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Monday, March 26, 2007


the supply-demand imbalance

a fine elementary post from calculated risk about what is going on in housing with regards to pricing and what can be expected to happen.

Inventory of 4.5 million units, and sales of 5.7 million, means 9.5 months of supply this summer. For the more optimistic, use 4 million units of inventory, and sales only falling to 6 million units, giving 8 months of supply.

Usually 6 to 8 months of inventory starts causing pricing problems, and over 8 months a significant problem. With current inventory levels at 6.7 months of supply, inventories are now well into the danger zone. By mid-summer, months of supply will likely be a significant problem.

a "significant problem" for pricing, that is. big picture notes that today's data release indicates a supply overhang of now some 8.1 months of inventory -- and not in august per the optimist's case, but in this february just past. one has to expect that price declines are just beginning, and that the nascent downtrend in home prices will not only reinforce but probably accelerate all this summer. one look at the arm rate reset graph from this wonderful post at wall street examiner indicates that, beginning in may, a terrific amount of pressure will fall upon the real estate foreclosure and personal bankrupty engines of what appears to be a recession.

for someone who sold their home in 2006 and has been renting, this is just what was hoped for. but the flip side of a slow, traumatic return to reason in the housing market is that credit will be scarce.

Lenders are increasingly refusing to lend to homebuyers who can't make a down payment of more than 5 percent, especially if they won't document their income. Until recently such borrowers qualified for so-called Alt A mortgages, which rank between prime and subprime in terms of risk. Last year the category accounted for about 20 percent of the $3 trillion of U.S. mortgages, about the same as subprime loans, according to Credit Suisse Group.

``It's going to be very difficult, if not impossible, to do a no-money-down loan at any credit score,'' said Alex Gemici, president of Parsippany, New Jersey-based mortgage bank Montgomery Mortgage Capital Corp. Companies that buy the loans ``are all saying if they haven't eliminated them yet, they'll eliminate them shortly.''

Tighter lending standards may slash subprime mortgage sales in half this year and Alt A mortgages by a quarter, according to Ivy Zelman, a Credit Suisse analyst in New York who covers homebuilders. The new requirements will force some prospective homebuyers to save more money for a down payment or risk being denied credit.

fannie mae and freddie mac are forbidden from buying such loans, so liquidity in these markets is dependent on investor appetite for mbs's -- and investors have recoiled sharply in recent months, not only from subprime but alt-a. as things go from bad to worse and the credit crunch widens into alt-a and prime, this writer would not expect old-fashioned standards to once again apply -- sparkling fico scores, 20% down.

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I certainly hope that you are correct in this Gaius, for purely selfish reasons.
I'm buying a house/condo for the first time this summer or fall. I have 20% to put down and wouldn't want it any other way. I lost my stomach for creative financing long ago.
Still, I had an acquaintance in real estate try to talk me into seeing "his guy" and recommending that I go for 100% financing just this weekend.

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fwiw, imk -- i find it difficult to poke a lot of holes in this assessment.

the arm reset spike from the 2/28s taken out in summer 2005 -- the top of the market -- starts in may. a lot of people with subprime and alt-a arms are going to find their payments way up -- and it's probably going to add a lot of fuel to the foreclosure fire. adler is talking about a 10-30% price collapse between here and september, as bank reo and truly desperate builders forget profit and start working very hard toward mere loss mitigation.

now, i have no idea if he's got the pricing *and* the timing right.

and one has to remember that the fed, in the heat of an election season, will be pressured hard to keep the easy money coming -- rates and money supply both -- the liquidity pump will be working overtime.

but in real terms -- figuring that real inflation may be 6-7% already -- that kind of real price cut is not only coming but will be exceeded in years to come.

i wonder how many people remember sir john templeton's warning about housing:

Sir John also had a few words about debt -- a four-letter word that folks seem not to care about: "Emphasize in your magazine how big the debt is. . . . The total debt of America is now $31 trillion. That is three times the GNP of the U.S. That is unprecedented in a major nation. No nation has ever had such a big debt as America has, and it's bigger than it was at the peak of the stock market boom. Think of the dangers involved. Almost everyone has a home mortgage, and some are 89% of the value of the home (and yes, some are more). If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing home prices down further." On that note, he has a word of advice: "After home prices go down to one-tenth of the highest price homeowners paid, then buy."

be careful about buying too soon -- it's in no one's interest to try to catch a falling knife, and there's likely to be a long denouement. if you're like me, other factors are also at work to determine when you have to move -- but (if you're renting) at least take a look at extending your lease.

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perhaps importantly, the economist this week:

A new study by Christopher Cagan, an economist at First American CoreLogic, based on his firm's database of most American mortgages, calculates that 60% of all adjustable-rate loans made since 2004 will be reset to payments that will be 25% higher or more. A fifth will see monthly payments soar by 50% or more.

Few borrowers can cope with such a burden. When house prices were booming no one cared. Borrowers refinanced or sold their homes. But now that prices have flattened and, in many areas, fallen, those paths are blocked.

The greatest difficulties threaten borrowers whose house is worth less than their mortgage. Just under 7% of all American homeowners had this “negative equity” at the end of December 2006 estimates Mr Cagan, using a sample of 32m houses (see chart 1). Among recent homebuyers, the share is even higher: 18% of all people who took mortgages out in 2006 now have negative equity. A quarter of all mortgages due to reset in 2008 are in the same miserable state (see chart 2).

Higher payments and negative equity are a toxic combination. Mr Cagan marries the statistics and concludes that — going by today's prices — some 1.1m mortgages (or 13% of all adjustable-rate mortgages originated between 2004 and 2006), worth $326 billion, are heading for repossession in the next few years. The suffering will be concentrated: only 7% of mainstream adjustable mortgages will be affected, whereas one in three of the recent “teaser” loans will end in default. The harshest year will be 2008, when many mortgages will be reset and few borrowers will have much equity.

Mr Cagan's study considers only the effect of higher payments (ignoring defaults from job loss, divorce, and so on). But it is a guide to how much default rates may worsen even if the economy stays strong and house prices stabilise. According to RealtyTrac, some 1.3m homes were in default on their mortgages in 2006, up 42% from the year before. This study suggests that figure could rise much further. And if house prices fall, the picture darkens. Mr Cagan's work suggests that every percentage point drop in house prices would bring 70,000 extra repossessions.

2008 is my target year, fwiw -- the point at which i will no longer be able to hold off my wife and growing family, when arguments for fiscal prudence start losing out to the need of another bedroom and a yard. :)

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I may not be able to hold on much longer either. My daughter and I are sharing living quarters with my parents. Very practical, but it does take a toll on my sense of self.

However, I'm going to take your advice and hold out a bit longer. If it works out, I owe you one. At the very least, I should send you a copy of Tolstoy's What is Art?. I do think that you would find it amusing.
Hope the family is well.

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