Fibonacci

Last year the question was whether the housing boom would slow down. Now it's how bad it will get. Navigating the market is more challenging than ever.

Silver™

Americans are increasingly nervous about the real estate market in 2007. They have good reason to be. But the news isn't all bad: Interest rates will remain at historically low levels, home buyers will see more opportunities, and best of all, for those planning for the long term, 2009 could be primed for a comeback.

http://www.msnbc.msn.com/id/16172774/

Silver™

Sales of new homes rose in November while the backlog of unsold homes fell for a fourth straight month, providing hope that the serious slump in housing could be ending.

Sales of new single-family homes rose by 3.4 percent last month to a seasonally adjusted annual rate of 1.047 million units, reflecting solid sales increases in every region of the country except the South, the Commerce Department reported Wednesday.

The increase was better than had been expected and offered hope that the steep slide in housing may be starting to bottom out as builders, using a wide array of incentives, begin to make a dent in the record level of unsold homes.

The 3.4 percent rebound in sales last month was the third increase in the past four months. It helped to lift the median price for a new home to $251,700, an increase of 3.2 percent from a year ago. The median price is the point where half the homes sold for more and half for less.

http://www.msnbc.msn.com/id/16368022/

zamo

^^ Seems that South Florida has the opposite story.

http://www.sun-sentinel.com/business...tory?track=rss

GreenMonster

I've got my brother renting a room off me, and we're quessing that 2009 will probably be a good time for him to buy a place of his own.

Looks like we've dropped alot in the past year, and hopefully the re-adjustment of prices only lasts thru 2007 and 2008.

I was BS'ing with my cousin who bought his house in 2000 (I got mine in 2001), that he got in at the best time, with me just being a little late. His prior house was bought in 1990 which was another peak in home values here in MA. We both agreed that Sept 2005 was the peak this time around, and it's all downhill from here.... Hopefully we hit bottom soon....

zamo

Just spoke with another realtor good friend of mine. She told me that the inventory levels have topped 20 months, and the rebound might be in 2008. Many people are not willing to lower the price because 1. they are already upside down (thanks 100% mortgages), 2. Refinancing is not an option as they have $0 equity.

Fibonacci

Here is a real example of a 3500sqft 4br/3.5ba/3car home on a golf course in an excellent school district in our area.

Toll Bro's New Construction 2003: Sold $620,000

Second Sale 2005: Sold $582,000 owner then spent $38,000 to finish basement (additional 1400sq ft living space).

Just sold 2007: $537,000 !!!

Silver™

That is because most people see the writing on the wall and want out of Detroit

Fibonacci

Would you be mine, could you be mine, won't you be my neighbor...

moeronn

Should I take offense?

The question is, what would that house have sold for if it were built in 2001?

And I agree with Silver.

MR1

Is this one that you were considering? Looks like there should be no big rush to buy right now.

Reddly9007

wow, that sounds like a great deal! NOT! One of my co-workers talked a seller down from 350k to 290k! Ruff market

Silver™

Guess I was right.

Detroit = America's worst metro housing market

Median Home Price Change 2005-2006: -10.5%

http://www.forbes.com/forbeslife/200...l?boxes=custom

Fibonacci

That's not exactly new news. Motown and Michigan as a whole has a shitty real estate market because of the Domestic Auto meltdown and the hollowing out of our manufacturing base.

My guess is that we are 90% thru the downturn though.

And like fdl says, based on global warming trends, we'll soon have balmy SoCal weather, but only with affordable real estate for those who get in now!!!

Fibonacci

Yah, we put an offer on said home but just missed it by a hair. It was a great deal, but there are plenty of other great deals out there and we aren't gonna chase anything.

Silver™

Just wait for the next round of layoffs from the Big 3, I am sure you can get it for $400K by then.

Fibonacci

.......PSSSSSsssssssssssss....

Silver™

^^^

Didn't Greenspan say to offer more alternatives, not lower standards.

Fibonacci

Certainly.

But I recall finding it odd at the time, that he'd opaquely recommend variable rate debt when short term rates (as a direct result of his actions) and long term bond yields were at 50 year lows (indirectly influenced by him).

Like Hillary says, there are no do-overs in life. I suspect this is one line that Alan would like to take back though.

zamo

In contract for a house in Weston, FL that has dropped $75K already. Appraisal came in at $3k over the sale price. Using $17k of seller contribution for closing costs and discount points.

It might go down a little more, who knows. But there are people buying right now. Baby v2.0 coming and needed to move soon.

fdl

Prices, sales fall in U.S. 'burbs

WASHINGTON–While the U.S. housing downturn has depressed once-thriving real estate markets around the nation, far-flung suburbs of major cities have suffered the most abrupt market correction.

Home construction in distant suburbs has slowed and prices and sales have fallen more than those of close-in suburban neighbours since a five-year U.S. housing boom ended in the summer of 2005.

Average home prices in Loudoun County, Va., 56 kilometres outside of Washington, D.C., fell roughly 11 per cent in 2006, according to the Northern Virginia Association of Realtors. By contrast, Virginia's Arlington County, which hugs the nation's capital, saw a price decline of only about 2 per cent.

"The news is: Your home is worth $100,000 (U.S.) less than it was a year and a half ago,"said real estate broker Mike Wagner.

http://www.thestar.com/Athome/article/179459

amisconception

http://calculatedrisk.blogspot.com/

Fibonacci

By Rich Miller and Matthew Benjamin Feb. 26 (Bloomberg)

amisconception

FREDDIE MAC ANNOUNCES TOUGHER SUBPRIME LENDING STANDARDS TO HELP REDUCE THE RISK OF FUTURE BORROWER DEFAULT

http://www.freddiemac.com/news/archi...melending.html

Fibonacci

http://mortgageimplode.com/

amisconception

http://news.yahoo.com/s/ap/20070306/..._ge/bernanke_6

Bernanke: Toughen up on mortgage giants

WASHINGTON -
Federal Reserve Chairman Ben Bernanke urged Congress on Tuesday to bolster regulation of mortgage giants Fannie Mae and Freddie Mac, and suggested limiting their massive holdings to guard against any danger their debt poses to the overall economy.
ADVERTISEMENT

Bernanke has previously supported efforts to pare the two mortgage companies' huge portfolios. This time, however, he was a bit more specific and recommended that their holdings might be linked to a "measurable public purpose, such as the promotion of affordable housing."

The Fed chief's suggestion was contained in remarks delivered via satellite to a bankers meeting in Hawaii.

His remarks come as worries about risky mortgages are making investors jittery. Those fears contributed to last week's worldwide stock meltdown, where the Dow Jones industrials suffered a gut-wrenching 416-point plunge.

Lenders to subprime borrowers — people with blemished credit histories — have been battered. Rising interest rates and weak home prices have made it increasingly difficult for these borrowers — especially those with adjustable-rate mortgages — to keep up with their mortgage payments. Delinquencies and foreclosures in the subprime mortgage market are spiking.

Against this backdrop, Bernanke said he wanted to be clear that by suggesting the change in Fannie Mae's and Freddie Mac's portfolio holdings, he was not advocating a change in the exposure of the mortgage giants' subprime loans.

Last week, Freddie Mac announced that it would no longer buy certain risky, subprime mortgages.

Fannie Mae is the No. 1 U.S. buyer of home mortgages; its rival, Freddie Mac, ranks as the second-largest buyer.

Fannie Mae and Freddie Mac — also referred to as government-sponsored enterprises, or GSEs, — were created by Congress to inject money into the mortgage market by buying home loans from banks and other lenders. They bundle the mortgages into securities for sale on Wall Street.

On Capitol Hill, various efforts over the past several years to tighten the government's reins on Fannie Mae and Freddie Mac have ultimately languished. However, prospects for compromise legislation have improved with the Democrats now in control of Congress.

"Legislation to strengthen the regulation and supervision of GSEs is highly desirable, both to ensure that these companies pose fewer risks to the financial system and to direct them toward activities that provide important social benefits," Bernanke told the banking gathering.

He said the Fed would like to see legislation passed this year.

Rep. Barney Frank (news, bio, voting record), D-Mass., chairman of the House Financial Services Committee, is proposing legislation that would give the regulator of Fannie Mae and Freddie Mac the discretion to limit or reduce the two mortgage companies' holdings.

Fannie Mae's and Freddie Mac's combined portfolios from the end of 1990 until the end of 2003 have grown more than tenfold — to $1.56 trillion, Bernanke said. Besides buying mortgage-backed securities, the mortgage giants purchase other types of assets for their own investment portfolios, Bernanke said.

In his speech, Bernanke did not provide any fresh insights on the turmoil seen in worldwide financial markets over the past week.

He also did not talk about the future course of interest rates in the United States. Many economists predict the Fed will hold rates steady when they meet later this month.

amisconception

The FED is way behind the market on this

amisconception

Cleaning Up in Subprime Loan World?

By Emil Lee
March 6, 2007

I recently decided to start looking for future survivors in the subprime mortgage sector. Stock prices of Accredited Home Lenders (Nasdaq: LEND), New Century (NYSE: NEW), NovaStar (NYSE: NFI), and IndyMac Bancorp (NYSE: NDE) have cratered, absolutely cratered, and nearly every pure-play subprime mortgage lender is priced as if it's going out of business. There's a lot of truth to the negativity surrounding subprime mortgages -- many have already gone out of business (or sold themselves), and many more probably will.

However, whenever an entire sector is painted with the same brush, there's opportunity. The biggest problem seems to be credit quality -- billions and billions of dollars' worth of loans were made that simply made no sense. Stated documentation (when the borrower can basically make up numbers if he or she chooses), interest-only, and negative-amortization loans are simply haphazard and for the most part should not be made.

Subprime cycle
So why were they made? For a while, making these questionable loans was a fantastic business. Gross premium gains on sales of loans shot up to the 4% range -- after subtracting expenses, some lenders were making a net 2% on loans sold, and on $10 billion, 2% is a whopping $200 million. How would you like to make $200 million just by originating a bunch of questionable loans and selling them to yield-hungry, unsuspecting investors? It's like a game of hot potato -- as long as the potato isn't in your hands at the end, you're good.

For a while, things were good -- subprime lenders were happy because they were getting fat premiums, Wall Street business (which provided the securitization services) was booming, and investors in these securitized loans were happy because yields were high and defaults were low. Such is life when interest rates are low. The housing boom masked underlying problems because people who couldn't pay for their mortgages could either roll over their loans or sell them at a gain. Thus, the subprime machine worked for a while.

Oops, I did it again
However, trees don't grow to the sky. Housing cooled off, which meant buyers were stuck with their houses. Thus, the ones who couldn't pay their mortgages started defaulting, which further pressured the housing market. Plus, a lot of borrowers were having their rates reset upwards, a move that increased defaults. Wall Street started getting cold feet and sending back more early-payment default mortgages, and that hurt subprime lenders badly and caused some to go under. Investors -- the ones holding the hot potatoes -- were getting hurt by a jump in default rates, which cuts directly into their yield. Thus, demand for subprime mortgages decreased, which decreased premiums, which further hurt subprime lenders.

As you can see, it's kind of a domino effect on the way up and the way down. That's why there are cycles, because the ride up and the ride down both have self-reinforcing mechanisms until something big happens and an inflection point is hit. It's kind of like the stock market, where everyone joins for a great party, which keeps getting better and better as you get drunker and drunker. Then, all of the sudden you wake up huddled over a porcelain bowl the next day swearing never to touch alcohol again.

Although I think it's pretty obvious there will be a lot of pain and suffering, I don't think every subprime lender is going to go under.

A subprime mortgage, like an insurance policy, is neither inherently good or bad: It's all about price and value. For example, after hurricanes Katrina, Wilma, and Rita, people thought the catastrophe-insurance business was the devil incarnate. The real problem was that insurance premiums didn't price the risk properly (due to faulty loss models), and guys like Warren Buffett made billions by simply waiting until pricing hardened and filling the void in capacity after the storms.

The same should happen in subprime mortgages. The people holding the shaky loans will be the ones who suffer the most. The housing market will probably suffer because some borrowers won't be able to get loans. Some originators who can't weather the storm will either be sold or go bankrupt. However, after that, the ones left standing -- like Forrest Gump's shrimping business after the storm -- will make a fortune.

Back to square one
The great thing about a free market is that it eventually self-corrects. The bad-loan poison will work its way back through the system and kill off the causes of that poison. As we've already seen, securitizers, government agencies, and investors are all cracking down hard. This forces originators to follow suit. Thus, things like stated documentation and negative amortization loans won't fly anymore. From now on, more loans that make sense and are priced properly will be made, and this will also help stabilize the housing market after the poison works its way out of the system.

In the end, my economics education taught me one very simple rule: It's about supply and demand. Previously, there was way too much unscrupulous demand for subprime mortgages. Once originators stretched the rules to provide the supply, things eventually went haywire. Now, demand is plummeting, and supply is as well (as originators shut down and cut back).

Smart investors know that fortunes are made while sifting through wreckage, so it's time to start looking for survivors. I don't know how long it will take for the poison to recede, but I do know that subprime borrowers still need places to live, and that a properly priced mortgage made on a properly priced home (even a subprime mortgage) is very valuable both to the borrower and the lender (and thus the investor). In time, there will be a balance again and the cycle will start anew.

However, I do not know when the subprime downturn will end, nor am I advising anyone to buy or sell specific subprime lenders. The sector will be volatile, and investors should do their own due diligence.

http://www.fool.com/investing/value/...npu=y&bounce=y

zamo

so, on top of the housing bubble, now we have the subprime mortgage bubble.

5o9

Although sub-prime was 20% of last years mortgage market, it is only 4% of total outstanding mortgage debt. Average house equity is 50%, down from 60% a decade earlier.

However, if you see sub-prime owners all around you, be very worried.

zamo

If this is true I might have lucked out.

http://news.yahoo.com/s/nm/20070307/...g_greenspan_dc

fdl

Lucked out? Who knows. National housing market means nothing. Its all about local. Right down to the neighborhood.

In Toronto for example, there are some neighborhoods that rose 20% in 2006. Some had a small decline or were flat, while others were in between. Its very localized.

zamo

^^ yeah. I closed last week tho. Needed to. I had a tenant ready to rent my previous house.

Fibonacci

Yes, the FED is behind the curve and the bond market is telegraphing this. It's highly unusual for 10yr treasuries toe yield 75 basis points below FED FUNDS.

BUT, the FED also has to protect the dollar. Gun's n Butter is not a recipe for low inflation. You can thank Dubya for the mess we're flying into. Tax cuts are great, but they need to be paired with spending cuts. Between Iraq and the generous helping of congressional spending bills (of which Dubya has never vetoed), we've got quite a mess on our hands.

Add in clowns like Billary which don't understand economics, who are railing against foreign ownership of our debt - just wait, this party of musical chairs is gonna be rocking soon enough. The day foreigners stop funding our deficits is the day the American consumer finds out he doesn't have a chair to sit in.

65 Fury Convert

Excellent analogy!

amisconception

Don Tomnitz, the CEO of DR Horton, said in a Citi Group conference call this afternoon (after lamenting about how bad business is), " 2007, all twelve months, will suck."

Full quote:

zamo

mostly because of the subprime hell

http://money.cnn.com/2007/03/05/news...n=money_latest

5o9

20% current (1-year) sub-prime default * 4% sub-prime share = 0.8% This is a huge amount. But,

All this sub-prime default brings the overall mortgage market back to normal default rates. Shocks will result in higher than average default rates. We are heading to more restrictive underwriting.

We certainly didn't want the 0.8% increase to the default rate, as the result of bad underwriting. Brings us back to Alan's comments regarding risk premiums.

Certainly, the bloodbath in sub-prime creates opportunities

Silver™

There has been a lot of pain in the market for mortgages to people with shaky credit histories. Small, so-called subprime lenders are filing for bankruptcy. Shares of big lenders New Century Financial (NEW), NovaStar Financial (NFI), and Fremont General (FMT) are getting crushed, as concerns about rising customer defaults mount. But through all the misery, some savvy hedge funds are posting big gains.

How's that? The hedge funds raking in fat profits from the meltdown in the subprime market have cleaned up by betting on a decline in the ABX subprime index, which measures the cost of insuring against defaults on subprime bonds. The index, created by London-based Markit Group, tracks 20 asset-backed bonds with a low investment grade credit rating. Beginning last fall a number of hedge funds began shorting the index—betting on a decline—either as a way to minimize their exposure to subprime bonds in their portfolios, or simply to profit from an anticipated sector rout. The ABX short bet came up a big winner when the index plunged in February, leading to a 34% decline for the year.

One of the hedge funds said to be cleaning up on the ABX short trade is Paulson & Co., a $7 billion fund led by former Bear Stearns BSC investment banker John Paulson. Traders familiar with Paulson say the hedge fund made a massive, leveraged short bet on the ABX index dropping. The fund reportedly scored a paper profit of hundreds of millions of dollars when the ABX index crashed, according to people familiar with the fund. Stuart Merzer, Paulson's general counsel, declined to comment.

http://www.businessweek.com/investor...308_900631.htm

amisconception

(Bloomberg) -- Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds.

Prices for credit-default swaps linked to the bonds of the New York investment banks this week traded at levels that equate to debt ratings of Baa2, according to Moody's Investors Service. For Goldman, Morgan Stanley and Merrill that's five levels below the actual Aa3 rating on their senior unsecured notes and two steps above non-investment grade, or junk.

Traders of credit derivatives are more alarmed than stock and bond investors that a slowdown in housing and the global equity market rout have hurt the firms. Merrill since 2005 has financed two mortgage lenders that subsequently failed and bought a third, First Franklin Financial Corp., for $1.3 billion.

``These guys have made a lot of money securitizing mortgages over the years in a mortgage boom time,'' said Richard Hofmann, an analyst at bond research firm CreditSights Inc. in New York. ``The question now is what is the exposure to credit risk and what are the potential revenue headwinds if they're not able to keep that securitization machine humming along.''

``There's been a little bit of a reappraisal of the financial sector, with a strong desire to get away from subprime exposure,'' said Scott MacDonald, director of research at Aladdin Capital Management LLC in Stamford, Connecticut, which manages $16.5 billion in assets.

Merrill equity analysts two days ago cut their recommendations on Goldman, Lehman and Bear Stearns shares as well as that of European banks Deutsche Bank and Credit Suisse Group to ``neutral'' from ``buy'' because they said earnings will probably decline next month as investors become wary.

Bear Stearns's stake in non-investment grade retained mortgage securities, or what its keeps from packaging loans into bonds, represents about 13 percent of the firm's ``tangible'' equity, according to CreditSights.
For Lehman, it's 11 percent. Goldman, Morgan Stanley and Merrill don't disclose how much of their total retained securities are rated below investment grade, or junk. Overall, their exposure is in ``the low- to mid-teens,'' CreditSights said.

Disclosures are kind of lacking,'' Hofmann at CreditSights said in an interview. ``They don't tend to break out the subprime piece of their retained interest.''