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Wednesday, November 04, 2009


eye of the housing hurricane

via the daily crux, dan ferris offers the updated mortgage recast chart presented by whitney tilson illustrating all too well the option ARM impulse that looms between today and 2012. though many variable-rate mortgage resets are mitigated by the ultra-low interest rates being bought by the federal reserve, option ARM recasts result in the full amortization of mortgages on which most payers were recapitalizing not only accrued interest but principal.

realtytrac highlights the shift underway.

“Rising unemployment and a new variety of mortgage resets continued to gradually shift the nation’s foreclosure epicenters in the third quarter away from the hot spots of the last two years and toward some metro areas that had avoided the brunt of the first foreclosure wave,” said James J. Saccacio, chief executive officer of RealtyTrac. “While toxic subprime mortgages drove much of that first wave of foreclosures, high unemployment and exotic Alt-A Option ARMs are spreading the foreclosure flood to more metro areas in 2009.”

when do i think buying a house will probably be a good idea? my guess is sometime after that second massive spike in loan recasts -- we're kind of "in the eye" of the housing hurricane at the moment.

the first "subprime" impulse fed created a massive supply-demand imbalance, which manifested as a combination of rapidly declining prices and very long average listing times across many metropolitan areas.

when the second wave of recasts hits, it will fall upon a market already glutted with houses for sale and shadow inventory. it will moreover disproportionately afflict middle- to higher-priced housing, where adjustable rate negative-amortization financing which anticipated little or no refinancing risk and considerable house price appreciation was more prevalent than the classic 'subprime' low-FICO loans which (though certainly present at the higher end) predominated the lower rungs of the housing food chain. given what the reality of negative equity has done to move-up buyers -- that is, virtually eliminating them -- this has the making for gargantuan problems among the suburban 'mcmansion' set. i rather expect that collar-county housing will more or less totally collapse under all the supply and get really, REALLY cheap as we move through 2011 into 2012 or 2013. particularly if there's a strong second leg to the recession -- as i expect there will be, probably starting in 2010, accompanying the decline of fiscal stimulus spending levels from current (-12%) of GDP -- mid-to-high-end house prices might fall shockingly far. there's such a huge supply problem!

many have focused on reversion to the mean in metrics such as price-to-rent, and i agree that the very-long-term forecast has to be exactly that. but what is less commented on is that the mean in price-to-rent becomes the mean only by prices spending as much time and magnitude substantially cheap vis-a-vis rents as they do expensive. given the dynamics of the situation in which we find ourselves today, it is no stretch to forecast an extended period of materially cheap house prices. if that environment is also one of falling rents thanks to very high rental vacancies and declining incomes, house prices could fall stunningly even from today's already-corrected levels.

as with many things in a balance sheet recession, government finances will be a critical determinant. if government deficit spending sustains incomes through a period of private sector balance sheet deflation, rents may correct to account for vacancies but would not be pressured further by declining employment and incomes. if, on the other hand, political pressure builds in favor of deficit hawks and government deficit spending is materially curtailed, it is difficult to provide a rational floor forecast. experience would suggest, on the precedent of 1990s japan and elsewhere, that residential real estate prices could under such conditions ultimately decline peak-to-trough well in excess of (-80%).

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Thanks for the mortgage reset link, the most important piece of data for me personally. Goldman's takedown of Roubini today was a fun read. Unfortunately can't view your freestockcharts links (no Silverlight issues)

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Very odd -- Tilson takes the chart, the seasonality in sales .... and forecasts a bottom in mid-2010 on slide 26.

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i don't follow tilson there either, rb, except to say that he seems in that timeframe to be predicting a mean reversion without overshoot.

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CRE? Residential is 1.5 trillion dollar second wave, CRE is 3.5 trillion.

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the other day I saw this very good article on gold and the dollar as a result of the Federal Reserve's continued attempts to debase our currency and continue to try to solve a debt crisis with more debt: Gold Price Headed to $2,300 on Hyperinflation Risk?

here’s a snippet from it: “The gold price, and the price of other hard assets, is rising as more investors across the globe ask themselves how these deficits and debts will be resolved. Furthermore, new congressional initiative aimed at politicizing the Fed would give the Secretary of the Treasury a veto over Section 13(3) governing emergency action by the Federal Reserve – and effectively taking away the independence of the central bank. Setting aside discussion of the power that the Federal Reserve currently has, if politics enters the arena of monetary policy, then the U.S. dollar’s fate is sealed. Political leaders who reflexively seek political refuge in populist pork-barrel and loose fiscal policies during difficult economic times may soon have the same power – and ballot-box pressure – over monetary policy.”

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