Housing Bubbles: Jumbo Mortgages = Jumbo Problems

Housing Bubbles: Jumbo Mortgages = Jumbo Problems

Hugh Pavletich FDIA
Performance Urban Planning
Christchurch
New Zealand

March 2, 2010

In early February this year, the New York Federal Reserve released expanded data on credit conditions .

The release states –

The Federal Reserve Bank of New York today released expanded data on consumer credit conditions in the United States. The data now constitutes one of the most robust sets of publicly available data on mortgage delinquencies and foreclosures.”

“Data released today include information on prime and jumbo mortgages, as well as detailed data on Freddie Mac, Fannie Mae, Federal Housing Administration and Veterans Affairs loans. In addition the coverage is extended to the state and county level for most series and US averages are now available for benchmark comparisons.”

“This information is aimed at helping government agencies, community groups, commercial institutions and other practitioners better understand, monitor and respond to local conditions associated with foreclosures and credit and mortgage delinquencies.”

The extent and condition of Jumbo Loans at the States level when comparing Texas and California is instructive.

In 2008 the total number of housing units in the United States was 129.065 million, with 13.7 jumbo loans per 1000 housing units. The New York Federal Reserve Report states that there are 1,764,401 active loans of which 6.1% are in foreclosure; 2.7% 30 – 59 days past due; 1.6% 60 to 89 days past due with 6.9% 90 days past due. The percentage of Adjustable Rate Mortgages (ARMs) overall is 50%.

The total number of housing units in the State of California is reported as 13.393 million with 63.1 jumbo loans per 1000 units. There are 845,792 active jumbo loans with 6.1% in foreclosure; 2.7% 30 – 59 days past due; 1.8% 60 to 89 past due with 9.5% 90 days past due. The percentage of adjustable rate mortgages is 91.6%.

The total number of housing units in the State of Texas is 9.598 million, with 3.4 active jumbo loans per 1,000 housing units. There are 32,267 active jumbo loans with 1.4% in foreclosure; 1.7% 30 days past due; 0.8% 60 – 89 days past due with 2.2% 90 days past due. The percentage of adjustable rate mortgages is 36.7%.

Although California has just 10.3% of the United States housing units, with 845,792 active jumbo loans of the national total of 1,764,401, this indicates 48% of the United States jumbo loans are in California. In contrast – Texas with 7.43% of the nation’s housing units and 32,267 jumbo loans, has just 1.83% of the nations jumbo loans.

The United States current population is 308.8 million, while California’s would be near 37.5 million now and Texas around 25 million. While California has 12.14% of the United States population, these latest Federal Reserve figures would indicate that it has just 10.3% of the total housing units. Texas with 8.1% of the United States population has 7.43% of the United States housing stock. Both States have large percentages of Hispanic’s, where household sizes tend to be higher.

California with an estimated population of 37.5 million and 13,393 million housing units, has approximately 357 housing units per 1000 population, while Texas with a population of 25 million and approximately 9.598 million housing units has 384 housing units per 1000 population. This would suggest that California should have at least 14.400 million housing units – at least a million more than is currently the case.

The State of California however, has in reality made it illegal to provide affordable housing, where people wish to work and live.

The California Building Industry Association reports that during 2009 there were just 36,289 residential permits issued – less than 1 / 1000 population, the lowest of any jurisdiction with population growth in the United States and the other countries covered by the Annual Demographia Surveys.

It is likely California’s permitting and housing construction rate during 2009 was worse than during the Great Depression of the 1930’s.

The Annual Demographia International Housing Affordability Surveys (this years 6th Annual Edition; 5th; 4th; 3rd and 2nd issued early 2006) of the major urban markets of what is loosely termed the Anglo world, illustrate clearly why there are excessive mortgages and consequentially excessive problem mortgages in California.

Overall at the bubble peak, California housing of its major urban markets was approximately 8 times gross household earnings, while in Texas, housing stayed at around 2.5 times gross household earnings. Soon after the California housing bubble collapsed, triggering the Global Financial Crisis, Herb Greenberg reported that financial institutions in California were lending up to in excess of 11 times gross household income. He provides an example of a household with an annual income borrowing a million dollars near the peak of the inflating California housing bubble.

As the Annual Demographia Surveys clearly illustrate, housing should not exceed 3 times gross annual household income, with mortgage debt loads of approximately 2.5 times gross annual household income. How a normal affordable housing market should perform, is again clearly defined on the Welcome Page of the Performance Urban Planning website and it is past time politicians, economists and planners understood the basics of structural urban economics.

It is rather remarkable the finance sector has yet to understand the consequences of lending in to bubble markets and price the risks accordingly.

It is however just a matter of time before they “learn by experience” in Australia, as Mish (Mike Shedlock) explained recently, as did Professor Steve Keen of Debtwatch and Edward Chancellor of The Financial Times. The Australian media has yet to ask the State Planning Ministers, when they intend to start dealing with the artificial regulatory barriers, to allow new housing lots on the fringes of their cities, priced at between $A30,000 to $A50,000, so that affordable housing can be provided.

In contrast however, the New Zealand Government has started in to the process (writers response) of dealing with the real structural issues, to ensure that over a reasonable and realistic time frame, housing affordability is restored.

ENDS