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Posts Tagged ‘Daniel Gross’

Banking Acronyms And Predatory Lending

February 12, 2007 | 11:09 am |

A few years ago, I was amazed at how profitable sub-prime lending was and how national banks were flocking to buy them. The first danger sign for me was when Citibank ran into problems when they purchased The Associates and subsequently assumed their legal woes and eventually settled. But it didn’t end there. In addition to large national retail lenders, International banks got into the game, including HSBC.

Daniel gross wrote a witty piece on HSBC called Hey Sucker Banking Corporation: How a British bank blew it in America [Slate]:

HSBC’s woes are the most highly visible evidence that the real estate-credit orgy of recent years is coming to an unhappy end.

Other names for the acronym HSBC other than its actual Hong Kong Shanghai Banking Corporation have been proposed but HSBC has become the posterchild for all that is wrong with subprime lending.

Don’t get me wrong, subprime serves a need. However, the search for quick profits and lapses in ethical standards associated with subprime lending has begun to take its toll on the lending sector of the economy. Sub-prime lending comprises 20% of all mortgages [MW] so its not an insignificant sector. It doesn’t mean that all sub-prime is predatory but its significant.

In a recent staff report by the New York Fed called Defining and Detecting Predatory Lending explores this topic:

We define predatory lending as a welfare-reducing provision of credit. Using a textbook model, we show that lenders profit if they can tempt households into “debt traps,” that is, overborrowing and delinquency.

This is all scary since those that borrow in this sector are the least likely to afford outside advice.

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Hope, Less Reality: New Home Sales As Phantom of the Housing Market

January 8, 2007 | 10:26 am | |

Before we get all excited and hope for some sort of near term national housing rebound, please take a look at Daniel Gross’ A Phantom Rebound in the Housing Market [NYT]. His MoneyBlog is a daily read for me.

Housing market hopefuls were uplifted by the Commerce Department’s 3.4% increase in purchases of new one-family homes. In fact, I grew annoyed because new home sale stats are very misleading and to place hopes on a housing rebound based such a flawed statistic, is a waste of energy.

The FOMC piled on to the optimism by saying:

“Sales of new and existing homes showed tentative signs of stabilizing, although at levels well below their mid-2005 peaks,” the Federal Reserve’s Open Market Committee said at its December meeting.

Dan’s article points out something that makes the Commerce Department look even more statistically challenged.

If a contract to buy a home, signed in November, is canceled in December, the Census Bureau does not subtract the failed transaction from the number of sales, or add the house back to its inventory total. In the last year, as the housing market has cooled, the volume of cancellations has risen to epidemic proportions.

In fact NAHB estimated that in November 2006, cancellations constituted 38 percent of gross sales, compared with 26 percent in November 2005 and about 18 percent in the first half of 2005. This means that 150k to 200k homes are being counted that never got built.

In their nearly always pessimistic outlook, but very insightful market commentary by Commstock Partners this week Don’t Believe the Hype on Housing, they define the generally inferred housing bottom as a

…a triumph of hope over reality.  Almost everything we see indicates that housing is still in a decline that has further to go.

  • Builders continue to report steep declines in new orders
  • Housing prices do not include non-price incentives and concellations
  • Underwrtiting standards are tightening (I have to laugh about that – if they increased 5-fold, standards would be much more lax than 5-10 years ago.
  • State and federal guidances have been issued about non-traditional mortgages
  • Subprime lenders are going bust.

It seems that as far as new home sales go, demand may be less than it seems. Of course before we write off the housing rebound completely, new home sales only accounted for 14.4% of all housing sales (annualized) in November.

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[Getting Graphic] Explaining The Current Disconnect Between Economists And Consumers

June 5, 2006 | 12:03 am | | Columns |

Getting Graphic is a semi-sort-of-irregular collection of our favorite real estate-related chart(s).

Click here for full graphic [NYT]


In Daniel Gross’ terrific article When Sweet Statistics Clash With a Sour Mood [NYT] he addresses the disconnect between the mood of the consumer and national economic statistics. I have been scratching my head lately at all the positive economic news and the inflation threat from an overheated economy.

Over heated economy? I have had many a discussion with various economists and despite the profession’s reputation for being worriers, lately I have found them to be just the opposite. I don’t feel their same optomism. Why?

Daniel Gross attempts to explain this abstract disconnect. Here are his major points:

The median net worth of a US family remained unchanged from 2001 to 2004

Only 6 percent rated the economy as very good, while 46 percent said it was fairly bad or very bad. And consumer confidence plummeted last month, according to the Conference Board. This strange and unlikely combination — strong and healthy aggregate macroeconomic indicators and a grumpy populace — has been a source of befuddlement to the administration and its allies.

Average net worth increased 6% from 2001 to 2004 while median net worth was flat suggesting that only the upper demographics have seen real improvement. These numbers are fairly shocking to me since housing prices have increased significantly over this period. This would seem to indicate that property owners have taken on a lot more debt. With home equity loans generally tied to adjustable rates and the fed posturing for another rate increase after two years of them already, the future doesn’t look so bright.

CPI is one of the main culprits

“It has no direct relationship to what people perceive as inflation,” he said. Mr. Baker notes that the index doesn’t take account of rapidly rising co-payments and higher insurance deductibles when it calculates health and medical costs. And to gauge inflation in housing, the index approximates a measure of rent instead of looking at home purchase prices.

“We’ve had a huge run-up in the price of housing, and that doesn’t show up in the C.P.I.,” he said. So while the index shows that inflation is elevated but still under control — up 3.5 percent from April 2005 to April 2006 — many Americans find themselves paying sharply higher prices for essential goods and services.

I have posted about CPI calcs on a number of occasions.

Statistical aggregates and averages are also to blame

Many of the macro stats that are presented monthly don’t apply to individuals. Mark Zandi of provides a great quote:

“If you put one foot in a tub of hot water and the other in a tub of cold water and take the average, everything is fine.”

My junior high school gym teacher once told me, “If you are running 4 mph with a friend and he jumps on your back, you don’t go 8 mph” (perhaps this is why I didn’t become a gym teacher).

I get this sort of feedback from my market reports and my weekly Three Cents Worth posts on Curbed. The readers want to know what the numbers means to their specific properties and not just to the market in general, something that aggregate statistics can not provide (thats what a property appraisal does.)

Timing is also a key factor

The OFHEO housing index that was released last week was a 1st quarter closed sales report so its based on contracts from November to February. Its hard to relate that to today’s market. On the other hand, and probably even more misleading, is the attempt to issue market reports in shorter time frames with inadequate data. We often see attempts to issue real time, weekly or monthly reports, for the sake of being current. However, the size of the data set drives the frequency of the report. The report does not drive the data. I see this on a local and national level and it only serves to confuse the consumer.

Now consider the fact that the housing market slow down will be just hitting the national stats in the coming months. The Fed is pondering its next move this month. That does not provide much confidence to consumers that they will make the right move, does it?

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Methodless Enthusiasm From Innovative Bubbles

January 31, 2006 | 12:05 am | |

Daniel Gross wrote a brilliant article (as usual) in this month’s issue of Wired In Praise of Bubbles: Boom and bust cycles have always driven the US economy fostering innovation.

The premise of the article is that people associate them with sob stories, criminal activity and irrational investment behavior.

[Bubbles] tend to follow a painful cycle of boom, bust, hand-wringing, and abject humiliation. But there’s often another step at the end: innovation. Over the past 150 years, many bursting bubbles have paved the way for economic and cultural progress.

methodless enthusiasm was reborn as irrational exuberance

The result of creating too much capacity gives way to other innovations that would have not been possible. One of the exciting aspects of the recent real estate boom has been the redevelopment of urban areas (ie San Diego, New York City, Chicago, Boston. etc.) that would not have been possible during a flat housing period.

Daniel Gross concludes:

“The result has been a real, delayed boom. Put cheap data transmission and storage together with an exploding population of consumers willing to use the Net and you get eBay, Google, and Yahoo! Now come widespread laments that another bursting bubble is anon: real estate, genomics, China stocks, wireless Internet, you name it. Maybe so. But sometimes, a little methodless enthusiasm is precisely what an economy needs.”

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Throwing The Housing Market A (Yield) Curve

January 3, 2006 | 12:01 am | |

In Daniel Gross’ The Dread “Inverted Yield Curve” – It makes brave economists cower [Slate] he counters the concerns made over the yield curve as the result of “rigid thinking.”

A) rising interest rates and higher energy prices are poison for the economy.
B) an inverted yield curve signals recession

The former was disproved in 2005. Short-term interest rates rose sharply as the Federal Reserve continued to hike rates at every opportunity it had, and energy prices continued to climb. Yet the economy grew at a healthy clip…

In theory, an inverted yield curve means that investors and the Federal Reserve are fretting about inflation in the short term, and that investors are pessimistic about long-term growth. The combination of slow growth and high inflation is often deadly.

“You have to look at a broad array of leading indicators and see if there’s a consensus,” he said. And the consensus—among economists and among leading indicators—doesn’t signal that anything close to a recession is in the offing.

As a group, for example, the 56 economists polled by the Wall Street Journal in November believe growth will average 3.2 percent over the course of next year. That’s a slowdown from the current rate of growth but nowhere near a recession…Not a single economist of the group forecasts negative growth for any quarter.”

Here is some other commentary on the Inverted Yield Curve.

The post Who’s afraid of the big bad yield curve? [Econbrowser] explains why we did get an inversion.

The short rate has been rising rapidly because the Federal Reserve is concerned about inflation and has been raising rates to slow the economy. The longer term yields fell this month because investors’ expectations of both inflation and the level of economic activity likely slipped a bit, along with a possible decline in the term premium. All of these factors usually suggest the likelihood of a slowdown in economic activity.”

Source: WSJ

The WSJ article Examining an Inversion discusses this issue with three noted economists, two of them from Swiss RE provided these comments on housing as it relates to the inverted yield curve.

An inverted curve tends to be associated with economic weakness. But there are few such signs right now. Industrial production is rising, manufacturing activity is expanding, business spending on capital equipment is up; housing permits are climbing and unemployment is falling, among other strong trends.

Strong corporate balance sheets today provide enough funds for investment even if consumer spending softens because of a moderating housing market.

As far as the housing markets go, if you subscribe to the argument that the brief inversion of the yield curve does not assure a recession, then all is sort of ok. The economy is expected to drag this year no matter what you think of the inversion, which would be expected to keep mortgage rates in check or see modest gains at best as long term rates remain historically low. However, the wild card is jobs and corporate profits. If the economy slows too much, then personal incomes and job creation will suffer and housing will not provide the offset to keep the economy moving due the potential for rising mortgage rates.


Home Owners: Too Big To Fail

December 27, 2005 | 12:01 am |

If there is one thing that mortgage servicers learned from the last downturn in the housing cycle (1989-1995) was that foreclosure were expensive and had the potential to be a public relations nightmare. In the today’s market, Ken Harney’s article Mortgage Servicers Help Avoid Foreclosures [Washington Post] discusses how mortgage servicers do everything they can to avoid foreclosures.

In the 1990-91 market downturn, lenders had to maintain large in-house departments to manage inventory as well as manage vendors that were needed in the process such as lawyers, brokers and appraisers. As an appraiser, I stood with many a broker and locksmith in the early 1990’s, getting into a foreclosed apartment, only to find the interior was picked clean.

Daniel Gross, in his article Didn’t Pay Your Mortgage? Don’t Worry. Why banks are so afraid to foreclose on you [Slate] he discusses why this is happening. Lightening up on those who fell victim to the hurricanes is understandable and would be a public relations disaster. But what about everyone else?

In the process of raising the percentage of home ownership [Census], the lending industry is trying to avoid the expense of foreclosure. The delinquency rate as of the 2nd quarter, according to the MBA was 4.34%, but less than half of those are in excess fo 90 days. [MBA]

Gross notes that the delinquincy rates of ARM mortgages is 10.04% and subprime loans is 9.06%, which means that the rate for conventional loans is barely on the radar, clearly a pattern related to the pressure to expand the base of customers to those who are a higher risk.

He concludes that when borrowers get behind in their payments, lenders prefer to do workouts and these often can come into the form of another refinance, with the homeowner getting deeper in debt. They have in effect, like lenders 20 years ago, become too big to fail.

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Creative Brain Drain Weakens Long Term Urban Revitalization

December 21, 2005 | 12:01 am | |

In Daniel Gross wrote a great post in Slate called: Are Journalists Underpaid? : Pity the sad, broke New York Times reporter [Slate]. Let me answer that quickly: “Duhhh!!” They are writing stories about some of the most expensive real estate in the world, not forgetting the difficulty and scrutiny their work entails.

The recent real estate article by Jennifer Steinhauer called New York, Once a Lure, Is Slowly Losing the Creative Set [NYT] addresses this point quite clearly.

In a related pattern, the eventual loss of early artisans who pioneered downtown urban locations as residential usually get priced out by hipsters only to start the cycle again somewhere else. This has been occurring with more frequency as urban areas entice residents from outlying suburban areas into their revitalized downtown markets.

The New York Times article, while a fascinating piece, doesn’t quantify the loss, but I suspect it is significant. I haven’t found great data on this yet, so perhaps its too early in the cycle to measure. This phenomenon happened in New York long ago with loft neighborhoods such as Soho, Tribeca, more recently Chelsea and moved on to parts of Brooklyn and now So Bro (South Bronx.)

Enticing the creative to remain is one of the most important issues to sustain urban revitalization efforts in the long term.


Chinese GDP: Apparently Its A Game

December 20, 2005 | 12:01 am |

I have been meaning to post this since last week but I’ve been trying to squeeze in my holiday shopping…

Daniel Gross, in his excellent MoneyBlog observes that the Chinese economy grew 15% overnight

This is particularly disturbing since we are looking long and hard at Chinese GDP and wondering what affect the Chinese economy is going to have on mortgage rates in the US next year.

In Richard McGregor’s article China to up GDP estimate by 20% [FT]:

“The revision is set to restate the size of its economy, in effect adding on the equivalent of Turkey and gaining the rank of the world’s fourth-largest economy.”

And here’s an amazing statement:

Zhou Xiaochuan, governor of the central bank, said this week: “The figures we used in the past have all been changed.”

Can you imagine if Greenspan or Bernanke had done this? Bedlam would ensue in the financial markets.

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Its More Than Shelter: Nearly 1 Out Of 10 Jobs Related To Real Estate

November 20, 2005 | 8:41 pm |

Daniel Gross wrote an excellent article on potential job loss caused by the cooling of the real estate market called As the McMansions Go, So Goes Job Growth [NYT]. The decline in housing starts and building permits are perhaps an indication that the housing market is cooling and with that, the jobs they have provided may be affected.

Source: NYT

Since the last recession in 2001, the real estate industry has provided 36% of all private-sector payroll job growth or 836,000 jobs. Real estate provides 9.7% of total domestic employment. There has been an unprecedented surge in membership to the National Association of Realtors over the past year as people try to make their fortunes as brokers in the housing boom [Matrix].

If we actually lose a few hundred thousand real estate related jobs and the Fed drops its concern about inflation with a weakening economy, it may be plausible that mortgage rates could actually trend downward as a result.

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Fraudulent Accounting Creates Jobs: Are We More Productive Or Not?

September 11, 2005 | 1:56 pm |
Source: NY Times

For the last 4 years, employment recovery has been weak. [NY Times]

The usual suspects have been: outsourcing, competition from China, high health care costs and lower work-force participation.

Daniel Gross‘ article has a different take using a research paper by the National Bureau of Economic Research: The Economics of Fraudulent Accounting “During periods of suspicious accounting (ie Enron, Worldcom, Adelphia, Halliburton, Arthur Anderson, Xerox, etc.) insiders sell their stocks, while misreporting firms hire and invest like the firms whose income they are trying to match. When they are caught, they shed labor and capital and improve their true productivity.” Removing the jobs lost from companies that restated their earnings would account for a large portion of total jobs lost. Enron was the poster-child for this sort of behavior.

So, what? How does this affect real estate?

Well, the Fed watches for employment patterns in its assessment of inflation risks. Inflation influences mortgage rates. For the past several years, productivity gains have been a plausible reason for limited gains in employment. Companies get more productive, then they need less employees. Now that theory is thrown a curve since a significant portion of the unemployment increase was from layoffs of firms that restated their earnings. Maybe things weren’t that bad?

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Lies, Damn Lies, And Government Statistics: Part II

August 21, 2005 | 12:07 pm | |

Go to the prequel of this post Lies, Damn Lies, And Government Statistics: Part I

And here is another post of the same topic concerning PPI Well, Maybe The Inflation Threat Is Not That Bad After All?

…After I finished my post on this topic last Friday, I came across yet another significant statistic that we should be uncomfortable with. Daniel Gross wrote an excellent article on productivity stats that suggests that the stats have even confounded Greenspan.

Source: New York Times

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