US Median Home Price 1965-2009
Gray area is “Inflation” period of 1972-1983, 201% total increase in home prices during that 12 year period, or 10.5% annually.
(click image to enlarge)

Consumer Price Index 1965-2009
Gray area is “Inflation” period of 1972-1983, 147% total increase in CPI during that 12 year period, or 8.5% annually.
(click image to enlarge)

CPI vs. Median Home Price 1972-1983
Close up of the gray area, home prices seemed to outpace inflation a bit during the peak inflation late ’70s early ’80s.
(click image to enlarge)

CPI vs. Median Home Price (y/y change) 1972-1987
Extended the view a bit, on the way up Home Price change peaked before CPI (’72) and bottomed first as well (’80, ‘82). Home prices off to the races again in the mid-late ’80s.
(click image to enlarge)

30-yr Fixed Mortgage rates vs. Median Home Price 1972-1987
Home price gains slowed as rates ramped, but even with 18% rates annual home price change only briefly declined.
(click image to enlarge)

30-yr Fixed Mortgage Rates vs. Median Home Price 1972-1987
As shown above, high rates slowed down increases but declines did not last long and prices started going up again when they lowered rates.
(click image to enlarge)

This post first appeared on Minyanville.

We have truly become a bailout nation.

As regulators mull over the possibility of rescuing CIT Group (CIT) — a small-business lender that counts over 1 million US firms as customers — analysts debate whether the relatively small firm is deserving of a taxpayer-funded bailout. Or for that matter, a bailout at all.

After converting to a bank holding company last year, CIT received $2.3 billion in TARP money to help solidify its financial footing. Yet even this injection of taxpayer capital couldn’t prevent its financial position from deteriorating further, and the company now faces the maturity of over $1 billion in bonds next month. Without government support, CIT doesn’t believe it will survive the summer.

The specter for a CIT bailout is a tricky political issue: It pits those that argue Washington must step in wherever necessary to support the reeling US economy, against those who are starting to wonder when the bailouts will stop and when bureaucrats will step back and allow the free market to determine who survives.

Few would argue that CIT presents a systemic risk to the US financial system; with a balance sheet of around $75 billion, the company is one-eighth the size of Lehman Brothers, according to research firm BTIG.

CIT is, however, a key lender to small businesses around the country. This means its failure could threaten salary payments for millions of American workers if the company’s customers are unable to get lines of credit with other financial institutions. Under different circumstances, banks like Wells Fargo (WFC), Citigroup (C), and Bank of America (BAC) would be eagerly serving CIT’s clients. Instead, they’re focused on reining in lending of their own.

If CIT were to fail, it would mark the biggest bank failure since Washington Mutual — now part of JPMorgan Chase (JPM) — collapsed last September.

By letting CIT fail and coordinating an orderly shuttering of its operations, the Obama administration has the opportunity to re-establish an old precedent long since forgotten in these turbulent economic times: Firms that should fail actually fail.

If, instead, the government rescues CIT, the yardstick by which we measure “Too Big to Fail” will be severely shortened. This wouldn’t be a welcome development.

For the past year, government power brokers — rather than market forces — have picked the winners and losers as financial firms have been besieged by a massive deflationary debt unwind. Further, as Washington wades deeper and deeper into the day-to-day operations of American business, companies are starting to compete for government cash, not customers.

Moral hazard is a concept quickly brushed to the side during times of crisis, but it’s precisely during these trying times that market principles should be the most firmly upheld. Sadly, over the past 24 months, the opposite has held true.

California may be broke, but that isn’t stopping legislators from trying to give away more money to try and save our swooning housing market.

Qualified buyers of new homes in California can currently receive a $10,000 tax credit for purchasing a newly constructed home. The program, originally capped at $100 million and set to tun through March of next year, according to the Wall Street Journal, is running dangerously low on funds. Never fear, the spend-happy politicians in Sacramento are looking to allocate another $100 million to the efforts — $21 billion budget deficit be damned.

According to Senator Bob Dutton, a Republican who sponsored the expansion bill,

“We didn’t realize how successful [the tax credit program] would be.”

Is it odd that a program can be called a success for the mere fact that it ran out of money almost a year too early? And if the chart above of new home sales in California is any indication, we should be very worried if the continuation of this bill is as “successful” as it was the first time around.

Home sales in May rose from April, the second straightly monthly increase. According to the National Association of Realtors, or NAR, purchases crept up 2.4% from the prior month, which was less than 3.0% analysis were expecting.

Prices continued their decline, falling 17% from a year ago, dragged down by distressed sales.

As readers of this site know, we rarely have much good to say about the NAR. They are a lobbyist group, plain and simple, and typically put the interests of their constituents (Realtors) above that of buyers and sellers. But this month, the NAR hit the nail on the head with respect to the current home buying environment:

“The increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan,” and “Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales.”

Bingo. The new appraisal rules are wreaking havoc in the mortgage market, with loans disastrously hard to get thanks to inept appraisers and appraisal management companies. Coupled with rising interest rates, this does not bode well for the nascent housing “recovery.”

The Mortgage Bankers Association, an industry trade group, dramatically cut its forecast for 2009 mortgage originations in the US to just over $2 trillion. The new estimate, down a whopping 27% from the March figure, is said to reflect an environment of rising mortgage rates and an increasing share of purchases going to all-cash buyers.

According to the MBA’s chief economist, Jay Brinkman (courtesy of the Wall Street Journal):

“We have now lowered this [forecast] for several reasons. First, while home sales have been higher than expected, home prices have fallen more than expected leading to smaller loans. Second, the large share of distressed sales or homes purchased by investors has resulted in the share of all cash home purchases being higher than normal.”

Toss in new appraisal laws which make getting a loan on anything but a pristine home downright impossible, and the housing outlook remains murky, at best.

A daily list of the stories YOU should be reading.

5. Even though we dont deserve it (dont try to say we do, we’ve had a negative savings rate for the last ten years), it looks like the US will be keeping our AAA credit rating.

4. The core consumer price index is up a little (0.1%, about as little as it can be up) for the month of May.

3. Foreclosures are starting to hit the California marketplace again after a months long pause due to foreclosure moratoria.

2. Mortgage applications continue to falter, now at a seven month low.

1. In today’s news thats not really news, a neighbor’s foreclosure will negatively affect your home’s value.  What was that you were saying about not wanting to bailout the guy down the street?

Address: 175 Bonita Ave. Redwood City, CA (MLS Listing)
List Date: 03/16/2009
Current List Price: $899,000
Original List Price: $1,029,000

* 4 bedroom, 3 bathroom, 2,650 sqft living area, 7,500 sqft lot
* Very good curb appeal
* One of the newer homes in the area (21 years old)
* Sweet deck in the back

Good curb appeal with dual garage

No word on whether the pool table comes with the home

Nothing quite like a deck

A daily list of the stories YOU should be reading.

5. Finally, I don’t have to pay off my credit card anymore.

4. Exactly what the country needs … more houses.

3. The people that got it right in 2008 are betting on hyperinflation.

2. What exactly is a Bing?

1. Did the lack of success with the first loan MODs ruin it for everyone else? Sure seems that way.