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From the Comments: Why So bearish on Housing, TC?

January 12, 2011 3 comments

TC is Bearish the Housing Market

In the comments on my Strategic Analysis Page, someone asked why I was so bearish on Housing.

I have a list of reasons:

1. Dr. Housing bubbles rental posts: Seems like much of California is still 100% overpriced compared to rentals.  Many parts of California still have significant drops coming.
2. Long term Housing prices from Robert Schiller shows that the depression shaved 50% off home prices. A similar bust today would take us down 20% more.
3. Foreclosed properties are trading at a 25% discount right now.
4. We have a huge shadow inventory of homes sitting out there, either not foreclosed or foreclosed and not on the market.
5. We’re looking at 9% unemployment for the next 3 years, even with a moderate recovery.  This is an extra 5% of people who wont even consider purchasing a house.
6. 22-25% of the housing market is  “underwater”, so I expect strategic defaults to increase starting Q3 2011. I’ve had 2 people ask me for advice about how to “give the house back to the bank” in the last 3 months, planning for next year. Mike Konzal is right to point out this hasn’t happened yet, and that you paid more money for the right to do this.  He is wrong to think that because it hasn’t happened, so it won’t happen.  This is a meme that is slowly finding its way into the popular consciousness.*

7. Standard market price overshooting during bad and good times
8. Securitization process broken, so home loans are more difficult to get today
9. Expectations that prices will be lower delays purchases.

All of this adds up to a 20% drop easily, with significant risk of further downside to a 30% drop. I do not have a formal data model to support this contention.  Housing prices seemed to jump after the War to a new level. Is this the correct level, or is the pre-war level more appropriate?

*About the Mike Konzal post, I found this section very interesting.  (P.S. That guy is on fire – he just keeps writing excellent posts.)

“You can see this in the testimony of David Lowman, Chief Executive Officer, JPMorgan Chase Home Lending, at a House committee:  ”In fact, almost 64% of borrowers who are 30-59 days delinquent on a first lien serviced by Chase are current on their second lien. It is only at liquidation or property disposition that first lien investors have priority.”  So what you see is a lot of people, over half, who have stopped paying their first mortgage trying to make some sort of payment.   If people were economically informed, financially literate and strategic they’d not pay the second (especially if they can’t pay the first).   But they want to be paying something.”

Mike takes this as good news – that we have people paying their second when they should be paying their first, and are financially illiterate.  And it is in a way.

But I take this same information very differently.  These people who are paying their first and not the second are strategically defaulting.  They know that every ding on their credit makes a difference.  If I am not mistaken, the second mortgage is a recourse loan – and banks are likely to go after them for a judgement or check garnishment if they do not pay.  This can happen extremely rapidly.

These homeowners would have to go into bankruptcy to write it down the second.  However, if the house is repossessed, the second may get wiped out in the process.  It is worth speculating on this in todays market.

[Updated by adding Link.  I am still getting the hang of this!]

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Australia is scrambling to find ways to support their housing market

December 15, 2010 Comments off

The RBA is allowing banks to sell Mortgage backed securities by another name – covered bonds.

This rule change will lower rates in Australia by approximately 50bp – but at this point, the bubble is over.  Valuations are simply too high, and everyone that wants a home already has one.

The Australia housing market bubble is popping – you can see it in the auction closing results.  This guy is the Calculated Risk of Australia.  I started following Calculated Risk back in 2005, and he was a lone voice in the wilderness documenting the day to day numbers associated with the U.S. bubble.

How bad will the fallout be for Australia?  The currency will get hammered for a few weeks while the carry trade unwinds.  After that, it depends on the strength of the global recovery.   Australia might get lucky yet again – by being the only country that has a crash during the strong world recovery.

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