10 Notes on Residential Housing

by: David Merkel posted on: June 18, 2008    
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I’m waiting for the day when I can write upbeat stuff about housing…  when I can buy homebuilder and mortgage stocks and crow about my gains.  I hope I live two more years. ;)  (Many thanks to Calculated Risk for their excellent coverage of residential housing.)

1) The first thing to note is that residential real estate values are still falling nationwide.  That affects Mortgage Equity Withdrawal [MEW] and derivatively, consumption.

2) Now, housing prices are likely to fall another 10-15%, which is what I have been saying for a while.  That will lead to more situations where there is negative equity, and more defaults, as they happen with negative equity and negative life events.

3) Foreclosures are making up a larger percentage of all sales, which is not a positive in the short run for prices.  In Sacramento, and some other places in California, foreclosures are the majority of sales.  As a result, it is no surprise that housing sales are at a low.  Foreclosures have risen rapidly across the country, not boding well for future sale prices.  Even in Florida, foreclosures are gumming up the market, and are getting reconciled slowly.

4) The GSEs are in a tough spot.  The government pushes them to make suboptimal loans that their shareholders don’t like.  I guess that’s a part of their deal.  As it is, the GSEs are playing a large role in many loans today.  Private capital doesn’t step up in an environment like this.

5) Labor mobility is limited when housing prices fall.  Pretty normal, if infrequent, in my opinion.  I faced this back in 1989; employers offered limited housing perks to new hires.  In three years, this will be gone.

6) Now, it should be no surprise for lending standards to tighten now.  We always shut the barn doors after the cows are in the fields.

7) Mortgage rates are rising, largely due to the reaction of the bond market to Fed chatter.

8 ) Prime ARMs will fuel the next wave of delinquencies.  If home values fall enough, any class of lending is vulnerable.

9) It should not surprise us that housing starts are low in an environment like this.  The bigger the boom, the bigger the bust.

10) I am not generally a Tom Brown fan.  He is too perma-bullish for my tastes.  He may have a correct technical point on subprime losses, but it may misrepresent losses for the financial sector as a whole.  Subprime is small.  Alt-A and Prime are much bigger, and losses are growing there.

This article has 11 comments! Add yours below...
David Merkel

David Merkel

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This article has 11 comments:

  •  
    Parkite
    Jun 18 11:20 AM
    Agreed about Tom Brown. He'll promote whatever is in his best interest.
  •  
    Redfish Mark
    Jun 18 11:43 AM
    My Website
    Sadly, the data would suggest you're correct about the Alt-A issue in particular; there is likely another tidal wave of defaults on the horizon. Like everything else in real estate, there are markets that have not suffered the bloody losses that carry the media day, but they're few and far between.
  •  
    jcrash
    Jun 18 12:01 PM
    Tulsa is doing fine. Thankfully, but since I'm not selling my home any time soon, I really don't care.
  •  
    billddrummer
    Jun 18 02:56 PM
    Well done article. It's going to be a long bumpy road down farther.
  •  
    Fellow IE
    Jun 18 04:26 PM
    What you are saying is more of a nationwide average scenario...but there are markets like NJ, NY, MA, Washington DC area, where price have stabilized now and doesn't seem to go any further down....definitely not 10%+... Cherry Hill, NJ is a good example of a nice area with housing value already down/comparable to 2005/2006 and seem to be staying very stable now...and is seeing some increased sales
  •  
    niterider
    Jun 18 08:28 PM
    hardikrs is a dreamer . I live in New york (Long Island). Houses are not selling. For sale signs are everywhere, and home prices continue to fall here. You can always tell when someone is in real estate. They make comments like hardikrs.
  •  
    johndough110
    Jun 19 12:08 AM
    Just rehabbed a home in Phoenix and sold 34 days on the market for $80K profit.

    Yep, it really stinks out there. Keep listening to our non-biased, truth-telling media!
  •  
    Left Coast
    Rick
    Jun 19 10:40 AM
    johndough110 -- so you're telling the truth - ha!
  •  
    Tom Lindmark
    Jun 19 12:19 PM
    My Website
    I like your article but take issue with your comment about Tom Brown. He does support his arguments with data. If you disagree with him you need to supply some data to support your thesis.
  •  
    User 213227
    Jun 20 11:02 AM
    My Website
    David, interesting post. Would you be interested in syndicating your content on the home page of my site? It's an online community of finance professionals ( www.wallstreetoasis.co... ). I could add an RSS feed that will allow me to promote your blog posts to my home page (when i think it will lead to a good discussion and/or is appropriate), but I wanted to make sure you were comfortable syndicating first. The syndicated post would have a link back to your original post. Thanks, Patrick (you can reach me at wallstreetoasis@wallst... if you have any questions).
  •  
    rm
    Jun 20 12:17 PM
    My Website
    [We always shut the barn doors after the cows are in the fields.]

    Ain't that the truth?

    Nearly every response to the "crisis," particularly when it comes to the legislators, has been to fix problems that have already occurred, and are unlikely to re-occur.
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