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[Suresh]

Metropolitan Real Estate Blog: The Real Estate Nightmare I Found In Las Vegas
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In no particular order here is a synopsis of this year’s conference:

1. No one has any idea when we will reach a bottom simply because no one knows how many classes of real estate are going down. The most optimistic guess was 2010 but most wouldn’t even hazard a guess. Some of the grey hairs think 5 or 6 years.
2. The problems in the residential side are quickly spilling over to the commercial real estate market.
3. The spread between bid and asked prices is as large as the Grand Canyon. Banks and particularly the community banks can’t afford to take the write-downs the bid price implies.
4. Aside from say multi-family and really solid income producing properties (producing solid verifiable income now, not projected income) there is no debt available. There is lots of equity looking for 20% and up returns. Since these will have to be largely unleveraged, the asset price required to deliver the return is abysmally low. Further driving down implied valuations is the fact that the equity is Wall Street money with 3 to 5 year time horizons.
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6. Builder lots are selling for improvement cost or less. Basically, the land is free. There is no debt available and the volume of transactions is approaching zero.
7. Small and mid-level banks are in trouble. So are the big boys but the govies will take care of them? Several of the deal guys said that banks they contacted three months ago about buying assets are all of a sudden calling back. Three months ago they said everything was fine. The idea du jour is to buy the bank to get the bank’s real estate. ...
8. Most think this is a credit driven problem, not a supply problem which was the case in 1991. They think the crunch is really going to start hitting when commercial loans mature and need refinancing. Unlike 1991 there is lots of equity on the sidelines which is a good thing. The bad difference from 1991 is that we got into this mess with a good economy not a recession. So if the economy goes south it could get real rough.
9. Banks have been rewriting their loans and creating new interest reserves to keep the Zombies alive. The regulators have said full stop.
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11. Underwriting is getting tougher and tougher. As one participant said,” …if you have financing take it and close the deal NOW.”
12. Mezzanine is going to be important as the level of available senior debt in the capital stack shrinks. Most Mezz lenders now only going up to 85%. They are also adjusting any appraisals by five to ten percent.
13. Lot prices in the hardest hit areas are back to 2000 to 2001 levels.
14. There is an absolute disconnect on valuations among buyers, sellers, senior debt, mezzanine and equity. Thus no deals are coming together.
15. Appraisals are good for no more than a month as values are deteriorating so rapidly. Some felt that the appraisers were only picking up sales comps and missing the comps that could be derived from note sales. Basically, no one trusts appraisals.
16. The Indy Mac performing loan sale that was reported to have been done at about 60% of asking price has fallen apart. Most of the bids at the 60% level were withdrawn after further due diligence. The actual prices the stuff went for is between 20% and 45%. By the way Indy Mac had current appraisals supporting their asking price.
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18. Things are going downhill so fast that deals that were struck 3 months ago need to be restructured.
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We went to this conference, frankly hoping to meet some people and start networking to possibly pick up some assets on the cheap. We did this back in the early 1990’s and it worked out well. We were shocked by what we heard. This is not just a problem with residential real estate. It is a problem with every class of real estate. There are one or two positives that may help lead us out of the situation but, so far, I think that the looming negatives may overwhelm everything.

It is no time to be buying.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Dave]

Don't look now, but rising mortgage rates threaten the whole housing market. Conforming 30yr. fixed interest rates have rising over 19% year to date. A home buyer would need to finance 19% less in order to have the same monthly payments as the beginning of the year when rates were closer to 5.6%. Assuming 20% down, in order to have the same monthly payment, the home price would have to be 20% lower. Because home prices are lagging interest rates, I expect housing inventory to build more quickly than before, ultimately driving prices lower. -Dave

NY Times: Woes Afflicting Mortgage Giants Raise Loan Rates

Mortgage rates are rising because of the troubles at the loan finance giants Fannie Mae and Freddie Mac, threatening to deal another blow to the faltering housing market.

Even as policy makers rushed to support the two companies, home loan rates approached their highest levels in five years.

The average interest rate for 30-year fixed-rate mortgages rose to 6.71 percent on Tuesday, from 6.44 percent on Friday, according to HSH Associates, a publisher of consumer rates. The average rate for so-called jumbo loans, which cannot be sold to Fannie Mae and Freddie Mac, was 7.8 percent, the highest since December 2000.

But now it appears the companies, particularly Freddie Mac, might have to slow their purchases of mortgage securities. In its filing, Freddie Mac said it aims to increase its portfolio by a total of 10 percent in 2008. A spokeswoman for Fannie Mae declined to comment on its plans.



“When we get to rate levels like this, the market just shuts down,” Mr. Barnes said.
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

[Suresh]

Note that GMO Chairman Jeremy Grantham does not assert that home price flat-lining for four years alone is sufficient. There must be concurrent income growth. However, such income growth would be terribly inconvenient for monetary policy makers as it would foster a wage-price spiral.

As an aside, in his newsletter, Mr. Grantham predicts other assets markets to correct to below fair value by 2010. He suggests a 10-15% correction in the S&P 500 and EAFE. It's not clear whether that is assuming constant earnings. I expect earnings in most of the non-resource companies to drop. So, a 10-15% correction may very well be a minimum.
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Infectious Greed: Jeremy Grantham: "I'm officially scared!"
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Jeremy Grantham, chairman of GMO, who has just published the July edition of his quarterly newsletter entitled "Meltdown! The Global Competence Crisis".

In terms of strategy, Grantham summarizes his view in what he believes should be investors' motto: "Don't be brave, run away. Live to fight another day."

Specifically, as far as house prices are concerned, Grantham looks at the ratio of US median house prices to family income and states: "In order for house prices to reach normal from here, they must either decline 17% immediately or experience four flat years while income catches up, or some combination." Even more worrying, however, is the normal tendency for bubbles to overrun on the downside.


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[U.K. readers should note that Mr. Grantham estimates that U.K. real home prices are well above two standard deviations away from the norm as well]
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Calculated Risk: Case Shiller: Real National Prices Decline to Q4 2002 Levels

The first graph compares real and nominal Case-Shiller Home Prices through Q2 2008 (real is current index adjusted using CPI less Shelter).

In real terms, the Case-Shiller National Home price index is off 25% from the peak. Real prices are now back to the Q4 2002 level (nominal prices are back to mid-2004).

With existing home inventory at record levels, and tighter lending standards, prices will probably continue to decline over the next few years - perhaps another 15% to 25% in real terms on a national basis.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

The glut of housing inventory hasn't even peaked yet. Think about the houses that will be dumped on the market in the aftermath of resetting Alt-A ARM and Option ARM loans. Such resetting will peak in 2010-2011. As Michael Corkery concluded in the article below, tax breaks and loan modifications aren't going to solve the glut of housing inventory.
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Wall Street Journal: Harsh Reality of House Glut Hitting Home
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The best-case scenario in a Congressional Budget Office report is a turnaround in construction by the end of 2009. The agency's "pessimistic" outlook is a "housing depression" in which housing starts don't recover to typical levels until 2012.

Either way, the near-term drivers of housing demand are shaky. Net immigration slipped to one million last year, down from 1.1 million to 1.2 million annually between 2002 and 2006. Further declines are likely if the U.S. gets mired in recession.

Meanwhile, rising unemployment could keep many renters from buying homes, despite falling prices. On the supply side, banks are dumping foreclosures on the market, competing directly with home builders for scarce buyers.
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Economists expect the Census Bureau to report Wednesday that housing starts fell 4.5% last month to an annual rate of 779,000, down from 817,000 in September. The National Association of Home Builders said Tuesday that builder-sentiment measure fell in November to the lowest point since the survey began in 1985.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

CBSNews.com: A Second Mortgage Disaster On The Horizon?
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The trouble now is that the insanity didn't end with sub-primes. There were two other kinds of exotic mortgages that became popular, called "Alt-A" and "option ARM." The option ARMs, in particular, lured borrowers in with low initial interest rates - so-called teaser rates - sometimes as low as one percent. But after two, three or five years those rates "reset."
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"How big is the potential damage from the Alt As compared to what we just saw in the sub-primes?" [CBS correspondent Scott] Pelley asks.

"Well, the sub-prime is, was approaching $1 trillion, the Alt-A is about $1 trillion. And then you have option ARMs on top of that. That's probably another $500 billion to $600 billion on top of that," [investment fund manager Whitney] Tilson says.

Asked how many of these option ARMs he imagines are going to fail, Tilson says, "Well north of 50 percent. My gut would be 70 percent of these option ARMs will default."

"How do you know that?" Pelley asks.

"Well we know it based on current default rates. And this is before the reset. So people are defaulting even on the little three percent teaser interest-only rates they're being asked to pay today," Tilson says.
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And there are tough years to come because, just like the sub-primes, the Alt-A and option ARM mortgages were bundled into Wall Street securities and sold to investors.

Sean Egan, who runs a credit rating firm that analyzes corporate debt, says he expects 2009 to be miserable and 2010 also miserable and even worse.
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"It's getting worse," Egan says. "There are some statistics from the National Association of Realtors, and they track the supply of housing units on the market. And that's grown from 2.2 million units about three years ago, up to 4.5 million units earlier this year. So you have the massive supply out there of units that need to be sold."

"What with the housing supply increasing that much, what does it mean?" Pelley asks.

"It means that this problem, the economic difficulties, are not going to be resolved in a short period of time. It's not gonna take six months, it's not gonna 12 months, we're looking at probably about three, four, five years, before this overhang, this supply overhang is worked through," Egan says.

In the next four years, eight million American families are expected to lose their homes. But even after the residential meltdown, Whitney Tilson says blows to the financial system will keep coming.

"The same craziness that occurred in the mortgage market occurred in the commercial real estate markets. And that's taking a little longer to show. But there are gonna be big losses there. Credit cars, auto loans. You name it. So, we're still, you know, we're maybe halfway through the mortgage bubble. But we may only be in the third inning of the overall bursting of this asset bubble," Tilson says.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

National Association for the Self-Employed: Mortgages Targeted At Small Businesses Deemed "Toxic"

The nation's small businesses own ninety-three percent of all "toxic" mortgages and are at risk of defaulting on their loans/payments. The data, released today by the National Association for the Self-Employed (NASE) in coordination with Prof. Samuel D. Bornstein and Jung I. Song, CPA of Bornstein & Song, CPAs and Consultants, shows that these "toxic" loans did not go to subprime borrowers. Rather, these "toxic" mortgages were targeted to small business owners who were prime and near-prime borrowers and may now find themselves facing sky-high monthly house payments.

The results of the study were extrapolated based upon an estimated 16.2 million self-employed small business owners in 2007, according to the Small Business Administration's Office of Advocacy.

With the majority of the nation's small businesses being run from a home office, this alarming evidence has significant implications for businesses owners facing foreclosure who may be forced to shut down for good. The "toxic" mortgages that were marketed to prime or near-prime borrowers include Alt-A, Alt-A ARMs, Option ARMs, and Interest-Only.

Based on the NASE survey, approximately 3,709,800 micro-businesses hold "toxic" mortgages. The magnitude of this Alt-A and "toxic" mortgage crisis exceeds the subprime mortgage crisis which had $855 billion of subprime loans outstanding.

"These small business owners will be at-risk for "payment shock" and default as their monthly mortgage payments skyrocket during the "resets" that are scheduled to begin in 4th Quarter 2008 and continue through 2012," said Prof. Samuel D. Bornstein of Bornstein & Song, CPAs and Consultants. "The resulting defaults will be the cause of the upcoming second "tsunami" wave of foreclosures that will dwarf the subprime crisis and will take many homeowners and small business owners."
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Dave]

Home prices, according to the Case-Shiller index, fell 18% in 2008. That is 102% more than the 8.9% decline in 2007.

Bloomberg: October Home Prices in 20 U.S. Metro Areas Fall 18%

Home prices in 20 U.S. cities declined at the fastest rate on record, depressed by mounting foreclosures and slumping sales.

The S&P/Case-Shiller index declined 18 percent in the 12 months to October, more than forecast, after dropping 17.4 percent in September. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

Other housing reports this month have shown property values are deteriorating even faster as foreclosures climb. Home resales, which account for about 90 percent of the market, dropped in November and median-home prices fell 13 percent from a year earlier, the most since records began in 1968, the National Association of Realtors said last week. Foreclosures and short sales accounted for 45 percent of last month’s total, the agents’ group also said.

The share of mortgages delinquent by 30 days or more and those already in foreclosure rose to all-time highs in the third quarter, the Mortgage Bankers Association said Dec. 5.

Lennar Corp., a U.S. home construction company that builds in 14 states, reported its seventh straight quarterly loss on Dec. 18.

“Frankly, we’re in the midst of a downward spiral and the momentum is building,” Chief Executive Officer Stuart Miller said on a conference call with analysts.
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

[Suresh]

Bloomberg: Record 19 Million U.S. Homes Stood Vacant in 2008
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The number of vacant homes climbed 6.7 percent in the fourth quarter from the same period a year ago, the U.S. Census Bureau said in a report today. The share of empty homes that are for sale rose to 2.9 percent, the most in data that goes back to 1956. The homeownership rate fell to 67.5 percent, matching the rate in the first quarter of 2001.
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About a third of owners whose home values drop 20 percent or more below their loan principal will “hand the keys back to the bank,” said Norm Miller, director of real estate programs for the School of Business Administration at the University of San Diego.
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The U.S. had 130.8 million housing units in the fourth quarter, including 2.23 million empty homes that were for sale, the Census report said. The vacancy rate was 3.5 percent in urban areas and 2.6 percent in suburbs, the report said.

In addition, the report counted 4.1 million vacant homes for rent and 4.8 million seasonal properties.
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U.S. banks owned $11.5 billion of homes they seized from delinquent borrowers at the end of the third quarter, according to the Federal Deposit Insurance Corp. in Washington. That’s up from $5.4 billion a year ago.

The U.S. housing market lost $3.3 trillion in value last year and almost one in six owners with mortgages owed more than their homes were worth as the economy went into recession, Zillow.com said in a report today.

The median estimated home price declined 11.6 percent in 2008 to $192,119 and homeowners lost $1.4 trillion in value in the fourth quarter alone, the Seattle-based real estate data service said.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

FT Alphaville: Timber!

Friday’s much better than expected US housing start figures are still feeding through into positive sentiment this Monday. At 582,000, the number reported by the Commerce Department beat analyst expectations of 530,000 by one of the widest margins yet since the crisis.

But just how significant a turnaround is this?


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Interestingly, however, lumber prices did not rebound on Friday with the data on housing starts. In fact, they posted a four-month low on reported fund liquidation.

This makes sense if you consider what Ian Sheperdson, chief US economist at High Frequency Economics, told the FT:

[Suresh]

Business Insider: Actually, Case-Shiller Shows That The Housing Crash Has Already Resumed

Whitney Tilson has another take on the August Case-Shiller numbers, which sent housing bulls into spasms of glee a few days ago.

The sequential increase in prices in August was less than the sequential increase in July. This, Whitney believes, is the start of the seasonal downturn that will take house prices down another 10%-15% by the middle of next year.

Whitney's chart shows the typical sequential pattern, which has monthly growth peaking in the spring and early summer and then turning down:

Sequential Home Prices February 2000 - August 2009
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Bloomberg: Case Says U.S. Housing Starts ‘Dead Flat in the Mud’

The U.S. housing market “is still bouncing along the bottom” as vacancy rates outpace historically low construction, said economist Karl Case, co- creator of the S&P/Case-Shiller home-price index.
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Housing starts have been at 15-year lows for the past 18 months, and vacancy rates are increasing, he said.
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“The unwritten story here is what’s going on with household formations and the pattern of them,” the Wellesley College economics professor said today in an interview with Tom Keene on Bloomberg Surveillance. “The census is telling us that households are being formed, but they don’t seem to be showing up.”

Case attributed this disconnect to fewer immigrants and more emigrants, as well as the “doubling-up phenomenon” where more people choose to live together or reside with their parents.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Mish's Global Economic Trend Analysis: New Home Sales and Bear Market Math
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[H]eadlines [tout] ... a huge 23.% jump in new home sales given that the "jump" was to the second worst month in history, dating back to 1963.

[Gluskin Sheff Chief Economist and Strategist] Dave Rosenberg puts the headline jump into perspective in Housing Data Are Not Supportive.

[Suresh]

Calculated Risk provides a historical graph of new home sales and a historical graph of months supply of new homes.

As recently as 2007, the median price of a new home was $247,900, according to the U.S. Census.
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Bloomberg: Sales of U.S. New Homes Dropped to Record Low in July
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Purchases fell 12 percent from June to an annual pace of 276,000, the weakest since data began in 1963, figures from the Commerce Department showed today in Washington. The median price of $204,000 was the lowest since late 2003.
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The median price decreased 4.8 percent from July 2009
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The supply of homes at the current sales rate climbed to 9.1 months’ worth from 8 months in June. There were 210,000 new houses on the market at the end of July, the same as the prior month.
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Toll, the largest U.S. luxury homebuilder, said today that buyers signed contracts for 701 homes in the three months ended in July compared with 837 houses in the same period last year.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.