This weekend in our open thread, I am going to introduce a new blog we have added to our blogroll:
The Housing Chronicles Blog.
MetroIntelligence Real Estate Advisors
‘Developments’ blog of the Wall Street Journal
I met Patrick Duffy, the writer for The Housing Chronicles Blog at a BIA function a couple of weeks ago. We exchanged cards and spoke about our blogs. After reading his blog, I wanted to include it in our blogroll to provide a different perspective.
Most of our blogroll is bubble blogs because these are the people who have been telling the truth. However, there are other bloggers that focus on housing that also see conditions for what they are that are not totally focused on the bearish side of the equation. I guess you could characterize including this blog as an attempt to be “fair and balanced,” but his writing isn’t the opposite of a bubble blog as much as it is from a slightly different perspective. It is possible to see the world from the eyes of those in the real estate profession without all the BS about “now is a great time to buy”.
Patrick and I come from the same world. I may not share all his views on public policy, but we both share the belief that the housing industry is important to our economy (just not as important as it became during the bubble). For those of you who want to see from the perspective of an industry insider without reading through the BS, I suggest you try out his blog.
With that introduction, I give you a few words from Patrick Duffy:
I
started The Housing Chronicles Blog in late 2007 because I noticed that
most of the ‘housing bubble’ blogs out there tended to only focus on
the bad news, thereby almost making a bubble a self-fulfilling
prophecy. Consequently, I saw the need for a more objective housing
blog that would harness my 20 years as an economics and development
consultant to the building industry. What I try to do is cite online
stories that I think would be interesting to anyone working in real
estate development, as well as provide occasional original articles on
everything from marketing online to builders taking on remodeling work
to stay afloat.
Although I originally intended the blog as a
regional voice, over time it’s expanded to include posts on the
national and international economic and political trends impacting all
types of real estate, and been regularly syndicated to Web sites run by
Reuters, The Wall Street Journal, CNN, USA Today, Builder magazine, Fox
News and Forbes. Besides the blog, I’ve also written on housing issues
for the Los Angeles Times, Builder & Developer magazine, Inman News and, most recently the “Developments” blog of the Wall Street Journal.
My
company, MetroIntelligence Real Estate Advisors, consults with home
builders, land developers, investors, lenders and municipalities on
real estate markets, opportunity analyses for existing land holdings,
and feasibility studies for specific projects. Prior to founding
MetroIntelligence, I was a Managing Director with Hanley Wood Market
Intelligence, which provides data on new home projects in multiple
markets throughout the U.S. I’ve also worked with a public home
builder managing their internal research activities, and first started
in the building industry as an intern with a land developer while
completing my degree in Economics from UC San Diego. In late 2008,
MetroIntelligence joined forces with Beacon Economics in order to leverage that firm’s team of PhD economists and accurate
track record of offering economic forecasts and also to reach out to
their client base including cities and counties, trade associations and
Wall Street institutions.
MetroIntelligence Real Estate Advisors
‘Developments’ blog of the Wall Street Journal
{book5}
I guess since I printed the press release last week, people are sending me more of them. I found this one interesting because it is a sign of our times:
EQUITYLOCK FINANCIAL OFFERS HOMEOWNERS NATIONWIDE FIRST PRICE PROTECTION AGAINST MARKET DECLINES
Home Price Protection™ plans protect equity by reimbursing sellers in proportion to decline in their market’s home price index
AUSTIN, TX – Add “marketproofing” to weatherproofing, childproofing and other common sense protective measures homeowners should take. It’s the kind of peace of mind EquityLock Financial’s new Home Price Protection™ provides, in helping preserve home equity in the event of a sale in a down market.
EquityLock’s contracts, recently made available nationwide, pay homeowners when they sell a home in a market in which average home prices have dropped since their purchase, in direct proportion to the size of their market’s decline, as calculated by the OFHEO’s bellwether local real estate value index. It’s a concept that may help restore a critical sense of confidence to tentative buyers and skittish markets.
It works simply. Mr. Jones buys a home in Orlando for $300,000, and 10 years later, sells it for $290,000. Over that period, Orlando’s home price index falls 10 percent. Upon closing, EquityLock pays Mr. Jones $30,000: his original purchase price of $300,000 times 10 percent. (Assuming the same market decline, that same contract would have paid Mr. Jones $30,000 even if he sold at a profit.)
“It’s a basic fact, which recent events have indelibly underscored, that our most important investment is subject to forces greater than the skills of even the savviest individuals,” said David Camp, EquityLock’s Executive Vice President. “We started working on the concept that would become Home Price Protection while markets were booming, as an innovative form of personal financial management. Recent events have made the need for it all the more apparent.”
While in the marketplace since only late 2008, EquityLock’s product has drawn strong interest from builders, developers and brokers, a number of whom are already offering Home Price Protection to incentivize sales of new construction. That’s in contrast to sweeteners like free granite counters, hot tubs and commercial-grade appliances – nice to have, but with no power to restore confidence to understandably shaky buyers. According to the National Association of Realtors, 75 percent of the nation’s builders and developers are currently offering some form of sales incentive.
While only recently commercially available, equity protection is a concept rooted in two decades of of academic study and a pilot program in Syracuse, New York. Leading, longtime academic advocates of the idea include Yale’s Robert Schiller and other housing economists. Fed Chairman Bernanke recently cited equity protection as a way to help restore confidence to real estate markets.
The product is also available directly to individual buyers of either new or resold homes, in addition to builders, brokers and other institutional customers. Typical premiums for a contract running from 10-15 years currently average 1.5 percent of home closing prices; terms vary by market-based factors. Full information and online applications are available at www.equitylockfinancial.com.
###
The EquityLock product has a lot of basis risk for an individual property. I have a feeling that for small losses there is a lot of noise mixed in with the signal.
For very large declines, whether your house lost 40% or 45% wouldn’t be as material. I would have expected this product to be available with a large deductible at a much lower price. If you put 20% down and have a 20% deductible, that should lead to a considerably lower premium.
You are accurate that it is a completely objective protection against getting caught in downward market trends. It is because of this that the premium is offered within reason; as a subjective or indvidualy policied home would be to susceptable to personal responsability of the homeowner. i.e. homeowner loves the color purple, paints the home purple now the home is worth less.
What is most important is that there is an option for a homeowner to not lose their hard earned equity due to market conditions deteriorating around them.
With an average one time premium of 1.5% (.75% in some markets) of the homes value and protection for 10-15 years…you couldnt ask for better security and peace of mind. Homeowners issurance cost this amount every year for a fire you have a likeliness of 1 and 500,000 to have.
I am a homeowner as well as a company representative and proudly bring this product to market as an antidote for homeowners to protect themselves and their financial future against messes like the current housing economy represents.
…. and the best part… in the scenario that your models are completely wrong and the insurance product fails (which seems highly likely in a 3 year deflationary period), Uncle Sam will step in and bail you out…. what could go wrong?
That is a strong opinion from someone who knows absolutely nothing about the company and product or how risk is managed and claims paid.
We all are angry about current market conditions as well as these so called bail outs.
Unfortunately they are a necassary evil to keep you and I away from the soup kitchen.
We should all learn from the past year or so and certainaly be more cautious; however remember that it is only a small amount of companies who have “let us down” compared to the millions of wonderful, structurly sound companies with great leadership who provide opportunities for us as consumers to protect ourselves and improve our way of life.
You are obviously angry and rightfuly so, as many of us are but aside from becoming a communist country we can always expect new ideas and new products to cross our paths. Some are suitable for us and others are not. Our freedom allows us to make those decisions for ourselves. Be happy that we live in a country with options and the right to refuse. As far as I know the only company with 100% market share is the IRS and would likely fail a customer survey. haha. That tells me that not everything is for everyone and dispersion is what makes us the capitalist model world wide.
Thank you for your opinion and I will assume we will not see your homeowner application coming though anytime soon. 🙂
I think your strong opinion greatly over-shadows mav?s. Is the average 1.5% fee EquityLock collects in the form of a lien on the property or paid out of pocket at closing? How does one cancel EquityLock?s services, or lien if one exists? Does EquityLock become a defacto co-owner with the real owner? Does EquityLock place conditions on the sale of a property that the real owner must adhere to?
Here?s another strong opinion; there is no such thing as altruism in the real world of housing. This ?product? is only going to be available if this company can profit from it, most probably paid by the homeowners but conceivably another government bailout recipient as mav pointed out. There are enough people with their hands in the homeowner?s pocket as it is. But hey, there is a buyer out there for just about everything.
Of course another solution to the issue of catastrophic home losses would be for the government to get out of the housing manipulation business and impose responsible lending practices which would lead to responsible housing market valuations and negate the market for yet another unnecessary tier of home ownership overhead. I think I will wait for housing to correct on basic fundamentals, you needent wait to see my homeowner application coming though anytime soon either.
I am sure this subject will be in the mainstream news before long?
I’m not angry I just understand the business model, maybe better than you. People who purchase this type of product will look at it as an option, and will look to cash out that option in the event that home prices fall further than your model predicts. In that event your company will be bankrupt and will not be able to pay out the benefit.
Thanks for the comments Mav and Consider,
I respect your assumptions but I must bring to light that both are uneducated guesses on the subject and the company. It is very apparent that neither of you have taken the time to either review our website or the business model before commenting.
The program is very simple; sign up and pay a one time fee for 10-15 years of protection. The local index value is pegged at the time of contract. When the home is sold if the market index has decreased the % drop is multiplied by the home value at time of contract and a check is cut. It is very black and white. No liens, no haggling and a homeowner can follow there local index at anytime. Claims are insured and paid at the time of resale.
Waiting for housing to correct based on basic fundamentals is a viable option however some don’t have the luxury of predicting when they may need to sell their home in the next 15 years or where the market will be when they do. Historicaly markets go up and markets come down. Its anyones guess.You can not assume that everyone is willing to take on the same personal risk of these fluctuations as you are.
Lending practices are not the only cause to our current situation. We are all to blame. The mass greed and group herding to “the next big thing”, in this case real estate ROI’s, was the real core cause. When my lawn guy is telling me to go buy condos where he already bought 3 and flipped them for 300% returns, thats a problem. It is the same thing we did with tech stocks and so on, going back hundreds of years.
Buy high and sell low, its the American way. Dont do what makes sense do what makes sense to your neighbor.
All i can say is that when I am at the closing table and every other 3rd party sitting there has some level of protection for themselves (title, lender, seller, realtor) except me…the homeowner, something is wrong. Everyone has brought life rafts for the boat ride except the boat owner. Maybe you feel confident your boat wont sink and just maybe everyone else knows something you dont.
We can have this argument until this page ran out of space. Probably best to just agree that products are not designed for everyone and the main intent of this dialogue is the argument itself and not the viability of the product or homeowner opportunity.
been fun, I wish all the best and lets hope and pray this storm will pass over sooner then later.
David
David,
That business model might work if House Price declines were similar to a fire. A fire is a random and typically one time event. Just because a house in your city burns down doesn’t mean your house will burn down. The problem is that house prices in a region will move down in unison. One house in a neighborhood does not decrease in price, the entire neighborhood does. You can take it to the extreme scenario (the one we are currently witnessing) where home prices decline nationally.
The other humorous thing here, is that your customers are in essence betting on your bankruptcy. They are betting that the future value of 1.5% is less than the potential equity loss. You are self selecting customers who think there is a high probability that the option will be worth more than the 1.5%. This isn’t even a take the money and pray business model…. it’s a take the money and run business model…. for reference please see the one quadrillion dollar credit default swap market…. I’m sure someone at AIG can clue you in…
Ultimately, if we build another housing bubble on 100% financing and loose credit, this kind of insurance would be unnecessary. It is far easier to just continually refinance at 100% LTV at peak valuations and walk away from the obligation if house prices fall. That leaves only two questions: 1. Is someone’s credit score worth 1.5% of the peak value of the property, and 2. Will the issuer of this policy be in business to pay when the market collapses. I am with Mav on this one. Since the market collapse will take out every house not just a select few, it will certainly bankrupt any company providing this insurance. Of course, I suppose they could sell a credit default swap to AIG…
IR, if this company is legit and really wants to be able to pay out the option value of the benefit they will need to be very savvy investing the 1.5%. The good news is there are plenty of sophisticated hedge fund managers, pension fund managers, and investment bankers recently made available to help them with their investment strategy…. it better be a good one!
I am guessing that the insurance company is expecting to hedge their risk with Case Shiller futures in the short term. Unfortunately, the longest exercise dates are not 10-15 years into the future.
There is a place for this kind of insurance. Since the banks already have a high chance of getting stuck with the house is there is a large price decline that lasts, they should be the ones selling this insurance. For example, for anyone with at least 20% down, the bank could charge a moderate premium where the insurance will cover any losses greater than 20%. They would either have to watch a CS-type index for the area (giving the borrower a basis risk), or have to administer individual losses. The thing is, they already would have to administer most of those losses anyhow, in a short sale or foreclosure situation. They just would have gotten more money for doing so.
I am not opposed to this sort of thing from banks. In practice, they might find themselves undercharging in rising markets. The same beliefs about prices going up forever might infect the pricing of gap insurance for homes. Most causes of large financial loss to individuals are insurable, and covering market drops in home prices is a big risk. Of course, nothing prevents the same kinds of problems that happen with homeowners’, auto or workers comp insurance: carrier insolvency, fine print exclusions, predatory pricing, unfair claims handling, and especially for home price coverage redlining. I have no idea what the right premium for home price guarantees for Detroit should be. However, I’m sure the number is huge.
Home price insurance also will have some hazards not seen with other insurance. If we back up to just before the insurance under discussion was offered, selling for less than you owed triggered credit problems. With insurance, it won’t. That means the homeowner has more of a pure option to sell when things are at their absolute worst. Why would they want to do that? They could sell the home they bought for $500k at $300k and purchase the one across the street for $300k. Unlike doing that in 2008, there would be no credit implications.
I tried to price the value of a hit to one’s FICO score a few months ago. I was surprised at the massive spread in what it was worth depending on: the person’s current credit rating; how much outstanding credit they had with universal default provisions; whether they intended to buy a house soon; and especially whether their career demanded a good credit rating. I concluded that for some people a good credit rating was worth about $120k more than a pretty bad one. However, with planning, someone could buy a car, get credit cards without universal default provisions, make any job move they were considering, and then default. If they paid close attention, they could have a decent credit rating again soon.
The people whose credit rating didn’t matter much to them, especially those who already had bad credit, would just give the house back.
I have been thinking about how an insurance company could hedge this bet, and the only thing I can think of is buying a long-term option on a future’s contract. If you bought a 5 or 10 year option on a put, you could insulate yourself against a loss. As long as you are charging the customer more than the cost of this option, you could make money.
Of course, the entire business model relies on customers not being able to or savvy enough to seek out and buy these options themselves.
It’s a pain to try to buy options on an exchange as an individual who does trade any other options. In any case, they are not sized right for individual homes.
The arbitrage on the option would disappear very quickly. Companies like this would quickly be setting the price for the option. I would be surprised if they were trying to hedge for the full loss scenario. Why? It’s too obvious, they actually want to make money.
David,
Feel free to correct any misunderstandings people may have. This open thread is intended to stimulate conversation. I have not read your company policies, and I have offered ignorant comments about it. I do so because I have common sense and a basic understanding of insurance. It does not require reading your company’s sales materials to be skeptical about it working.
You can come here to educate us if you wish. I can assure you we are all too lazy to go read a bunch of self-serving BS on your website. I will go a step further and say that almost no one on earth will go to your website, read your materials, and believe a word of it. You will need to be personable and convincing and pitch your product yourself. Most of us are also going to be skeptical, however most people are also open minded enough to consider rational arguments. Most will recognize a good deal when they see it.
BTW, calling people ignorant and uneducated is not likely to sell many policies…
the challenge here is that you cannot take a sophisticated product and scope it down to a mass mobility conversation and offer opnions on something not understood. It is not that simple and it doesnt work like that. to say that because a market deteriorates the company is bankrupt is very nieve especialy considering the different underwriting variables as well as risk dispersion and hundreds of other factors. To try and simplify look at hurricane zone homeowners insurance. they manage risk through premium, dispersion, predictive factors and most important risk transferance via re-insurers etc. A hurricane doesnt wipe out the carrier it simply gets dispersed throughout many carriers.
anyway thanks for the conversation, i must sign off. I thank you for the input and wish everyone all the best.
Thats all right – we were all too stupid to understand credit default swaps. Luckily the masters of the universe told us it all made sense if you could see the fine print and use your magic decoder ring. You did use a lot of really long words though and I hope that bullshit dispersion… err make that flatulent ruminant end product dispersion works out for you. Also thank you for pointing out that but for Irvine Renters communist rantings that nice bubble would still be going strong and we could all refinance our Helocs. So sad to see a giant economy humbled by a single voice in the wilderness.
> You did use a lot of really long words though
I was especially impressed by “nieve”.
haha thanks IrvineRenter,
you just told me everything I need to know about you and the site.
good day,
And you just told us everything we need to know about you and your product.
Good day,
I sense a public relations emergency.
Ah, so this is what goes on in these weekend ‘open threads.’ All sorts of weirdos come out of the woodwork trying to promote their own agenda.
I read several stories today about how HUD must do something to reduce foreclosures, and how the Obama administration must address the foreclosure issue immediately. In these articles were several comments about possible ‘solutions’ to the mortgage mess. None of these ‘solutions’ mentioned a word about more affordable prices – that means BIG price declines from current levels.
All the “experts” are ranting about how more money must be lent out, or how banks must work out deals with their borrowers to keep them in their homes. The only real solution to the foreclosure *CRISIS* is to let home prices fall far back down to where people can actually afford them, without putting 60% of their take-home pay toward housing expenses. Until that happens, the pain will continue. Happy renting!
Back to open thread…
We all have our real estate heroes, people who bought low, realized there was a bubble, cashed out at the peak and became renters.
I just came across the ultimate hero, Mr. Sam Zell.
http://www.nytimes.com/2009/02/07/business/07properties.html?_r=1
In 2007 Mr. Zell sold (cashed out) a portfolio of 573 commercial properties he had spent 30 years acquiring to the Blackstone Group for $39 billion. Today, nearly every one of the properties sold by Mr. Zell is underwater on debt.
Way to go Mr. Zell, you are my ultimate hero! Now you can repurchase these properties for a fraction of what you sold them for. Good for you.
I saw that one too. He is either very lucky or totally brilliant. He might be both.
Changing the subject since its an open thread… Full page Ad in todays NY Times from John Strumpf CEO Wells Fargo. Interesting screed announcing that those junkets were paid for “out of our profits” Wells Fargo cancelling all its employee recognition events will only hurt the team members and damage the airline and hospitality industry as collateral damage. I guess all of that $25 billion bailout was some sort of voluntary taxpayer contribution to the profits and we had no right to interfere with the Las Vegas junket.
Outsider — I saw that ad this morning by Wells Fargo. We agree on the ad’s content. I was infuriated enough by it to go to Wells Fargo’s site in order to send to email them about this further waste of tax-payer dollars. I am not a Wells Fargo customer so I was unable to do so. If anyone knows a contact point at Wells Fargo to send a comment to, I’d love to have it.
The content of my email would be something along the lines that I would have a hard time considering a change to Wells Fargo when they pay for such self-serving ads, etc.
-sorry about the typo/editing error- it should read “… in order to email them…”