Today S&P released the September Case Shiller Home Price Indices data which show house prices are still falling.

The August Case Shiller NY data showed a smaller month over month decline of only .16% but September more than made up for it with a month over month decline of 1.04%. This was the largest single month drop since February. Last September the MoM drop was only .39% and the YoY drop was 3.60% Compared to last year, the NY Metro index is down 7.29%. In the past 27 months, only 2 showed positive MoM changes.

The Case Shiller tiered data continues to show that low priced homes are the hardest hit. They have fallen the most in value and at a greater rate. Low, mid and high priced homes have fallen, 10.36%, 8.11% and 5.73% respectively compared to last year as indicated by the following charts.

At the end of July, New York Governor David Paterson said in an address, the era of buy now and pay later is over. He's been taking a realistic stance on the state's finances and economic position and the citizens of New York seem to appreciate it, according to this newsday.com report.

Conventional wisdom has it that we don't like to hear bad news from our political leaders. While President Jimmy Carter ruminated about the national malaise, Ronald Reagan heralded morning in America and beat him.

But weirdly enough, New Yorkers are lapping up every bit of bad news from Gov. David Paterson. The governor went on a three-day tour of the state in June to advertise out-of-control property tax bills. How did we react? According to the Siena College poll, 44 percent of New Yorkers said he was doing a good job, up from 30 percent the previous month.

Then in midsummer, Paterson told us the economy was in the tank, he froze hiring in state government, and he called the legislature back into session to cut $1.2 billion in spending. The result? His job approval soared to 52 percent.

This week, the governor tells us that legislators are "bloodsuckers" and is calling for a zero-growth budget next year. We won't know how that plays until Monday, when Siena College releases another poll. But poll spokesman Steve Greenberg offered a peek yesterday at the early results: "I see the trend continuing."

New Jersey Governor Jon Corzine is also working on reducing state debt but the opinon of him is declining. We liked it when he shut down government until a sound budget was created but when not all the fat was trimmed we booed. Governor Corzine has had to make some tough decisions to reduce the state's deficit. The current plan drawing criticism is charging 89 small municipalities without their own police a fee for the services they recieve from state troopers.

Faced with an estimated budget shortfall of nearly $3 billion in January, lawmakers in the Garden State offered early-retirement packages to nearly 4,000 state workers, completely dissolved two state agencies and slashed the operating costs of every remaining department by an average of 5 percent.

The Legislature rescinded hundreds of millions of dollars in property tax breaks for some residents, made deep cuts in funding for hospitals and ultimately delivered Gov. Jon Corzine (D) a budget that he called “painful” to sign.

Now, one aspect of New Jersey’s sharply pared-down spending plan is drawing new opposition from many corners of the state. To help cut costs and raise revenue, the state has decided to start charging small municipalities for a service they have enjoyed free since 1921: regular state police patrols that help communities without police departments respond to crime, car accidents and other emergencies.

NJ needs to find ways to cut it's spending and increase it's revenues. Something has to give. Only 4% of residents live in areas where there are no local police forces. The rest pay taxes that goes towards local police forces as well as state troopers. These municipalities might want to consider measures other nj municipalites are working on to consolidate services with neighboring towns. In Bergen County, Demarest and Haworth are two such towns looking to consolidate. Looking at the map provided in the Stateline.org's article, the majority of municipalities are clustered together. It should be fairly easy for them to work together to provide their own consolidated police forces if they don't want to pay for State Troopers. The areas affected are among the least densely populated areas in NJ but also include parts of Hunterdon County which is the most affluent county in NJ.

As of September 1st, Freddie Mac and Fannie Mae will no longer be purchasing subprime mortgages in NY due to legislation that is aimed at helping troubled borrowers but also puts more restrictions on those who purchase mortgages to guard against predatory lending practices.

...because of the "potential for heightened legal and business risk exposures." In its decision, Fannie Mae restated its policy by saying "it will not purchase or securitize certain mortgage loans that meet the definition of 'high-cost' or 'high-risk' home loans."

This sounds similar to some of the legislation that states enacted back in 2001 and 2002 that would make entities that purchase subprime mortgages responsible for predatory lending practices involved in the origination of the mortgage. Unfortunately the Treasury Department stepped in on behalf of the banks.

Banks generally give out more in loans than they have on deposit. They can do this by selling off some of their loans to investors. The securitization of subprime loans was a big contributor to the housing bubble. Towards the end of the bubble, the number of conforming loans dropped while subprime and Alt-A loans rose. In addition most of the non-prime loans were securitized which was a large departure from the past. Up until 2002 Fannie Mae and Freddie Mac didn't even deal in subprime. These two companies hold or guarnatee about half of the mortgage debt in the US.

If the GSE's don't buy these mortgages that's a lot of money that won't go back to replenish bank's reserves to allow them to write more loans. In my opinion, this is a good thing. The amount of credit that was issued which caused the bubble caused a lot of problems for borrowers, lenders investors and the economy in general. We need to start returning to a more normal pace of lending and bring housing prices back in line with incomes. 

"New York and the nation got into this crisis in the first place because Fannie Mae and Freddie Mac turned a blind eye to the abuses of loan originators," said Bertha Lewis, executive director of New York Acorn, an advocacy group.

The law also sets in place requirements for lenders in foreclosure proceedings and makes it a crime to write mortgages for borrowers knowing they cannot repay them.

Now that last part is a bit of a shock. You'd think it wouldn't be in a bank's best interest to lend to people they know can't possibly pay them back. But that happened over and over during the bubble. The banks didn't care because they just wanted to have new mortgages to sell on Wall St. It's pretty sad that they had to make a law that essentially keeps banks from shooting themselves in the foot. Kinda have to wonder what all those bonuses were for. My theory was to cash out as much as possible before the crap hit the fan.

With subprime mortgages being harder to sell in the NYC along with other aspects of the legislation, lenders will have less incentives to write bad loans. Without being to write loans to people that can't afford them, they'll have to write loans that people can afford. Since the marjority of the people in the NYC area can only afford a tiny fraction of the housing stock available, house prices are going to need to come down if sellers expect to sell. Otherwise properties will sit on the market for years.

The strange thing is that the law doesn't preclude the anyone from purchasing subprime loans in NY, Fannie Mae and Freddie Mac included. What it does from my understanding, is what previous state legislations tried to do. Put responsibility for predatory lending also on those who purchase these loans so that they would have an incentive to make sure these high risk, high cost loans do not fall into the realm of predatory lending.

Sounds like Freddie Mac and Fannie Mae are afraid to touch NY subprime loans because they might fall under the predatory lending laws. Probably a good idea for the GSE's but what does it say about the companies originating and servicing these loans? Maybe the NY metro area can fall back out of the least affordable housing market spot.

The National Association of Home Builders(NAHB)/Wells Fargo Housing Opportunity Index data shows that the New York-White Plains-Wayne, N.J, which includes Bergen County, NJ is the least affordable area in the nation.

A meager 11.4% of homes in the area were affordable to families earning a median income of $63,000. The index first started recording data in 1991 and this is the first time a metropolitan area outside of California took the bottom spot.

The national trend is for housing to become more affordable but the NY Metropolitan area hasn't seem to gotten the message, even though house prices have begun to drop in some areas. The chart below shows just how fast houses were becoming out of reach. Though that didn't stop lenders from giving out the money to buy these homes. But that's why we're in the position we are now.

Here in Bergen County, it looks like house prices will take a big tumble. The following chart compares the year over year change in median house price sold in Bergen County compared to the National numbers. As we can see, when the national prices rise, Bergen County's house prices rise faster, when they fall, they fall faster. It looks like we're in for a big correction as house prices start approaching a rate where people can afford to buy without it being such a drain on their finances. We have a long way to go.

A lot of people think that they made a smart decision during the bubble by only buying a house they could afford based on traditional debt to income guidelines.The reality might be quite different.

A good rule of thumb is to buy a house priced at 2.5 times your yearly household income.  This will result in monthly mortgage payments that will allow you to put money into other areas including savings. The median house price to income ratio had skyrocketted during the bubble as lenders relaxed their standards and most buyers went along for the ride. Nationally, the house price to income ratio hit a high of 4.6 in 2006. In Bergen County, NJ the house price to income ratio hit its peak in 2005 at 5.63. This means that home buyers were paying around 2 or more times what sound financial planning indicates they should be spending on housing.

For most that were able to purchase a home using more traditional guidelines, they would have bought a home on the lower end of the price range. As we can see from the chart on the left showing the tiered data for the NY-Metro Case-Shiller Index, there is much greater volatility in lower priced homes.

The chart shows the overall, low, middle and high groupings' Case-Shiller Indices in blue and the red lines indicate the year over year change in the Case-Shiller Index for the low and middle price groups compared to the high price group. Compared to high priced homes, low priced homes did the worst. When house prices were rising, lower priced homes were increasing as much as 9.03% faster than high priced homes. When house prices started to fall, lower priced homes fell as much as 5.01% more than high priced homes.

Medium priced homes weren't much better. At times, they were increasing up to 5.14% and falling up to 4.76% more. While all home prices will undergo a correction, the lower and middle priced homes will have to correct more.

The point where low and middle priced homes break away from higher priced homes is around the same time that the origination of subprime first mortgages started to rise dramatically and conforming first mortgages dropped significantly.

So what does this mean for people that tried to be sensible while others were going nuts? They bought a home they could afford and if they bought it to live in for many years chances are it isn't a big deal to them. Even if they sell it years down the line, they will have a harder time seeing any appreciation. If they bought the home as a place to live and not an investment, it may not matter to them. But if they hit hard times, they most likely will not have much equity in their homes to draw upon.

Compare that with people that bought more house than they could afford. Since their mortgage payments are a hardship, they are more likely to be able to argue and get a loan modification or to qualify for programs to help them. For those that bought a house they could afford, there are no programs to help them make up for the lost equity.

It seems that if you're going to be part of a stampede, you're better off staying with the herd, no matter where it's headed.

The NY Times CityRoom Blog has an entry on Governor David A. Paterson's address this afternoon, which he warned of an economic and budget crisis for NY as a result of lower revenues and rising costs. I think we should all pay close attention to what he says. 

“When I travel across the state, I see communities suffering,” Mr. Paterson said in his address, from the Red Room of the State Capitol in Albany. “Everywhere I go, I meet people who are losing their jobs and their homes. I meet families who are forced to pay more for gasoline and for food while their paychecks stay the same. Next winter, some of these families will have to choose between heating their homes and feeding their children. The rising cost of health care means that they cannot afford to get sick.”

...

He vowed, “We will cut spending. Government will learn to do more with less.” He called for help from business and labor leaders and New York’s representatives in Washington to support him.

He added, “It is time for New York and other governments to cut up our credit cards. The era of ‘buy now and pay later, and later’ is over. The faster we address this crisis, the faster and stronger we will emerge from it.”

I think more people should pick up Thomas Stanley's and William Danko's book. "The Millionaire Next Door".

"How can you join the ranks of America's wealthy (defined as people whose net worth is over one million dollars)? It's easy, say doctors Stanley and Danko, who have spent the last 20 years interviewing members of this elite club: you just have to follow seven simple rules. The first rule is, always live well below your means. The last rule is, choose your occupation wisely. You'll have to buy the book to find out the other five. It's only fair. The authors' conclusions are commonsensical. But, as they point out, their prescription often flies in the face of what we think wealthy people should do. There are no pop stars or athletes in this book, but plenty of wall-board manufacturers--particularly ones who take cheap, infrequent vacations! Stanley and Danko mercilessly show how wealth takes sacrifice, discipline, and hard work, qualities that are positively discouraged by our high-consumption society. "You aren't what you drive," admonish the authors. Somewhere, Benjamin Franklin is smiling."

Another, more recent, book written by Thomas Stanley that follows the same premise is "The Millionaire Mind"

"Besides offering insights into millionaires' pinchpenny ways, pleasing quips ("big brain, no bucks"), and 46 statistical charts with catchy titles, Stanley's book booms with human-potential pep talk and bristles with anecdotes--for example, about a bus driver who made $3 million, a doctor (reporting that his training gave him zero people skills) who lost $1.5 million, and a loser scholar in the bottom 10 percent on six GRE tests who grew up to be Martin Luther King Jr. Read it and you'll feel like a million bucks. --Tim Appelo --This text refers to an out of print or unavailable edition of this title. "

If more of us start living within our means, demand for certain items will follow which will bring prices down. Allowing people to stretch their dollar further. It is my belief that a lot of the increase in prices in todays economy is due to the increased purchasing that is fueled through credit. Just as NY must spend today's dollars, so must we all. The way to save the economy is to spend wiser the money that we have, and use credit in sensible ways that justify the associated interest and fees.