All views are welcome. The discussion in the comments is usually very informative and provides an excellent discussion of different perspectives. Thank you to everyone that participates!
However there is some behavior that I believe is inappropriate, such as insulting other posters (name calling), posting using multiple aliases, or posting using the names of other frequent posters.
Please be polite and all are welcome to participate. Thanks in advance to everyone.
We're an Empire (of Debt) now. We create our own "reality".
Its a new paradigm, and everybody who doesnt buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.
Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and Hondas.
This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.
CR, Great Post. The recent economic data seems very weak. Therefore, as indicated in your post further weakness in housing is nearly guaranteed. Unless lending standards tighten meaningfully the decline may be gradual but lengthy. It seems likely the poorer housing company stocks are a long way from the bottom in time and possibly price.
Lucky you in your Honda, 'Harm'. Many of us would love to live in a Honda...and dump this crummy Fiesta, you know?
So, no correction in the housing bubble, just a minor adjustment now and again while the bubble continues to grow with the Honda liveaboards?
I feel like such a moderate next to you. Talk about taking the Recession-Scare punch bowl away...
"Bank of America Securities analyst Daniel Oppenheim upgraded several of the builder stocks today, saying he sees an "improvement in traffic, affordability and construction trends." ...
Heading for the exits, just when the the turnaround is starting?
CHARLOTTE, N.C., Dec. 1 /PRNewswire/ -- Bank of America Chief Financial Officer Alvaro G. de Molina today announced his intention to resign from the company. Joe Price, Global Corporate & Investment Banking Risk Management executive, has been named to succeed de Molina as chief financial officer.
CR, it seems Robert Schiller is in agreement with you.
Saw a nice interview of Prof Robert Schiller on yahoo this morning. He says that he thinks there's still not enough fundamental pervasive pessimism about housing yet. Until optimism is completely wiped, he thinks the housing decline should last. He mentions it may last some more years.
Look for Schiller at this link Videos - Yahoo! Finance
Could it be that these latest upgrades are part of a classic "pump and dump strategy"? As for Al Molina leaving BofA, I don't really see any correlation there. He has been getting CEO offers from what I hear...
CR -- if you were an analyst would you not subscribe to the concesus view? I think that you probably would. For an analyst the most prudent course of action is to follow concesus. Those that dont typically get fired.
But since you are a blogger, you have the privilege to write what you really think. Consider yourself lucky. Most analysts dont write what they really think. They write what they get paid to write.
Somebody from Citibank, who no doubt is paid entirely too much money, and whose job I now want, wrote:
"We expect both the timing & steepness of this rally to take most industry observers by surprise."
He's gotta be kidding. If the homebuilders still have in 'em a rally potential equal to what we've seen since August, that would put the price of many issues very close to their ALL-TIME HIGHS.
Excellent link Kevin, but do I comprehend the full import of 'the carry trade is over'?
The housing market has to rebound to a postion that is better than the 2% financing hurdle requires, yes? And that cheap yen with ZIRP may be a thing of the past for Japan's improving economy and increasing reliance on non-American bound exports, yes? So an increasingly larger financial hurdle. So prices may unwind on houses faster than anticipated, shortening this 'soft spot' of depreciating house prices...getting rid of the less seasoned speculators first...a short period of unhappiness, yes? But once housing prices are low enough to sustain a 2% price escalation, we are back to normal and everyone lives happily everafter?
This doesn't touch upon the sinking $, but I think Kasriel does not see that happy ending in the near future.
Kevin -- norther trust has its own agenda. Its kind of like listening to Bill Gross. Remind last time Bill Gross or northern trust for that matter were bearish on bonds?
Despite falling rates, NOD's and foreclosures are trending up. The homebuyer market is exhausted and the subprime/exotic loan borrowers are trapped. Lower rates are proving they will not save housing.
I love that the crowd is driving the stock prices up, when the time is right the shorts will be even better.
So, I think we agree that true optimists -- those who expect a quick return to 2003-2005 sales numbers and continued price appreciation -- are unlikely to be right. However, I believe it is possible, if unlikely, that housing prices could meander up with incomes for another couple years. In short, the argument is, it could be 1986.
Yes, I am playing Devil's Advocate with myself. Cf my post on prices, mortgages and incomes. Like our host, I think it's 1989, mostly based on inventories. However, rates are low, employment while not nearly as good as the headline rates suggest remains stable for now, and incomes are okay. Prices could flatline for some time.
I'm not betting on it, but how do the inventory/income/affordability numbers now differ from the late '80s?
But once housing prices are low enough to sustain a 2% price escalation, we are back to normal and everyone lives happily everafter?
I think we'll live happily everafter but I think housing prices may go lower then is expected and take longer to rebound then is expected.
sharkbait
I witnessed one of these bust in the eighties, REO were selling for 20 cents on the dollar, 50% of subdivison, defaults, no buyers and that one wasn't caused by overbuilding, speculation, and easy money it was caused by to many people with to much debt.
supply/demand
Nonetheless, with underlying housing demand growing 3 percent per year, the large gains in residential investmentwhich averaged 8-1/2 percent per year between 2001 and 2005clearly could not continue indefinitely. Moreover, housing demand may slow to less than 3 percent, as demographics point to slower growth in household formation. As a result, we at the Chicago Fed expect some further weakness in residential construction.
see - , Federal Reserve Bank of Chicago
I'm normally wary of anything sell-side analysts have to say, we all know they have an agenda that sometimes collides with delivering the honest truth to the public. Such is BoA's Oppenheim, for example. But I reserve particular contempt for anything anyone at Citigroup has to say about the housing market. Citigroup, you see, is home to the most unvaryingly bullish booster for this sector, one Steven Kim.
In fact, I find Citigroup's recent cheerleading an excellent contrary indicator.
That's not to say their efforts haven't been effective. Look at KB Home. There is absolutely no fundamental basis for a 30% rise in their stock price. The company is one of the most highly leveraged and overly exposed builders in the market.
If nothing else, KB Home is a study in the salutary benefits accruing to a stock price from relentless shilling by analysts and media hypsters, with the additional fortuitous "inability" to report full financial results due to ongoing "internal investigations".
The BofA's Oppenheim, who has heretofore been a pretty solid observer of the housing situation, must be highly embarrassed at how he has been used. Maybe he judged it was worth it, but it has come at a high cost to his integrity. After this adventure in sell-side whoring, he'll have to work hard to earn back his credibility.
Two key groups really drove this market higher: Speculators, and the sub-prime group. The speculators are largely gone. The sub-prime group is still around, but for them rates are quite high. If inflation is at the level it's purported to be, their real rate is really high.
And for those paying a mortgage on a depreciating home, their effective real rate is astronomically high.
For those with good FICO scores .. I agree with you, rates are low. But the folks with the good FICO scores have always been in the market. Knock back the sub-prime owners to pre-boom levels (in other words, tighten up lending standards), and housing levels revert back to where they were in the good 'ol days.
What I'm trying to say: At this point, I don't consider rates to be the real issue. It's more accurate to say "housing can be supported because lending standards remain loose".
Thanks wcw, for that thoughtful, informed and engaging post -how are things different from the late 80s?
The environment is not crowded by hi-tech distractions and alternative investment opportunities since skewed by tax shelters for principal residences and much easier credit conditions. [Residential investment has had 2 consecutive quarters of >10% losses seeing those other attractions.]
The "meandering up incomes" is a proposition that looks extremely doubtful to me.
If the income distribution was headed the other way, I might be able to entertain this for a few moments, but those Texas janitors distract me mightily.
It looks like we might see some of the recent speculators take some losses and furthermore, current speculators take their trade elswhere until house prices improve. That alone should pull prices down further and may partly explain the haste of authorities to announce that the worst is over.
If you understand how hosting a highly accessed web site works, you can come to the conclusion pretty quickly that the "rates are low" argument is way too simplistic. Rates are only one part of the equation. The cost of a mortgage is based on rates and price.
The argument is like saying, "because a web site is linked to a router with very wide bandwidth, it should be able to handle a boatload of traffic." Of course, you need to serve the web site from from a computer with enough processing power to handle a bunch of simultaneous connections.
Replace bandwidth with easy money. Then replace processing power with personal income relative to price. People simply do not earn enough to pay for the price of houses, so the low rate argument is a moot point.
Networks fail even when bandwidth is more or less unlimited. The housing market can also take a beating even when easy money is abundant.
I would submit that the data regarding (resale) inventory numbers has already taken many by suprise (including myself). Any data junkie cannot deny that inventory is well, well off it's peak (some san diego zip codes have seen up to 35% reductions in inventory since mid summer 06), activity is quite robust for this time of the year (buyer traffic/pending sales), interest rates have come back to what they were at the beginning of the year, most builders have seriously pared back their inventory, and homebuilder stocks are in a furious rally of late. False bottom or stabilization ? The true answer to that will not be known until at least mid summer 07 or even 08? Data does not lie...or does it...?
Fun stuff.
Agreed. We got a lot of "positive" outlook reports all through the year 2000 on the stock market. You can't expect to have such a large run-up in prices and a tiny drop.... it's just not realistic.
Lots of good data.
As always, great graphs.
There is one point I think is questionable:
"This high level of existing home inventory should depress new home sales and put pressure on prices."
I think the builders are more able to lower prices in order to increase sales.
I think the builders will be causing most (or a great deal) of the downward price pressure. It looks like there is no level of inventory that will reduce owner's asking prices. A lack of offers should cause a drop in asking prices.
"We expect both the timing & steepness of this rally to take most industry observers by surprise."
And rather than make a killing and retire young, we decided to share this suprising info with all of you...the whole world in fact...because we're just the friendly kind
of folk.
I find it weird that just a week before all the home builders are going to present at Bank of America´s 2006 Credit Conference they all get upgraded. Timing seems a little weird, why not wait until you see what they have to say and then upgrade them? I'm not a big conspiracy fan but it just seems odd, no?
I think the so called 'optimists' for the most part have 'vested interests'-
The view based on 'fundamentals' is the acceptance that 0 percent interest rates for a prolonged period of time is 'normal'....
This is where reality vs. fantasy sets in. These same warm and sunny optimists are for the most part the same characters who said in early 2000 that Nasdaq 5000 was based on 'fundamentals'.
and as a continuation of my thought above- after many of those IT stocks took a major beating- many of these optimists in late 2000 upgraded them and said they where a 'buy'- funny how these individuals lack credibility.
If I owned Citigroup's second mortgage portfolio, I'd be writing upbeat research notes, too. (Although it occurs to me that if I owned Citigroup's second mortgage portfolio I probably wouldn't be smart enough to spell "optimism," let alone use it in a complete sentence.)
OK, just ignore me this morning. Someone just suggested that it's 1989 and I have a few traumatic memories of 1989; it makes me goofier than usual. Not only was that about the high-water mark of the last time we experimented with negative amortization ARMs, we also had the Gyp 'Ems (GPMs, Graduated Payment Mortgages) and Step Loans and 7/23 Two-Steps and everyone's favorite COFI ARM (which gave way to the COLA NUT, but I digress). Yeah, this generation didn't invent "nontraditional" mortgages, it has just, um, refined the concept. Thing is, in '89 we did actually carry all that crap on the books, which introduced at least some caution into the equation. Now that you can find a synthetic CDO strip tranch for every dumb-ass mortgage freaks like me can think of, I conclude there's nothing to worry about here. Folks. Move along. These are not the 'droids you are looking for.
Another day, another sucinct--and telling--graph. CR once again refutes BS with sound facts. Meanwhile, the WSJ can't regurgitate a governemnt report without distorting it....
The thing about the starts to sales figures this time is that a relatively high percentage were being bought by investors. The figures on that are all over the map, mainly because so many investors tried to hide the fact, partly to get better loan rates.
The inventory figure needs to be boosted both the cancelled sales and the houses held by investors who intended to sell within a year or so.
When I first heard about blogs, I thought, what a complete load of crap. And, by and large, time has validated that assumption.
But if there is one blog that actually fulfills the claims of their advocates, Calculated Risk is it. Thanks, CR.
Your blog is not equilibrated but not biased by espurious (interested) views. It is your view, your hypotheses and your thinkings. You post bearish and bullish views but this doesn´t mean balance. I think it is OK because balance is not truth, nor wisdom necessarily. You have your own bias, but it is genuinelly yours and not other's. You give us the possibility to learn freely from your knowledge and for that you deserve credit.
Thanks (again) a lot for your blog. It is good to view bullish arguments in your blog and to read how you discuss them.
I want to make a question. It is clear that Citi economists are more optimistic than some economists that work for investment banks (such as Goldman Sachs). I believe that Citi businesses include both investment and traditional lending. Do you think is there a consensus among traditional banks and a different consensus at investment banks? What is the position of, lets say Bank of America, on housing?
I had lunch with an elete insider from one of the country's largest home builders, a few days ago. I drove to the meeting; he came by private jet. I chided him about his company's huge land write-downs. He said all that will be history as of 2007. From here on, he stated, his company will pay very little for options on tracts of land, buy nothing it hasn't already 'sold', build nothing over $300,000, and concentrate its building in the southern coastal states (excluding Florida). He expects his company's stock to be very strong in 2007.
I talked to him about a townhome I contracted for in a new town center project at a South Carolina beach. He informed me that his company had taken down a huge tract of land in that same project, and then sold half of it for double what it had paid. The company that bought it from his company, then sold it for double what it had paid. This was all in the last year.
As I predicted last quarter, everyone focuses on the front page OFHEO number, 3.5% annualized appreciation. They talk about appraisal bias, but no one digs into the numbers to actually calculate the appreciation from Q2 06 to Q3 06. So I will. The quarterly change in the seasonally adjusted purchase only index is 0.37%, which annualizes to about 1.5%. So, according to the purchase only OFHEO index, house prices fell in real terms between the 2nd and 3rd quarter. They have a seasonally adjusted and non-seasonally adjusted series - not seasonally adjusted the increase annualizes to 1.4%.
Not everyone mort: As I predicted last quarter, everyone focuses on the front page OFHEO number, 3.5% annualized appreciation.
Did you visit the link to Kasriel provided above?
Kevin | 12.01.06 - 9:04 pm |
Thanks for those personal recollections of '89 Tanta and the germinations of the current 'financial instruments' in housing.
My concern is that there are a lot of people planning to sell next spring, including speculators who now have their fingers crossed waiting for the housing market to improve. I don't think that housing can recover in the hot (bubble?) markets without much greater price declines. With speculators as net sellers, where will the buyers come from? The high prices will keep out many first time buyers, and the notion of owning a second or third home as an investment has already taken a real beating. Will foreclosures continue to rise? Do the bulls realize how much prices have gone up during a period of relatively flat wage growth? I realize that my take is not based on hard analysis--it mainly comes from spending a good amount of time reading blogs.
So, I think the answers will come next springwhen we see whether inventories come down, at least some, or rise appreciably. If the economy continues to slow, that will be a factor, but I don't think that interest rate cuts will help housing that much. The real interest rate is the rate of the loan minus the rate of price appreciation. If we see negative price appreciation, or even the prospect of zero growth, low interest rates won't be enough.
Sounds like a good survival plan. Also sounds like a real margin killer. Unless his company's stock hasn't participated in the most recent rally, his '07 view may be a bit optimistic.
Housing optimist's basic underlying argument(not stated)is that interest rates will be low therby providing a variety of lending products that will encourage strong demand in the marketplace.
Credit insurance is the backbone to the bond market. Think of it as automobile insurance, higher risk behavior leads to higher premimums etc. If the housing foreclosure rate continues to rise due to resets,and economic slowdown then we might see significantly higher cost for credit insurance.
Analysts...
We always found it remarkable that you could spend an entire day with a plant tour and financial analyses with these guys and they would walk away with no idea what the drop-though profit items were and little clue how to describe the technology. In many cases, including where a friend of mine was Communications Director, the company would write the analysts' opinion for them. After exhausting attempts to correct information, it's all they could do.
The purpose of analysts is to move market prices to suit the intended beneficiaries. The press can be friendly to management....or not so friendly. Our stock was trashed by an article indicating that a huge company was entering the market. It failed to mention that the company was to be our customer. The new customer raised sales about 40% the first year. Not a word of contrition from the analyst. He had done his job. Whoever it was who wanted an entry point to buy our stock got his chance.
This is all 7-12 year old information, but I'd imagine this is all repeating itself with the RE market now.
All this data stuff is a bunch of gobbilty goop to your Average Joe. (Not that I don't appreciate it though). But what is totally understandable to almost anyone is "can I afford it?".
When houses (that you would live in) cost 5-6 times annual income the only reason to buy with a "tricky loan" is to do so with the hope of either rising equity or rising incomes. When neither are in the cards, then you're Average Joe gets out of the game. And the only ones buying become those who "have to"...., and I'm not sure "have to buy" occurs and will occur nearly as often as "have to sell".
When your Average Joe sees their average neighbor lose their job or their house or both (which will only be accelerated by Homebuilder's ability to undercut), then you will have a complete psychological turnaround in those who actually buy and sell houses.
When your average joe becomes "happy" with their current home, or "happy" renting and doesn't feel they are "missing the boat", then volume drops till prices become fundamentally affordable.
Just like Nasdaq 5000, (driven by those who don't normaly buy stocks), when it began to fizzle, your Average Joe became content to sit on the sidelines.
The Average Joe drove house prices up, and they'll drive them down. Homebuilders may have pricing power now but they are currently selling to those who still have "faith". Anyone buying now may be getting more house for their dollar but they are still buying more than they can afford. If you make a household income of $150 grand you "expect" to live in the type of house selling for about $700,000 but can only truly afford a $450-500 grand house...which you wouldn't live in! So, everyone is forced to pay more than they can afford if they chose to buy a house.
If home builders lower continue to lower their price to sell in stock in a declining market, they may unload inventory and perhaps make a profit, but they will undercut all the "have to" sellers and hasten to create a psychological environment where buying a house is not their smart move it once was.
From someone who is increasingly happy with their current home, and who looks at recent buyers as "suckers". I'm not alone.
You may not like interpreting data but it is the underlying data in the end that is paramount. This data is key to how the fed and financial markets play out and ultimately how the economy plays out.
There is nothing in that report that contradicts Average Joe's outlook. Rather it underscores how his self-interested behavior is reflected in the arcane dynamics of housing supply and demand, prices, inflation and interest rates.
Btw, how is business in the SD area lately? Inventories have crept down, but that always happens this time of year. Yet they're still very high. Have you seen any downward movement in prices? Are people buying on contingency? And if so, are you still seeing cancellations and/or sales dropping out of escrow due to buyers who can't sell their existing homes?
TIA and best of luck to you during these trying times.
First off, the AEI link is NOT data... it is opinion partially processed from data & assumptions (biased assumptions at that)... it might be right or it might be wrong. From the opening paragraphs...
A weak housing sector has accompanied every American recession since 1965, but not every episode of housing weakness has accompanied a recession. An annual drop in the growth rate of residential investment (a good measure of homebuilding activity) of more than 10 percent has coincided with a recession five of the seven times it has occurred since 1965. (In 1967 and in 1995, declines in residential investment occurred without a recession.)
Credit the author that it does not say a recession is unlikely - rather it is possible to not have a recession but will be difficult to avoid. I'd sure agree with that.
But if you look at '65-'66 and '95-'96 as role models of how a decline in residential fixed investment doesn't lead to a recession... I don't think you'll find you either want them as role models or that that they fit.
1965-66 was the ramp up of the Viet Nam War... the major escalation phase. I don't think we want that.
1995-96 was the ramp up to dot.com... there were many 'Schumpeter' benefits from the technology and a repeat of this would certainly be better than a war... but is there a 'next big thing' out there?
I'm an engineer who runs a small business and if there is one out there - I sure missed it.
In fact, if anything, I see the reverse side of the cycle - increased commoditization & consolidation... the complete anti-thesis of what you saw in 1996.
Given we don't want a war and that there is no 'next big thing' on the horizon? And using the AEI format... what's out there to stop us from heading into recession?
Again looking at it truthfully and without bias based on our wishes and self-interest... and believe me I'm FAR better off without a recession... what's in the way of this ending very badly?
Kevin - yep, I looked at it. Kasriel is comparing the NAR series to the 30 yr mort rate - a worthwhile comparison, but not an OFHEO number comparison.
Tanta - wrt your recollections, isn't the current subprime wave just a nastier and less transparent form of Shared Appreciation Mortgages? If prices go up, the lender gets a piece, via the high spread, and if prices don't go up, the lender doesn't get a piece. The only difference is less transparency - at least in the SAM case the sharing arrangement is explicit, and the involvement of the foreclosure process - the contract isn't explicit that the lender is gambling on continued appreciation, so the resolution is via default and foreclosure instead of being provided for in the contract.
Interesting way of looking at it, mort_fin. I never did much in the way of SAMs except in bond programs with "recapture" provisions, which are of course anti-speculator devices. (Civilians: I'm talking about low-interest first or no-interest second mortgages backed by bond programs that require the borrower to share some or all of the equity if the property is sold at a profit in some specified number of years; it keeps flippers out of subsidized loan programs.) In the brave new world of 100% LTV, financed closing costs, lenders doing cash-outs with no seasoning requirements, etc., we seem to have gone out of our way to eliminate all the anti-speculator devices this go-round.
What I guess I focus most on is the old 11th District COFI (Cost of Funds Index) ARM. It was mostly a CA phenomenon with some infiltration in the rest of the US. The selling point of the COFI versus the old warhorse Treasury ARM, as I recall, was that COFI lagged treasuries on the way up, or the bond market will get you before the Fed does. COFIs disappeared after a fair bit of bath-taking, as with Neg Am, only to re-emerge in the 00s as the LIBOR ARM (the "globalization COFI"--LIBOR is London Interbank Offered Rate or a kind of cost of funds index). I remember with a great deal more clarity the sales pitch for LIBOR over CMT: LIBOR lags treasuries on the way up, or the bond market will get you before the global credit market does.
There is one seriously big difference between the COFI and the LIBOR, of course. COFI was all the rage when rates were at historial highs and it was reasonable to think they had nowhere to go but down. LIBOR, on the other hand . . .
There's been discussion in this post on when to short HB stocks. I'm a bit depressed right now because during April-Aug I made a lot of money with puts on builders and some lenders. However, I believed too much in fundamentals (which in my view are still a disaster) and lost most of my profit (and some sleep) between Sept-Nov. At least I am smart enough to be out now and I hope that I am smart enough to be more cautious and to listen to what the market is saying, not what I feel confident will happen in the longer term. I'm not sure what I'll do next, although I'm sure that I won't be as aggressive, and I probably won't buy any more puts on housing related stocks until after an interest rate cut or two.
Mortgage Bonds Hurt by Delinquencies, Housing Slump
The mortgage bond market is beginning to buckle under the weight of the worst U.S. housing slump in six years.
Yields on so-called sub-prime mortgage securities rated BBB have risen to 6.52 percent on average from 6.28 percent on Sept. 5, data compiled by Bank of America Corp. show. The yield premium, or spread above the one-month London interbank offered rate, a lending benchmark, rose to a seven-month high of 1.2 percentage points.
Tanta - well I'm late to the game but...if I had Citi's 2ndMort (trans. Fr.) I'd be drinking even more heavily than normal. And not the good stuff either.
CR - thanks for surveying and taking apart all the headlines and 'local' (i.e. MoToMo data). BtW - YTD housing stocks (as proxied by the IRY ETF) are up 35%. Which I"d known then but that wasn't my call at all - on the presumption that any decent analyst could dload the same data and manage an Exel graph as well as most, being paid handsomely to do so. So the real question is what's going on ?
A very serious question as it happens. Before we get into your in-depth analysis of timing, lag, cyclic structures, etc. we're still faced with a slowing economy. And, w/o being in denial, a couple of years housing graphs that look terrible. How can anyone, even without getting into your level of analysis, reach an optimistic conclusion escapes me. But as Keynes said, 'the market can stay irrational longer than you can stay solvent'.
So, if we all believe your analysis - which I do having done some parallels in a small way - the slowdown is hard to ignore. And, it seems to me, only ignorable if you look only at recent data. That must be the mantra - headlines, first line of data, ignore next lines, ignore history. Voila' - a momenturm market feeding on itself.
Courtesy of BigPicture to Mish's there's a very intersting post on what the homebuilders are really doing at:http://globaleconomicanalysis.blogspot.com/2006/11/mortgage-brokers-synopsis.html
CR - part II: now if we dig into and take seriously your work then the well-known (or at least knowable) lag structures haven't really begun to bite though they're visible. And will be compounded by all the cycle differences of excess inventory, resets, etc.
But nobody seems to be seeing what's visible to see ? How odd as Jar-Jar would put it. But what to do ?
One woudn't want to step in front of this train but it seems like shorting the stocks or relevent ETFs might be a sound strategy once the technicals begin to confirm the underlying realities.
Then we have the problem of wider economic impact. With a slowing economy, slowing consumption, insufficient capex by business the MEW and construction employment shocks will come as a great surprise to many many people. And won't it be fun if int' currancy pressures force the Fed to keep rates higher than they otherwise might ?
So the real question cycles back to when the real housing downturn becomes visible in the headlines, what economic impacts it'll have and how the musical chair players react to it all. Thougts, comments, suggestions ?
DaveL, Agree hard to be optimistic about housing with a slowing economy. My main trigger for increased bearishness of housing related businesses would be either increases in mortgage delinquencies much higher than have been currently experienced or significatly tighter lending standards. Otherwise the housing weakness could be very gradual and choppy.
Will be plenty of time to short the builders when the downward trend has been established. Allways be a rally to short them .
2006 RE sales strong from a historical point of view, strong employment, lots of cheap credit, could call this a little correction if one is inclined.
DaveL:
I remember reading about Native Americans driving stampeding buffalo off a cliff. If you were a buffalo in the middle of the pack everything was making perfect sense, until the buffalo in front of you disappeared.
My general recommendation is to read every wall street insider book you can find. The whole system runs on phases of Cramerism until it exhausts itself and many are ruined. Fooled by Randomness by Taleb gives some good perspective. Make small bets with huge payouts waiting for the big dislocations. People are inherently awful at computing expected value. Just because A is 75% probable and B is 25% probable doesn't mean you should go with A. If A pays out $1 but B pays out $10, then the mathematically sound bet is to go with B. Over many experiments you will come out ahead. People tend to think of only the probability, not the payoff. Game theory books are fun to read also.
Liar's Poker, Fiasco, and When Genius Failed are interesting reads. Needless to say, I'm more wary of my investment bankers than I am of the crackheads all around me while walking though my local ghetto. Wall Street's primary purpose is to add efficiency in the allocation of capital. Typically that means allocating the capital to their own pockets, often at the expense of some poor guy's pension plan. Of course, they can only pick the pockets of the public for so long before something truly catastrophic happens -- pick pocketing doesn't grow food the last time I checked.
Wallstreet is all about new and more clever ways of figuring out how to stick somebody else with the bag of risks while keeping the rewarding pot of gold for themselves. From various readings, their general context of existance seems to be a driving desire to fuck you and then rip your face off (their terminology). Keep that in mind when dealing with them, especially any information flowing out of them.
Just to make this post not totally worthless, here is an interesting read for the derivatives curious crowd.
Arthur Jensen: You have meddled with the primal forces of nature, Mr. Beale, and I won't have it. Is that clear? You think you've merely stopped a business deal? That is not the case. The Arabs have taken billions of dollars out of this country, and now they must put it back. It is ebb and flow, tidal gravity. It is ecological balance. You are an old man who thinks in terms of nations and peoples. There are no nations; there are no peoples. There are no Russians. There are no Arabs. There are no third worlds. There is no West. There is only one holistic system of systems; one vast, interwoven, interacting, multivaried, multinational dominion of dollars.
The world is a business, Mr. Beale; it has been since man crawled out of the slime. Our children will live, Mr. Beale, to see that perfect world in which there's no war or famine, oppression or brutality - one vast and ecumenical holding company, for whom all men will work to serve a common profit, in which all men will hold a share of stock - all necessities provided, all anxieties tranquilized, all boredom amused. And I have chosen you, Mr. Beale, to preach this evangel.
Howard Beale: Why me?
Arthur Jensen: Because you're on television, dummy. Sixty million people watch you every night of the week, Monday through Friday.
Howard Beale: I have seen the face of God.
Arthur Jensen: You just might be right, Mr. Beale.
This transnationalism is tricky and the face of God not always so clearly depicited. Could we have Hubbard, Chair of the committee on Capital Marketing regulation that seeks to restore US companies to a level playing field in the international market, comment on this face of God?
No, we couldn't because he and his committee are too busy accepting donations from those starving transnationals.
Typically that means allocating the capital to their own pockets, often at the expense of some poor guy's pension plan. Of course, they can only pick the pockets of the public for so long before something truly catastrophic happens --
Another good book in Other Peoples Money by Nomi Prines who worked for Goldman Sachs.
There are a lot of Goldman Sachs people moving into government positions of late. Henry Paulson our new Treasury secretary scares the hell out of me.
You can read more comments from housing optimists at the two industry websites realtor.org and nahb.org
However, some of the publications require a subscription which I don't have.
In the December 11 issue of BusinessWeek, Jan Hatzius, the chief U.S. economist at Goldman Sachs, states that completions lag starts by 6-12 months and that even if housing activity stays at current levels then 600,000 residential construction jobs could be lost over the next 1-2 years.
I mention this because Hatzius is saying basically what CR has already told us.
"Btw, how is business in the SD area lately? Inventories have crept down, but that always happens this time of year. Yet they're still very high. Have you seen any downward movement in prices? Are people buying on contingency? And if so, are you still seeing cancellations and/or sales dropping out of escrow due to buyers who can't sell their existing homes"
Captain Spaulding,
Biz is not bad. Homes are moving if they are priced competitively with the current market reality. One big difference from exactly one year ago - last year at this time activity was dead. This year it is quite active if not robust for the season. The 10 year bond is about equal to what it was last year at this time...but...prices are anywhere from 3% to 25% lower depending on location. People are not buying on contingency due to the fact that now it's not the case of "when" a property will sell but "if" a property will sell. I've got some contacts in the homebuilding industry that are saying exactly what the B of A analyst said...activity has increased quite a bit in the past month. Oh, and I'm not real fond of anal-ysts
Do I think housing or housing stocks have bottomed? I'll answer that question with a quote from one of my favorite authors - Mark Douglas : "Anything Can Happen" and also say that no two cycles are the same. There are likely just as many people that bought property or properties between 96-2000 that are sitting on huge equity gains as there are late comers in trouble.
Fun stuff
There are likely just as many people that bought property or properties between 96-2000 that are sitting on huge equity gains as there are late comers in trouble.
I'd bet there are FAR more of the latter than the former... at least I sure hope so or we really are screwed.
If there are far more sitting on a sizable cushion of equity then this will be a 'down turn'... else it will be as bad as the most pessimistic bears envision.
Just an FYI - I lived in the rural Midwest through the 'Farm Crisis'... I heard an economist at IA State Univ do a 'postmortem' a number of years later (like a decade)... he said that at no one time did more that 25% of farms ever become even threatened let alone fail...
If you are unfamiliar with the Farm Crisis it too was initially driven by a credit bubble & run up in land/real estate prices. Once affordability got well over typical incomes then even creative financing couldn't save it... it was just a matter of time until an event (income declines do to commodity price shift) took them out.
End result was the whole market and local economies collapsed completely because of a few at the margin precipitated the initial fall & there wasn't enough equity buffer to carry most through.
I KNOW residential won't follow exactly the same path, too many differences... But the lesson to come away with though is that all markets are made at the margins. If unsustainable patterns are persistent (like funny financing to support valuations) then small shifts at the margin can drive the whole market down.
The only thing that would stop such a major shift would be 'fundamentals' - say most owners have so much equity they can resist all but the biggest shocks (say lose a job, divorce, health emergency) without being forced to liquidate in an emergency.
Think of it as a 'sell stopper'.
If on the other hand, they are too close to the edge (like they bought recently at high LTV)... even minor hiccups become major events.
Better hope there is a lot of equity out there still.
I'd bet there are FAR more of the latter than the former... at least I sure hope so or we really are screwed.
Should have read...
I'd bet there are FAR more of the FORMER (with equity) than the LATTER (without equity)... at least I sure hope so or we really are screwed.
While a slow and gradual 'correction' and reallocation of the nations resources away from RE speculation will be a good thing, an immediate crash would not... equity is the buffer moderating the correction and keeping us from a crash.
Serves me right for watching football while surfing the web.
Dryfly, good post. Easy to forget that many big market moves are due to a relatively small number of marginal buyers or sellers. That is why I think the availability of financing to marginal buyers is critical.
serves me right for watching football while surfing the web"
I was doing the same thing dryfly
Thank you for your intelligent and insightful comments. I truly appreciate having the opportunity to read and learn from this blog. Also, I agree with your view and tend to lean towards the bear camp myself... knowing that being proven wrong wouldn't be such a bad thing.
Just a bummer to see how people whom had generous equity postitions built up in their properties from the original runup thru 2001 have greed set in and cash out their equity to purchase one or more additional properties...now finding themselves faced with the possibilty of losing them all.
just a bummer to see how people whom had generous equity postitions built up in their properties from the original runup thru 2001 have greed set in and cash out their equity to purchase one or more additional properties...now finding themselves faced with the possibilty of losing them all.
Wow - how history rhymes (if not repeats)... what you described is how many farmers got in trouble in the ag crisis. They did EXACTLY the same thing.
In my county land was selling for about $800/acre in the mid to late 1970s... then land values started taking off due to speculation similar to condo flipping. Folks would buy a 1000 acres and sell it to somebody else a year later for double what they bought it for, so on.
Eventually local farmers got in the act - they would take out loans against their farms that had been in the family for generations - some over 100 years called 'century farms' - and buy neighboring parcels for the appreciation.
And we aren't even talking big parcels. A guy might have 1000 acres he paid $500 an acre for twenty years ago and have it half paid off then buy a 200 acre parcel nearby for $2,000 an acre and increase his holding by 50% but triple his leverage.
While the land was escalating folks were buying more and more at higher and higher prices... then it just stopped. Just like that. About 1983.
And none of these guys had incomes - from farming or otherwise - to support the debt. Foreclosures started and it was a blood bath.
But it all started on the margins... the guys would try to sell of the small parcels & back out in reverse but the market would have none of that.
In the end people would lose all, their families century farm, because the over extended at the margins.
The farmers who DIDN'T expand during the bubble & DIDN'T take on debt... waited for the bottom & later doubled their farms for a song & a dance. Many are still farming today.
In my county land went from about $800 pre-runup to say $3,500/acre peak (approx) to as little as $400/acre post-crash. And we are talking prime Midwestern farm land that needs no irrigation and very little fertilizer. Top soil 6-10 ft thick.
A guy might have 1000 acres he paid $500 an acre for twenty years ago and have it half paid off then buy a 200 acre parcel nearby for $2,000 an acre and increase his holding by 50% but triple his leverage
I am a moron tonight - heck the farmer increases his holdings by only 20% but ends up with approx three times the debt!!
Anyway... I knew people who did that and lost all - kids from my high school class who bragged at our 5 yr reunion they had expanded their families holdings so that they had $4 million dollars worth of farm land under plow... then never showed up again at another reunion. They lived in the same town I had gone to high school so I heard the story - they lost their families 'century farm' in the 'crisis'.
Those are times you never forget. It was a mini-depression. And for most the hard times were unavoidable - they were going to suffer some - but if they had been more cautious they would have survived.
Here is the bust I saw in CA one of my kids bought this in 98 and sold in 04 they are currently renting it is listed now for 260k. 95 was reo fire sale, No buyers.
Take Residential RE. How is the selling price normally determined? By comps. By the history of the last sales. Now at the top of the bubble, things take a while to happen, because the comps are not accurate of current market conditions. They lag a bit. As sellers unload, the comps drop. As the comps drop, the prices of everything in the neighborhood drops. Dragged down by the comps without anything being done by the owner.
Without any transaction involving the owner.
As the market drops then all kinds of things can happen. For companies holding those RE assets, the assets are supposed to be marked to market.
I am not real sure what recourse mortgage holders have if the value drops below the mortgage amount if there is no sale. But refis are going to be a pain.
"Better hope there is a lot of equity out there ..."
CNN: "In 1973, the average homeowner's equity was 68 percent. That's dropped to 55 percent today" 10/28/06
So equity is at record lows, even with the run-up in prices. This is extraordinary. The "wealth" generated by the bubble has already been spent, plus we've spent some of the rest of the accumulated equity! There is no cushion, at least in aggregate. This will become known as "drunken sailor" economy. It was great 'til we ended up flat on our face.
This is what scares me the most.
it's almost as if people look at their 'owned' houses as if they'll never pay off the loan. this is called rent so i don't get why people partake in even buying unless they have some perverse notion that appreciation rates will continue to defy all logic explanation.
The housing derivatives market sees the divergence as with many of the other commenters here. The CME housing futures show that the major housing markets (existing homes, repeat-sales) in the US are going to be worth 4.5% to 8.5% less in November 2007. That is from professional trading, albeit low value, but trading nonetheless. The S&P/case-Shiller Indices settle these.
The housing derivatives market also sees that perhaps the home builders shares may have bottomed. A question that the housing futures traders have is whether home builders shares and economics respond to more home sales and starts figuresand less to housing prices. In other words, are sales and lack of sales the economic metric that determines HB shares values and forward guidance?
The housing futures and options market are pricing US housing prices lower in 2007.
I read the following the Nov. 30th Motley Fool article on housing stocks:
"Every industry looks at the inventory-to-sales ratio, and housing should be no exception. Having said that, consider that the ratio of single-family housing starts to sales is now at the lowest level since the government started recording this data in 1963."
Is this really so?
And then there is this:
"Rates are falling, and that means affordability is rising. The benchmark 10-year Treasury is currently at the lowest level in 10 months and trending lower. Mortgage applications (purchases) have risen 20% in the past five months, while refinancing applications have climbed nearly 50%. The latter will put money in current homeowners' pockets, making it possible for them to "trade up" to larger, more expensive, or even newly constructed homes if they desire."
Okay, while it's true that the 10-year is forecasting a Fed rate reduction (which may or may not happen, of course), I wonder if new mortgage apps really are trending upward that strongly. Nothing I've read anywhere else suggests this is true.
And I find the claim that people are going to re-fi and use the extra cash to trade "up" preposterous.
But I'd appreciate comments on the facts he uses to support the bull case. Thanks.
umber2son, there's nothing second-best about your bullshit detector.
I like the 10Y being at its lowest in 10 months point. ("30 year" fixed rate mortgages are more or less priced off the 10Y). If you couldn't afford it 10 months ago . . .
The last Freddie Mac Cash-out Report showed that the average cash-outer in Q3 was taking a higher rate on the new loan than they had on the old loan; the median property had appreciated by about 33% since the old loan was made at a median of about three years ago. The aggregate amount of cash taken and percent of all refis involving cash-out were at record levels.
It is not easy to draw hard conclusions about how many cash-outers' higher monthly payments on the new loan were offset by lower monthly payments on consumer debt (or a HELOC with skyrocketing payments based on short-rate indices) being paid down or paid off with the cash proceeds, or how many of these were ARM-to-fixed refis just prior to reset, which means that the borrower didn't "really" take a higher rate on the new loan--at least, not for more than a month or two. It can, however, be fairly confidently stated that people (can) use refi proceeds to buy second homes and investment properties. Taking a cash-out refi in order to "upgrade" the house you're living in is beyond "preposterous." A "bridge loan," maybe. But the usual, least expensive way of liquidating the equity in your current home in order to buy a new one is still to sell it. If you are unable to do that, you often become what is known in the industry as a "cancellation." Your average "cancellation" walks away from a decent-sized chunk of cash earnest money, making it a bit dicy to borrow earnest money by hocking the house you have. Cancellation rates are said to be also at "record levels" these days. I will also observe that every signed contract that got cancelled also generated at least one mortgage purchase application before it flamed out, and quite possibly more than one, especially if it cancelled because the contract on the existing home purchase which also generated a purchase application fell out first.
High refi/cash-out refi volumes may help in the short-term to keep the default rate/foreclosed inventory numbers down for a while. The idea that they will boost new home sales is a particularly frightening kind of kool-aide drinking.
The Motley Fool comments strike me as a bit disingenuous. Echoing Bill who commented earlier, they completely ignore the fact that median house prices remain unaffordable compared to median incomes in many markets. Just exactly who is going to buy up all this excess inventory and keep house values high? I'm not sure there's been enough decline in house prices here in Eastern MA to get a rally going again. I'm not sure about locally for me, but statewide, the median house cost is still about 6 times the median household income. That's a BIG mortgage for most of us.
As someone else pointed out, alot of sellers have pulled out of the market in the hopes of waiting until things get better, so it seems to me that there's more potential inventory than the optimists are acknowledging. (Granted that the Fools are only talking about housing starts, of course, and CR already noted the major flaw in their numbers.)
Sliding off on a tangent, Richard says: It's almost as if people look at their 'owned' houses as if they'll never pay off the loan. I think that's correct; alot of people thought they were buying a cash cow rather than a place to live, and they would just keep milking off HELs and taking deductions on their income taxes, because who needs to pay off a mortgage when your equity is growing at 30% a year? I wonder how the housing market will do if people no longer see houses as an instant piggy bank, filled by someone else.
One more post from your Average Joe about what is "really happening" out here.
I have friends who are paying $1600 a month for rent on a house near the beach. They feel they are the only ones who don't own. Now, with tricky financing from new home builders, they can pay $1500 a month to own a condo with NO PAYMENTS for a year! The condo is inland and sucks but they are willing to move to pay no rent for a year on something they will "own". They will do a stated income loan and believe that the male (is a plumber) will have his business off the ground by then. In the meantime, their only risk is their credit. She is the mother of two kids with different fathers and the plumber is her new boyfriend. Needless to say they have never thought past tomorrow before and aren't doing so now. But without the need to save for a down...and with lucrative short term incentives, what the heck.
I have another friend who has to move "up" because of a growing family. A new home developement nearby with about 20% (5 of 25 that just can't sell) of their new houses that have been empty coming up on a year, is going to buy his current home for the full price, to sell him theirs at full price. This will potentially ruin the comps if the builder sells his old home for a loss later but it won't be in the builder's neighborhood and upset those who bought the other 20 homes in the development. The old neighborhood neighbors will probably bev emporarily happy because the recent sale to the builder keeps the comps up in their neighborhood. In the meantime the builder can afford to let the old house sit empty and wait for the market to "come back" next spring. If they eventually lose money, no biggie, they were willing to knock down the price of the new house by $50-60 grand anyway.
I have a sister-in-law who got divorced 3 years ago and "bought out" her husband to keep the house. They owed $400,000 on a $700,000 house. She did a stated income, option arm for $500,000 and gave her ex $100,000. She makes less than $50,000 a year in a gov job. She pays about $1700 a month and the other $2000 grand or so goes on top of her current loan. She's probably up to $550,000 loan on a house that she "thinks" is still worth $700,000, but I doubt she could walk away with nothing after fees etc. It may be worth $550,000 if she's lucky. That is a train wreck in the making. She thinks she'll get room mates when she "needs" to. She doens't even realize she is borrowing $2000 each and every month and still barely making it.
I other friends (couple) who bought a house in 98 for $200,000. They sold it for $275,000 a few years later and moved up. They continued to move up two more times (even out to vegas and back) He has tried to sell insurance, amway, etc, you get the picture. She cuts hair. They have virtually lived off of home equity the last 5 years (about $300,000 in MEW total). They have no net worth. The gravy train of MEW
Average Joe, your second example (the builder buyout) is even worse than you think. That's a textbook example of a "non-arm's-length" transaction, which means that reputable lenders are either unwilling to touch it or place substantial LTV restrictions on it. The appraiser should factor the buyout as a sales incentive into the appraised value of the new home, which effectively lowers the amount you can borrow since LTV is based on the lesser of price or appraised value. Therefore, everybody lies to the lender and the appraiser. Every time a builder lies (about buyouts or any other concealed inducement), that builder takes on the low probability but high severity risk that the borrower will default, the lender will look for a bag holder, and the party who engaged in the most fraudulent activity gets to be It. Just something for owners of homebuilder stocks to think about.
Speaking of delinquency rates, I noticed the Fed's Q3 DQ and charge-off stats are online today. Late payments on residential real estate loans are leading the DQ race. Here's a complete post I had at my blog...
Every quarter, the Federal Reserve releases data on loan delinquencies (defined as loans that are at least 30 days past due) and charge-offs. Q3 figures were just released today. Surprise, surprise: Late payments on real estate loans are on the rise.
The delinquency rate for all RE loans jumped to 1.47% in Q3 from 1.38% in Q2. That's the highest since Q2 2004. The residential RE delinquency rate jumped to 1.72%, the highest since Q4 2003, while commercial RE delinquencies were only 1.10%, the highest since Q1 2005.
It's important to note that these deliquency rates are VERY low historically. But the trend is clear -- toward higher DQ rates. All the easy money/Frankenstein Financing handed out during the housing bubble is coming back to bite lenders. The only question is, "How severe will the fallout be?"
Delinquency rates for most other loan categories (agricultural, commercial & industrial, etc.) remain low, though credit card DQs are picking up. Charge-offs remain low, but they lag DQs by a few months (you have to miss a payment first, then the bank tries to get you caught back up, THEN they charge off the loan as uncollectable)
What's convincing is optimism. Kind of like Iraq.
And, you know, the same hand gave us both causes for optimism: Alan Greenspan.
Seeing George Bush doesn't have a brain in his head, Greenspan gets the nomination for the most evil man in the world.
But only if the optimism is nothing more than that. If the optimism is justified, then George Bush is a genius, and Alan Greenspan is the Messiah.
All, just a friendly reminder ...
All views are welcome. The discussion in the comments is usually very informative and provides an excellent discussion of different perspectives. Thank you to everyone that participates!
However there is some behavior that I believe is inappropriate, such as insulting other posters (name calling), posting using multiple aliases, or posting using the names of other frequent posters.
Please be polite and all are welcome to participate. Thanks in advance to everyone.
Best to all.
Bill, you obviously haven't got the "memo" yet.
We're an Empire (of Debt) now. We create our own "reality".
Its a new paradigm, and everybody who doesnt buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.
Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and Hondas.
This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.
CR, Great Post. The recent economic data seems very weak. Therefore, as indicated in your post further weakness in housing is nearly guaranteed. Unless lending standards tighten meaningfully the decline may be gradual but lengthy. It seems likely the poorer housing company stocks are a long way from the bottom in time and possibly price.
Lucky you in your Honda, 'Harm'. Many of us would love to live in a Honda...and dump this crummy Fiesta, you know?
So, no correction in the housing bubble, just a minor adjustment now and again while the bubble continues to grow with the Honda liveaboards?
I feel like such a moderate next to you. Talk about taking the Recession-Scare punch bowl away...
"Bank of America Securities analyst Daniel Oppenheim upgraded several of the builder stocks today, saying he sees an "improvement in traffic, affordability and construction trends." ...
Heading for the exits, just when the the turnaround is starting?
CHARLOTTE, N.C., Dec. 1 /PRNewswire/ -- Bank of America Chief Financial Officer Alvaro G. de Molina today announced his intention to resign from the company. Joe Price, Global Corporate & Investment Banking Risk Management executive, has been named to succeed de Molina as chief financial officer.
(
Hi,
CR, it seems Robert Schiller is in agreement with you.
Saw a nice interview of Prof Robert Schiller on yahoo this morning. He says that he thinks there's still not enough fundamental pervasive pessimism about housing yet. Until optimism is completely wiped, he thinks the housing decline should last. He mentions it may last some more years.
Look for Schiller at this link
Videos - Yahoo! Finance
Could it be that these latest upgrades are part of a classic "pump and dump strategy"? As for Al Molina leaving BofA, I don't really see any correlation there. He has been getting CEO offers from what I hear...
CR -- if you were an analyst would you not subscribe to the concesus view? I think that you probably would. For an analyst the most prudent course of action is to follow concesus. Those that dont typically get fired.
But since you are a blogger, you have the privilege to write what you really think. Consider yourself lucky. Most analysts dont write what they really think. They write what they get paid to write.
Somebody from Citibank, who no doubt is paid entirely too much money, and whose job I now want, wrote:
"We expect both the timing & steepness of this rally to take most industry observers by surprise."
He's gotta be kidding. If the homebuilders still have in 'em a rally potential equal to what we've seen since August, that would put the price of many issues very close to their ALL-TIME HIGHS.
sharkbait
For an analyst the most prudent course of action is to follow concesus. Those that dont typically get fired.
Paul L. Kasriel doesn't follow concesus.
The Carry Trade in U.S. Housing Looks to be Over
this one
Excellent link Kevin, but do I comprehend the full import of 'the carry trade is over'?
The housing market has to rebound to a postion that is better than the 2% financing hurdle requires, yes? And that cheap yen with ZIRP may be a thing of the past for Japan's improving economy and increasing reliance on non-American bound exports, yes? So an increasingly larger financial hurdle. So prices may unwind on houses faster than anticipated, shortening this 'soft spot' of depreciating house prices...getting rid of the less seasoned speculators first...a short period of unhappiness, yes? But once housing prices are low enough to sustain a 2% price escalation, we are back to normal and everyone lives happily everafter?
This doesn't touch upon the sinking $, but I think Kasriel does not see that happy ending in the near future.
sharkbait, for Wall Street there is clearly an incentive to always be bullish.
I try to call it the way I see it, and explain why - and you are right, I have that luxury.
Best to all.
Kevin -- norther trust has its own agenda. Its kind of like listening to Bill Gross. Remind last time Bill Gross or northern trust for that matter were bearish on bonds?
Despite falling rates, NOD's and foreclosures are trending up. The homebuyer market is exhausted and the subprime/exotic loan borrowers are trapped. Lower rates are proving they will not save housing.
I love that the crowd is driving the stock prices up, when the time is right the shorts will be even better.
So, I think we agree that true optimists -- those who expect a quick return to 2003-2005 sales numbers and continued price appreciation -- are unlikely to be right. However, I believe it is possible, if unlikely, that housing prices could meander up with incomes for another couple years. In short, the argument is, it could be 1986.
Yes, I am playing Devil's Advocate with myself. Cf my post on prices, mortgages and incomes. Like our host, I think it's 1989, mostly based on inventories. However, rates are low, employment while not nearly as good as the headline rates suggest remains stable for now, and incomes are okay. Prices could flatline for some time.
I'm not betting on it, but how do the inventory/income/affordability numbers now differ from the late '80s?
Picking 89Q3 out of the hat isn't easy.
calmo
But once housing prices are low enough to sustain a 2% price escalation, we are back to normal and everyone lives happily everafter?
I think we'll live happily everafter but I think housing prices may go lower then is expected and take longer to rebound then is expected.
sharkbait
I witnessed one of these bust in the eighties, REO were selling for 20 cents on the dollar, 50% of subdivison, defaults, no buyers and that one wasn't caused by overbuilding, speculation, and easy money it was caused by to many people with to much debt.
supply/demand
Nonetheless, with underlying housing demand growing 3 percent per year, the large gains in residential investmentwhich averaged 8-1/2 percent per year between 2001 and 2005clearly could not continue indefinitely. Moreover, housing demand may slow to less than 3 percent, as demographics point to slower growth in household formation. As a result, we at the Chicago Fed expect some further weakness in residential construction.
see
- , Federal Reserve Bank of Chicago
I'm normally wary of anything sell-side analysts have to say, we all know they have an agenda that sometimes collides with delivering the honest truth to the public. Such is BoA's Oppenheim, for example. But I reserve particular contempt for anything anyone at Citigroup has to say about the housing market. Citigroup, you see, is home to the most unvaryingly bullish booster for this sector, one Steven Kim.
In fact, I find Citigroup's recent cheerleading an excellent contrary indicator.
That's not to say their efforts haven't been effective. Look at KB Home. There is absolutely no fundamental basis for a 30% rise in their stock price. The company is one of the most highly leveraged and overly exposed builders in the market.
If nothing else, KB Home is a study in the salutary benefits accruing to a stock price from relentless shilling by analysts and media hypsters, with the additional fortuitous "inability" to report full financial results due to ongoing "internal investigations".
The BofA's Oppenheim, who has heretofore been a pretty solid observer of the housing situation, must be highly embarrassed at how he has been used. Maybe he judged it was worth it, but it has come at a high cost to his integrity. After this adventure in sell-side whoring, he'll have to work hard to earn back his credibility.
WCW wrote:
"However, rates are low"
Two key groups really drove this market higher: Speculators, and the sub-prime group. The speculators are largely gone. The sub-prime group is still around, but for them rates are quite high. If inflation is at the level it's purported to be, their real rate is really high.
And for those paying a mortgage on a depreciating home, their effective real rate is astronomically high.
For those with good FICO scores .. I agree with you, rates are low. But the folks with the good FICO scores have always been in the market. Knock back the sub-prime owners to pre-boom levels (in other words, tighten up lending standards), and housing levels revert back to where they were in the good 'ol days.
What I'm trying to say: At this point, I don't consider rates to be the real issue. It's more accurate to say "housing can be supported because lending standards remain loose".
Thanks wcw, for that thoughtful, informed and engaging post -how are things different from the late 80s?
The environment is not crowded by hi-tech distractions and alternative investment opportunities since skewed by tax shelters for principal residences and much easier credit conditions. [Residential investment has had 2 consecutive quarters of >10% losses seeing those other attractions.]
The "meandering up incomes" is a proposition that looks extremely doubtful to me.
If the income distribution was headed the other way, I might be able to entertain this for a few moments, but those Texas janitors distract me mightily.
It looks like we might see some of the recent speculators take some losses and furthermore, current speculators take their trade elswhere until house prices improve. That alone should pull prices down further and may partly explain the haste of authorities to announce that the worst is over.
If you understand how hosting a highly accessed web site works, you can come to the conclusion pretty quickly that the "rates are low" argument is way too simplistic. Rates are only one part of the equation. The cost of a mortgage is based on rates and price.
The argument is like saying, "because a web site is linked to a router with very wide bandwidth, it should be able to handle a boatload of traffic." Of course, you need to serve the web site from from a computer with enough processing power to handle a bunch of simultaneous connections.
Replace bandwidth with easy money. Then replace processing power with personal income relative to price. People simply do not earn enough to pay for the price of houses, so the low rate argument is a moot point.
Networks fail even when bandwidth is more or less unlimited. The housing market can also take a beating even when easy money is abundant.
I would submit that the data regarding (resale) inventory numbers has already taken many by suprise (including myself). Any data junkie cannot deny that inventory is well, well off it's peak (some san diego zip codes have seen up to 35% reductions in inventory since mid summer 06), activity is quite robust for this time of the year (buyer traffic/pending sales), interest rates have come back to what they were at the beginning of the year, most builders have seriously pared back their inventory, and homebuilder stocks are in a furious rally of late. False bottom or stabilization ? The true answer to that will not be known until at least mid summer 07 or even 08? Data does not lie...or does it...?
Fun stuff.
Agreed. We got a lot of "positive" outlook reports all through the year 2000 on the stock market. You can't expect to have such a large run-up in prices and a tiny drop.... it's just not realistic.
Don't you know that CR spends the other half of his day writing puts on homebuilders to sell to us suckers?
I can see him now, saying... "I just keep ripping the faces off those fuckers and they just keep coming back for more."
sorry for the profanity, the joke required it. nor is questioning CR's motive an original joke. another apology.
Lots of good data.
As always, great graphs.
There is one point I think is questionable:
"This high level of existing home inventory should depress new home sales and put pressure on prices."
I think the builders are more able to lower prices in order to increase sales.
I think the builders will be causing most (or a great deal) of the downward price pressure. It looks like there is no level of inventory that will reduce owner's asking prices. A lack of offers should cause a drop in asking prices.
"We expect both the timing & steepness of this rally to take most industry observers by surprise."
And rather than make a killing and retire young, we decided to share this suprising info with all of you...the whole world in fact...because we're just the friendly kind
of folk.
I find it weird that just a week before all the home builders are going to present at Bank of America´s 2006 Credit Conference they all get upgraded. Timing seems a little weird, why not wait until you see what they have to say and then upgrade them? I'm not a big conspiracy fan but it just seems odd, no?
I think the so called 'optimists' for the most part have 'vested interests'-
The view based on 'fundamentals' is the acceptance that 0 percent interest rates for a prolonged period of time is 'normal'....
This is where reality vs. fantasy sets in. These same warm and sunny optimists are for the most part the same characters who said in early 2000 that Nasdaq 5000 was based on 'fundamentals'.
and as a continuation of my thought above- after many of those IT stocks took a major beating- many of these optimists in late 2000 upgraded them and said they where a 'buy'- funny how these individuals lack credibility.
If I owned Citigroup's second mortgage portfolio, I'd be writing upbeat research notes, too. (Although it occurs to me that if I owned Citigroup's second mortgage portfolio I probably wouldn't be smart enough to spell "optimism," let alone use it in a complete sentence.)
OK, just ignore me this morning. Someone just suggested that it's 1989 and I have a few traumatic memories of 1989; it makes me goofier than usual. Not only was that about the high-water mark of the last time we experimented with negative amortization ARMs, we also had the Gyp 'Ems (GPMs, Graduated Payment Mortgages) and Step Loans and 7/23 Two-Steps and everyone's favorite COFI ARM (which gave way to the COLA NUT, but I digress). Yeah, this generation didn't invent "nontraditional" mortgages, it has just, um, refined the concept. Thing is, in '89 we did actually carry all that crap on the books, which introduced at least some caution into the equation. Now that you can find a synthetic CDO strip tranch for every dumb-ass mortgage freaks like me can think of, I conclude there's nothing to worry about here. Folks. Move along. These are not the 'droids you are looking for.
Another day, another sucinct--and telling--graph. CR once again refutes BS with sound facts. Meanwhile, the WSJ can't regurgitate a governemnt report without distorting it....
The thing about the starts to sales figures this time is that a relatively high percentage were being bought by investors. The figures on that are all over the map, mainly because so many investors tried to hide the fact, partly to get better loan rates.
The inventory figure needs to be boosted both the cancelled sales and the houses held by investors who intended to sell within a year or so.
When I first heard about blogs, I thought, what a complete load of crap. And, by and large, time has validated that assumption.
But if there is one blog that actually fulfills the claims of their advocates, Calculated Risk is it. Thanks, CR.
CR.
Your blog is not equilibrated but not biased by espurious (interested) views. It is your view, your hypotheses and your thinkings. You post bearish and bullish views but this doesn´t mean balance. I think it is OK because balance is not truth, nor wisdom necessarily. You have your own bias, but it is genuinelly yours and not other's. You give us the possibility to learn freely from your knowledge and for that you deserve credit.
Thanks (again) a lot for your blog. It is good to view bullish arguments in your blog and to read how you discuss them.
I want to make a question. It is clear that Citi economists are more optimistic than some economists that work for investment banks (such as Goldman Sachs). I believe that Citi businesses include both investment and traditional lending. Do you think is there a consensus among traditional banks and a different consensus at investment banks? What is the position of, lets say Bank of America, on housing?
I had lunch with an elete insider from one of the country's largest home builders, a few days ago. I drove to the meeting; he came by private jet. I chided him about his company's huge land write-downs. He said all that will be history as of 2007. From here on, he stated, his company will pay very little for options on tracts of land, buy nothing it hasn't already 'sold', build nothing over $300,000, and concentrate its building in the southern coastal states (excluding Florida). He expects his company's stock to be very strong in 2007.
I talked to him about a townhome I contracted for in a new town center project at a South Carolina beach. He informed me that his company had taken down a huge tract of land in that same project, and then sold half of it for double what it had paid. The company that bought it from his company, then sold it for double what it had paid. This was all in the last year.
oops, elete should have been elite.
Tanta, For the FED I'd say 1976. Wall St. has yet to feel the pain. It will.
As I predicted last quarter, everyone focuses on the front page OFHEO number, 3.5% annualized appreciation. They talk about appraisal bias, but no one digs into the numbers to actually calculate the appreciation from Q2 06 to Q3 06. So I will. The quarterly change in the seasonally adjusted purchase only index is 0.37%, which annualizes to about 1.5%. So, according to the purchase only OFHEO index, house prices fell in real terms between the 2nd and 3rd quarter. They have a seasonally adjusted and non-seasonally adjusted series - not seasonally adjusted the increase annualizes to 1.4%.
Not everyone mort:
As I predicted last quarter, everyone focuses on the front page OFHEO number, 3.5% annualized appreciation.
Did you visit the link to Kasriel provided above?
Kevin | 12.01.06 - 9:04 pm |
Thanks for those personal recollections of '89 Tanta and the germinations of the current 'financial instruments' in housing.
My concern is that there are a lot of people planning to sell next spring, including speculators who now have their fingers crossed waiting for the housing market to improve. I don't think that housing can recover in the hot (bubble?) markets without much greater price declines. With speculators as net sellers, where will the buyers come from? The high prices will keep out many first time buyers, and the notion of owning a second or third home as an investment has already taken a real beating. Will foreclosures continue to rise? Do the bulls realize how much prices have gone up during a period of relatively flat wage growth? I realize that my take is not based on hard analysis--it mainly comes from spending a good amount of time reading blogs.
So, I think the answers will come next springwhen we see whether inventories come down, at least some, or rise appreciably. If the economy continues to slow, that will be a factor, but I don't think that interest rate cuts will help housing that much. The real interest rate is the rate of the loan minus the rate of price appreciation. If we see negative price appreciation, or even the prospect of zero growth, low interest rates won't be enough.
realist wrote:
"build nothing over $300,000"
Sounds like a good survival plan. Also sounds like a real margin killer. Unless his company's stock hasn't participated in the most recent rally, his '07 view may be a bit optimistic.
Housing optimist's basic underlying argument(not stated)is that interest rates will be low therby providing a variety of lending products that will encourage strong demand in the marketplace.
Credit insurance is the backbone to the bond market. Think of it as automobile insurance, higher risk behavior leads to higher premimums etc. If the housing foreclosure rate continues to rise due to resets,and economic slowdown then we might see significantly higher cost for credit insurance.
Analysts...
We always found it remarkable that you could spend an entire day with a plant tour and financial analyses with these guys and they would walk away with no idea what the drop-though profit items were and little clue how to describe the technology. In many cases, including where a friend of mine was Communications Director, the company would write the analysts' opinion for them. After exhausting attempts to correct information, it's all they could do.
The purpose of analysts is to move market prices to suit the intended beneficiaries. The press can be friendly to management....or not so friendly. Our stock was trashed by an article indicating that a huge company was entering the market. It failed to mention that the company was to be our customer. The new customer raised sales about 40% the first year. Not a word of contrition from the analyst. He had done his job. Whoever it was who wanted an entry point to buy our stock got his chance.
This is all 7-12 year old information, but I'd imagine this is all repeating itself with the RE market now.
All this data stuff is a bunch of gobbilty goop to your Average Joe. (Not that I don't appreciate it though). But what is totally understandable to almost anyone is "can I afford it?".
When houses (that you would live in) cost 5-6 times annual income the only reason to buy with a "tricky loan" is to do so with the hope of either rising equity or rising incomes. When neither are in the cards, then you're Average Joe gets out of the game. And the only ones buying become those who "have to"...., and I'm not sure "have to buy" occurs and will occur nearly as often as "have to sell".
When your Average Joe sees their average neighbor lose their job or their house or both (which will only be accelerated by Homebuilder's ability to undercut), then you will have a complete psychological turnaround in those who actually buy and sell houses.
When your average joe becomes "happy" with their current home, or "happy" renting and doesn't feel they are "missing the boat", then volume drops till prices become fundamentally affordable.
Just like Nasdaq 5000, (driven by those who don't normaly buy stocks), when it began to fizzle, your Average Joe became content to sit on the sidelines.
The Average Joe drove house prices up, and they'll drive them down. Homebuilders may have pricing power now but they are currently selling to those who still have "faith". Anyone buying now may be getting more house for their dollar but they are still buying more than they can afford. If you make a household income of $150 grand you "expect" to live in the type of house selling for about $700,000 but can only truly afford a $450-500 grand house...which you wouldn't live in! So, everyone is forced to pay more than they can afford if they chose to buy a house.
If home builders lower continue to lower their price to sell in stock in a declining market, they may unload inventory and perhaps make a profit, but they will undercut all the "have to" sellers and hasten to create a psychological environment where buying a house is not their smart move it once was.
From someone who is increasingly happy with their current home, and who looks at recent buyers as "suckers". I'm not alone.
You may not like interpreting data but it is the underlying data in the end that is paramount. This data is key to how the fed and financial markets play out and ultimately how the economy plays out.
Check it
AEI - Housing and American Recessions
sandiegoRE, thanks for the link.
There is nothing in that report that contradicts Average Joe's outlook. Rather it underscores how his self-interested behavior is reflected in the arcane dynamics of housing supply and demand, prices, inflation and interest rates.
Btw, how is business in the SD area lately? Inventories have crept down, but that always happens this time of year. Yet they're still very high. Have you seen any downward movement in prices? Are people buying on contingency? And if so, are you still seeing cancellations and/or sales dropping out of escrow due to buyers who can't sell their existing homes?
TIA and best of luck to you during these trying times.
First off, the AEI link is NOT data... it is opinion partially processed from data & assumptions (biased assumptions at that)... it might be right or it might be wrong. From the opening paragraphs...
A weak housing sector has accompanied every American recession since 1965, but not every episode of housing weakness has accompanied a recession. An annual drop in the growth rate of residential investment (a good measure of homebuilding activity) of more than 10 percent has coincided with a recession five of the seven times it has occurred since 1965. (In 1967 and in 1995, declines in residential investment occurred without a recession.)
Credit the author that it does not say a recession is unlikely - rather it is possible to not have a recession but will be difficult to avoid. I'd sure agree with that.
But if you look at '65-'66 and '95-'96 as role models of how a decline in residential fixed investment doesn't lead to a recession... I don't think you'll find you either want them as role models or that that they fit.
1965-66 was the ramp up of the Viet Nam War... the major escalation phase. I don't think we want that.
1995-96 was the ramp up to dot.com... there were many 'Schumpeter' benefits from the technology and a repeat of this would certainly be better than a war... but is there a 'next big thing' out there?
I'm an engineer who runs a small business and if there is one out there - I sure missed it.
In fact, if anything, I see the reverse side of the cycle - increased commoditization & consolidation... the complete anti-thesis of what you saw in 1996.
Given we don't want a war and that there is no 'next big thing' on the horizon? And using the AEI format... what's out there to stop us from heading into recession?
Again looking at it truthfully and without bias based on our wishes and self-interest... and believe me I'm FAR better off without a recession... what's in the way of this ending very badly?
Kevin - yep, I looked at it. Kasriel is comparing the NAR series to the 30 yr mort rate - a worthwhile comparison, but not an OFHEO number comparison.
Tanta - wrt your recollections, isn't the current subprime wave just a nastier and less transparent form of Shared Appreciation Mortgages? If prices go up, the lender gets a piece, via the high spread, and if prices don't go up, the lender doesn't get a piece. The only difference is less transparency - at least in the SAM case the sharing arrangement is explicit, and the involvement of the foreclosure process - the contract isn't explicit that the lender is gambling on continued appreciation, so the resolution is via default and foreclosure instead of being provided for in the contract.
Interesting way of looking at it, mort_fin. I never did much in the way of SAMs except in bond programs with "recapture" provisions, which are of course anti-speculator devices. (Civilians: I'm talking about low-interest first or no-interest second mortgages backed by bond programs that require the borrower to share some or all of the equity if the property is sold at a profit in some specified number of years; it keeps flippers out of subsidized loan programs.) In the brave new world of 100% LTV, financed closing costs, lenders doing cash-outs with no seasoning requirements, etc., we seem to have gone out of our way to eliminate all the anti-speculator devices this go-round.
What I guess I focus most on is the old 11th District COFI (Cost of Funds Index) ARM. It was mostly a CA phenomenon with some infiltration in the rest of the US. The selling point of the COFI versus the old warhorse Treasury ARM, as I recall, was that COFI lagged treasuries on the way up, or the bond market will get you before the Fed does. COFIs disappeared after a fair bit of bath-taking, as with Neg Am, only to re-emerge in the 00s as the LIBOR ARM (the "globalization COFI"--LIBOR is London Interbank Offered Rate or a kind of cost of funds index). I remember with a great deal more clarity the sales pitch for LIBOR over CMT: LIBOR lags treasuries on the way up, or the bond market will get you before the global credit market does.
There is one seriously big difference between the COFI and the LIBOR, of course. COFI was all the rage when rates were at historial highs and it was reasonable to think they had nowhere to go but down. LIBOR, on the other hand . . .
There's been discussion in this post on when to short HB stocks. I'm a bit depressed right now because during April-Aug I made a lot of money with puts on builders and some lenders. However, I believed too much in fundamentals (which in my view are still a disaster) and lost most of my profit (and some sleep) between Sept-Nov. At least I am smart enough to be out now and I hope that I am smart enough to be more cautious and to listen to what the market is saying, not what I feel confident will happen in the longer term. I'm not sure what I'll do next, although I'm sure that I won't be as aggressive, and I probably won't buy any more puts on housing related stocks until after an interest rate cut or two.
Mortgage Bonds Hurt by Delinquencies, Housing Slump
The mortgage bond market is beginning to buckle under the weight of the worst U.S. housing slump in six years.
Yields on so-called sub-prime mortgage securities rated BBB have risen to 6.52 percent on average from 6.28 percent on Sept. 5, data compiled by Bank of America Corp. show. The yield premium, or spread above the one-month London interbank offered rate, a lending benchmark, rose to a seven-month high of 1.2 percentage points.
Mortgage Bonds Hurt by Delinquencies, Housing Slump (Update1) - Bloomberg.com
That should help the builders:-)
Tanta - well I'm late to the game but...if I had Citi's 2ndMort (trans. Fr.) I'd be drinking even more heavily than normal. And not the good stuff either.
CR - thanks for surveying and taking apart all the headlines and 'local' (i.e. MoToMo data). BtW - YTD housing stocks (as proxied by the IRY ETF) are up 35%. Which I"d known then but that wasn't my call at all - on the presumption that any decent analyst could dload the same data and manage an Exel graph as well as most, being paid handsomely to do so. So the real question is what's going on ?
A very serious question as it happens. Before we get into your in-depth analysis of timing, lag, cyclic structures, etc. we're still faced with a slowing economy. And, w/o being in denial, a couple of years housing graphs that look terrible. How can anyone, even without getting into your level of analysis, reach an optimistic conclusion escapes me. But as Keynes said, 'the market can stay irrational longer than you can stay solvent'.
So, if we all believe your analysis - which I do having done some parallels in a small way - the slowdown is hard to ignore. And, it seems to me, only ignorable if you look only at recent data. That must be the mantra - headlines, first line of data, ignore next lines, ignore history. Voila' - a momenturm market feeding on itself.
Courtesy of BigPicture to Mish's there's a very intersting post on what the homebuilders are really doing at:http://globaleconomicanalysis.blogspot.com/2006/11/mortgage-brokers-synopsis.html
CR - part II: now if we dig into and take seriously your work then the well-known (or at least knowable) lag structures haven't really begun to bite though they're visible. And will be compounded by all the cycle differences of excess inventory, resets, etc.
But nobody seems to be seeing what's visible to see ? How odd as Jar-Jar would put it. But what to do ?
One woudn't want to step in front of this train but it seems like shorting the stocks or relevent ETFs might be a sound strategy once the technicals begin to confirm the underlying realities.
Then we have the problem of wider economic impact. With a slowing economy, slowing consumption, insufficient capex by business the MEW and construction employment shocks will come as a great surprise to many many people. And won't it be fun if int' currancy pressures force the Fed to keep rates higher than they otherwise might ?
So the real question cycles back to when the real housing downturn becomes visible in the headlines, what economic impacts it'll have and how the musical chair players react to it all. Thougts, comments, suggestions ?
DaveL, Agree hard to be optimistic about housing with a slowing economy. My main trigger for increased bearishness of housing related businesses would be either increases in mortgage delinquencies much higher than have been currently experienced or significatly tighter lending standards. Otherwise the housing weakness could be very gradual and choppy.
Will be plenty of time to short the builders when the downward trend has been established. Allways be a rally to short them .
2006 RE sales strong from a historical point of view, strong employment, lots of cheap credit, could call this a little correction if one is inclined.
DaveL:
I remember reading about Native Americans driving stampeding buffalo off a cliff. If you were a buffalo in the middle of the pack everything was making perfect sense, until the buffalo in front of you disappeared.
My general recommendation is to read every wall street insider book you can find. The whole system runs on phases of Cramerism until it exhausts itself and many are ruined. Fooled by Randomness by Taleb gives some good perspective. Make small bets with huge payouts waiting for the big dislocations. People are inherently awful at computing expected value. Just because A is 75% probable and B is 25% probable doesn't mean you should go with A. If A pays out $1 but B pays out $10, then the mathematically sound bet is to go with B. Over many experiments you will come out ahead. People tend to think of only the probability, not the payoff. Game theory books are fun to read also.
Liar's Poker, Fiasco, and When Genius Failed are interesting reads. Needless to say, I'm more wary of my investment bankers than I am of the crackheads all around me while walking though my local ghetto. Wall Street's primary purpose is to add efficiency in the allocation of capital. Typically that means allocating the capital to their own pockets, often at the expense of some poor guy's pension plan. Of course, they can only pick the pockets of the public for so long before something truly catastrophic happens -- pick pocketing doesn't grow food the last time I checked.
Wallstreet is all about new and more clever ways of figuring out how to stick somebody else with the bag of risks while keeping the rewarding pot of gold for themselves. From various readings, their general context of existance seems to be a driving desire to fuck you and then rip your face off (their terminology). Keep that in mind when dealing with them, especially any information flowing out of them.
Just to make this post not totally worthless, here is an interesting read for the derivatives curious crowd.
The Promise and Perils of Credit Derivatives
SSRN-The Promise and Perils of Credit Derivatives by David Skeel, Frank Partnoy
As for tangents, take that one Tanta!
US economy bottoms in '08?
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Doc. Honey. You're messing with The Good Tanta. I'll see your tangent and raise you a sidetrack.
Bailey said it's 1976. You know what that means:
Arthur Jensen: You have meddled with the primal forces of nature, Mr. Beale, and I won't have it. Is that clear? You think you've merely stopped a business deal? That is not the case. The Arabs have taken billions of dollars out of this country, and now they must put it back. It is ebb and flow, tidal gravity. It is ecological balance. You are an old man who thinks in terms of nations and peoples. There are no nations; there are no peoples. There are no Russians. There are no Arabs. There are no third worlds. There is no West. There is only one holistic system of systems; one vast, interwoven, interacting, multivaried, multinational dominion of dollars.
The world is a business, Mr. Beale; it has been since man crawled out of the slime. Our children will live, Mr. Beale, to see that perfect world in which there's no war or famine, oppression or brutality - one vast and ecumenical holding company, for whom all men will work to serve a common profit, in which all men will hold a share of stock - all necessities provided, all anxieties tranquilized, all boredom amused. And I have chosen you, Mr. Beale, to preach this evangel.
Howard Beale: Why me?
Arthur Jensen: Because you're on television, dummy. Sixty million people watch you every night of the week, Monday through Friday.
Howard Beale: I have seen the face of God.
Arthur Jensen: You just might be right, Mr. Beale.
This transnationalism is tricky and the face of God not always so clearly depicited. Could we have Hubbard, Chair of the committee on Capital Marketing regulation that seeks to restore US companies to a level playing field in the international market, comment on this face of God?
No, we couldn't because he and his committee are too busy accepting donations from those starving transnationals.
dr strangemoney
Typically that means allocating the capital to their own pockets, often at the expense of some poor guy's pension plan. Of course, they can only pick the pockets of the public for so long before something truly catastrophic happens --
Another good book in Other Peoples Money by Nomi Prines who worked for Goldman Sachs.
There are a lot of Goldman Sachs people moving into government positions of late. Henry Paulson our new Treasury secretary scares the hell out of me.
Hey, Tanta, for a moment there I thought you had acquired a transcript of a secretly taped coversation between Daniel Oppenheim and Robert Toll.
Imagine my relief when I realized it was only Paddy Chayefsky.
You can read more comments from housing optimists at the two industry websites realtor.org and nahb.org
However, some of the publications require a subscription which I don't have.
In the December 11 issue of BusinessWeek, Jan Hatzius, the chief U.S. economist at Goldman Sachs, states that completions lag starts by 6-12 months and that even if housing activity stays at current levels then 600,000 residential construction jobs could be lost over the next 1-2 years.
I mention this because Hatzius is saying basically what CR has already told us.
I love Tanta.
"Btw, how is business in the SD area lately? Inventories have crept down, but that always happens this time of year. Yet they're still very high. Have you seen any downward movement in prices? Are people buying on contingency? And if so, are you still seeing cancellations and/or sales dropping out of escrow due to buyers who can't sell their existing homes"
Captain Spaulding,
Biz is not bad. Homes are moving if they are priced competitively with the current market reality. One big difference from exactly one year ago - last year at this time activity was dead. This year it is quite active if not robust for the season. The 10 year bond is about equal to what it was last year at this time...but...prices are anywhere from 3% to 25% lower depending on location. People are not buying on contingency due to the fact that now it's not the case of "when" a property will sell but "if" a property will sell. I've got some contacts in the homebuilding industry that are saying exactly what the B of A analyst said...activity has increased quite a bit in the past month. Oh, and I'm not real fond of anal-ysts
Do I think housing or housing stocks have bottomed? I'll answer that question with a quote from one of my favorite authors - Mark Douglas : "Anything Can Happen" and also say that no two cycles are the same. There are likely just as many people that bought property or properties between 96-2000 that are sitting on huge equity gains as there are late comers in trouble.
Fun stuff
There are likely just as many people that bought property or properties between 96-2000 that are sitting on huge equity gains as there are late comers in trouble.
I'd bet there are FAR more of the latter than the former... at least I sure hope so or we really are screwed.
If there are far more sitting on a sizable cushion of equity then this will be a 'down turn'... else it will be as bad as the most pessimistic bears envision.
Just an FYI - I lived in the rural Midwest through the 'Farm Crisis'... I heard an economist at IA State Univ do a 'postmortem' a number of years later (like a decade)... he said that at no one time did more that 25% of farms ever become even threatened let alone fail...
If you are unfamiliar with the Farm Crisis it too was initially driven by a credit bubble & run up in land/real estate prices. Once affordability got well over typical incomes then even creative financing couldn't save it... it was just a matter of time until an event (income declines do to commodity price shift) took them out.
End result was the whole market and local economies collapsed completely because of a few at the margin precipitated the initial fall & there wasn't enough equity buffer to carry most through.
I KNOW residential won't follow exactly the same path, too many differences... But the lesson to come away with though is that all markets are made at the margins. If unsustainable patterns are persistent (like funny financing to support valuations) then small shifts at the margin can drive the whole market down.
The only thing that would stop such a major shift would be 'fundamentals' - say most owners have so much equity they can resist all but the biggest shocks (say lose a job, divorce, health emergency) without being forced to liquidate in an emergency.
Think of it as a 'sell stopper'.
If on the other hand, they are too close to the edge (like they bought recently at high LTV)... even minor hiccups become major events.
Better hope there is a lot of equity out there still.
Typo alert...
I'd bet there are FAR more of the latter than the former... at least I sure hope so or we really are screwed.
Should have read...
I'd bet there are FAR more of the FORMER (with equity) than the LATTER (without equity)... at least I sure hope so or we really are screwed.
While a slow and gradual 'correction' and reallocation of the nations resources away from RE speculation will be a good thing, an immediate crash would not... equity is the buffer moderating the correction and keeping us from a crash.
Serves me right for watching football while surfing the web.
Dryfly, good post. Easy to forget that many big market moves are due to a relatively small number of marginal buyers or sellers. That is why I think the availability of financing to marginal buyers is critical.
serves me right for watching football while surfing the web"
I was doing the same thing dryfly
Thank you for your intelligent and insightful comments. I truly appreciate having the opportunity to read and learn from this blog. Also, I agree with your view and tend to lean towards the bear camp myself... knowing that being proven wrong wouldn't be such a bad thing.
Just a bummer to see how people whom had generous equity postitions built up in their properties from the original runup thru 2001 have greed set in and cash out their equity to purchase one or more additional properties...now finding themselves faced with the possibilty of losing them all.
Cheers
just a bummer to see how people whom had generous equity postitions built up in their properties from the original runup thru 2001 have greed set in and cash out their equity to purchase one or more additional properties...now finding themselves faced with the possibilty of losing them all.
Wow - how history rhymes (if not repeats)... what you described is how many farmers got in trouble in the ag crisis. They did EXACTLY the same thing.
In my county land was selling for about $800/acre in the mid to late 1970s... then land values started taking off due to speculation similar to condo flipping. Folks would buy a 1000 acres and sell it to somebody else a year later for double what they bought it for, so on.
Eventually local farmers got in the act - they would take out loans against their farms that had been in the family for generations - some over 100 years called 'century farms' - and buy neighboring parcels for the appreciation.
And we aren't even talking big parcels. A guy might have 1000 acres he paid $500 an acre for twenty years ago and have it half paid off then buy a 200 acre parcel nearby for $2,000 an acre and increase his holding by 50% but triple his leverage.
While the land was escalating folks were buying more and more at higher and higher prices... then it just stopped. Just like that. About 1983.
And none of these guys had incomes - from farming or otherwise - to support the debt. Foreclosures started and it was a blood bath.
But it all started on the margins... the guys would try to sell of the small parcels & back out in reverse but the market would have none of that.
In the end people would lose all, their families century farm, because the over extended at the margins.
The farmers who DIDN'T expand during the bubble & DIDN'T take on debt... waited for the bottom & later doubled their farms for a song & a dance. Many are still farming today.
In my county land went from about $800 pre-runup to say $3,500/acre peak (approx) to as little as $400/acre post-crash. And we are talking prime Midwestern farm land that needs no irrigation and very little fertilizer. Top soil 6-10 ft thick.
A guy might have 1000 acres he paid $500 an acre for twenty years ago and have it half paid off then buy a 200 acre parcel nearby for $2,000 an acre and increase his holding by 50% but triple his leverage
I am a moron tonight - heck the farmer increases his holdings by only 20% but ends up with approx three times the debt!!
Anyway... I knew people who did that and lost all - kids from my high school class who bragged at our 5 yr reunion they had expanded their families holdings so that they had $4 million dollars worth of farm land under plow... then never showed up again at another reunion. They lived in the same town I had gone to high school so I heard the story - they lost their families 'century farm' in the 'crisis'.
Those are times you never forget. It was a mini-depression. And for most the hard times were unavoidable - they were going to suffer some - but if they had been more cautious they would have survived.
dry fly
Here is the bust I saw in CA one of my kids bought this in 98 and sold in 04 they are currently renting it is listed now for 260k. 95 was reo fire sale, No buyers.
Sale History
10/19/2004: $173,000
06/03/1998: $63,000
12/10/1997: $85,492
03/03/1995: $15,000
02/26/1993: $81,500
Changes at the margin affects a lot.
Take Residential RE. How is the selling price normally determined? By comps. By the history of the last sales. Now at the top of the bubble, things take a while to happen, because the comps are not accurate of current market conditions. They lag a bit. As sellers unload, the comps drop. As the comps drop, the prices of everything in the neighborhood drops. Dragged down by the comps without anything being done by the owner.
Without any transaction involving the owner.
As the market drops then all kinds of things can happen. For companies holding those RE assets, the assets are supposed to be marked to market.
I am not real sure what recourse mortgage holders have if the value drops below the mortgage amount if there is no sale. But refis are going to be a pain.
"Better hope there is a lot of equity out there ..."
CNN: "In 1973, the average homeowner's equity was 68 percent. That's dropped to 55 percent today" 10/28/06
So equity is at record lows, even with the run-up in prices. This is extraordinary. The "wealth" generated by the bubble has already been spent, plus we've spent some of the rest of the accumulated equity! There is no cushion, at least in aggregate. This will become known as "drunken sailor" economy. It was great 'til we ended up flat on our face.
This is what scares me the most.
it's almost as if people look at their 'owned' houses as if they'll never pay off the loan. this is called rent so i don't get why people partake in even buying unless they have some perverse notion that appreciation rates will continue to defy all logic explanation.
The housing derivatives market sees the divergence as with many of the other commenters here. The CME housing futures show that the major housing markets (existing homes, repeat-sales) in the US are going to be worth 4.5% to 8.5% less in November 2007. That is from professional trading, albeit low value, but trading nonetheless. The S&P/case-Shiller Indices settle these.
The housing derivatives market also sees that perhaps the home builders shares may have bottomed. A question that the housing futures traders have is whether home builders shares and economics respond to more home sales and starts figuresand less to housing prices. In other words, are sales and lack of sales the economic metric that determines HB shares values and forward guidance?
The housing futures and options market are pricing US housing prices lower in 2007.
I read the following the Nov. 30th Motley Fool article on housing stocks:
"Every industry looks at the inventory-to-sales ratio, and housing should be no exception. Having said that, consider that the ratio of single-family housing starts to sales is now at the lowest level since the government started recording this data in 1963."
Is this really so?
And then there is this:
"Rates are falling, and that means affordability is rising. The benchmark 10-year Treasury is currently at the lowest level in 10 months and trending lower. Mortgage applications (purchases) have risen 20% in the past five months, while refinancing applications have climbed nearly 50%. The latter will put money in current homeowners' pockets, making it possible for them to "trade up" to larger, more expensive, or even newly constructed homes if they desire."
Okay, while it's true that the 10-year is forecasting a Fed rate reduction (which may or may not happen, of course), I wonder if new mortgage apps really are trending upward that strongly. Nothing I've read anywhere else suggests this is true.
And I find the claim that people are going to re-fi and use the extra cash to trade "up" preposterous.
But I'd appreciate comments on the facts he uses to support the bull case. Thanks.
umber2son, there's nothing second-best about your bullshit detector.
I like the 10Y being at its lowest in 10 months point. ("30 year" fixed rate mortgages are more or less priced off the 10Y). If you couldn't afford it 10 months ago . . .
The last Freddie Mac Cash-out Report showed that the average cash-outer in Q3 was taking a higher rate on the new loan than they had on the old loan; the median property had appreciated by about 33% since the old loan was made at a median of about three years ago. The aggregate amount of cash taken and percent of all refis involving cash-out were at record levels.
It is not easy to draw hard conclusions about how many cash-outers' higher monthly payments on the new loan were offset by lower monthly payments on consumer debt (or a HELOC with skyrocketing payments based on short-rate indices) being paid down or paid off with the cash proceeds, or how many of these were ARM-to-fixed refis just prior to reset, which means that the borrower didn't "really" take a higher rate on the new loan--at least, not for more than a month or two. It can, however, be fairly confidently stated that people (can) use refi proceeds to buy second homes and investment properties. Taking a cash-out refi in order to "upgrade" the house you're living in is beyond "preposterous." A "bridge loan," maybe. But the usual, least expensive way of liquidating the equity in your current home in order to buy a new one is still to sell it. If you are unable to do that, you often become what is known in the industry as a "cancellation." Your average "cancellation" walks away from a decent-sized chunk of cash earnest money, making it a bit dicy to borrow earnest money by hocking the house you have. Cancellation rates are said to be also at "record levels" these days. I will also observe that every signed contract that got cancelled also generated at least one mortgage purchase application before it flamed out, and quite possibly more than one, especially if it cancelled because the contract on the existing home purchase which also generated a purchase application fell out first.
High refi/cash-out refi volumes may help in the short-term to keep the default rate/foreclosed inventory numbers down for a while. The idea that they will boost new home sales is a particularly frightening kind of kool-aide drinking.
94121: xoxoxo
The Motley Fool comments strike me as a bit disingenuous. Echoing Bill who commented earlier, they completely ignore the fact that median house prices remain unaffordable compared to median incomes in many markets. Just exactly who is going to buy up all this excess inventory and keep house values high? I'm not sure there's been enough decline in house prices here in Eastern MA to get a rally going again. I'm not sure about locally for me, but statewide, the median house cost is still about 6 times the median household income. That's a BIG mortgage for most of us.
As someone else pointed out, alot of sellers have pulled out of the market in the hopes of waiting until things get better, so it seems to me that there's more potential inventory than the optimists are acknowledging. (Granted that the Fools are only talking about housing starts, of course, and CR already noted the major flaw in their numbers.)
Sliding off on a tangent, Richard says: It's almost as if people look at their 'owned' houses as if they'll never pay off the loan. I think that's correct; alot of people thought they were buying a cash cow rather than a place to live, and they would just keep milking off HELs and taking deductions on their income taxes, because who needs to pay off a mortgage when your equity is growing at 30% a year? I wonder how the housing market will do if people no longer see houses as an instant piggy bank, filled by someone else.
One more post from your Average Joe about what is "really happening" out here.
I have friends who are paying $1600 a month for rent on a house near the beach. They feel they are the only ones who don't own. Now, with tricky financing from new home builders, they can pay $1500 a month to own a condo with NO PAYMENTS for a year! The condo is inland and sucks but they are willing to move to pay no rent for a year on something they will "own". They will do a stated income loan and believe that the male (is a plumber) will have his business off the ground by then. In the meantime, their only risk is their credit. She is the mother of two kids with different fathers and the plumber is her new boyfriend. Needless to say they have never thought past tomorrow before and aren't doing so now. But without the need to save for a down...and with lucrative short term incentives, what the heck.
I have another friend who has to move "up" because of a growing family. A new home developement nearby with about 20% (5 of 25 that just can't sell) of their new houses that have been empty coming up on a year, is going to buy his current home for the full price, to sell him theirs at full price. This will potentially ruin the comps if the builder sells his old home for a loss later but it won't be in the builder's neighborhood and upset those who bought the other 20 homes in the development. The old neighborhood neighbors will probably bev emporarily happy because the recent sale to the builder keeps the comps up in their neighborhood. In the meantime the builder can afford to let the old house sit empty and wait for the market to "come back" next spring. If they eventually lose money, no biggie, they were willing to knock down the price of the new house by $50-60 grand anyway.
I have a sister-in-law who got divorced 3 years ago and "bought out" her husband to keep the house. They owed $400,000 on a $700,000 house. She did a stated income, option arm for $500,000 and gave her ex $100,000. She makes less than $50,000 a year in a gov job. She pays about $1700 a month and the other $2000 grand or so goes on top of her current loan. She's probably up to $550,000 loan on a house that she "thinks" is still worth $700,000, but I doubt she could walk away with nothing after fees etc. It may be worth $550,000 if she's lucky. That is a train wreck in the making. She thinks she'll get room mates when she "needs" to. She doens't even realize she is borrowing $2000 each and every month and still barely making it.
I other friends (couple) who bought a house in 98 for $200,000. They sold it for $275,000 a few years later and moved up. They continued to move up two more times (even out to vegas and back) He has tried to sell insurance, amway, etc, you get the picture. She cuts hair. They have virtually lived off of home equity the last 5 years (about $300,000 in MEW total). They have no net worth. The gravy train of MEW
Average Joe, your second example (the builder buyout) is even worse than you think. That's a textbook example of a "non-arm's-length" transaction, which means that reputable lenders are either unwilling to touch it or place substantial LTV restrictions on it. The appraiser should factor the buyout as a sales incentive into the appraised value of the new home, which effectively lowers the amount you can borrow since LTV is based on the lesser of price or appraised value. Therefore, everybody lies to the lender and the appraiser. Every time a builder lies (about buyouts or any other concealed inducement), that builder takes on the low probability but high severity risk that the borrower will default, the lender will look for a bag holder, and the party who engaged in the most fraudulent activity gets to be It. Just something for owners of homebuilder stocks to think about.
Speaking of delinquency rates, I noticed the Fed's Q3 DQ and charge-off stats are online today. Late payments on residential real estate loans are leading the DQ race. Here's a complete post I had at my blog...
Every quarter, the Federal Reserve releases data on loan delinquencies (defined as loans that are at least 30 days past due) and charge-offs. Q3 figures were just released today. Surprise, surprise: Late payments on real estate loans are on the rise.
The delinquency rate for all RE loans jumped to 1.47% in Q3 from 1.38% in Q2. That's the highest since Q2 2004. The residential RE delinquency rate jumped to 1.72%, the highest since Q4 2003, while commercial RE delinquencies were only 1.10%, the highest since Q1 2005.
It's important to note that these deliquency rates are VERY low historically. But the trend is clear -- toward higher DQ rates. All the easy money/Frankenstein Financing handed out during the housing bubble is coming back to bite lenders. The only question is, "How severe will the fallout be?"
Delinquency rates for most other loan categories (agricultural, commercial & industrial, etc.) remain low, though credit card DQs are picking up. Charge-offs remain low, but they lag DQs by a few months (you have to miss a payment first, then the bank tries to get you caught back up, THEN they charge off the loan as uncollectable)