Mortgage Market Minute

A barrage of key reports on housing showed price declines easing, sales of new homes improving from last year and foreclosures in California dropping to levels not seen since before the start of the credit crunch nearly five years ago. Taken together, the data paint a muddled but moderately positive picture of a market headed toward bottom, economists said Tuesday. “Fundamentals for the housing market are improving: affordability is very high given the drop in prices and extremely low interest rates, and the labor market is gradually healing,” economists for PNC Financial wrote in a note Tuesday morning. “However, tight credit remains a problem. Foreclosures are weighing on prices and will continue to do so in the near term.” Perhaps the most encouraging report Tuesday was news that during the first three months of the year the number of homes entering foreclosure in California declined to a level not seen since the second quarter of 2007. That was an 8.5% decline from the prior quarter and a 17.6% plunge from the same period a year prior, San Diego real estate research firm DataQuick reported. Even the bad news had a silver lining. Home price declines in big American cities continued but also moderated, according to the Standard & Poor's/Case-Shiller index of 20 American cities. The index dropped 0.8% from January to February, and 3.5% from February 2011. Sixteen cities tracked by the index posted declines and nine cities saw average home prices hit new lows. Los Angeles fell 0.8% from the prior month, while San Francisco was down 0.7%. San Diego was slightly positive, up 0.2% from January. And while new home sales nationally fell 7.1% in March the government revised figures for February up significantly. Even though the figure for March was the lowest since November, it was slightly above analyst expectations and helped cheer Wall Street. “Sales are improving at a snail’s pace from near record lows, with the South accounting for the lion’s share of the gains. Inventory continues to shrink — good news, since builders will have to replenish stocks by ramping up on starts once demand picks up,” IHS Global Insight economists Patrick Newport and Erik Johnson wrote in a note to clients. “New home sales should fare better in 2012 than they did in 2011, when they set a record low.” Source: Los Angeles Times

More Americans believe that now is a good time to buy a home, compared with last year according to a recent survey from mortgage finance company Fannie Mae. More also expect rental prices to climb this year, another sign that consumers see the housing market as a prime buyers market. “Conditions are coming together to encourage people to want to buy homes,” said Doug Duncan, vice president and chief economist of Fannie Mae in a press release. “Americans’ rental price expectations for the next year continue to rise, reaching their record high level for our survey this month. With an increasing share of consumers expecting higher mortgage rates and home prices over the next 12 months, some may feel that renting is becoming more costly and that homeownership is a more compelling housing choice.” According to the survey results, 73 percent of Americans believe that conditions are ripe now for buying, the highest level in a year, and up 3 percentage points from the previous month. On the other hand, consumers are convinced it is not a great time to sell (only 14 percent said it was.) While still a minority, more people now think home prices will rise over the next year, with the percentage moving up to 33 percent, up 5 percent from last month and the highest percentage since this time last year. On average they believe home prices will inch up 0.9 percent this year. What’s more, the number of respondents who think mortgage interest rates will rise this year is growing, up 5 percentage points from last month to 39 percent. As more and more people expect interest rates to climb, that could put more pressure on buyers and those looking to refinance to jump in and take advantage of current low rates. That notion is likely to be compounded by the rising expectation of higher rental prices. A record 49 percent of those polled say prices will increase in the next year, and they believe they will grow on average by 4.1 percent. Source: National Mortgage News

The National Association of Realtors is predicting existing-home sales will jump 7 to 10 percent in 2012 to the highest level in five years, based on an "uneven but higher sales pattern" so far this year.

Home prices fell 3.2% during the second-half of last year, but as spring approaches values are bottoming out, according to a new report from Bank of America/Merrill Lynch Global Research. "We expect roughly flat prices this year and next, with modest growth in 2014," B of A/Merrill reported. Back in November, the bank's research analysts predicted that prices would decline by another 4% to 5% this year. However, a B of A/Merrill proprietary home price model now shows that prices are "bottoming” due to favorable policy developments, better economic data, and a decline in the supply of homes on the market. In terms of "positive policy" developments, the analysts cite the rollout of the HARP 2.0 program, the $25 billion settlement between the five major servicers and state attorneys general, and a new REO bulk sales program that converts GSE foreclosures into rental properties. The REO-to-rental is a "win-win for the housing market and the economy" by removing excess supply from the market, the firm writes. Chris Flanagan, head of U.S. mortgage research, and senior economist Michelle Meyer authored the B of A/Merrill Lynch Global Research housing price forecast report. Of course there's a bit of irony in the report: Although the bank sees better days ahead for housing, B of A is slashing its presence in the residential origination and servicing markets. Source: National Mortgage News

It's the eternal question in real estate: Should I buy or rent? The answer has never been clearer: Buy. In 98 of the top 100 housing markets, buying a home is more affordable than renting, according to the online real estate company Trulia. Only Honolulu and San Francisco buck the trend. There are several reasons. Home prices are falling. Mortgage interest rates are at historically low levels. And rents are on the rise. Of course, many renters are not in a position to buy. For one, it's hard to get a mortgage these days, despite low rates. And paying rent can push them further away from being able to afford to buy. "Rising rents make it harder for people to save for a down payment, which is the biggest barrier to buying a home that aspiring homeowners face," Jed Kolko, Trulia's chief economist. The nation's cheapest buyer's market is Detroit, where purchasing is only 3.7 times more expensive than renting. Other top five metro areas where buying is much better than renting are Oklahoma City, Dayton, Ohio,Warren, Mich. and Toledo, Ohio. Rankings like these, however, can obscure the factors that go into each decision. Housing markets, even within a single metro area, typically have local submarkets. Take New York City, for example. Renting in Manhattan is more affordable than buying. But in suburban Westchester County just miles to the north, buying is the more affordable option. The size of the home can also make a difference. In some markets, renting can be a better deal on larger homes, according to Trulia. In San Francisco, for example, studio and one-bedroom apartments sell for 13.1 times rent, while three bedrooms or larger sell for more than 18 times rent. The Trulia survey does not take into account home price trends, which are another factor for individuals choosing whether to buy or rent. "People will pay more for a home if they expect prices to rise and give them a better return on their investment," said Kolko. Those calculations are about to change, according to Ken H. Johnson, a professor of real estate at Florida International who has studied the buy-vs-rent question extensively. He believes home prices nationally have bottomed. "The ship has turned," he said. "Markets should slowly start to recover. Housing will return to its traditional role of a safety investment." If so, that adds an incentive to buy. And investing in many of the most expensive markets may be even safer. Kolko pointed out that places like Honolulu, San Francisco and Boston have strong long-term growth prospects. They also have little physical space to grow, a factor that tends to keep prices strong. On the other hand, old areas that aren't growing much -- while cheap -- may not return much in the long run. "Buying is much cheaper than renting in slow-growing places with high vacancy rates and land to spare, like Detroit and Cleveland, where prices are unlikely to improve much in the future," he said. -- CNN Money

TODAY, March 14, 2012, is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it. To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for. It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief. But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied. I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work. When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival. Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave. How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence. What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym. Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all. It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact. It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are. These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen. When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there. My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore. I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer. Greg Smith is resigning today as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa. Source: New York Times

The monthly jobs report data came in better than expected at 227,000 new positions created in February, while the unemployment rate remained steady at 8.3%.

Housing Affordability Index Hits Record High Housing affordability conditions have reached the highest level since recordkeeping began in 1970, according to the National Association of Realtors®. NAR’s Housing Affordability Index rose to a record high 206.1 in January, based on the relationship between median home price, median family income and average mortgage interest rate. The higher the index, the greater the household purchasing power. An index of 100 is defined as the point where a median-income household has exactly enough income to qualify for the purchase of a median-priced existing single-family home, assuming a 20 percent downpayment and 25 percent of gross income devoted to mortgage principal and interest payments. For first-time buyers making small downpayments, the affordability levels are relatively lower. NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami, said this latest data underscores buyer opportunities in today’s market. “This is the first time the housing affordability index has broken the two hundred mark, meaning the typical family has roughly double the income needed to purchase a median-priced home,” he said. “For buyers who can qualify for a mortgage, now is a very good time to become a homeowner.” NAR projects the affordability index for all of 2012 will be at an annual high, with little movement in mortgage interest rates or home prices during the year. “Housing inventory levels have declined to a point where conditions are becoming much more balanced in much of the country,” Veissi said. “If access to credit improves, we could see a much more meaningful increase in home sales and broader stabilization in home prices with modest gains in areas with stronger job growth.” -- The Niche Report