[LA_Renter]

I found this article to put things in proper context.

“The typically short memories of the markets have already put the US sub-prime meltdown behind them.

It’s as if investors think that, because the roof hasn’t caved in on the entire sector yet – despite some high profile casualties – it never will.

And a rise in pending home sales in the US in February had the optimists out in force yesterday, driving the Dow Jones up 128 points to close at 12,510, a five-week high.

So is all right with the world again?

The National Association of Realtors said that pending US home sales rose 0.7% in February, helping to drive the Dow Jones index to a triple-digit gain.

But investors would do well to remember that pending sales are still down 8.5% on last year. And more importantly, even the NAR admitted that sales might be experiencing “some fallout from a decline in subprime lending.”

As one analyst quoted on Markwatch argued, investors are clutching at straws. “Pending home sales data, when did that become a market moving piece of information?” said Eliot Spar of Ryan Beck & Co. “When the market is range bound, it doesn’t take much to move traders off the fence as they extrpolate one data point into a trend.” In other words, one swallow doesn’t make spring – and there’s plenty of other news to suggest the sub-prime debacle is far from over.”

http://www.moneyweek.com/file/27826/is-the-us-housing-slump-coming-to-an-end.html

[LA_Renter]

Fantastic! This is something people would be able to understand.

[LA_Renter]

Cashman,

I found this article explaining the ratios using a 7% interest rate. It used to be that you should only use 28% of your gross income for a mortgage with 36% as a maximum. I guess our new paradigm of lending changed all that at least for the first couple of years of the mortgage. There is a awful lot of pain out there right now.

“If we do take this as an assumption and apply what most lenders call affordable (paying a maximum of 28% of your monthly income for your mortgage), we can figure out what medium home price to medium family income ratio is for a given down payment and mortgage interest rate. What we have then is a number that represents the maximum multiple of income that a home could cost and still be affordable (again by the conventional definition of affordability) to a medium income earner. Given the assumption above, this ratio is valid across the entire US housing market and allows us to directly compare one market to another (assuming, of course, we are using local values for median family income and median home price).

To figure out what the maximum affordable home price to income ratio is, let’s assume we earn a medium family income of $1000 a year (we can assume anything and it will not change the ratio). Again, lending standards say that we can use a maximum 28% of our monthly income to service our home mortgage debt. So we have (1000/12)*.28=23.33 dollars available each month that we can use to pay the mortgage. Now we need to figure out the monthly cost for each $1000 we borrow so that we can know how much we can spend on a home. For a 7% fixed rate 30 year loan (for example), it costs $6.65 a month to borrow 1000 dollars. Therefore we can afford to borrow 23.33/6.65=3.5 multiples of 1000 dollars (i.e. 3.5*1000=3500 dollars). 3.5 is then the maximum affordable medium home price to medium family income ratio for a mortgage with 0 dollars down and a fixed 7% interest rate. Said in a more realistic way, a family making $100,000 a year can afford at most a $350,000 home (350000/100000=3.5) with this mortgage.

For rates of 6% and 8% (all other conditions the same) the ratios are 3.9 and 3.2 respectively. The ratio is larger for smaller interest rates because the cost of borrowing money is cheaper and we can do more with the 28% of our income we are allowed to use. Again, these ratios hold true for any locale given our assumptions.”

http://www.benengebreth.org/archives/2005/06/housing_priceto.php

[LA_Renter]

The drum beat continues.

“Recent, well-publicized problems in the subprime residential mortgage lending market have had a negative effect on the rest of the residential mortgage marketplace, specifically with regard to alternative (“Alt-A”) residential mortgage loans that M&T actively originates for sale in the secondary market. Alt-A loans originated by M&T typically include some form of limited documentation requirements, as compared with more traditional residential mortgage loans. Unfavorable market conditions and lack of market liquidity impacted M&T’s willingness to sell Alt-A loans in the first quarter. At a recent auction of such loans fewer bids than normal were received and the pricing of those bids was lower than expected. In accordance with generally accepted accounting principles, loans held for sale must be recorded at the lower of cost or market value. As a result, the carrying value of M&T’s Alt- A portfolio that had been held for sale was reduced by $12 million in the first quarter of 2007, which M&T estimates will result in an after-tax reduction of net income of $7 million in the quarter, or $.07 per diluted share.”

http://biz.yahoo.com/prnews/070330/clf161.html?.v=2

[LA_Renter]

“Maybe 50% or maybe only 1%. It would be interesting to know.”

Here is also something to consider. Say it is 1% that are in trouble in that neighborhood, if they are in trouble than potential buyers of the same means will not be able to buy that property assuming tighter lending standards. For every person in trouble there is a corresponding decrease in demand. Lets say you have 10% of people that are in trouble that paid near peak prices, then you have also reduced the pool of potential buyers by 10% giving a net of 20% decrease in demand (people leaving Foreclosed properties that they shoud have never bought + decreased pool of buyers that would have been able to purchase that property in previous years) and you have added 10% of those properties back into inventory. Point being the numbers really don’t have to be that big to have significant impacts on local markets.

[LA_Renter]

Irvine as an example. I have to admit I feel giddy about using a city in the heart of the “it will never go down” OC. I have taken a lot of slack form my friends down there. Here is a quote from a recent Bloomberg article I’m sure we have all read about Irvine.

“In Irvine, where just nine months ago office vacancies approached a three-year low, home prices were at an all-time high, and unemployment was less than the national average, at just 3.6 percent, the unraveling subprime mortgage market is ruining the recent prosperity.

Hometown lenders including New Century and Ameriquest Mortgage Co. already have fired more than 3,000 people, house and condominium prices are down 17 percent since June and office vacancy rates are poised to double this year, said John McDermott, regional manager for Orange County at commercial real estate broker Sperry Van Ness.

“It’s a huge engine that has been shut off,” McDermott said. “I don’t know where the new influx of jobs are if you take the lending market out of the equation.”

O.K. this is an acute example of what a Southern California city looks like when you take RE related jobs away. It appears from this reporting you do get the beginning of steep price declines. The city of Irvine looks like it is in localized recession. I’m getting that this is a harbinger of things to come in So Cal. “It’s a huge engine that has been shut off” I think that statement is true of all RE and RE related jobs right now. “I don’t know where the new influx of jobs are if you take the lending market out of the equation.” If you take the word lending and replace it with “RE and RE related jobs” I think that describes the situation facing California’s economy right now. The impact on Irvine is more immediate given the large Corp presence of subprime lenders but it gives a telling view of what things will look like if SD and other So Cal cities go into negative job growth. I don’t know if this is the methodology that RO is looking for but it suggest strong anecdotal evidence of how this will play out to the more severe side. It’s worth watching.

[LA_Renter]

I agree with most of what you are saying renterclint. Something you just posted just struck me.

“but what if 90% of the home-owners actually have the ability adjust their personal budgets to hang on and keep their homes for the long haul?”

I notice we talk a lot about NOD’s, foreclosures, REO’s but we don’t spend much time talking about that next category of homeowner that will be able to make it barely. IMO if 90% of the homeowners can adjust their personal budgets to keep their homes it will still have an overall negative impact on the local economy. As these loans reset higher people will have the choice to walk away with blemished credit or hold on with greatly reduced discretionary income. That means no vacations, no new flat screen TV, no new luxury car etc. Even if they hold on the economy will still suffer. The key to determine price declines is demand. If we slip into recession then the possibilities of the large price drops are greater. I guess my point is that we face that risk if these people hold on or not.

[LA_Renter]

Good point Cow_Tipping, I’m thinking more of Joe Sixpack here. Face it we bears, bubbleheads whatever you want to call us have been an alienated bunch. Ever since the subprime fiasco it seems more shoes are dropping than a caterpillar wearing NIKES. You have Bad headlines daily, Rising NOD’s and foreclosures, congressional hearings bearing down on lenders pointing out that millions could lose their homes, New home sales miss, Lennar miss and dropping guidance, Alt-A’s looking very shaky, Beazer now under criminal investigation (Worldcom and Enron are still fresh memories). It’s really starting to look nasty out there. Bubbles always have capitulation, I don’t think we are there yet but this thing seems like it is really unraveling. IMO

[LA_Renter]

I don’t know, I could be wrong but it really looks like this housing downturn is picking up some strong momentum. I’m wondering if we are getting close to some perverbial tipping point???

Wonder what BB is thinking tonight?? Duck!

[LA_Renter]

From the Market Watch Blog;

Beyond Subprime, Continued…

As we continue to connect the dots from subprime to midprime, take a look at last night’s press release from Fulton Financial (fult). Seems its Resource Bank subsidiary is being forced to buy back first and second loans that were sold into the secondary market because the borrowers were defaulting early in the payment cycle. These early payment defaults are a common snafu in the subprime slime, but here’s the twist: For Fulton these 80/20 loans, otherwise known as mortgages with zero down payment, appear to be Alt-A, with credit scores above 620. The company says that in recent months Resource “has experienced an increase” in the rate of early payment defaults “primarily related to one specific product sold to one specific investor.” While the total number of loans isn’t significant, with Fulton taking a pre-tax loss of $5.5 million against its total assets of $15 billion, the trickle-up effect seems to be underway.

[LA_Renter]

“wierd scenes inside a gold mine”

The West is the Best

[LA_Renter]

The Economist probably wrote the best Housing Bubble article of any publication in June of 2005. It was titled “In Come The Waves” Here is the intro

The global housing boom
Jun 16th 2005
From The Economist print edition

NEVER before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stockmarket bubble burst in 2000.…

I used to have the link but you have to be a subscriber now. Many if not most of their predictions are coming true.

[LA_Renter]

Here is the link, they have some nice graphs off to the side.

http://www.latimes.com/business/la-fi-bloggers24mar24,1,3705713.story?coll=la-mininav-business

[LA_Renter]

Interesting thread. What is the role of government and its institutions? Where is the line of personal responsibility? I have somewhat libertarian views on this so Ultimately I put a bigger portion of responsibility on the consumer. Greed has its consequences people. I’ll buy that 750K dollar house although I make 90K a year and have to use a Neg Am Arm to get in because I know that house is going to hit 1.2 in two to three years. Yeah! Fear also has its consequences, you have the person that buys the 750k with a 90K income using an exotic loan for fear of being priced out forever. These are simplistic examples but they highlight the two primary emotions that took over this market, Greed and Fear. IMO government cannot effectively legislate or regulate the actual animal spirits of the market place. There really is no need, MARKETS ALWAYS CORRECT!

Now I think somebody pointed out that the leaders of our institutions, in this case the Fed and Congress, also have a responsibility to the market place and I agree. Let the animal spirits be animal spirits but know when to take the punch bowl away. IMO Greenspan simply mismanaged the last recession. Basically they overshot liquidity into the market and grew too dependent on RE to drag us out of the downturn. Usually American innovation will take over and lead us onto new horizons providing investment opportunities and jobs. Our greatest innovation of this decade has been…..drum role please……….The IPOD!

Here is the risk moving forward. Do you notice all the media and congressional hearings going on right now. IMO the risk moving forward is that those in power will overshoot in the other direction. We may run into a period where credit becomes too tight. You have angry congressman grandstanding and coward lenders looking at all applications under a microscope. Generally corrections have a tendency to overshoot in the other direction. If that happens California is toast. It will also provide some good investment opportunities for those left over with credit and cash.

[LA_Renter]

“It also does bring in Treasury purchasers because of the higher yield (long time holders vs short time).”

My question is would it bring in Treasury purchasers if they are investing in a falling currency?? How high would those interest rates have to be? I really don’t like thinking about this.

[Author]

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