Housing and Unemployment Rates

Last Friday, after the Bureau of Labor Statistics (BLS) reported a surprising drop in the unemployment rate, former General Electric CEO Jack Welch tweeted his disbelief:

@jack_welch Unbelievable jobs numbers..these Chicago guys will do anything..can't debate so change numbers

5 Oct 12

Mr. Welch's 1.3 million followers on Twitter immediately began to comment, mostly negatively. The blogsphere quickly followed, with numerous commentators weighing in.


Most seemed to feel that it seemed highly unlikely that the BLS - mostly composed of career employees whose jobs will not be threatened regardless of who is the next President - would deliberately report false numbers to help President Obama.

Here, for example, is Reuters columnist Felix Salmon:

Does he have any evidence that the Chicago guys might be manipulating data? No. Does he think it’s even possible for the Chicago guys to be manipulating the data? Evidently, he does. What makes him say that? He won’t say. But is it a legitimate question to raise? In Welch’s eyes, absolutely, yes. If you’re Jack Welch, it seems, any time there’s US data which makes the government look good, the question can and probably should be raised: might the data be wrong? Or, might the government be manipulating it?

http://blogs.reuters.com/felix-salmon/2012/10/09/conspiracy-jack/

Eventually the tumult became so great that Welch announced on Monday that he would no longer write articles for either Fortune magazine or Reuters, largely due to their critical comments about his tweet.

In comments after his tweet last Friday, Mr. Welch indicated that his disbelief in the BLS report was largely based on his own personal recent experiences.  He remains involved with a number of different companies, and all of them continue to struggle; ergo, the overall U.S. economy must be struggling.

Jack Welch made a career relying in many cases on his instincts; even his autobiography is titled "Jack: Straight from the Gut".  It is not surprising, then, that he continues to believe that his instincts are often the best guide to what is really going on in the world around him.

I think that Mr. Welch is wrong, but like him I am relying on my "gut instincts".  My belief that last week's improvement in unemployment is real, and not an election year gimmick, is largely based on the significant improvement in housing that seems to be occurring in many parts of the nation.

Housing is a crucial part of our economy.  When new homes are built, or when existing homes are sold, our economy benefits.  Homes have to be furnished, repaired, and maintained, all of which involve businesses that employ thousands of people.

When the housing boom turned into a bust in 2008, housing activity came to a screeching halt.  Even now, when low mortgage rates have made home ownership more affordable than it has been for years, there still is a marked preference for renting versus buying.

But this is slowly changing, and as housing improves so too does the overall employment picture.

Last weekend I happened to watch an interview with Warren Buffett that appeared on the PBS program "Charlie Rose" in August 2011.

In the interview, Buffett noted that Berkshire Hathaway owns 70 different companies.  At the time - again, this is 14 months ago - the companies that were either directly or indirectly associated with housing were the ones doing the poorest in Berkshire's portfolio.

When housing recovered, Mr. Buffett noted, he expected unemployment to plummet, since so many different parts of the economy are related to the housing industry.

He says in the interview that he expected that unemployment in the United States would be 7.3% by the time of the Presidential election (it was around 9% at the time).  In the summer of 2011 this seemed wildly optimistic, but now seems at least plausible.

Housing is recovering, and this could be the reason that employment numbers are surprising on the upside.  Even the mortgage lenders at my employer Boston Private Bank and Trust Company said in a meeting this morning that the housing market in the Greater Boston area is stronger than it has been for years.

Here's the full interview with Warren Buffett if you have a spare hour:

What Are The Mortgage-Backed Securities Markets Telling Us?

For several years I managed portfolios of mortgage-backed securities for institutions and mutual funds.

Mutual funds investing in mortgage-backed securities guaranteed by GNMA ("Ginnie Mae") were very popular in the late 1980's and early 1990's. Ginnie Mae carries the full faith and credit of the United States government, so investors are protected from losses from mortgages. Other funds backed by FNMA ("Fannie Mae") and FHLMC ("Freddie Mac") also were very appealing, even though these agencies carried the implied, but not direct, government guarantee.

The appeal of high dividend payouts from government guaranteed mortgages was very attractive to investors dependent on income, especially retirees. For example, I was lead manager on a Ginnie Mae mutual fund targeted to AARP members which grew to a peak of $8.2 billion in five years.

(Of course, Ginnie Mae funds can still lose money if interest rates rise, like they did in 1994. After investors learned this harsh reality, the popularity of Ginnie Mae funds understandably waned).

There are several dynamics to managing mortgage-backed securities, but one of the most important is to try to anticipate prepayment speeds.

As we all know, mortgages can be paid prior to maturity for any number of reasons. When you sell your home, for example, you typically pay off your mortgage. Or if mortgage rates fall, many homeowners will refinance their existing mortgages into new, lower rate mortgages.

One other reason for the early prepayment of mortgages is something that we used to not focus on too much: namely, existing mortgages on a home that is foreclosed will be paid off early when the home is resold at auction.

If you're a manager of a mortgage-backed securities portfolio, then, trying to figure out the approximate rate of prepayment can make the difference between a successful investment and one that produces only mediocre results.

In a period of declining interest rates, the older higher rate mortgages are typically refinanced, but at varying rates of speed. Today, with so many homeowners facing the unpleasant reality that their homes are worth less than their mortgages, refinancing speeds have been considerably slower than economic models would suggest.

While this has resulted in very attractive returns for mortgage-backed investors, it also tells a fairly dismal tale of the state of the housing market in the United States, as Floyd Norris points out in this morning's New York Times:

In normal times, old securities with relatively high interest rates would have virtually disappeared as owners refinanced, paid off the old mortgages and took out loans at lower rates. But these are not normal times, and speculators now are profiting from the woes of homeowners who cannot refinance but have not defaulted. Because Fannie and Freddie guarantee the loans, buyers of those securities are sure to recover the amounts lent.

Prices of high-coupon mortgage securities rose to unprecedented heights earlier this year as investors concluded that those who had not refinanced by then would never be able to do so, and that owners of the securities would be able to collect above-market interest rates for a long time. Those prices have declined, but not by very much, since the administration announced its refinancing plan.

http://www.nytimes.com/2011/12/02/business/time-to-accelerate-the-housing-recovery-floyd-norris.html?pagewanted=2&ref=business

As Mr. Norris points out, many economists in agreement that true economic recovery in the United States will not begin until housing improves.

The unfortunate truth is that until some resolution is reached on how to handle underwater mortgages - and take some of the "juice" away from mortgage-backed investors - our economy recovery seems destined to be muted.

Why Buy A Home Now If Prices Are Going to Continue to Fall?

Robert Shiller had a good article last weekend in the New York Times about the role that future price expectations might have on overall economic activity, particularly as it relates to housing.

Shiller, of course, is the Yale professor who famously wrote the book Irrational Exuberance in 2000, which correctly forecast the popping of the technology stock bubble.

He then turned his attention to the housing market, and together with Karl Case of Wellesley College came up with the Case-Shiller index of housing prices that is now widely followed.

Shiller has also been prescient about the future course of housing a few years ago, and even wrote a bearish chapter on housing in one of subsequent editions of Irrational Exuberance.

Dr. Shiller was in the news last week with the forecast that housing prices could decline -25% from current levels.

He subsequently backpedaled somewhat on this forecast - noting that predicting the trend of housing prices was like trying to predict the weather - but I think the point remains that he is more bearish on housing than most economists.

That said, many surveys of people actually involved in the business of building and selling houses are more in line with Professor Shiller.

For example, Diana Olick of CNBC posted a tweet on Twitter that indicated that a recent survey of home builder sentiment reached lows not seen since February 2009.

The problem is largely expectations rather than fundamentals. Low mortgage rates and falling house prices has driven affordability of buying a new home to levels where, on a purely financial basis, it makes more sense to buy than rent.

Yet no one wants to buy and watch the value of their new home drop by another 10% or 20%. Or, put another way, the expectation of lower future home prices has become a major impediment to any improvement in housing.

This is the point that Shiller made last Sunday:

Even for people who have other reasons to buy a house, there may be little urgency to do so. Our 2011 survey found that the median expectation for home price appreciation next year is just 1 percent. So it won’t be surprising if new home sales remain abysmally low and few jobs are created in the hard-hit construction industry. And it shouldn’t be a shock if the personal savings rate stays at around 5 percent, as it has recently, up from around 1 percent in 2005. This would mean that consumer spending will not drive a strong recovery.


The Sickness Beneath the Slump - Economic View - NYTimes.com

Hopefully he is wrong in his bearish sentiment, but given his track record it's hard to bet against Robert Shiller.

Housing Woes Continue

I don't know about your neighborhood, but in my town "for sale" signs are sprouting up in front of houses faster than the dandelions are appearing.

Spring, of course, is historically the best time to sell a house, since families want to be able to be able to move into a new home prior to the start of school next fall.

Problem is, housing sales are tepid at best, and with so much inventory on the market is hard to see how house prices will be increasing any time soon.

Buyers are reluctant to buy when there is so much downward pressure on house prices, and are instead renting.

As I have written on numerous occasions, borrowing to buy real estate is the largest part of credit demand. If housing and commercial real estate sales are sputtering, demand for credit will also remain weak, and interest rates will stay at historically low levels.

Yesterday's Financial Times wrote that the home price tracking company Zillow reported that:

...house prices dropped -3% in the first quarter and more than -8% year on year - their steepest rate of decline since the months after Lehman Brothers collapsed.

Oh, and in other good news, Zillow estimates that 28% of US homeowner have mortgages that are higher than the value of their homes, i.e "negative equity".

As the FT noted:

For perspective, in the UK during the mid-1990's, a period often remembered as the slump of housing slumps, 11 per cent of mortgages were in negative equity.

So its not surprising that anyone connected with the housing market is reporting very slow business.

Yesterday the New York Times carried an article discussing the reduction in support that the federal government is planning for higher end houses:

For the last three years, federal agencies have backed new mortgages as large as $729,750 in desirable neighborhoods in high-cost states like California, New York, New Jersey, Connecticut and Massachusetts. Without the government covering the risk of default, many lenders would have refused to make the loans... But now Democrats and Republicans agree that the taxpayer should no longer be responsible for homes valued well above the national average, and are about to turn a top slice of the housing market into a testing ground for whether the private mortgage market can once again go it alone. The result, analysts say, will be higher-cost loans and fewer potential buyers for more expensive homes.


Fed Retreat on Big Mortgages May Hurt Upscale Housing - NYTimes.com

If you live in the most parts of the country, the government's move seems logical - why help out houses priced far above what most houses in their region sell for?

But on the coasts the reduction in government support for housing seems premature.

Housing Continues to Suffer

Housing is a mess.

While most of the attention of financial analysts and media is focused on the rapid rise in the prices of commodities like oil and gold, housing prices in many parts of the country continue to tick lower.

The problem is largely psychological. Even if they can afford it, no one wants to buy a house if they think prices will be lower 6 months ago.

I had a long conversation last week with someone who is very involved in the home mortgage market in the Boston area.

After her children graduated college, she and her husband decided to "downsize" and sell their house.

After sitting on the market for several months, they finally sold their home, but at a price well below assessed value ("my neighbors are not happy with us", she said with a rueful smile).

So what now?

Well, this well-connected, savvy mortgage lender has decided to rent. She, like many Americans, believe that housing is trapped in a downward price spiral. While renting a home lacks that psychic appeal of owning real estate, at least you don't feel like your retirement assets are locked up in a depreciating asset.

Here's the change of housing prices since their peak in 2006, courtesy of the blogger West Wing:

Home prices (median) since '06 peak: Miami -32%, Tampa -33%, L.A. -35%, San Diego -37%; Phoenix -50%; Ft. Myers -54%; Vegas -55%

Little wonder that most Americans are avoiding buying homes.

Bloomberg carried an article about this trend yesterday. Here's an excerpt, with the full link below:

The most affordable real estate in a generation is failing to lure buyers as Americans like Pauli sour on the idea of home ownership. At the end of 2010, the fourth year of the housing collapse, the share of people who said a home was a safe investment dropped to 64 percent from 70 percent in the first quarter. The December figure was the lowest in a survey that goes back to 2003, when it was 83 percent.

“The magnitude of the housing crash caused permanent changes in the way some people view home ownership,” said Michael Lea, a finance professor at San Diego State University. “Even as the economy improves, there are some who will never buy a home because their confidence in real estate is gone.”

Americans Shun Most Affordable Homes in Generation as Owning Loses Appeal - Bloomberg

Deflation Watch Continues: Housing Goes Splat

I normally would not comment on monthly data but the most recently housing numbers are, well, sobering.

Here's the data from Bloomberg's story today (I have added the emphasis):

Purchases of new U.S. homes unexpectedly declined in February to the slowest pace on record and prices dropped to the lowest level since December 2003, adding to evidence the industry is floundering.

Sales decreased 16.9 percent to a 250,000 annual pace, figures from the Commerce Department showed today in Washington. Economists surveyed by Bloomberg News projected a gain to a 290,000 rate, according to the median estimate. The median price fell 8.9 percent from the same month in 2010.

But wait, there's more good news:

The median sales price dropped to $202,100 in February from $221,900 a year earlier, today’s report showed. Last month’s median price was the lowest since $196,000 in December 2003. The share of homes sold for $500,000 or more fell in February, matching January 2009 as the lowest on record.

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=agKm7PCj3ijA

Now, I'm sure some of these figure can be blamed on the horrible weather on the east coast in February.

Still, I'm pretty sure that the west coast had seasonable weather last month, so it can't be all weather-related.

And you would think that plummenting house prices would lead to at least some increase in new home sales.

No, actually: Even with home prices dropping by 14%, new home sales were the lowest in the 50 year history of the data.

Housing is one of the biggest components of the typical household expenses, so these figures have a real impact.

Housing Malaise Points to Deflationary, Not Inflationary, Pressures

The papers continue to be full of talk of inflationary pressures. Oil prices have rocketed to nearly $120 a barrel, propelled by the unrest throughout the Middle East. Other commodity prices have stayed high as well.

Most strategists think interest rates will move higher as well, despite the fact that most bond yields have moved lower over the past few weeks.

However, housing prices continue to drift lower, despite massive efforts on the part of the federal government to stimulate housing demand. Nearly 1 out of 11 houses in the United States now stand vacant, and 1 out of 4 mortgages are underwater.

In other words, those looking for inflationary pressures have obviously not been looking at housing, despite the fact that housing accounts for nearly 40% of the typical American household budget.

I ran across this article a couple of days ago in the New York Times, and came away suitably concerned. Here's an excerpt:

Robert J. Shiller, the Yale economist who is the author of “Irrational Exuberance” and who helped develop the Standard & Poor’s/Case-Shiller Home Price Index, put himself in this last group. Mr. Shiller said in a conference call on Tuesday that he saw “a substantial risk” of the market falling another 15, 20 or even 25 percent.

The 20-city Case-Shiller composite is already off 31.2 percent from its peak, according to data released Tuesday. Average home prices in Atlanta, Cleveland, Las Vegas and Detroit are below the levels of 11 years ago. A drop the size that Mr. Shiller says he thinks could happen would put Chicago, Dallas, Charlotte and Minneapolis there, too. It would create a lost decade for housing in much of the country even before the effects of inflation.

Mr. Shiller said several political trends indicated a dreary future, including the uncertainty over the mortgage holding companies Fannie Mae and Freddie Mac and proposals to reduce the mortgage tax deduction.

Home Prices Slip in Most U.S. Cities, Case-Shiller Index Shows - NYTimes.com

I hope Professor Shiller is wrong - the article goes on to cite several other industry experts who do not believe the outlook is as dire as he portrays - but I do think he raises some valid concerns.

More on Housing

Ben Bernanke was on 60 Minutes on Sunday discussing, among other things, why the second round of quantitative easing by the Fed was necessary. I agree with the Chairman, although I think the economy could also use some help from the fiscal side (but this seems unlikely to happen).

Much of the Fed's attention is focused on housing, which continues to be mired in a deep slump. I posted a couple of pieces last week about housing, but recent data that has been released reinforces the problems in this very important sector of our economy.

Interesting, although most of us would think that the way to increase demand for housing would be to simply reduce the cost of a home, this really doesn't seem to be the case. Management at Pulte - the largest publicly-traded home builder in the United States - mentioned that they saw no point in reducing the prices of their unsold inventory since consumer confidence, not prices, is what is holding back buyers.

Floyd Norris had a short piece in the New York Times on Saturday noting that lower price houses seem to be dropping at the fastest rate, which would be consistent with Pulte's comments. Here's an excerpt from his column, with the link below:

The S.&P./Case-Shiller indexes released this week showed widespread declines in home prices in the third quarter of this year as the market suffered from the removal of temporary tax credits that had led to a small rally in home prices earlier in the year. No region had lost more than 5 percent in a quarter since mid-2009, but that happened to Phoenix in the third quarter.

Home Value Sinking Fastest at Those Priced Low - NYTimes.com

The biggest fear about the future that Pulte expressed was the possible privatization of Fannie Mae and Freddie Mac. According to management, without these two government agencies there would be virtually no financing available for home buyers, since the private market has virtually disappeared.

This morning's Financial Times had article talking about the virtual elimination of the private mortgage securities market. Here's an excerpt:

The lack of new {private mortgage} deals does not mean that there are no new home loans being made in the U.S. Instead of being privately financed, new mortgages are almost entirely funded by the U.S. government, through its backing of mortgage agencies such as Fannie Mae and Freddie Mac. For nearly three years, these agencies have bought the majority of new mortgages from banks and repackaged them into government guaranteed mortgage-backed securities.

However, the private market has been shrinking: It is down by nearly $1,000bn since its peak in 2007. Indeed, {UBS's Paul} Jablansky says this has buoyed demand for other existing debt. Investors are receiving $20bn a month from expiring MBS and re-investing some it in deals that still exist.

In other words, whether the Fed's policies will be effective in helping housing may depend largely on factors outside of its control, such as consumer confidence and the fate of Fannie and Freddie.

"Could Your Children Buy Your House?"

I went to go hear a presentation on the housing market at a luncheon sponsored by the Boston Security Analysts Society yesterday.

It was a good meeting, even though the tone of the remarks by the speakers was relatively bearish on the outlook for housing over the next couple of years.

Present on the panel were Karl Case, a Wellesley College professor who also is a founding partner of Fiserv Case Shiller Weiss(the latter publishes the widely followed Case Shiller index of housing prices); Laurie Goodman of Amherst Securities; and Brian Kinney of State Street Global.

I won't go through the whole presentation here; I have attached a link to an excellent summary done by Susan Weiner at the bottom of this post.

The one point on which I do want to comment involves the role of demographics on important economic areas like housing.

In the course of his remarks, for example, Professor Case remarked on the puzzling fact that even though new housing stock is being added an incredibly low rate (echoing the comments from Pulte Homes that I discussed yesterday) the vacancy rate of existing housing remains very high.

It is curious, noted Case, that even though housing would seem to be more affordable today than it has been for decades (through a combination of lower prices and low mortgage rates) the vacancy rate remains stubbornly high. Logically it would seem that vacancies should be declining if there is no new housing stock being added, and yet that has not been the case.

The answer might be that the population of the United States is lower than current estimates. The results of the 2010 census will not be published for some time, but Case hypothesized that maybe the official figures will show that we simply have less people to buy houses than we think, and therefore econometric models need to be adjusted accordingly.

While Case was talking, I was reminded of an anecdote that a very good investment strategist named Chuck Clough used to relate. Chuck worked for Merrill Lynch for a number of years, and was in my opinion an excellent source of investment insights and ideas.

Chuck told me that when he would give talks to groups of senior citizens he would often discuss the future of housing prices. This was back in the 1990's, by the way, long before the housing bubble.

Chuck would look out into the audience of people whose children were mostly grown and ask:

"How many of your children can afford to buy your house?"

Laughs and guffaws would inevitably ensue - what a silly idea, the idea that today's young adults in their 20's would be able to buy their parents' houses.

But then Chuck would ask a follow-up question:

"Well, if your kids can't buy your houses, who will?"

Silence.

Even though Chuck posed this question more than a decade ago, it still seems relevant today, especially when it relates to house prices.

As we are all aware, real incomes have been stagnant for at least the last 10 years, except for the very highest income bracket. Young college graduates today are struggling to find any work, much less a good-paying job. Yet it remains the case that most people start to buy homes when they are in their late 20's, or early 30's, when they are starting a family. But if they can't afford a new house - even after prices have fallen from a few years ago - this process becomes impossible.

In short - if you want to get really bearish on housing - you could make a case that house prices still have further to fall in order to get prices in line with real incomes.

This would also have implications for older Americans who have viewed their homes as a source of savings. We have always assumed that at some point in your life you will sell your house and use the proceeds to fund your retirement. What if these funds will not be as munificent as we have come to expect?

Food for thought.

http://ht.ly/1ahm33

Is the Housing Market Worse Than the Official Numbers would Indicate?

I went to go hear the management of PulteGroup (formerly known as Pulte Homes) yesterday.

Pulte is the nation's largest homebuilder, building single-family homes across the nation. The company also develops residential communities. In other words, if any company has a decent read on the housing market, it would be Pulte.

Unfortunately the story they painted was not a good one. Housing sales across the nation are poor, and most of their sales agents are not painting an optimistic picture for 2011.

Pulte will be focusing on two areas next year: cutting administrative costs (i.e. layoffs) and reducing their debt burdens. They don't see a lot of opportunity to buy land for future development; most of the significant plots they have looked at are either less desirable for building new homes (e.g. the land is near electric power lines or power plants) or there is significant local resistance to more housing developments.

If all of this is not gloomy enough, there doesn't seem to be much they can do about boosting sales. The obvious response - cutting house prices - doesn't seem to be working. Instead, Pulte feels that the real problem is buyer paralysis: no one wants to buy a house now since most are expecting prices to move lower in the months ahead. As they put it, buyers are afraid of feeling stupid by overpaying today.

Then you add this twist: Apparently there is a movement in Washington to privatize both Fannie Mae and Freddie Mac. In their opinion, this would be disasterous for their business, since these two agencies seem to be the only ones offering mortgages for home buyers. Without Fannie and Freddie, they felt, whatever meager housing demand remains would collapse. They even felt that eliminating the mortgage interest tax deduction (one of the current proposals of the deficit reduction committee) would be less harmful to their business than the removal of Fannie and Freddie from the market.

Pulte's gloomy outlook echos comments from another home builder, DR Horton, a couple of weeks ago. Horton too is very pessimistic on the prospects for 2011.

What's interesting about Pulte's comments is how different their view than that of many economists. Already you are seeing talk in the media that housing has stabilized, and that some areas are seeing signs of improvements in house prices. However, these comments seems to be largely based on broad market indices like the Case-Shiller index rather than people with "feet on the ground".

Out of this picture of gloom comes only one hopeful thought: in many industries, companies are often the last to actually see the improvements in business that are coming down the pike. These same housing developers that are so gloomy today were also very optimistic just a few years ago, and were aggressively adding new housing developments to their portfolios.

But if Pulte, et.al. are correct, next year might not bring the recovery we all want.

What to Know About Home-Sale Tax Rules - WSJ.com

I didn't see this yesterday on the Wall Street Journal's blog but it came across Twitter today.

Thought it was a pretty useful summary of capital gains taxes on home sales (if you're lucky enough to still have a gain!). Here's a sample:

Here is how the basic rules work: In the late 1990s, then-President Bill Clinton signed legislation that officials said at the time would eliminate capital-gains taxes for most people who sell their primary home for a profit. That legislation generally allowed most sellers to exclude a gain of as much as $500,000 (if married and filing jointly) or as much as $250,000 (if single).

To qualify for the full exclusion, you typically must have owned the home -- and used it as your primary residence -- for at least two of the five years prior to the sale. For more details, see IRS Publication 523 ("Selling Your Home") on the Internal Revenue Service website (www.irs.gov).

What to Know About Home-Sale Tax Rules - WSJ.com

Risk to Global Economy: China's Real Estate Bubble Threatens to Burst - SPIEGEL ONLINE - News - International

I don't know whether this is a big deal or not, but it seems to be getting more and more press.

Analysts have been calling for a correction in Chinese real estate prices for years. However, real estate busts typically don't happen quickly, but rather a slow-moving train that rapidly gains steam.

The chart I have attached here first appeared in the New York Times in 2007, at the peak of the real estate boom in the U.S.

The data on U.S. housing had been compiled by Yale professor Robert Shiller, who at the time was calling for a major correction in house prices (Shiller, of course, had been prescient in 2000 by publishing Irrational Exuberance, which correctly called a stock market top).

It seems fairly obvious in retrospect that some sort of correction was needed, but most (including Fed Chairman Bernanke) did not foresee any major trouble ahead.

When I first started traveling to Japan in the late 1980's, everyone was talking about the high cost of real estate, but the grind lower didn't really begin until several years later. More recently, in this country, house prices began to spike to unsustainable levels in 2004, yet it really wasn't until the latter part of 2007 that we saw any real signs of significant problems.

So it could be that China may be headed for a problem.

Here's an excerpt from the piece (have added the highlights):

China, which long seemed immune to the global crunch, now faces the threat of a homemade real estate crisis. This could spell trouble for many local governments, which in some cases have financed almost a third of their major infrastructure projects, like airports and train stations, by selling agricultural land to real estate sharks.

Chinese municipalities sold 319,000 hectares (788,000 acres) of land in 2009 alone, an increase of 44 percent over the previous year. Local governments have borrowed heavily from banks, in the anticipation that land prices would continue to rise...

In some cities, the number of new residential units has already exceeded the number of new households. In major cities like Beijing and Shanghai, the Chinese pay about 20 times their annual salary to buy a condominium. By comparison, this factor is only about eight in expensive major world cities like Tokyo.

Risk to Global Economy: China's Real Estate Bubble Threatens to Burst - SPIEGEL ONLINE - News - International

Walking Away From Million-Dollar Mortgages - NYTimes.com

When you hear or read about problems in the housing market, usually the discussion is focused on the lower end, subprime mortgages. But it appears (judging from this article in the New York Times this morning) that people are walking away from their mortgages on the upper end as well.

Here's an excerpt:

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Even more disturbing:

The delinquency rate on investment homes where the original mortgage was more than $1 million is now 23 percent. For cheaper investment homes, it is about 10 percent.

Think about that: roughly one out of every four homes in ritzy vacation spots like the Hamptons or Nantucket that have huge mortgages are at least delinquent. Given the fact that if they can't sell vacation homes in the middle of summer, I would bet that by this time next year they are in foreclosure.

Walking Away From Million-Dollar Mortgages - NYTimes.com

Now the tone of the article is one of mild outrage. And while I am not suggesting that we should have any sympathy for these folks, I would also take a step back and ask whether their behavior is any different than what goes on in corporate America.

Corporations walk away from their debt obligations all of time: just look at the airline industry as a prime example. When a company files for Chapter 11 bankruptcy, it is usually thought to be the act of thoughtful managements trying to figure out a way to save jobs (including their own).

Even countries will default - I mean, how many times has Argentina defaulted on its debt over the last century, only to come back to the markets and be greeted with open arms (and open wallets)?

From a purely economic standpoint, then, these borrowers who owe over $1 million on their primary or secondary homes are doing a very rational act: cutting their losses.

Problem is, we don't expect individuals to act as corporations. But if this starts a trend, it could have very serious implications for the housing market.