matisse capital management

Remember? Moody's Called a Housing Bottom for Mid-2010

Moody's Investors Service, in a mid-2009 report, copied below, predicted a 2010 bottom for US Home Prices.  However the most recent Case Shiller report said that six cities (Atlanta, Charlotte, Miami, Portland, Seattle and Tampa) have hit new lows since the 2006 peak.  A few more months of home price depreciation and several more cities will be added to that list.  I think we are looking at a couple years before we hit bottom in housing.

"...Moody's said it now expects a trough in home prices won't be reached until the middle of next year...Moody's said in addition to borrowers' financial pressure, unemployment is now projected to peak at over 10% in mid-2010 and remain in the high-single digits for two years after they peak."

The Case Shiller Housing Data for October

Prices declined in all 20 markets surveyed.  According to Standard & Poor's, this is due to the expiration of the housing tax credit, which lifted the lower end of the market in the spring, and the continiung difficult economy.  I am sure, however, that significantly tighter underwriting standards on the part of banks are not helping the situation.  In October, six cities hit new lows: Atlanta, Charlotte, Miami, Portland, Seattle and Tampa.  Year-over year, home prices were up 0.2% in the 10 city index and down 0.8% in the 20-city index.  The full S&P report is here.

The market with the biggest drop in October was Atlanta at -2.9% while Washington DC fared best at -0.2%.  Nationwide, according to Standard & Poor's, home prices are back to mid-2003 levels.  But for some other cities they have gone further back in time.  Take Phoenix (where I live) for example.  Home prices are now at March 2001 levels.  And I have heard of people who bought here in early 2008, thinking the worst was over, walking from their homes.  In Las Vegas, home prices are now at November 1999 levels and in Detroit, home prices are now at December 1994 levels.

Will Fanny and Freddie Cut Underwater Mortgage Balances?

The devil will be in the details.  Reportedly, (WSJ) Fannie Mae and Freddie Mac are in talks with the government to join programs that reduce the principal balance on underwater mortgages.  In my  opinion, this is what should have been done a few years ago when the housing market turned ugly: resetting the principal balances to fair market value.  This would have allowed the housing market to "un-stick" - homeowners with negative equity could sell their homes and move (to take new jobs or cut expenses), agents would get commissions, the number of foreclosures would be reduced and the market would have moved forward.  But the real question for this new strategy for Fannie and Freddie is: at what level will these mortgages be reset?

Will principal be reduced by an arbitrary number like 10%, 20% or will it be reset at fair market value?  If the program ends up being anything like HAMP, the government's refinance program, which has a refinance limit of 115% of fair market value, the benefits will be limited.  According to CoreLogic, at least 10% of borrowers in the US owe 125% or more of their homes current value, and 23% of all households with a mortgage are underwater.  And then there are the states like Arizona, Florida, California and Nevada where many homeowners are 50% or more underwater.  Any reduction of principal balances by Frannie or Freddie would have to be large enough to make a meaningful difference in these states (where homeowners are more likely to walk) to impact the marketplace.  Otherwise, in my opinion, it will be a useless exercise.  And as the WSJ points out:

"Fannie Mae and Freddie Mac are reluctant to reduce principal because it limits their options to recoup losses. Typically, the companies collect claims from mortgage insurers or force banks to buy back certain loans when a loan defaults. Those options are relinquished when writing down loan balances."

 

Case Shiller's US Housing Data for September

Home prices dropped in 18 of 20 cities.  The full S&P Case Shiller report for the month can be found here.  It states that, as of the third quarter 2010, US home prices are 1.5% below the level recorded a year earlier, and nationwide prices are down 0.7% for the month.  Standard & Poor's attributed this to the expiration of the housing tax credit, the continuing poor economy and the large inventory of homes for sale (and goes on to mention the large shadow inventory of homes).  Below is the 20-city Case Shiller Index for September:

On average, US home prices are now at the same level they were in mid-2003, and the 20-city index is now down 28.6% from its 2006 peak; however, it is still 4.0% above the April 2009 trough.  But the index appears to be heading lower.  The hardest hit markets in September were: Cleveland, -3.0%; Dallas, -1.6%; Minneapolis, -2.1%, Portland, -1.9% and Phoenix, -1.5%.  The best performing markets were Las Vegas at +0.1% and Washington DC at +0.3%.  This was a turnaround, albeit small, for Las vegas, which has been the worst housing market in the country.  It is also a change for Dallas, which so far is the least impacted city in the index, with prices now down only 8.1% from the peak. In any case, the new data seems to confirm fears of a double-dip in the US housing market, as 15 of 20 cities are now in negative territory year-over-year.

The European Housing Bubble by Country

Home Prices: "The Perfect Storm Brewing"

The percentage of distressed sales may rise again.  From the WSJ:  With HAMP and the housing tax credit, prices stabilized briefly.  Distressed sales as a percent of all sales fell from 45% in early 2009, to 25% in late 2009 and 30% in June.  But as the Wall Street Journal reports, these programs are now "wearing off."  What will be the impact on housing prices?  "We see the perfect storm brewing with rising supply and falling demand," said Ivy Zelam, chief executive of research firm Zelman & Associates and one of the first to warn of trouble five years ago.  She estimated that distressed sales could account for half of the market by year-end if traditional sales didn't rebound..."  This would mean a renewed, downward price trend.

Chart: Existing and New Home Sales, 1998 - Present

Source: The Federal Reserve Bank of Dallas

The Case Shiller Housing Numbers for June

17 of 20 cities had price increases in June.  Las Vegas continued its descent with -0.6% for the month, while Phoenix and Seattle had no price change.  The 10 and 20-city composite indices were both up 1.0% for June.  Although this is positive news, Standard and Poor's cautions that: "The worry starts when you remember that the Homebuyers’ Tax Credit has expired, foreclosures are still at high levels, and July data on home sales and starts were very, very weak...."  The winning markets for the month of June were Detroit, Chicago and Minneapolis, all at +2.5%.

Notes on the Current Housing Market

Existing homes sales dropped 27.2% in June according to the National Association of Realtors.  The total sales of 3.83 million units was the lowest since 1996 and the existing inventory of unsold homes is now estimated at 12.5 months, up from 8.9 months.

Is housing now longer the way to build wealth?  From the NYT: "...many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century...'There is no iron law that real estate must appreciate,' said Stan Humphries, chief economist for the real estate site Zillow. 'All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up'...Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation."

The Case Shiller Housing Data for May

"The last 7 months have basically been flat"per David Blitzer, head of the index at Standard and Poor's.  Home prices are now back to the level they were in Fall 2003.  The 10-city index was up 5.4% from May 2009, and the 20-city index was up 4.6% from May 2009.  But, per S&P: "While May's report on its own looks somewhat positive, a broader look at home price levels over the past year still do not indicate that the housing market is in any form of sustained recovery.  Since reaching its recent trough in April 2009, the housing market has really only stabilized at this lower level.  The two Composites have improved between 5 and 6% since then, but this is no better than the improvement they had registered as of October 2009."  So most of the gains over the last year came in August, September and October of 2009.

19 of the 20 cities in the index showed price appreciation between April and May.  Only Las Vegas had depreciation and prices there are now 56.4% below the peak.  Year over year, only 13 cities had positive price growth and much of the improvement in the 20-city index was driven by large gains in Los Angeles (+9.7%), Minneapolis (+11.6%), San Diego (+12.4%) and San Francisco (+18.3%).