Widely seen as a forerunner in national real estate trends, San Diego County is being viewed “with some trepidation” by lending giant Fannie Mae as its housing market cools.

“San Diego is one of the areas of the country that has had incredible . . . price gains,” Fannie Mae Chief Economist David Berson said yesterday during an economic and mortgage market report. “There is no question that the San Diego housing market has slowed.

“Inventories have surged in San Diego and the surrounding areas,” he continued. “Home price gains . . . are certainly down from their peak and perhaps will fall.”

San Diego is one region that is experiencing low affordability after a rapid and unsustainable rise in home prices, Berson said. Major metropolitan areas on both coasts are experiencing their lowest affordability levels “since the mid-1980s, when interest rates were considerably higher than they are now.”

While San Diego County’s economy is basically sound, the strong presence of investors in the housing market makes it subject to price fluctuations, he added. “We view it with some trepidation. It is one of the areas we are concerned about.”

Berson said the condo market here is at risk “because the supply has gone up dramatically.” There have been “lots of condo conversions. The investor share probably has been far more active in the condo market.”

Investors favor condos over single-family homes because they’re considered to be easier to sell quickly, he said. “Condos are far more commodity-like than single-family homes.”

Berson said the national housing market will continue to slow.

“We have had five years of record home sales,” he said. “That is unprecedented in the modern era. New home sales this year will fall by 9 to 10 percent. . . . Existing home sales, we think they will fall this year by about 7 to 9 percent.”

Union Tribune

Past performance may not predict future results, but it certainly captures the assets required to obtain future management fees.

Futures on the Past

This little diversion into the nature of past, present and futures markets was prompted by a review of the Chicago Mercantile Exchange’s housing futures. All futures markets are based on the principle of indifference. If interest rates are at 5% and storage costs amount to 1% of the underlying asset’s price, then a one-year future should be priced 6% over the current cash market price. You should be indifferent to the choice of buying the asset now and storing it yourself or buying it in the futures market for delivery a year from now.

Futures markets also have a large measure of insurance built into them. Producers sell futures to lock in a price to be received, and consumers buy them to lock in a price to be paid. Risk management is understood, almost without saying, to involve events that will happen in the future.

This is not the case with housing futures. Each of the contracts is based on the S&P/Case-Shiller (CSI) home price indices. They cover metropolitan areas of Boston, Miami, New York, San Diego, San Francisco, Washington, D.C., Chicago, Las Vegas, Denver and Los Angeles, as well as a composite national index. That in itself does not present a problem; we have close to 25 years of experience trading index-based, cash-settled futures on things such as stock indices.

Frequency becomes a problem. Unlike a stock index that is refreshed several times a minute, the CSI indices are released at 1:15 p.m. Central Standard Time on the last Tuesday of every calendar month. The release is of necessity for data collected for previous months. For example, the August report will cover the data collected for April, May and June in each reporting region.

Here’s a question for the philosophy majors in the audience: Can you be at risk for something that has happened in the past? Moreover, can you really work up a sweat trading something released just once a month that will not have an immediate impact on other markets? We are perfectly accustomed to trading monthly releases of government data or even quarterly releases, because we know they change our and others’ perceptions of reality. But does anyone remember how a change in the Miami CSI index in March changed their life, or, more importantly, their business plans?

The Risk Exists



This is not to deny that a risk exists in the residential real estate market. The Federal Reserve’s Flow of Funds data for the end of the first quarter of 2006 put household holdings of residential real estate at $20.364 trillion. For comparison, households and nonprofit organizations own $5.6845 trillion of corporate equities and $4.5374 trillion of mutual fund shares.

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The big boys are at it again, trying to beat the system out of pure greed for making even more money:

The Department of Housing and Urban Development on July 18 announced $1.6 million in settlements under The Real Estate Settlement Procedures Act (RESPA) with a national mortgage lender and two major homebuilders who engaged in a business practice involving captive title reinsurance. 

The agreements included a $650,000 settlement with CitiMortgage, Inc., and its captive title reinsurance company Chesapeake Reinsurance; a $675,000 settlement with M.D.C. Holdings, Inc., certain of its Richmond American Homes homebuilding subsidiaries and AHT Reinsurance; and a $305,000 settlement with WL Homes, which does business as John Laing Homes, a California and Colorado builder. 

Captive title reinsurance is a practice whereby a title insurance company transfers a portion of the risk and title premium to a company owned by the builder, lender or real estate broker referring the title business. 

In HUD’s view, any captive title reinsurance arrangements in which payments are not bona fide and exceed the value of the reinsurance are a violation of RESPA. HUD also has a particular concern when these arrangements involve an entity that is in a position to refer business to the primary title insurer. There is also strong evidence these arrangements are designed to generate referral fees when there is a history of few or no claims paid, HUD said. 

"There is almost never any legitimate need or business purpose for title reinsurance on a single-family residence," said HUD Assistant Secretary for Housing Brian D. Montgomery. "HUD will continue to work with the states to investigate captive arrangements to make certain that they aren’t created for the purpose of obscuring referral fees." 

The companies came forward and cooperated with HUD in reaching these settlements. In addition to the settlement payments, the companies agreed not to enter into any new captive title arrangements and to cease writing new captive title reinsurance business.

These are HUD’s first settlements in the nation involving the recipients of payments made by title companies to captive companies for reinsurance. The settlements come in the wake of recent settlements states have obtained from title insurance companies who paid significant portions of the premiums they received to such captive companies.

Broker Newswire

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INDIANAPOLIS — Middle-class neighborhoods, long regarded as incubators for the American dream, are losing ground in cities across the country, shrinking at more than twice the rate of the middle class itself.

In their place, poor and rich neighborhoods are both on the rise, as cities and suburbs have become increasingly segregated by income, according to a Brookings Institution study released Thursday. It found that as a share of all urban and suburban neighborhoods, middle-income neighborhoods in the nation’s 100 largest metro areas have declined from 58 percent in 1970 to 41 percent in 2000.

Widening income inequality in the United States has been well documented in recent years, but the Brookings analysis of census data uncovered a much more accelerated decline in communities that house the middle class. It far outpaced the decline of seven percentage points between 1970 and 2000 in the proportion of middle-income families living in and around cities.

Middle-income neighborhoods — where families earn 80 to 120 percent of the local median income — have plunged by more than 20 percent as a share of all neighborhoods in Baltimore, Chicago, Los Angeles and Philadelphia. They are down 10 percent in the Washington area.

It’s happening, too, in this prosperous, mostly white middle-income Midwestern city where unemployment is low and a vibrant downtown has been preserved. As poor and rich neighborhoods proliferate, the share of middle-income neighborhoods in greater Indianapolis has dropped by 21 percent since 1970.

"No city in America has gotten more integrated by income in the last 30 years," said Alan Berube, an urban demographer at Brookings who worked on the report.

"It means that if you are not living in one of the well-off areas, you are not going to have access to the same amenities — good schools and safe environment — that you could find 30 years ago," he said.

The decline of middle-income neighborhoods may also be a consequence of increased economic opportunity and residential mobility, especially for upper-income minorities, said Joel Kotkin, an urban historian and senior fellow at the New America Foundation.

"This is about upward mobility and class. Until the 1970s, middle-class blacks and other minorities often had little choice about where they could live," said Kotkin, the author of "The City: A Global History." He added: "They usually had to live close to lower-income people of their own race. Now, if they can afford it, they can move to higher-income neighborhoods. Dollars trump race. Many choose not to live around poor people."

The Brookings study says that much more research is needed to better understand why middle-income neighborhoods are vanishing faster than middle-income families. But it speculates that a sorting-out process is underway in the nation’s suburbs and inner cities, with many previously middle-income neighborhoods now tipping rich or poor.

Several urban scholars who had no role in the Brookings study said that its findings are consistent with what they have seen in cities from Los Angeles to Cleveland, as the middle class hollows out and as an economic chasm widens between rich and poor neighborhoods.

"We are increasingly being bifurcated on an economic basis," said Paul Ong, a professor of public affairs at the University of California at Los Angeles. "It has taken a big chunk out of the middle."

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