Fleck: Home-loan house of cards ready to fall

Submitted by
CalculatedRisk on Sun, 01/14/2007 - 10:05pm (18 comments)
Mozo Maz wrote on Sun, 1/14/2007 - 10:13 pm

Fleckenstein is pretty close to a permabear -- but I think he's right that the SubPrime story is heating up.

What will be the "Enron" of 2007? Will it be Ameriquest? New Century? WAMU?

jm wrote on Sun, 1/14/2007 - 11:04 pm

If I remember correctly, the government had to issue $200 billion to finance the S&L bailout. How much larger will this debacle be? Though many believe the banks are OK this time because they've sold off so many loans, the figures I've seen show them more exposed to real estate lending than ever. And of course we have FNMA and FRMC -- and maybe some more funding to the PBGC to cover pension fund losses on securities that will tank in the course of this.

Tanta wrote on Mon, 1/15/2007 - 2:46 am

So Fleck's short NEW. There's a shock. I'm with jm--I'd like to know who's long.

seminole wrote on Mon, 1/15/2007 - 6:16 am

I'm going to get back into NEW, it has received a bit of a pop lately.

Detroit Dan wrote on Mon, 1/15/2007 - 7:41 am

From today's Detroit News:

NEW HOME BUILDING PLUMMETS
Metro construction permits drop nearly 50% as stalled subdivisions become common sight.

bailey wrote on Mon, 1/15/2007 - 7:46 am

I looked at a SoCal house for sale over the weekend, the asking price is in the mid $2mm range. I was told by the realtor a nearby comparable house sold in mid '04 for just under #2mm, that prices are firming & this home offered value. I learned the present owner bought it in '02 for a little more than $1 mm & that buyer purchased it back in '98 for $650k. (This was way back when buyers had to prove they had jobs & savings for the down payment).
This places the home's current asking price @ 2.8 times its '98 selling price. I recall reading recently that MOST SoCal homes prices have close to tripled in the last nine years so while this price escalation seems extraordinary, it's probably pretty close to SoCal's norm.
CA is a HUGE portion of our national economy. Yet, the head of our Federal Reserve System, Mr. Bernanke, claims housing has been driven by "fundamentals". Enough said?

Detroit Dan wrote on Mon, 1/15/2007 - 7:48 am

Here's more from the previously referenced article on the Detroit housing market:

Scores of homes are languishing on the market as residents flee the area for jobs in other states or take early retirement and move south. Foreclosures and personal bankruptcies are soaring.

As a result, home values in Metro Detroit are dropping faster than in almost any other part of the country.

Some new and existing homes are being sold at auctions.

In this environment, builders large and small are scaling back on plans for new construction. Incomplete subdivisions, stalled after the completion of a fraction of the homes originally planned, can be found throughout Metro Detroit's suburbs.

Detroit's automakers are in the midst of an epic downsizing that is trickling through almost every corner of Metro Detroit's economy.

Last year, all nine of the counties in the region had a decrease in home building permits from one-third to nearly 60 percent, according to Housing Consultants.

For the first time in nearly two decades, Metro Detroit families are seeing a significant decline in the value of their homes, according to the National Association of Realtors.

The median sales price for a single-family home fell to $154,100 in the third quarter of 2006 from $172,000 in the third quarter of 2005. It was the largest drop in value of any market in the nation.

Reality wrote on Mon, 1/15/2007 - 8:38 am

Seeingtheforest notes that interest rates are currently showing an Inverted Yield Curve.

Can you comment?

Seeing the Forest: Interest Rates Inverted

bailey wrote on Mon, 1/15/2007 - 8:45 am

FORGET HOUSING FOR A DAY, DO SOMETHING SPECIAL! Brad DeLong posts MLK's full "Letter from a Birmingham Jail". Get your kids or a friend or two & some pizza, settle in & read this, every word.
J. Bradford DeLong's Grasping Reality with All Eight Tentacles

sharkbait wrote on Mon, 1/15/2007 - 9:10 am

The latest stats I have seen nationwide say that prices are about 1% to 2% down yoy. This has been the case since about August. So I think the market has firmed up substantially. I dont think there is any upside to house prices and I think they will fall some more towards the second half of the year year -- but it looks like people are buying again. Also hot markets such as Manhattan have experienced declines of about 15-20% -- and thats about it. I dont see much softness in the Manhattan market at the moment.

CR do you see any evidence to the contrary?

EZRider wrote on Mon, 1/15/2007 - 9:12 am

Off topic:

"If I remember correctly, the government had to issue $200 billion to finance the S&L bailout."

And wasn't John McCain ground zero when this happened? Now he's leading candidate on the Republican ticket.

4shzl wrote on Mon, 1/15/2007 - 9:34 am

I'm short NEW also, but I hate being on the same side of trade with Fleckenstein. The term "permabear" was coined with him in mind. BTW, his longtime bubblevision nemesis, Joe Battipaglia, issued a bearish statement at the beginning of last week. I found this so unnerving from a contrarian point of view that I covered most of my short positions. I guess I should send Joe a thank-you note . . . ;>)

deb wrote on Mon, 1/15/2007 - 9:41 am

I track the number of homes entering escrow in the last 30 days, each day here in the San Fernando Valley. Every holiday season this number drops dramatically, as you might imagine. Then, activity picks up substantially as the new year begins. Well, not this year.

Last year this time, there was about a 5% increase in the number of homes entering escrow week over week. This year, there is about a 10% DECREASE week over week.

This is very abnormal activity seasonlly. With a median household income of just over $50k and a median home price of over $500k, "strategic financing" is, no doubt, a necessity around here. The slowdown seems to coincide with the sudden closures of a number of subprime lenders. Coincidence?

ron wrote on Mon, 1/15/2007 - 9:52 am

sharkbait says:

but it looks like people are buying again.

The issue is transaction volume! We have a RE overhead so to speak that needs X sales to feed all the many aspects of the business. RE will always have some level of YOY sales the question is really what impact those sales have on the generally economy and how large of a RE food chain can it support.

dryfly wrote on Mon, 1/15/2007 - 10:13 am

shark there is no sign anything is really moving much unless heavily discounted with invisible incentives.

My family is preparing to sell a home that my late father lived in - very nice acreage in a section of the country with a strong & diversified economy... even the realtors we talk to are bracing us for a 'long haul'. Their message is cut price a lot from recent comparables or be prepared to wait & wait & wait.

Talk to us about 'market firming' next May - then we'll know a lot more.

My guess is that you will be partially correct in that prices will not have officially fallen much farther - but that will mask the deeper issue found in transactional gridlock... almost nothing selling.

Buyers waiting for more price fall...

Sellers waiting for a return to 'normal' price appreciation...

Realtors praying for commission check.

That doesn't sound to 'firm' to me.

antoine wrote on Mon, 1/15/2007 - 10:35 am

I'm amazed at how fast the sub-prime market is blowing up. 10 firms in a couple of weeks. It's amazing how fast they go from rock solid the bankrupt in a eye-blink. Makes you wonder how solid any of those firms are? Are they all completely vulnerable to even small swings in capital reserves?

What we are seeing is a cascading degree of probability that many more and major firms will blow up, shortly. Since it seems so few are properly capitalized or have ever planned for the contingency of loan reversals/returns.

How fragile these creatures be!!!

sharkbait wrote on Mon, 1/15/2007 - 11:35 am

I would have agreed with dryfly except I backlog of unsold homes is only 6.3 months. That is nothing compared to about 10 in the early nineties. So until we see inventories pick up wrt to sales it is hard for me to say that the bottom has fallen out of the RE market.

I think what is different this time is that rates have actually fallen thanks to Bernanke. I also think that prices may continue to decrease very slowly for a good number of years to come -- at least as long as houses are available 0% down.

jamminjames wrote on Mon, 1/22/2007 - 9:58 am

I think this guy is definately permabear. Housing will have an impact on the economy and many in the real estate market have predicted this year will be down 10%.

All this being said, there will be a shift in players in the Real Estate market. Many people thrived the last few years and grew too fast and were careless about guidelines and letting loans slide they shouldn't have. For this reason, many big players will be bought, sold, and bankrupt. I think NEW will not be one of them due to their conservatism, financial strength and structuring, and positioning. I think CFC and NEw will be the top two surviving the subprime crunch due to their size, leverage, and strength. NEW is one of the few subprime companies buying other companies to position itself for the long haul and lower costs internally and remain competitive.

I think you will be surprised about NEW, but I can see why it doesn't look good for subprime. There are prime companies going under too though.

I think it will be interesting to see the implications of first payment defaults, fraud, and those that took adj rt mtgs, negative amort, etc... to get a home and will default.

I think a bigger problem is people trying to get jobs to feed their family, earn a living, and being able to afford a home. Rather than offer 50yr+ mtgs, people should focus on giving people housing that is affordable that they can own free and clear, so their money isn't all tied up into the roof on their head and can survive in this growing more unaffordable economy.

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