Joe writes:
“these are low end areas with high foreclosure rates and high demand for housing”

This describes Denver to a T — and it probably also describes why there has been a pretty marked increase in home prices over the past 4-5 months (more than can be explained by seasonal factors).

Tanta has an important post today on the Alt-A wave that is taking over from the subprime wave. There is a good comment in that article’s comment thread that addresses the issue we’re discussing here.

“Subprime and Alt-A: The End of One Crisis and the Beginning of Another”, by Tanta, Calculated Risk, August 12, 2008.

Andy writes:
Tanta,
Here in the Sacramento area there are many newer subdivisions with high volumes of homes that are obviously abandoned, many of which have been abandoned for quite some time. Many of these neighborhoods are full of homes that sold in the $700K to $1m+ range (like the subdivision I currently live in). While many of them have for sale signs on them, a good 30 to 40% haven’t had a for sale sign on them for months, some for up to 1 year. Some of the REOs that are “For Sale” are priced very ridiculously high for the current market. Ex: $645K for a home where a comparable REO in the same neighborhood just sold for $405K.

Is this a way to keep banks from realizing losses if they keep pretending these homes are worth something close to the paper they’re holding?
Andy | 08.12.08 – 5:33 pm

Inquiring minds want to know if you are spending the day rousting (or roasting) the tenants in your backyard. Presumably they have trashed the place; have you experienced a positive return?

More like would cause their executives’ pay packages to plunge (sorry, I’m still on that jag). Negative carry is cheaper than 20% writedowns?

“The ship hung in the air in exactly the same way that a brick doesn’t.”

I have no idea why the price declines are so agonizingly slow, except that perhaps the institutions holding REO fear that dumping their houses on the market will result in price discovery that would cause their assets to plunge, not to mention even more defaults as more homeowners sense they are upside-down.

Obviously the “free market” isn’t really working in this case. I think house prices are being kept artificially high while institutions await a miracle (or a bailout), but I don’t really have evidence for this.

I have read your posts and believe you are dead on but here’s what I don’t get…who is buying and who is lending the money today that keeps housing prices relatively flat? In Denver, there has been almost no price depreciation (that I can find) and housing prices remain staggeringly high.

As an example, I can afford, at 3x income, a $420k house. So I earn well above the average Denver worker’s wage, which would allow me to live in neighborhoods that are adjacent to major streets and have bums and drug users cruising the alleys…seems odd with high mortgage rates, tighter credit, and increasing inflation. FWIW, I love Denver and will most likely never leave.

Thanks

I found this link at Implode-O-Meter. The author is asserting that we’re looking at a multi-year surge in defaults of prime, conforming mortgages. Just for starters, that would kill F&F’s market caps many times over. Which is why there is a steady drum beat about a turnaround at the end of ’08: the GSEs simply can’t hold on any longer unless that happens.

“The next wave of mortgage defaults: More borrowers with good credit are defaulting on their home loans, and that’s going to make it even harder for the staggering housing market to recover”, by Les Christie, CNN Money, August 12, 2008.