Tuesday, November 27, 2007

Home Prices Show Record Decline

In Sept S&P/Case-Shiller Home Price Index fell 4.9% y/o/y, the biggest drop since the data began in 1988 -- but in-line with expectations. It's the 9th straight month of declines. Lower house prices will help to clear out excess inventories (a lot much more than rate cuts).
Here's the money quote from Shiller:
"The declines in the national figure are notable for two reasons. First, the 3rd quarter decline, at 1.7%, was the largest quarterly decline in the index’s 21-year history. And, second, the year-over-year decline posted its second consecutive record low at -4.5%. Consistent with prior 2007 reports, there is no real positive news in today’s data. Most of the metro areas continue to show declining or decelerating returns returns on both an annual and monthly basis.
All 20 metro areas were in decline in September over August. Even the five metro areas that still have positive annual growth rates -- Atlanta, Charlotte, Dallas, Portland and Seattle -- show continued deceleration in returns."
Here's the metro overview:
S&P/Case-Shiller Index Release - September 2007 Index

A FED rate cut won't help this slow process of adjusting prices to economic reality. Banks continue to tighten guidelines and the major mortgage insurance companies AIG, GE are pulling out of providing lenders protection from default on anyone with less than a 620 FICO. Mortgage rates and especially jumbo mortgage rates for prime borrowers are at the best levels in years. These items and the belief by the public at large that prices were irrational will pressure the real estate market for severals years. As an example of the moves that have occured so far. This is from our friends at Sacramento Area Flippers in Trouble

8112 Sacramento StFair Oaks, CA 95628
Total Loss: $390,000
Percent Loss: 33.1%
Asking Price: $789,000Bedrooms:4 Baths: 3 Sq. feet:3501
Listing History:Down 36.9% from $1,250,000 On 2006-04-09Down 34.2% from $1,199,000 On 2006-06-16Down 33.1% from $1,179,000 On 2006-07-15Down 28.2% from $1,099,000 On 2006-09-16Down 33.1% from $1,179,000 On 2006-09-30Down 49.1% from $1,549,000 On 2007-07-14Down 34.2% from $1,200,000 On 2007-08-18Down 1.3% from $799,000 On 2007-10-20Days on market: 594# of Times Listed: 6

11836 Delavan CirRancho Cordova, CA 95742
Total Loss: $323,500
Percent Loss: 32.3%
Asking Price: $679,000Bedrooms:6 Baths: 4 Sq. feet:5600
Listing History:Down 38.3% from $1,100,000 On 2006-09-16Days on market: 434# of Times Listed: 3

6030 Eagles Nest RdSacramento, CA 95830
Total Loss: $300,000
Percent Loss: 33.3%
Asking Price: $600,000Bedrooms:3 Baths: 3 Sq. feet:3039
Listing History:Down 33.3% from $899,000 On 2006-05-25Days on market: 569# of Times Listed: 3

6415 Valenda CtElk Grove, CA 95757
Total Loss: $294,500
Percent Loss: 42.5%
Asking Price: $399,000Bedrooms:5 Baths: 3 Sq. feet:2954
Listing History:Down 27.5% from $550,000 On 2007-06-16Days on market: 161# of Times Listed: 2

11999 Mandolin WayRancho Cordova, CA 95742
Total Loss: $288,000
Percent Loss: 43.2%
Asking Price: $379,000Bedrooms:3 Baths: 3 Sq. feet:2885
Listing History:Down 20.2% from $475,000 On 2007-08-04Down 17.4% from $459,000 On 2007-09-08Down 11.7% from $429,000 On 2007-09-29Days on market: 112# of Times Listed: 3
If a peak at Sacramento, CA wasn't enough look over at Phoenix Flippers in Trouble. When will the bleeding stop? 08, 2011? Make a comment while it's still FREE of charge.

Tuesday, November 20, 2007

Countrywide:Sorry you can't afford it.

Obviously, you are well aware of the credit crunch and the impact it has had thus far on the once roaring real estate markets. I say it's just the tip of the iceberg. Over half the loans in CA in 2006 were NEGAM or interest only. That is a small window into the loans that pushed the bubble further and will lead to a larger, more protracted collapse than anyone anticipates. Those days seem like ancient times in the mortgage world. Countrywide announced this today:

As you may be aware, federal regulatory agencies have issued joint guidance which impacts the qualifying methodology for non-traditional mortgage products. This guidance was designed to better address risks associated with non-traditional mortgage products that offer interest-only and/or negative amortization payment features and to better support the needs of those borrowers who might not understand these types of risks. In an effort to further align our lending strategy with this guidance, effective Monday, November 19, 2007 Countrywide®, America's Wholesale Lender® began calculating borrower repayment capacity for non-traditional mortgage products using the following three criteria:

The greater of the Note Rate or the Fully Indexed Rate
A full amortizing payment
A loan amount which includes the total potential negative amortization
The resulting qualifying payment amount will be used to calculate both the Housing and the Debt-to-Income (DTI) Ratios for the loan transaction. The qualifying loan amount including the total potential negative amortization is determined as follows:
New York - 110% of the original loan amount
All other states - 115% of the original loan amount Please note, for ARM loans with MTA or COFI indices, the qualifying interest rate will be calculated using the fully indexed rate (index + margin) plus an "adjuster." The adjuster is a variable which will be used to annualize the MTA or COFI indices due to the "lagging" nature of these two indices.

The bottom line is that a borrower has to qualify at the highest possible payment the loan could have in the future. During the boom everyone underwrote to the minimum payment, either the interest only or the lower NEGAM payment. Otherwise very few of these loans would have been approved. That's how you had someone making $100k buying a 800k house. The normal historic lending ratio is to have a loan balance that doesn't exceed 4x your gross annual income.
The exotic loans that were everywhere and are now like neutron bombs, destroying the borrower but leaving the home standing are no longer available. Countrywide's action is not the first major lender to dramatically tighten lending guidelines. But, I highlight their action because they originated about 20% of all mortgage loans year to date. The removal of leverage has been very rapid. The decline of real estate in the hot markets has just begun. I am an optimist by nature but I believe we are in a recession now and we likely will be in a deep recession until 2010. The FED can't cut rates to bail anybody out because the dollar will collapse even further. Creating a whole series of global problems. It's time for belt tightening for the American consumer. Don't let this spoil your Thanksgiving. Be thankful for what matters most in life. Pray that we buckle down and fight our way back to becoming the shinning beacon of hope on the hill that world expects and we deserve to be.

Friday, November 16, 2007

Recession and possible depression. Can I get some prozac with that?

Finally the "recession" talk is making headlines. The only thing right now that drives me wild is that there is still a discussion that the US will face a recession.... If the US would use a more "realistic" formula I assume that the recession is already here.... The clearest sign might be that Starbucks reported the first decline ever in customer visits. Hmm, five dollar coffee is a necessity right? Watch for 7-11 to pick up all the old Starbucks customers who downgrade. The good old substitution effect. Take a look at the warnings we have seen from Coach, Kohl's, JC Penny, etc. They are all reporting sharp drop offs in traffic YOY. Walmart is reporting various signs of consumer downgrading as well. But Ferrari is sold out for the year. So at least the rich are still doing well. I know you were worried for a minute that we were in serious trouble.

IN 1929, days after the stockmarket crash, the Harvard Economic Society reassured its subscribers: “A severe depression is outside the range of probability”. In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started. Today, most economists do not forecast a recession in America, but the profession's pitiful forecasting record offers little comfort Recession in America / America's vulnerable economy

Also in case you think BusinessWeek and The Economist forgot to take their anti-depressants I would encourage you to think about what the CEO of the one largest banks in the US said today:

Wells Fargo CEO John Stumpf dropped the "D" word today: "We have not seen a nationwide decline in housing like this since the Great Depression," Stumpf said at a banking conference in New York. Stumpf said the second-largest U.S. mortgage lender and fifth-largest U.S. bank was "not immune" from the storm, but was well-positioned to ride it out, despite expectations for "elevated" credit losses from home equity loans into 2008. Are we in a recession? Post your thoughts or anecdotal evidence. Free speech still works here.

Friday, November 9, 2007

Fired: Heads roll as Mortgage Bets Collapse.

This has been a dramatic week on Wall St. We have seen multi-billion dollar losses disclosed from almost all global banks. CEO's at Citigroup and Merrill Lynch have been sacked because of mortgage losses and unacceptable risk management. The shoe dropped when the $100 billion dollar M-LEC super conduit that CITI and other banks were working to setup with the US Treasury dept stalled. I wonder why. Heard in the back alley of Wall St,"Psss, hey I have a box here of mortgage paper that we modeled to be worth $20 billion. Would you loan us money against it? We are a little low on liquid cash because we are investing so much in these great mortgages. Oh no, you can't look inside, but trust us we have more PhDs calculating the value of these holdings than any other bank. We are CITI after all." The idea was to package all the junk mortgage paper in a massive pool and have other banks buy the paper. The problem continues to be that everyone is valuing the paper according to some rocket science model not what the market price is. Granted their isn't a real market for subprime or ALT-A, aka scratch and dent mortgage paper. To get an idea how bad it is inside the belly of mortage lending, here is a chart of 2007 Prime HELOC loans. These are perfect credit borrowers. Known as the ABX-HE-AAA. What this means is that the average current value of these loans is .70 on the dollar. This is largely because of an illiquid market, foreclosures, defaults and the great unknown of how these loans will perform in years to come. In the foreclosure wave sweeping the nation HELOCs are completely wiped out. Total loss. So the market believes right now that a third of the money lent will never be paid back or recovered in foreclosure. Gee, no wonder it is very difficult to find a HELOC to turn on the household ATM above 80% loan to value.
Credit will continue to get tighter until the losses stop. It could be years of bank confessions as the unwind occurs and the bubble deflates. I would expect to see residential real estate to fall in the bubble markets through 2011 because of all the resetting paper. The foreclosures that are on the market now are people who stopped paying in Feb/Mar, well before the credit freeze, high gas prices, and the fall of real estate price declines really gathered momentum. It's called creative destruction. The weak hands give up assets to the strong buyers. Houses in bubble areas continue to get more affordable for people running the make sense economic calculations. The buyers that are circulating now at open houses are putting 15-20% down payments, getting fixed rates and fully documenting income. Sure prices might drop but they are in it for the long haul and they can easily make the payment on their $500k home that some fool bought for $700k in 2005. This decade won't soon be forgotten for it's massive excess and dramatic belt tightening following the bubble.