Housing Doom

Peter Schiff vs. rabid realtor- I thought this was pretty funny:

Edit: Restored video access. It may take a few minutes to become available.

Enjoy.

I track a number of things fairly faithfully, but I’ll confess I don’t track Phoenix area rentals on a regular basis.  Every now and again though, L will humor me and look up the current number.  Here’s what he sent me yesterday:

Total number of properties found: 8845  Active for rent on MLS
 
Total number of properties found: 57876 Active for sale on MLS
 
Total number of properties found: 24699 Active for sale show vacant on MLS  43%

It seemed that the number of actives was rising faster than it had earlier in the year, so I dug up what history I had, and saw this interesting trend in Phoenix rentals:

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We know that inflation is hitting us in the pocketbook, and that government-backed GSEs and lender bailouts could come back to bite taxpayers,  but did you know about the $1.15 trillion that we could end up on the hook for? [Hat tip G!]

Oct. 30 (Bloomberg) — Banks shut out of the market for short-term loans are finding salvation in a government lending program set up to revive housing during the Great Depression.

Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.

To meet the sudden demand, the institutions sold $143 billion of short-term debt in August and September, according to the FHLBs’ Office of Finance. The sales pushed outstanding debt up 21 percent to a record $1.15 trillion, an amount that may become a burden to U.S. taxpayers because almost half comes due before 2009.

The government is “taking a lot of risks through the Federal Home Loan Banks that are unnecessary,” according to Peter Wallison, a fellow at the American Enterprise Institute, a Washington-based organization that analyzes public policy, and general counsel at the Treasury Department from 1981 until 1985.

The home loan banks, known as FHLBs, are increasing risks to taxpayers by assuming the role as a lender of last resort, said Wallison. That’s the job of the Federal Reserve, he said.

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We haven’t talked about the ABX in a while, but it’s been heading south again:

Lenders were giving out loans like candy at this time last year. As a result, this Halloween will be no treat for anyone whose fortune is tied to the housing market.

Lenders, investors, builders and borrowers have lost billions of dollars from spiking foreclosures of loans made to borrowers with poor credit.

The losses look set to keep rising.

"The reality is that what’s going on in subprime isn’t going to end anytime soon," said Andrew Lahde, managing partner of Lahde Capital Management, which bets against mortgage-backed securities.

ABX indexes, barometers of demand for mortgage-backed securities, have plunged again in recent weeks. They range from the highest-rated AAA slice of mortgage debt to the riskiest tranches, rated BBB-.

The BBB- tranche from the second half of 2006 was worth just 17.94 cents on the dollar Monday, according to Markit.com. Some tranches eventually may prove worthless.

For those of you who figure that one graph is worth a thousand words, here’s what the second half of 2007 looked like as of yesterday:

Here’s AAA and AA:

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It’s a story we’ve seen time and again here in Phoenix- small investors decided to purchase homes at the top of the market, the market cooled, and now the investors can’t sell or rent out their property.

We knew Phoenix wasn’t alone in it’s misery- you can hear the same story in Las Vegas, Miami, and other cities across the nation.  The story is not a uniquely American one however.  How familiar does this story sound from across the pond in Manchester, England? [Hat tip to our Liverpool reader for the link!]

Like so many young professionals hoping to cash in on Britain’s property boom, Paula Collins, a 26-year-old recruitment consultant from London, thought her money would be safe.

 The buy-to-let market was booming and the deal from a Manchester developer seemed too good to pass on.

The two-bedroom flat in the Castlefield area was valued at £175,950, but the developer was offering a 15 per cent discount, taking the price down to £149,500 - and best of all, no downpayment was required.

He would pay the 15 per cent deposit. Paula simply needed to cover her legal costs and stamp duty. If it sounded too good to be true, it was.

After 18 months, in which Manchester, like many northern cities, has seen a massive oversupply of new city centre apartments, Paula’s flat is now worth just £140,000.

Her mortgage costs her £900 a month, but she receives only £600 a month in rent. That’s when she could find a tenant. Now the flat is lying empty, so Paula has to stump up £900 a month just to cover costs.

So why is the fate of investors in the U.K. a concern to us in the U.S?  Consider these comments from U.S. Treasury Secretary Hank Paulson on the U.S. market:

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Congressional leaders want President Bush to do something done about the subprime mortgage crisis:

Congress’ top Democrats demanded quick action on the subprime mortgage crisis, saying President Bush has been slow to address a situation that could cost millions of people their homes.

"This is a national crisis. Too bad it’s taken so long to realize that we have a crisis," Senate Majority Leader Harry Reid of Nevada said at a joint news conference with House Speaker Nancy Pelosi of California.

President Bush wants Congress to do something about the crisis:

Bush said Congress also has yet to act on any of the measures he proposed in August to help homeowners facing foreclosure. “These are sensible reforms” that would help people stay in their homes, Bush said.

As for most Americans, they prefer that Congress and President Bush stay out of it:

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I was about to log off late Friday evening when G forwarded me a Bloomberg article by Bob Willis that was just too funny not to share. [A lot of our sidebar comes to us courtesy of G, who's efforts are always much appreciated]  The headline was U.S. Homeownership Falls in Longest Slide Since 1981:

Homeownership in the U.S. dropped for a fourth consecutive quarter, the longest decline since at least 1981, suggesting more Americans will miss their best chance of building wealth.

With home values dropping across the country, there are a number of us who are currently happy to be missing out on this "opportunity," but it gets even better.

I thought Willis was funny, but Nicolas Retsinas, who he quotes, was even funnier:

“Owning a home in this country has been a principal source of wealth creation for low- and moderate-income people,” said Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts. ``In the absence of home equity, families will inevitably spend less.”

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A Yahoo Finance Board post attributed to Dan Jones of E-Bluewater caught my eye yesterday.  Jones asked What’s the number, Fannie? and he’s asking an important question:

"What’s the Number, Fannie?"

I’m going to put that at the top of my blog everyday until we find out just what "The Number" is. What number, you may ask!? The number I’m looking for is the actual drawdown in value that the $4 trillion portfolio of mortgage securities managed and/or guaranteed by Freddie Mac and Fannie Mae that has occurred as a result of this sub-prime, Alt-A, SIV-LITE debacle that we’ve come to know and love now. I want to know, from the company, what the MARKED TO MARKET portfolio is valued at these days.

Why do I want to know that? I look at Merrill Lynch, Washington Mutual, Bear Stearns and the other culprits here in this debacle and I’m seeing multi billion write downs. $5 billion at Merrill…basically all the quarterly earnings for WaMu…it’s all being recognized and they are taking the hit to earnings and book value much as they should. GAAP rules dictate that.

I am going on record here to say that we don’t get to the bottom of this mortgage debacle until we find out that number. And once we find out that number, we find out just how willing the Government is to bail out FNM and / or FRE. $4 trillion, with a 5% haircut is $200 billion. FNM and FRE’s equity, combined is about 1/3 of that. Does that make you wonder why both of these Government Sponsored Entities have been floating preferred stock lately? $500 million at a clip… It’s because they’re raising equity in the only way they can!

I think we see this number - be it $100, $200 or $300 billion - and we see one or both of these GSE’s come to the brink of being basically zeroed out on equity, and its THEN that we find out just how willing the government is to back these groups with "full faith and credit".

Up until we see that number, all the interest rate cuts in the world aren’t going to help - they’re only going to prolong the situation and kill off our US Dollar.

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It’s Op-Ed Friday, and I have to share this from Ambrose Evans-Pritchard:

Over the last three months we have seen a rolling collapse of speculative debt and real estate across half the global economy, yet friends still come over to my desk at the Telegraph, with that maddening look of commiseration on their faces, and jab: “so when is the sky going to fall then, eh”?

Well, excuse me. The sky has fallen.

The rest of the article is a good read, and it looks like the Chicken Littles of the world have a strong case.

We’d love to hear what you think.  Are the Chicken Littles just crying wolf?  Please share your links, stories, comments….

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Ah, once again we play dueling numbers with the New Home Sales Report.  Reuters reports:

WASHINGTON, Oct 25 (Reuters) - Sales of new single-family U.S. homes rose 4.8 percent in September but sales in August were revised down sharply according to a government report on Thursday that painted a mixed picture of the battered housing sector.

According to the Department of Commerce:

Sales of new one-family houses in September 2007 were at a seasonally adjusted annual rate of 770,000, according toestimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.8 percent (±10.3%)* above the revised August rate of 735,000, but is 23.3 percent (±8.0%) below the September 2006 estimate of 1,004,000.

Note that once more, the margin of error for the month-to-month figure is larger than the percent change, making the number statistically insignificant.  As usual, at the bottom of the report, the Commerce Department states:

Changes in seasonally adjusted statistics often show irregular movement. It takes 5 months to establish a trend for new houses sold.

Translation:  "Don’t get too worked up about MOM, you need to look at the long term trend." Note that the longer term year-over-year is down 23.3%.

In addition to the margin of error,  there’s the matter of the revision.  Just for fun, I thought I would try something a little different with the graph.  When graphing the sales numbers, I always revise the previous month’s figures.  This month, I’ll graph it both ways.

Here is the trend using last month’s unrevised number:

Now here’s what it looks like with the revised August number:

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