1) The rating agencies have been running like crazy. They do that when they are behind the curve. Whether it is Moody’s on subprime, or S&P on Alt-A lending, the downgrades are coming in packs. Then there are difficulties with the debts of real estate partnerships, like LandSource Communities Development, which is likely to file for insolvency, together with some residential developers.
2) Now, there have been a few summary pieces on how the rating agencies changed as the housing boom moved on. Here is one from the New York Times, and one from the Wall Street Journal. As I had commented long before in my writings at RealMoney, the rating agencies were co-dependent with those that paid them. That said, it would be hard to construct a system that would not be that way. Buyers don’t have a concentrated interest in ratings. Issuers so.
3) If I were Ambac, I would be doing all that I could to allege fraud on contracts where representations and warranties were not upheld. Ambac is fighting to survive.
4) Mortgage insurers — it is the best of times, if you survive, because you are the almost the only game in town for those wanting to do low down payments, and rates for mortgage insurance are way up. But, it is the worst of times, housing prices are falling, rating agencies are downgrading, and defaults on insured mortgages are rising.
5) Foreclosures:
- An excellent summary and map of foreclosure activity.
- Maryland makes them take a little longer. (The article overstates the lengthening.)
- California is suffering.
- Desperate in Denver.
- Foreclosures and crime are correlated.
- Which leads the FHA to act, and the states to act as well, because Federal efforts are slow.
6) Gotta love OFHEO, which is trying to rein in the GSEs during a lending crisis. Even though they may have traction, I don’t see how they tighten the regulations during a crisis.
7) For that matter, consider the lenders. Countrywide seemed to purposely ignore the creditworthiness of borrowers as they jammed it out the door lent on mortgages. Even with all this, mortgage lenders are complaining that new regulations will make mortgages less affordable. What they mean is that they will issue fewer mortgages, and they will make less profit. Please, let’s stop making it easy for those that can’t afford a home to take the risk of buying one. Higher mortgage rates are bad in the short run, but good in the long run.
8 ) Dr. Jeff reluctantly asks what inning we are in on housing. I understand that it is an overused metric, but it is overused for a reason. Nine is an intuitive number — are we halfway through? Fifth inning. One-quarter? Third. Almost done? Eight or ninth. He also makes a simple request to those of us who opine on the housing slump, to be more definite in what we say, provide more data, and what will be signs that the troubles are turning.
I need to set up some housing recovery googlebots to scan for me, but my guess is that we are in the fifth inning of the troubles. When I get more definitive guesses/answers to the questions, I will post.
9) Delinquencies:
- Lenders, or better, servicers, are struggling with the load.
- That said, the growth in subprime delinquencies is slowing. Perhaps we are going through burnout, where most of those likely to default have done so, and a few incremental defaults remain.
- But home equity loan experience keeps getting worse. (My only surprise there is how slow this has been in arriving.)
10) Home prices continue to fall, and estimates to the nadir (cycle low) range between 0-50%, with 10-20% being the most common.
11) Falling home prices will lead to many more foreclosures in prime loans, and of course Alt-A and subprime. Foreclosures happen when a sale would result in a loss, and a negative life event hits ? death, divorce, disaster, disability, and unemployment.
12) Second-order effects:
- Home remodeling expenditures fall
- (Commercial) Architecture Billings index falls. (Does not bode well for commercial real estate.)
- Low new housing sales.
- Tough total sales environment in the SF Bay Area. Sales fall before housing prices, and rise as housing bottoms. (Opinions on that last thought?)
- Allegations of fraud are thick among borrowers and lenders. A lotta smoke, but is there any fire?… Clearly, the servicing system was not designed for this level of failure, so I’m not surprised that things are moving slowly.
- Homeowner vacancy rates are at an all-time high. That should keep the pressure on prices, because there is a lot of competition if you want to sell, and there is a lot of dark supply waiting to emerge if prices get more favorable. Emergence from this set of troubles may be slow, much like a credit crisis in the corporate bond market often feels slow to unwind.
Re. the OFHEO vs. Case-Shiller topic, the fact that CS only covers a subset cities does not explain the discrepancy. Here in San Diego, for instance, OFHEO shows a decline of about 5% whereas CS shows almost 20% (it’s actually 24% but I am disregarding the last two months to line it up with OFHEO).
It is pretty clear to me that the discrepancy comes from the fact that OFHEO only measures homes bought/refid with conforming loans, and thus throws out the properties at greatest risk of becoming must-sell inventory. C-S measures all sales (of detached homes).
I don’t know about nationwide but I can comment on San Diego, with which I am extremely familiar. Anyone who says we are near the end of the bust here in SD is indulging in fantasy.
– Volume (the best leading indicator for local RE) is absolutely dismal and there is a glut of inventory — most recently 10 months’ worth of resale inventory. This is at the typical seasonal low in months of inventory, so it’s probably closer to 11 or 12 months deseasonalized. This level of inventory is deep bear market territory for SD.
– Default notices have been at all time highs in recent months, easily more than doubling the rate of default we saw in the 6-year SD housing bust in the early 90s. (This is adjusted for ensuing population growth). At current processing rates, that are just defaulting now will not actually hit the market for at the very least 6 months on average… and again, we have JUST seen the all time default records. Defaults could drop by 2/3 and we’d still be in bear market territory (as measured by the last bust).
– YOY job growth just went negative for SD — something that never happened in the 2001-era recession. And the jobs being created are typically lower paying than the jobs being lost.
– Against this backdrop, SD homes still remain substantially overpriced based on their historical relationship with incomes and rents. It’s still much cheaper to rent than buy (even if you don’t count the price depreciation as an expense… if you do then it’s WAY cheaper to rent). And it remains tough for the typical person to buy at these levels without getting wacky loans or settling for an inferior property.
– Finally, consider that the prior bust lasted for 6 years, and that was after a boom that was tiny in magnitude and duration compared to the more recent boom.
I don’t know exactly what inning this is for SD… if I had to guess I’d say 4th or 5th. But I just wanted to note that the theory (oft-advanced by local RE pundits) that SD in near the bottom is completely indefensible and lacking in factual basis. I have a tough time believing it’s any different in the rest of SoCal… as for the nation in aggregate, I don’t know, but I thought a little local color might help people puzzle things out.
San Francisco as an area is unusual: SF itself is still extremely high and somewhat stable at this height as well as Marin County to the north. The surrounding closer suburbs have two characteristics: Still high, but pockets of (crime-ridden) housing low in value, ie Richmond and Oakland in Alameda across the Bay where you can find bad houses for as little as $100K. Suburbs further out in Contra Costa the prices are coming down seriously, like Stockton, but still overpriced compared to other areas of the country. And remember wages do not reflect the same differential as housing costs so wages are still relatively low compared to housing costs.