

You may not be quite ready to accept the idea that housing on a national basis has moved beyond bottoming out and is now in slow recovery mode.

But think about this: Even if you're bearish on the market, you've got to notice that some extraordinarily positive signs are popping up that point to recovery.

New mortgage applications last week for home purchases and refinancings were up 77 percent from the same week in April 2008, according to the Mortgage Bankers Association. That's a statistic that's hard to ignore!

Mortgage rates continue to average well below 5 percent -- 4.7 percent last week on average for 30-year fixed-rate loans and 4.5 percent for 15 year loans. Rates like these are a major factor pushing applications way up, no question, but sharply lower housing prices in many markets are an important part of the equation as well.

Nearly 600,000 homebuyers have already claimed either the $7,500 tax credit from last year, or the $8,000 credit for this year, according to IRS data cited by the National Association of Home Builders.
Many of these buyers are true first timers, but plenty of others are people who are now jumping back into real estate after not owning for a few years, drawn in by today's much more affordable prices and financing.

The rebound underway in mortgages is even creating a mini hiring boom! The Bank of America has just announced that it will be adding 5,000 new positions around the country -- just to deal with its red hot mortgage business, which closed nearly 400,000 new loans during the first quarter. Other big lenders are hiring loan officers and processors again too.

Hard-hit local housing markets continue to roar back with sales gains. On Florida's west coast, in the Sarasota and Bradenton areas, sales were up 28 percent in March over last year, and pending sales -- pointing to more purchases in the pipeline but not yet closed -- were up 27 percent.

Inventories of unsold houses in the Sarasota-Bradenton area are down 31 percent, to the lowest level since December 2005, according to a report from Trendgrafix.

Nationally, house prices have begun moving up again after many months of declines. According to the Federal Housing Finance Agency, prices rose by seven tenths of a percent on average last month - after falling by six and a half percent during the previous 12 months.

By Kenneth Harney, Published: April 28, 2009, http://realtytimes.com/rtpages/20090428_realestateoutlook.htm

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

Home prices down, but rate of loss eases

S&P/Case-Shiller index of 20 major cities falls for 31st straight month, but annual rate is not a record low for the first time since October 2007.

NEW YORK (CNNMoney.com) -- The weak housing market continued to plague home sellers in February as home prices extended their losing streak to 31 consecutive months, according to a report issued Tuesday.

However, the rate of decline slowed, with the S&P/Case-Shiller 20-city home price index not hitting a record low for year-over-year drop for the first time since October 2007.

"We will certainly need a few more months of data before we can determine if home prices are finally turning around," said David Blitzer, chairman of the index committee at Standard and Poor's.

The index fell 18.6% from February 2008, compared with a 19% year-over-year decline in January. The index was also down 2.2% from January. The index has not recorded a price rise since July 2006 and has fallen 30.7% since that peak.

"I don't think it's great news," said real estate analyst Mike Larson of Weiss Research. "It's just a moderation in the monthly declines and it fits in with the pattern we're seeing of things getting less bad."

"But it's still a weak market. The patient has moved out of intensive care unit but it's still in the long-term care ward," he added.

Moderation: This is the second time in the past several months that the decline trend has seemed to moderate, according to Ken Goldstein, an economist with the Conference Board.

"The first occurrence proved to be a ledge on the way down to the bottom," he said. "We're probably closer to the bottom now."

The leveling off has had a positive impact on consumer confidence, which jumped suddenly this month, although still at historically poor levels.

"Consumers are no longer in despair," said Goldstein. "They're just depressed."

More and more markets are reaching a balance point, according to Bernard Markstein, senior economist with the National Association of Home Builders (NAHB), where prices should level off. He cites other stats, such as stabilizing new and existing home sales, that indicate we're coming to an end of the housing market meltdown.
"By the end of the year, we should be on the slow road to recovery," he said.

Cities: Of the 20 cities tracked by the index, 16 recorded a slower decline in February than the month before.
No index city has fared as poorly as Phoenix, where prices have fallen 35.2% over the past 12 months and 4.5% in January. Prices are down 51% from their peak.

But Phoenix is hardly unique, according to Larson. He said that if you ask any real estate agent in any of the once overheated markets, he or she will tell you that prices in many neighborhoods are off 40% to 50% from their highs.
Las Vegas, which has recorded more foreclosures than any other city, is close behind Phoenix with a 31.7% year-over-year loss and a drop of 3.6% for the month. Prices there are off 48.4% from their peak.

Other big losers include San Francisco, down 31% over the past 12 months and 3.3% for the month; Miami, down 20.5% year-over-year and 3% month-over-month; and Los Angeles, 24.1% lower on an annual basis and down 2% on a monthly basis.

The housing bust has touched some of the cities on the list less severely. In Dallas, prices were down 4.5% annually and 0.2% monthly. Denver showed a 5.7% annual drop and a 1.7% monthly dip, and Boston was 7.2% lower on a yearly basis and 1.3% monthly.

That price declines did not accelerate in February is certainly a positive change, according to Goldstein, showing that the housing crisis is beginning to let up a little.

"Still, we're in a deep hole, one that will be tough to climb out of," he said.

By Les Christie, CNNMoney.com staff writer
Last Updated: April 28, 2009: 12:08 PM ET

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

Hope seen, despite home sales downturn

Realtors say home resales fell 3% in March, but analysts point to signs of a stabilizing market.

NEW YORK (CNNMoney.com) -- Sales of existing homes fell in March, according to an industry report released Thursday, but analysts say the housing market is showing signs of stabilization.

The National Association of Realtors said that existing home sales fell last month to a seasonally adjusted annual rate of 4.57 million units, 3% lower than the downwardly revised rate of 4.71 million in February.

March sales were down 7.1% year over year, and came in weaker than the 4.65 million rate forecast by analysts surveyed by Briefing.com.

Despite last month's decline, existing home sales appear to be stabilizing, according to Ian Shepherdson, economist at High Frequency Economics.

"Sales are volatile month-to-month, but the trend appears to be flattening off," Shepherdson said in a research note.

Single family home sales, which are considered the core of the market, fell at a 10% annualized rate in the first quarter of 2009, after a 17.4% drop in the last three months of 2008. At the current sales pace, existing-home sales will be down "only" 2% in the second quarter, according to Shepherdson.

First-time buyers made up 53% of existing home sales in March. Charles McMillan, NAR's president, said first-time buyers are "crucial" to a recovery in the overall housing market.

"The housing market always heals from the bottom up, and with large numbers of first-time buyers entering the market it will become a little easier for sellers to trade up or down," McMillan said in a statement.

Meanwhile, sales of "distressed properties" accounted for over half of all transactions in March. Foreclosed homes typically sell for 20% less than traditional homes, according to NAR.

"Clearly foreclosure activity is driving the marketplace," said Adam York, an economist at Wachovia Economics Group, in a research report. "Buyers are clearly looking for 'bargains,' if they are looking at all."

Existing home sales in the West declined 4.2% in March. Sales in the South and the Northeast also fell, while sales in the Midwest were unchanged.

The national median existing-home price was $175,200 in March, up 4.2% from $168,200 in February. Still, the median existing-home price was down more than 12% since March 2008, when it was $200,100.

The total number of existing homes on the market at the end of March fell 1.6% to 3.74 million units. At the current sales pace, it would take an estimated 9.8 months to sell that inventory of properties. That's up slightly from 9.7 months in February and January.

"The inventory overhang has stabilized too," Shepherdson said. But the number of existing homes on the market remains historically high, and prices will continue to fall rapidly "for the foreseeable future," he said.

First Published: April 23, 2009: 10:06 AM ET
By Ben Rooney, CNNMoney.com staff writer
Last Updated: April 23, 2009: 1:52 PM ET

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

New home sales show signs of revival

Despite a decline in March, the annual rate remains above what economists expect after an even stronger than originally reported February.

NEW YORK (CNNMoney.com) -- Sales of newly constructed homes are showing indications, ever so slight, that the housing decline may be near an end, a government report showed Friday.

The Commerce Department said new home sales fell 0.6% last month to a seasonally adjusted annual rate of 356,000. But that was from a rate of 358,000 in February that was revised up from the originally reported at 337,000 -- the level economists were expecting for March.

The net revision to the prior three months equals an increase of 31,000 units, according to Wachovia Economics Group.

"This is clearly a better-than-expected number," said Michael Larson, a real estate analyst at Weiss Research. "Technically, yes, sales declined, but the last three months were revised higher and the raw number came in better than expectations."

"All signs are pointing to stabilization in market conditions, which is due to lower prices," Larson said. "We still have a problem with unemployment, and that's why any rebound we see will be muted."

Another signs of a bottom in the market: The estimated number of new homes for sale at the end of last month was a seasonally adjusted 311,000, according to the Commerce Department. Last month, it was 328,000 unsold homes.

At the current sales pace, it would take 10.7 months to sell through that inventory, according to the report. That's down from the previous month, when the estimated months of inventory was 11.2, and was nearly 2 months below January's level of 12.5.

"While the inventory correction will likely overshoot to the downside, we are getting closer to stability in the marketplace," said Adam York, economist at Wachovia Economics Group, in a research note. He added that new home inventory is now approaching late 1990s levels.

"As we have long said, getting the new home market back into equilibrium is an important precursor to broader housing market improvement," York said.

The median sales price of new houses sold in March was $201,400, down 3.5%from the revised $208,700 in February and 12.1% from March 2008, when it was $229,300.

"Median prices fell for the third straight month as builders fought the rising tide of foreclosure sales for buyers' attention," said York.

As buyers bargain shop for deals on foreclosed properties, homebuilders have drastically scaled back production to meet falling demand.

On Thursday, the National Association of Realtors said sales of existing homes fell 3% in March, after an unexpected rise the month before.

First Published: April 24, 2009: 10:17 AM ET
By Ben Rooney, CNNMoney.com staff writer
Last Updated: April 24, 2009: 11:31 AM ET

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

NAR President speaks about existing home sales

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

Home Prices Approaching a Bottom in Period Ahead

While the Federal Housing Finance Agency reported that home prices in February registered their first consecutive monthly gain in two years, FHFA Chief Economist Patrick Lawler cautioned it is far too early to conclude that home values have bottomed out.

“There may be issues associated with the foreclosure moratorium. In January and February there were a lot fewer foreclosures than in previous months,” Lawler said while discussing current home price trends in a panel discussion at last week’s NAHB Construction Forecast Conference.

He also added that the FHFA calculated more transactions in areas across the nation where home prices are doing better. “That helped push up prices some,” he said.

From the fourth quarter of 2007 through the fourth quarter of 2008, FHFA reported that home prices fell 8% nationally, Lawler said, while the S&P Case-Shiller Home Price Index reported a drop of 18%.

Part of the discrepancy, Lawler said, is that the FHFA uses the prices of homes backed by mortgages or sold by Fannie Mae and Freddie Mac, and that subprime, jumbo and FHA mortgages are not included in the agency’s home price index. Another difference is that the FHFA encompasses rural areas while the S&P/Case-Shiller home price data are concentrated on major metropolitan markets.

Pointing out that distressed sales accounted for 50% of the total in California during the last quarter of 2008, Lawler added, “we have fewer distressed sales in our index than Case-Shiller.”

A study last year by the Federal Deposit Insurance Corporation (FDIC) to ascertain the total number of home-price boom-and-bust markets found that of 104 markets that experienced a “boom” in 2006, just three were still considered boom markets in 2008 and only one, Detroit, was listed as a “bust.”

The analysis defined a boom market as one that had experienced a real price gain of 30% or more in three years. A market was considered a bust if had posted a nominal price decline of at least 15% in five years.

“The data show that home prices are essentially where they were in 2003,” said Richard Brown, chief economist of the FDIC.

Citing the S&P Case-Shiller Future Prices Index, Brown said that futures prices, which have lagged actual home price declines, suggest a floor in U.S. home prices by early 2010.

To help shore up home prices, Brown said a broader stabilization of the financial system — including policies to provide liquidity to mortgage markets and bolster the capital of banks — is necessary to provide more mortgage credit and to get financial institutions to start lending again. He also said that the number of foreclosures must be whittled down “to arrest some of the downward pressure on home prices.”

Nation's Building News, Photos by Morris Semiatin, http://www.nbnnews.com/NBN/issues/2009-04-27/Economics+&+Finance/3.html

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

Sussex County Home Sales - as of April 27, 2009

The season has begun! We were able to get out and enjoy the beach this weekend, and even strolled the new boardwalk in Rehoboth. It was nice to get out and soak up the sun!
The real estate market continues to move -- slowly, but continously. In the past two weeks, there have been 74 new closed real estate transactions. Below is a break down of what has sold this year.

Single Family - 323
Condo / Town Home - 106
Mobile Home - 41
Multi- Family - 2
Lots / Land - 79
Farms - 2
Commerical - 10

The total closed real estate transactions for the yaer thus far is 563. The average list price as of March 31 was $313,762, and the average sales price was $294,587. Homes are selling at 93.9% of list price and are averaging 198 days on the market.

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

Sussex County Home Sales - as of April 15, 2009

April Showers bring May flowers, right? I should hope so with the day we are having outside! Well, I would say February's gloomy stats brought new hope for March's records. It was quite an impressive change, and one that I am rather excited to report. Here is a breakdown of what sold over the past week.

Single Family - 489
Condo / Town Home - 93
Mobile - 37
Multi-Family - 2
Lots / Land - 73
Farms - 2
Commercial - 10

There were 40 additional closed real estate transactions in the past week, bringing the total to 489 for the year thus far. The average list price as of March 31 was $313,762, compared to $296,924 for the end of February, and the average sales price was $294,587, compared to $278,270 for the end of February. To me, that says the market is slowly turning around. Throughout 2008, we had seen a monthly decline between average list and sales prices of about 9.5%. This jump in the March statistics is about a 10.5% increase. This is good news indeed! Let's see how long and well it lasts.

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

State of the Housing Market

I’ll start with the subject we all care about the most: housing. First, some good news: Existing Home Sales (for February) came out yesterday and unexpectedly rose by 5.1%. This is the largest monthly rise since July 2003. As you all know, I thought home sales would bottom in November but I was wrong . . . January’s #s were lower than November’s. I expected Obama’s Stimulus package to more aggressively attack the housing problem.

Unfortunately, the housing problem was pretty much left out of Obama’s $800 billion stimulus package ($8,000 tax credit for 1st time homebuyers doesn’t really help much). As I explained previously, the deflationary spiral in housing is very well entrenched and really requires government intervention to stop it from continuing.

Fortunately, the quantitative easing (explained below) the Fed announced last week should hold mortgage rates low for awhile which should help the housing market. If the uptrend in sales continues, January will be the bottom in terms of Home Sales. However, due to the declining stock market and the extreme negativity of the media, consumer sentiment was very low in the first half of March, so, it is possible that March Home Sales will be lower than February’s. On the bright side, if the stock market keeps going up or at least, doesn’t decline much, I think consumer sentiment will improve dramatically in late March/April. This will definitely help home sales. A 500 point gain on the Dow yesterday will certainly help sentiment.

Home Sales can be thought of as the 1st derivative of Home Prices. In other words, Home Sales reflect the slope of the Home Price curve. As Home Sales start increasing, we will see the pace of Price declines start to moderate. Once home sales rise sufficiently and go above a certain threshold, Home Prices will finally bottom out and start to rise. I expect this to happen late this year on a National level, possibly sooner if we get a dramatic stock market rise or additional housing stimulus.

In the meantime, I would suggest that you use the dramatic and unexpected increase in existing home sales in February as an indication of a bottom in housing to generate some urgency with your prospects. Here’s a good article you may want to email to your prospects to create some urgency: www.cnbc.com/id/29553757

Home Prices & Affordability

It’s very frustrating for me when I hear “economists” in the media speaking about how they believe home prices still have to drop a bit to return to historical levels relative to incomes. Granted, I agree that home prices will indeed drop more but I vehemently disagree that home prices are still too high. I’m not sure what data these “Professionals” are looking at but the Nationals Data reported by the Census Bureau indicate that the housing bubble has sufficiently burst and prices are back to normal levels. In fact, if you factor in current mortgage rates, homes have never been more affordable. I’ll provide some graphs below to illustrate this.

One of the most common stats referred to regarding home prices is the ratio of the Median Home Price to the Median Household income. Historically, as you can see below, home prices are usually between 3 and 3.5 times Household Incomes. Right now, using today’s data, we are at 3.16. Going back prior to 1980 isn’t really that relevant since the 30 year fixed mortgage industry as we know it today didn’t really exist until the 1980s. In fact, pre-1940, if you wanted to buy a house, you had to take out a 5 year loan (imagine how high the payments were on a 5 year loan).

However, keep in mind, the graph above doesn’t take into account interest rates. As I’ve explained before, most people buy homes by getting a mortgage so you really can’t evaluate the affordability of home prices without incorporating current mortgage rates. The graph below shows the % of Monthly Household Income (Median) needed to pay the Mortgage Payment on a Median Priced Home.

This graph shows that for as far as the data goes back, homes have never been more affordable than they are now. HOWEVER, AND THIS IS REALLY IMPORTANT: Notice how the “bubble” in prices really doesn’t show up on this graph like it does in the first graph above. I found this extremely interesting. Why don’t we see the price bubble in this graph??? The reason is that while home prices boomed, mortgage rates dropped almost as fast as prices went up. So, one could make the argument that we really didn’t have as much of a price bubble as people thought . . . it was mostly a result of dropping mortgage rates as opposed to the common belief that people were buying homes that they couldn’t afford. Granted, many people did buy homes they couldn’t afford but the graph above shows that although median home prices went way up, mortgage rates came down so fast that there was only a slight increase in the % of Household Income used for the Mortgage Payment. So, the average home buyer between 2003-2005 wasn’t as overextended as is commonly believed. Clearly, in areas like California and Las Vegas, home prices were way too high relative to Incomes and people did overextend themselves, but this is not the case for most of the rest of the country. As you can see, homes have never been more affordable. Right now, it requires only 20% of the Median Household Income for the Mortgage Payments on the Median Prices Home (and this assumes 100% financing . . . just multiply all #s by .8 to assume a 20% down payment).

Mark-to-Market Accounting

One of the big issues discussed in the media regarding the banks’ health is Mark-to-Market (MTM) Accounting. First, let me explain what this means. Basically, prior to 2007 (FAS 157), when banks purchased securities such as Mortgage Backed Securities, banks would value the securities on their books at the purchase price (more or less). So, if ABC Bank paid $100 for Security X, ABC Bank would report the value of Security X as $100 until they sold the security, at which point, they would recognize a profit or loss on the sale. Mark-to-Market, or Fair Value, accounting states that banks must report the value of their assets at current market prices (whether they sell them or not). This means, that if a security similar to Security X was recently sold by another bank for $80, ABC Bank would be forced to “write down” the value of Security X to $80 and report at $20 loss.

Right now, most banks own a large amount of Mortgage Backed Securities (CDOs, CMOs, etc). A Mortgage Backed Security (MBS) is just a pool of mortgages where the owner of the MBS collects the payment made by all the people who took out these mortgages. Prior to late 2007, there was a fairly liquid market from MBS securities, meaning, banks could easily sell their MBS securities if they didn’t want to keep them on their books. Once home prices started to drop substantially and mortgage default rates increased, nobody wanted to buy MBSs anymore. Nobody knew how bad the housing market would get and how many people would default on their mortgages so it became very difficult to value MBS securities. So, basically, almost overnight, there were no buyers for MBSs. MBSs became “toxic assets”. Because a normal market from MBSs evaporated, the only transactions for MBSs that took place after late 2007 were “distressed sales”. This means that a bank or hedge fund who owned MBSs could only sell them at drastically discounted prices . . . usually less than 50% of par value. In the example above, ABC Bank could only sell Security X if it was willing to accept a price of $30 (30 cents on the dollar).

So, these “distressed sales” became the new market prices for MBSs. This creates a huge problem. These distressed MBS sales combined with the new Mark-to-Market accounting required banks to “write down” their MBS holdings by huge amounts. If a bank owned $10 billion of an MBS security and the latest sale of a similar MBS security occurred at 30% of par value, the bank would be forced to report a $7 billion loss and write their MBS holdings down to $3 Billion. The important thing to recognize is that this phenomenon is forcing banks to write down the value of their MBS Securities way more than is justified by the cash flows generated by these securities. In other words, many of these MBS securities are still comprised of mostly current loans and are still generating significant cash flow. So, from a Discounted Cash Flow valuation standpoint, these securities are still worth 80-90% of their purchase price. However, the MTM rule requires banks to treat these “good” MBS securities as if they are only worth about 30% of their purchase price.

Here’s why this is such a big problem: when a bank writes down the value of their MBS securities by let’s say $10 billion, there is an immediate decrease in the Bank’s retained earnings (and thus Equity) by $10 billion. For every $1 of Equity (Capital) a bank has, a bank typically loans out around $10 (10:1 leverage or a 10% leverage ratio). Banks like to maintain a constant leverage ratio and are required to maintain a minimum leverage ratio by the FDIC. So, when a bank loses $10 billion is Equity, in order to maintain the same Leverage Ratio, the bank would have to decrease the $ amount of their outstanding loans by $100 billion. This is the problem . . . as banks take more and more losses on their MBS portfolio, they need to reduce their lending by 10 times as much as their losses . . . this creates an enormous reduction in new lending and in some cases has caused banks to “call-in” some of their loans just to meet the minimum leverage ratio required by the FDIC. This is the reason banks have stopped lending. Also, another issue making the problem worse is that while the government is publicly telling banks to keep lending, behind the scenes, the bank regulators are scrutinizing everything a bank does and scaring the crap out of banks. Bank regulators (FDIC regulators) are literally threatening to take over or shut down a bank if the bank continues to issue “risky” loans.

Incidentally, you won’t hear this mentioned much by the media (mostly because they don’t know financial history that well) but Mark-to-Market accounting was also required during the Great Depression and is considered one of the reasons for the severity of the Great Depression and also one of the main reasons so many banks failed during the Great Depression. Recognizing the problems caused by Mark-to-Market accounting, FDR repealed the MTM rule in 1938. So, banks lived blissfully without MTM accounting between 1938 and 2007. Also interesting is the fact that Mark-to-Market accounting was required during the 1930s for much the same reason that it was re-instated in 2007: to create more transparency within the financial reporting of banks and other institutions. I can’t help but think of the cliché “Those who don’t know history are destined to repeat it.”

Here’s the real problem with Mark-to-Market accounting: although it seems like a good and reasonable idea, a side effect of MTM is that it greatly amplifies the economic cycle and creates both a positive feedback loop in good times (causing bubbles) and a negative feedback loop in bad times (causing depressions). In good times, banks are able to “write-up” their assets under MTM and thus significantly increase their lending which perpetuates the economic boom. In bad times, banks are forced to “write down” their assets and in order to maintain their capital ratios, they must significantly reduce lending, which perpetuates the economic decline. So, while it is honorable and it makes sense to require banks to use current market prices to value their assets, the negative side effects are devastating. One may even argue that without MTM, the Great Depression would not have occurred because much fewer banks would have failed. As a caveat, there was no FDIC prior to the Great Depression. The FDIC was implemented to prevent the types of “Bank Runs” that destroyed the banks during the Great Depression.

The Toxic Asset Plan

So, there are really two ways the government can help the banks right now: They can either repeal the MTM rule, allowing the banks to value the MBS securities at their purchase price or they can do something to help the banks sell these “toxic assets” and get them off their books. Here are the arguments for and against each method of helping the banks:

Repeal the MTM Rule

Pros: Repealing this rule would literally fix the banks balance sheets overnight and create windfall paper profits for the banks. The assets that these banks wrote down to 30 cents on the $, the banks could “write up” to 100 cents on the dollar, booking a huge profit, and creating a huge increase in equity (capital). Doing so, would allow banks to significantly increase their lending.

Cons: The opponents of repealing the MTM rule claim that all we would be doing is fooling ourselves by allowing the banks to value their MBS securities at values that are clearly not accurate given the state of these mortgages and the housing market. Doing this would simply delay the inevitable loss the banks would have to take when they either sell their MBS securities or let them mature. The argument is that repealing this rule would be financially irresponsible and would just be perpetuating the American way of sacrificing the future prosperity of our children for our own current economic benefit.

Buying the Toxic Assets from the Banks

Pros: this would allow the banks to raise cash and rid themselves of the assets that have been destroying their balance sheets. By selling these assets, the banks would have more cash “reserves” and would thus be able to make more loans. More importantly, once the assets are off the banks books, the uncertainty of how much damage these assets are going to do to the banks will be gone, allowing the banks some breathing room to rebuild and recapitalize.

Cons: The buyer of these toxic assets probably will not be willing to pay a price high enough to induce the banks to sell their toxic assets. Right now, the banks essentially have a “paper loss” on these assets. If the banks sell them for pennies on the dollar, the banks will be locking in a large cash loss on these assets. As I explained above, many of these assets are probably worth a lot more than the current market value assigned to them. So, unless the bank is desperate for cash, it is in the banks best interest to hold the toxic assets and hope that the housing market recovers to the point where these assets start trading at values closer to par.

As you know, the government has chosen the 2nd option above and yesterday announced a public/private toxic asset purchase plan. In my opinion, although this plan is better than nothing and may improve sentiment regarding the safety of the banks, I do not believe many banks will choose to sell their toxic assets under this plan. Banks know that the government will eventually have to fix our housing and economic crisis. Banks don’t want to “Buy High & Sell Low” so most banks will choose to hold these assets on their books until conditions improve and they can sell them at a better price. The Private Hedge Funds involved in the governments plan will only buy these MBS assets at a significantly discounted price (so they can turn a profit). However, I don’t think the banks are going to be willing to sell at this significantly discounted price. We’ll see.

There is some major opposition to repealing the MTM rule so I doubt this will happen either. However, I do think that the government will alter the MTM rule (they already have slightly) in a way that will allow banks to value their MBS assets at a higher value. This will help a lot.

AIG & Credit Default Swaps

If there is any one company involved in this whole mess who is really the villain and is worthy of the blame that has been placed on them, it is AIG. In order to justify why I believe that, I need to explain what Credit Default Swaps are. In one sentence, the Credit Default Swap market is an unregulated insurance market . . . “unregulated” is the key word. Because this market is unregulated (it never should have been), it is open for major abuse and fraud. Basically, a Credit Default Swap is simply a way to provide insurance against the default of a specific company or institution on its debt. So, for example:

Let’s say I own $100 of debt (bonds) of Company A. If I am worried that Company A might go bankrupt and not
pay me my $100 back, I can buy a Credit Default Swap to insure me against losing my $100 if Company A
defaults. So, let’s say AIG agrees to sell me a Credit Default Swap that pays me $100 if Company A defaults
anytime within the next two years (a 2 year term . . . swaps are sold with varying terms, usually 1 year, 2
years, and 5 years). In order to provide me with this insurance, AIG requires me to pay them $2 per year for
the next two years. After two years, the Swap expires. So, if the company does default sometime over the next
two years, AIG pays me $100. If Company A does not default, I will have paid AIG $4 and AIG will have paid me
nothing. I could also sell my swap sometime before it expires if I want.

Here’s the problem: As I mentioned, the Swap Market is an “over-the-counter” unregulated market. What this means is that there is no Exchange or Regulatory Agency (like SEC or CFTC) regulating the purchase and sale of these swaps. This creates a big problem because it allows anyone to Sell these Swaps, even if they person selling the swaps doesn’t have the money to pay in the event that a default event triggers a payment (in the above example, AIG could sell me the swap even if they didn’t have the $100 to pay me if Company A defaulted). When a derivative is regulated, the buyer and seller of the derivative are required to post “margin” in an account in order to ensure the ability of the buyer and seller to follow through on the terms of the derivative contract. If the price of the underlying market moves and jeopardizes the ability of the posted margin to cover the loss of the buyer or seller, the losing party will be required to post more margin $ (a margin call) in order to maintain their derivative contract. For this reason, in regulated derivative markets (currency future, stock index futures, stock options, etc), there really is no “counter-party risk”. In other words, you don’t really have to worry about the solvency of the person on the other side of a transaction because the rules governing the transaction will guarantee that the counterparty is always able to fulfill their obligation under the derivative contract. (Sorry if this is confusing or boring . . . this is an important part of understanding the problem created by CDSs).

So, because the CDS market is unregulated, anyone can sell CDSs to pocket the annual premium paid by the buyer of the CDS. Here’s the problem: What if the debt that the CDS covers actually defaults?? Then, the Seller of the CDS has to pay a large sum of money to the buyer of the CDS. What if the seller doesn’t have enough money to pay the Buyer? The problem is that unregulated swap markets creates somewhat of a legalized Ponzi scheme for immoral Sellers of CDSs. With these markets unregulated, someone (or some company) with little to no money could sell millions of dollars worth of these swaps in an effort to get rich, knowing full well that they have no ability to fulfill their side of the deal in the event that some of the debt covered by the CDSs they sold defaults. The Seller thinks: if this works out for me and the debt covered by my CDSs doesn’t default, I’ll be rich . . . if not, I’ll just declare bankruptcy because I know I can’t pay anyway.

This is basically what AIG did. AIG sold way more CDSs than they had the cash to support. In other words, AIG basically threw a Hale Marry pass and crossed their fingers. If the economy had continued to stay healthy, AIG would have collected millions, if not billions of dollars worth of “Premiums” from the Buyers of the CDSs, showing huge profits for the company. But, if the economy turned down and some of the debt covered by these CDSs defaulted, AIG would be obligated to payout Billions of dollars that they didn’t have. It was an extremely irresponsible and selfish thing for AIG to do. It’s kind of like watching a football game with your friend and betting your friend $50 on the game even though you know you only have $5 in your wallet. If your team wins, you smile and collect the $50 . . . if your team loses, you say, “Oh, whoops, sorry, I don’t have $50”.

The reason the government chose to bailout AIG is that the government thought that if they didn’t bailout AIG, that many other companies who bought CDSs from AIG (including many banks) might go bankrupt. The government felt it was easier to support AIG than deal with the fallout caused by not supporting AIG. I tend to believe the government made a mistake here and should not have bailed out AIG. Here’s why: something like 95% of the Credit Default Swaps issued were bought by speculators who did not actually own the underlying debt covered by the CDS. For this reason, these speculators were merely betting (hoping) that a certain company would default on its debt and they could collect a large payment from AIG. So, using my example above, these speculators were paying AIG $2 per year in hopes that the debt covered by the CDS would default and AIG would pay them $100. So, in almost all cases, the CDS buyer would not suffer a catastrophic loss if AIG failed to pay them the $100. On the contrary, if AIG did pay, the Buyers of the CDSs would experience a windfall profit ($2 investment for $100 payout). The buyers already paid the premium to AIG so there really is no additional loss of funds associated with the failure of AIG to pay them their $100. For this reason, I believe very few, if any, institutions that had purchased CDSs from AIG would have failed if we had let AIG fail. In reality, by funding AIG, all we are really doing as taxpayers is allowing some of these lucky CDS buyers to experience windfall profits. Of course, about 5% of the buyers of CDSs actually bought the CDSs to hedge the debt they own from Company A (using the example). These people or companies would have suffered a real loss but I would argue that because these people or companies had the cash to purchase the debt in the first place, they would have been able to sufficiently absorb the loss if AIG failed to pay.

Unlike many other programs the government has funded that have been termed “bailouts”, we are unlikely to get our taxpayer money back from AIG. We have given AIG $180 billion of taxpayer money . . . very little of which I expect to get back. To give some perspective, this # is equivalent to almost $1,600 per American Household. For all intensive purposes, it’s as if each household has written a check to AIG for $1,600. It really is incredible.

Government Intervention in Free Markets

There has been a ton of discussion over the last few months about the government’s role in business and “free markets”. Some argue that markets work the best with little or no government involvement or regulation and others argue that we need a lot more government regulation over our markets and economy. I used to be in the Free Market camp where I believed the government should stay out of the way and let the markets run themselves. I now realize that I was wrong. I believe now that it is the government’s responsibility to create and enforce rules in each market to ensure the fair, moral, and sound operations of markets. However, I also believe that the government should not get directly involved in the markets and also should not do anything that creates an unfair advantage for certain players in the market. Let me provide an analogy that may shed some light on this:

Let’s take the game of soccer. Free Market proponents would say, “Just give them the ball and tell them that the team that gets the ball in the other teams goal the most wins.” The Free Marketeers would not want a referee to supervise the game and would hope that the players general sense of fairness and morality would compel them to follow the basic rules of the game. What do you think would happen? The game would eventually turn into rugby and be dominated by the team with the biggest players who were willing to punch and push the ball into the goal using their hands and any other method they could think of to win the game. The teams that were trying to play fair and stick to the rules of the game, would always lose. Now, the flipside is the Pro Gov’t Regulation crowd. This crowd would not only want many rules and a referee to supervise the game, this crowd might take it too far and create gov’t owned teams that were allowed to play using slightly different rules. The Pro Regulation crowd may even alter the rules for certain teams in an attempt to keep the good teams from winning too much or force the good teams to give some of their players to the losing teams.

Hopefully the analogy makes sense and illustrates that we certainly need rules governing our markets and that the government or some entity needs to enforce those rules. What we don’t want is the government becoming an active participant in the markets or imposing rules that provide an unfair advantage to certain market participants. The Mortgage Industry is a perfect example of an industry that did not have enough regulation. As you know (especially if you watched “House of Cards” on CNBC), the mortgage brokerage business became a very immoral business between 2003 and 2007. Basically, the most successful mortgage brokers were the people who pushed loans upon people who shouldn’t have them and told these people to lie on their loan apps. They did this because there really was no legal or negative financial consequence to the brokers for doing this. Since the mortgage brokers sold off the loans to banks and investment banks who packaged them into CMOs, the mortgage broker didn’t care of the loans defaulted. Also, since there really isn’t any legal enforcement agency for mortgages (like the SEC for Stocks), there wasn’t really any legal risk involved with issuing loans to unqualified borrowers or encouraging borrowers to lie on their loan apps. Basically, the “good” mortgage brokers who tried to follow the rules and do what was right (morally) for the borrowers and the lenders were forced out of business by the brokers who were willing to bend the rules and game the system. One consequence of lax regulation is that in tends to encourage immoral behavior and put the “good” guys and girls out of business.

An example of the government taking regulation too far (in my opinion) is the compensation restrictions on companies that took the TARP money. By doing this, the government is inadvertently altering the game in a way that is not beneficial for the long term health of the economy. Regulating income has a couple negative effects: 1. It discourages people from working too hard since there is a cap on their income . . . in other words, if there is no benefit to being the best and working the hardest, why do it? 2. It creates an unfair advantage for the banks that didn’t take TARP money. If a bank didn’t take TARP money and can still pay whatever they want, they can “poach” all the best employees from the banks who did take TARP money, making the TARP banks even weaker and the other banks stronger. Government control over compensation in a free market economy is a very bad idea.

Ending on a high note, the light at the end of the tunnel is getting much stronger. 2 months of increasing retails sales, consumer confidence increasing, the stock market going up, existing home sales rising, mortgage rates dropping . . . there’s a lot of good stuff happening.