US house prices in freefall -- redux

[PLATO]

Originally posted by DanS


Actually, I thought it was pretty good news. On a month-to-month basis, 7 out of 20 metro areas had price gains. Most of the losses moderated. The exception being Las Vegas, which is still falling at a greater than 3% rate per month.

On the other hand, since May (the month covered) is normally a strong month, I guess I wouldn't be surprised to see the declines reaccelerate.

May is traditionally a very strong month as it signals the start of the summer buying season (traditionally anyway). Of the seven metro areas you mention (Denver, Atlanta, Boston, Minneapolis, Charlotte, Portland, and Dallas), only Charlotte is showing any type of year over year stability. Last year Charlotte's indicie was at 133.42 and this May it is at 133.16 (up from 131.81 in April). In all of the seven areas that were up the gains were very modest at best (with the possible exception of Boston which turned in a relatively strong performance).

Overall both the 10 city and 20 city indicies show decline. More importantly, the larger market cities continue to show somewhat sharp declines.

All in all, it is a poor report. Further regional analysis may shed some bright spots. For example the early data out of the South (except for Florida) may be showing some stabilization. It is seeming more likely that there will be several regional "bottomings" as opposed to a single national "bottoming" of the market.

While this may help to stabilize markets somewhat, I don't think you will see an end to the credit crisis until we see what investors perceive as a national bottoming. The real problem areas continue to be the areas that have the most exposure in the markets and that is just not good news.

[DirtyMartini]

Since LS is gone --

the singular of indices is index

[Kidlicious]

Originally posted by Ben Kenobi
I don't believe unemployment under 5 percent is the sign of an economy which is functioning abnormally.

Unemployment is a lagging indicator. That means that a high unemployment rate means that the recent past was a period of contraction. That said there are sectors of the economy where unemployment is high, like construction. Do you know what that means? It means new homes aren't being built like you claimed they would be. Also, sales of existing homes is down to a 10 year low. You also claimed that lower home prices would mean more people owning homes. Wrong again.

How is this not how an economy should work? You see an economic downturn and go "market failure". Market failure my ass. Did no one teach you that markets go up and down? Do you believe that markets are only supposed to go up?

The point is that you don't know the consequence of a market failure. Of course it's a market failure. The problem is you don't know the effects.

If you have any evidence, I suggest you present it. I am open minded, but I guess I'd learn more from reading the Austrians.

Ummm.... No, not really.

[DanS]

Originally posted by PLATO
All valid questions for sure. Due to what I have seen and knowing what Merrill was doing during the time period in question, I am betting that the majority of the securities are adjustable rate mortgages. Just a guess, but I would bet on it.

I wonder where you have found any basis for this, especially since these folks have done all in their power to obscure the provisions of these assets. How much security is offered? How senior are the tranche's claims against the security? Are the tranches levered? Any exotic provisions?

Guesses about these provisions aren't good enough, I'm afraid. Even the 22 cents on the dollar isn't a real market price set in an arm's length transaction, so that offers you no hard information.

The primary reason for this is the uncertainty associated with the returns, not the actual values of the instruments.

This doesn't make any sense to me. Can you please explain? The hard core value folks haven't bit on any of this stuff, and they make a habit of knowing what smells like a good deal and what smells like dog****. They are built to handle uncertainty and risk just fine.

[PLATO]

Originally posted by DanS


I wonder where you have found any basis for this, especially since these folks have done all in their power to obscure the provisions of these assets. How much security is offered? How senior are the tranche's claims against the security? Are the tranches levered? Any exotic provisions?

I guess that the best way to answer that is to say that I have been an insider on this game, but not with Merrill. Frankly, I have tried to be a bit vague over time to help conceal how much I know and how I know it. I will tell you that I don't know the exact composition of Merrill's debt, but that I know a lot about other CDO's that are very similar to Merrill's. Still, I will reiterate that all this is is a guess...so take it for what it is worth (but it is an educated guess!)

Now let me say a further thing. Reductions of force have taken me out of this game (and in reality I can't say that it hurts me to bad...except financially, but what the hell). I still have contacts and I still hear a lot of things that you won't find just floating around. It is really hard sometimes to decide what I can and cannot say on a public forum. Therefore, I try to stay to my opinions and talk in general knowledge. That sounds like a dodge to even me, but that's the best I have to offer. I will say that Merrill has come out publicaly today and said that these instruments are "primarily mortgage backed". Based upon what I know of Merrills operation and where they were feeding their business from, I'd say that is right.

Merrill didn't run completely away from this debt either. They provided sizable financing for this buyout and the way they structured the loan they will maintain a good bit of liability if losses are excessive.

Guesses about these provisions aren't good enough, I'm afraid. Even the 22 cents on the dollar isn't a real market price set in an arm's length transaction, so that offers you no hard information.

Very true, but then I am not attempting to advise anyone on an investment strategy...just speaking to the generalities that surround this type situation. The actual "real market price" for these securities is actually less if you take into account the structure of the financing arrangement.

Blackstone had a similar deal with UBS on the buyout that they had and it was a significantly higher price. The only significant differences that I am aware of is that the UBS securities were more seasoned than I am hearing that the Merrill ones are. This is what is leading me to believe that what we are seeing is downgraded mortgage debt generated post December 2005 and that spells Merrill's subprime arm, First Franklin. The vast majority of First Franklin's stuff was 2 year adjustable ARMs.

This doesn't make any sense to me. Can you please explain? The hard core value folks haven't bit on any of this stuff, and they make a habit of knowing what smells like a good deal and what smells like dog****.

It does when you look at actual foreclosure rates versus default rates...loss mitigation recoveries...forbearance agreements...and loan modifications. While there are substantial losses involved in all of these, several options the lenders are taking are helping to stabilize these portfolios. They are not existing in a vacuum. Investors are not able to yet see the tangible effects of these efforts. For example, a loan in forbearance is by definition non performing but may be current to the forbearance agreement and providing an income stream.

Finally a word about the tranches. This is a situation that is fubar. The ratings that were issued on the securities in some of these tranches were nothing short of criminal. The investment banks used faulty models and the rating services gave lip service to actually looking into what they were rating. I am astounded that there are not thousands of lawsuits on this issue alone. It is nearly impossible to tell what you really have in any particular tranch...and thus the uncertainty. The efforts of the lenders to stabilize these portfolios is very hard to quantify. It is hard to tell what percentage of these loans will actually have performed by the time they are liquidated, but we know that it will be a sizable percentage due to the nature of the security. Modeling is being done to try to assess this right now. The market sees so much uncertainty and very little quatifiable data other than default rates and thus sets its price at the worst case (or actually below the worst case) price.

I hope that I am not rambling here, but it is very difficult to try and explain such a complex picture in such a brief space. Did I answer your question?

[DanS]

A very good column in the WaPo today. Here's the lede...

http://www.washingtonpost.com/wp-dyn/content/article/2008/07/29/AR2008072901964.html?hpid=opinionsbox1

The Homeownership Obsession
By Robert J. Samuelson
Wednesday, July 30, 2008; Page A15

The real lessons of the housing crisis have gotten lost. It's routinely portrayed as the financial system run amok; the housing market became a casino. The remedy, we're told, is to enact rules that prevent a repetition. All this is partly true. But it ignores a larger truth: Our infatuation with homeownership, embedded in dozens of government policies, has turned housing -- once a justifiable symbol of the American dream -- into something of a national nightmare.

As a society, we're overinvesting in real estate. We build too many McMansions. They use too much energy, and their carrying costs, including mortgage payments, absorb too much of Americans' incomes. We think everyone should become a homeowner, when many families can't or shouldn't. The result is to encourage lending to weak borrowers who are likely to default. The avid pursuit of a few more percentage points on the homeownership rate (it rose from 64 percent of households in 1994 to 69 percent in 2005) has condoned enormously damaging policies.

Does every house need a "home entertainment center"? Well, no. But when you subsidize something, you get more of it than you otherwise would. That's our housing policy. Let's count the conspicuous subsidies.

[Ben Kenobi]

Unemployment is a lagging indicator.

True, but we've seen nothing to indicate unemployment of over 10 percent as of yet. That leads me to believe this is a correction, and well needed.

It means new homes aren't being built like you claimed they would be.

Where did I claim that? Existing inventories will need to be cleared out first, before we shall see new construction. What that means is that supply is finally adjusting to the drop in demand. This is the first sign that housing prices have fallen far enough. Once the supply has worked it's way through, then it will have hit bottom.

Also, sales of existing homes is down to a 10 year low.

Good. That means demand has dropped, so the prices can now fall to more reasonable levels.

You also claimed that lower home prices would mean more people owning homes. Wrong again.

After prices have fallen. Prices haven't fallen far enough yet. I would expect demand to continue falling until the prices are more reasonable.

Let me put it this way. Housing prices are still the same as they were in 2002. I would bet it will fall down to somewhere near 1994-5 in terms of overall house value before we shall see things start to pick up. If I were a betting man that would be my prediction. The correction will overshoot, such that housing will be undervalued again, and then we will see prices and demand shoot up.

It will probably take about 10 years before housing prices will be back up to where they would be at about 4 to 5 percent yearly appreciation, assuming no drop at all.

[PLATO]

Originally posted by DanS
A very good column in the WaPo today. Here's the lede...

http://www.washingtonpost.com/wp-dyn/content/article/2008/07/29/AR2008072901964.html?hpid=opinionsbox1

While there are a few very minor factual errors in it, that piece has a lot of truth to it.

[Kidlicious]

Originally posted by Ben Kenobi
True, but we've seen nothing to indicate unemployment of over 10 percent as of yet. That leads me to believe this is a correction, and well needed.

You have been studying Austrian School haven't you? We don't need a correction. We need jobs. Unemployment is intolerable. 10% is a tragedy best to be avoided at very high costs. Only a fool would plan 10% unemployment and call that what we need.

Where did I claim that? Existing inventories will need to be cleared out first, before we shall see new construction. What that means is that supply is finally adjusting to the drop in demand. This is the first sign that housing prices have fallen far enough. Once the supply has worked it's way through, then it will have hit bottom.

You're using double speak. You stated before that this is good for the economy because now more people would be able to own houses. I told you that just the opposite would happen, and it has.

Also, this bottom that you speak of is based on people's expectations, and nothing else. So when are people going to start buying houses.

When they do start buying houses speculators will start scooping up houses like crazy. No one is ever going to benefit from this but the rich. The poor people in homeless shelters aren't going to get their homes back.

Please explain how this is all good for the economy.

Good. That means demand has dropped, so the prices can now fall to more reasonable levels.

Let me put it this way. Housing prices are still the same as they were in 2002. I would bet it will fall down to somewhere near 1994-5 in terms of overall house value before we shall see things start to pick up. If I were a betting man that would be my prediction. The correction will overshoot, such that housing will be undervalued again, and then we will see prices and demand shoot up.

It will probably take about 10 years before housing prices will be back up to where they would be at about 4 to 5 percent yearly appreciation, assuming no drop at all.

What you don't understand is that future demand is going to be based on people confidence in the market. I wouldn't say that your prediction is any worse than anyone elses, but to move prices consumers will have to act together. That is their expectations will have to all be the same. I don't see that happening at any definite time. That's the whole problem with markets.

Also, you don't understand what the consequences are for the housing market to be ****ed up like this for the indefinite future. This is going to affect the whole economy is a very serious way.

[Kidlicious]

Originally posted by DanS
A very good column in the WaPo today. Here's the lede...

http://www.washingtonpost.com/wp-dyn/content/article/2008/07/29/AR2008072901964.html?hpid=opinionsbox1

"We think everyone should become a homeowner, when many families can't or shouldn't."

Bull****. Everyone should own a home, and they shouldn't have to pay high interest. Rent is horribly exploitive.

The real problem is that we are trying to make rich people richer and make everyone own a home. We can't do both.

[PLATO]

Originally posted by Kidicious


"We think everyone should become a homeowner, when many families can't or shouldn't."

Bull****. Everyone should own a home, and they shouldn't have to pay high interest. Rent is horribly exploitive.

The real problem is that we are trying to make rich people richer and make everyone own a home. We can't do both.

Not necessarily.

Given the closing costs on a mortgage, a person who moves often should not own a home.

A person who has shown that they do not have the ability to manage debt or credit should not own a home.

These are just a couple of obvious ones. There is a plethora of debatable ones as well.

Now...don't get me wrong. I believe in affordable housing and fairly easy access to credit for potential homebuyers. I also believe in a lender exercising reasonable dilligence to make sure that repayment can be reasonably expected and that you are not putting a borrower in an untenable position.

[Patroklos]

Also, this bottom that you speak of is based on people's expectations, and nothing else. So when are people going to start buying houses.

When I can afford to Kid, and every time the price drops more and more people can afford to. In my case I can now, but since I know prices will keep falling I will wait. However, at some point every one can't just wait forever and people will start buying again (including me).

Lets take San Diego for instance. Home prices have fallen 20%, have wages fallen 20%? So what does that mean as far as what people can afford in relation to homes?

[Kidlicious]

Originally posted by Patroklos


When I can afford to Kid, and every time the price drops more and more people can afford to. In my case I can now, but since I know prices will keep falling I will wait. However, at some point every one can't just wait forever and people will start buying again (including me).

Lets take San Diego for instance. Home prices have fallen 20%, have wages fallen 20%? So what does that mean as far as what people can afford in relation to homes?

Eventually, yes. What I'm talking about is the time period before that happens.

[Kidlicious]

Originally posted by PLATO
Given the closing costs on a mortgage, a person who moves often should not own a home.

Nor would they want to I expect.

A person who has shown that they do not have the ability to manage debt or credit should not own a home.

If they owned their home they wouldn't have so much problems paying their bills.

[PLATO]

Originally posted by Kidicious

Nor would they want to I expect.

I agree. Your statement was that "everybody" should own a home.

If they owned their home they wouldn't have so much problems paying their bills.

I don't think this is correct at all. The costs of owning a home are much greater than renting when you factor in maintenance costs. Now, you could say that maintenence is factored into the rent, but that would be neglecting the economy of scale that landlords are usually able to realize. The simple fact is that it costs more to own than it does to rent. Over time, this will reverse itself, but it is usually within the first three years of a loan that default is a major issue.