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Tuesday, June 03, 2008


geographic distribution of housing stress

calculated risk carries some detailed looks at the morbidity of the housing bust in california and minneapolis, including this important point:

This is the common pattern: the low end saw the most appreciation, the most foreclosures, and now the fastest price declines. This higher distressed property activity at the low end is also distorting some of the median price measures, as Jeff and Aaron report:

[The] higher market share places a heavy downward weight on aggregate sales price figures, giving many the erroneous impression that the housing market in its entirety is seeing massive declines in value. In reality, the lender-mediated market and the traditional seller market are experiencing stark differences.

As has been widely reported in recent months (including in our own research products), the median sales prices of Twin Cities homes in the first quarter of 2008 were 10.3 percent below the first quarter of 2007—a sizeable and conspicuous decline. But lost in the hub-bub—and partly because no one had the data until now—is that the traditional sales market that does not include foreclosures and short sales saw only a 3.9 percent decline in median sales price during the same time period.

I spoke with Jeff Allen today, and just like for some REOs in Oceanside, the low end REOs in Minneapolis are seeing a significant pickup in buyer interest, possibly from investors, as the lenders have started to price these homes aggressively. This suggests that prices are approaching a bottom in some of these low end areas.

this is not to say that prices are not declining in more affluent sectors of housing -- indeed, losses so spectacular cannot help but affect all market segments. it has been well noted here and elsewhere that the evaporation of underwriting standards and incidence of fraud was not a subprime phenomena but a securitization phenomena that infiltrated all segments -- subprime, alt-a, prime, poor, middle-class, affluent, urban, suburban, exurban. but it is to say that the scale of those declines is being exaggerated by the skew of distressed properties in the lower-priced segments, as the skew of the phenomena itself was concentrated there.

i've been seeing as much myself in examining the 75th percentile data for chicagoland, which has behaved markedly better than the 25th.

but we are talking here about what has happened. there are more pessimistic views of what will happen. paul jackson at housing wire has already noted that REO property is just starting to go upscale:

“We’re just now seeing Alt-A and prime delinquencies begin their climb,” said one source, an MBS analyst who asked not to be named. “That means a whole lot of deluxe REO is on its way.”

and now the point is being reinforced by the analysis of the minneapolis fed.

“When mapped at the ZIP Code level using GIS software, information about the status of mortgage loans … tell a more nuanced story,” authors Michael Grover and Andreas Lehnert wrote.

Exurban areas, those located on the fringe of key metropolitan suburbs, were often the center of housing growth during the boom; not surprisingly, perhaps, the authors find evidence that the housing mess — particuarly for subprime borrowers, who often drove growth in such fringe areas — has taken its strongest toll to date in the so-called exurban fringe surrounding the Minneapolis-St.Paul area.

It’s a pattern that so far has been repeated in numerous other local markets nationwide. ...

But that may be be changing, Grover and Lehnert warn. At least in the Twin Cities area, they find evidence that loan delinquency patterns are moving towards the suburbs in what could be an ominous march towards the next stage of the nation’s housing mess.

“Our analysis of the Twin Cities area reveals that delinquency rates were highest in suburban ZIP Codes outside of the two central cities, in communities as geographically varied as Forest Lake, Oakdale, and Lakeville,” they write. “In contrast, delinquency rates in the neighborhoods around downtown St. Paul and in portions of North Minneapolis were lower.”

The finding matches a warning issued this past week by First American CoreLogic, which found that the risk of housing price declines and increased foreclosures in Southern California’s metropolitan hub of Los Angeles had soared during the first quarter of 2008.

In other words, the housing mess appears as if it may be moving from hard-hit inner cities and the exurban fringe towards more affluent suburbia. And with Alt-A performance continuing to decline at a record pace, the spread of the nation’s housing mess into key suburbs — where Alt-A lending was perhaps most prevalent — suggests more losses ahead for investors and lenders alike.

i have to say that this comports all too well with my intuition and anecdotal experience, perhaps making me less critical than i ought to be. but i live in exactly this slice of the distribution, where i know from experience that negative carry -- that is, the fact that one can rent at a significantly better price point than one can own -- is a huge problem. perhaps we should be applying the insight of jonathan rosner here.

Rosner: ... Where I think we see the next leg and what I am watching carefully now is that we are seeing the drawdown of committed but undrawn lines of credit by distressed borrowers who are taking cash out of the line to pay first their primary mortgage and then revolving lines of credit. At some point we reach a terminal period where they default on their credit card and then their primary mortgage. I'm not sure it does not go in the other order, but we'll see. That is the reason, I believe, that we've seen a little bit of a slowdown, a respite from a massive spike in defaults, because the borrower who is Alt-A and prime largely, even with the decline in home values, still has access to credit. Consumers do not give up spending of their own volition. They do so only after they have exhausted all other options.

The IRA: Suggesting that we could be headed to a huge uptick in default experience in unsecured and mortgage loans in the not too distant future?

Rosner: Yes, we will see the drawdown of HELOCs until they are exhausted, resulting in an eventual upsurge in defaults on mortgage-related and revolving credit. ... I would be very wary of institutions that have HELOC exposure. For the time being, I would be less concerned with the credit card companies. And then there is the situation in commercial real estate, where the wheels are starting to shake and even fall off the wagon.

the people rosner is describing are the ones that live in the american suburbs.

if these analysts are correct, foreclosure is about to become a much larger problem among the indebted suburban middle-class than it has been heretofore -- and that means growing price pressure on 75th percentile properties as they increasingly end up REO.

i remain of the opinion that credit contraction means deflation, particularly of levered assets relative to raw materials, but that monetary policy managers have done their level best to inflate in spite of it. the result in housing has been severe and widespread real price declines hidden by $4 gas. should systemic deleveraging continue -- as i think it must -- one must consider that the monetary stimulus is already in the market. inflation has become enough of a concern now that further interest rate cuts are unlikely, as ben bernanke implied today.

if this is so, we may indeed be on the cusp -- without being too dramatic here -- of a monetary moment somewhat analogous to 1931. real interest rates -- currently deeply negative with low policy rates and high commodity-based inflation -- may well start to increase even as economic conditions slow, credit contracts further, joblessness becomes problematic, corporate defaults rise -- but all this is met by limited monetary policy response in an effort to protect the currency, indeed perhaps even a tightening of money supply.

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