Ten Notes on Residential Housing

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 lowForeclosures 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.