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 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.
June 18th, 20089:27 am at
Hello David,
I agree regarding Tom Brown. He has made a number of very well reasoned arguments on various subjects, but I think he has missed the forest for the trees. One example is personal. We owned a stake in First Marblehead, of which Second Curve was/is a large holder. Brown argued repeatedly about the soundness of the business and how loss assumptions were too aggressive by the bears. Of course, Brown may end up being correct on that narrow point but completely missed the risk of the “forest” as the entire asset backed securitization function has seized up! Brown made these arguments when FMD was at $40 and it is now at $4.
Everyone makes mistakes, but Brown’s holier than though tone leaves me less than broken up by what is likely a major debacle at his fund(s).
I think the past year has exposed those who were simply along for the ride on the credit bubble formation and those who really know what they are doing. It seems to me Brown is likely the former.