Housing Doom

Doom Transcripts: Index & Guide

Housing Doom is pleased to present a second selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

This is the presentation by UBS fixed income researcher Tom Zimmerman.  Tom’s the most moderate of AEI’s Six Bears but in my opinion the scariest, because he usually brings the hardest data to the table.

Tom Zimmerman: [0:11:43] Thanks a lot, Alex, it’s great to be here again. [slide 0²] What’s amazing about coming down here every 6 months is that I’m usually viewed as one of the more bearish people in my shop, and also when I speak at conferences around the country I’m usually sort of sitting on the bearish side of these discussions. But I come down here, [laughs] and I’m not … it’s a … I feel like I’m a raving bull about what’s going to happen in the world when you listen to some of these people talk. So anyway, that hasn’t changed, in the last 6 sessions, so …

We had lunch together today, and it’s exactly the same.

I see some green shoots here and there, but I think that it’s not something the other panelists see some real major problems down the road.

What I thought I’d do today is just continue some of the things I’ve talked about before in terms of the housing market, mortgage market. And then at the end talk about some of the lessons that we’ve learned from this bubble which isn’t over with yet, but we’ve learned some lessons or at least some take-aways from it.

But just the first couple of slides to go through what’s happened to the housing market here in the United States, and as most of you know, there are some positive signs. [slide 1] The existing home sales, new home sales, have bounced back a little bit the last few months, granted from very, very, very low levels from new houses, that’s for sure.

One questionary note: you take a look at the existing home sales, which are by far more important that new home sales in the total scheme of things — [slide 2] California came out (which is the West, that orange line there) … The existing home sales bounced back pretty rapidly back in 2008. And now what happened is the rest of the country sort of caught up with it, but you see California and the West has sort of slowed down now, while the rest of the country’s started to take off a little bit.

And I think what this slide points out is that you do stimulate sales when you crash a market completely, and California’s housing market crashed first, and I think that’s where you see the existing home sales came back faster. The questionary note — this bit of a bounce we’ve gotten in the other parts of the country may be a reflection of that process as well. So we may end up with a little bounce, and then going sideways the next 2 years. So I wouldn’t read too much into this particular chart.

Inventories are down, [slide 3] certainly more so on the new home sales than on existing home sales, and we’ll talk more about this inventory situation which … This is the visible supply, which is your local realtor board has it on their sheets. There’s a shadow inventory, which is considerably larger than this, and we’ll talk about that later. So this is positive, but not as good as it might be.

This is definitely a positive chart. [slide 4] This Case-Shiller index of home prices, and if you saw the article by Robert Shiller last week, and he said he’s amazed at this chart. You’ve got the last 3 or 4 months in positive territory for these 20 MSAs [Metropolitan Statistical Areas]. Granted, there’s a very sharp seasonal pattern to the housing market. I’m guessing, I’ll bet that these numbers will be in the negative territory by fall and winter. But nonetheless, this is a pretty amazing chart compared to where we’ve been. So his analysis of it in that article said something to the effect that he’s amazed that people think the housing market could have done as well — is going to do, [0:15:00] meaning that he had his survey, and I forget the percentage but a large number of people who were buying homes felt that in the next year or so their houses would be worth a lot more. So we’re sort of back to that … a little bit of that psychology’s coming back into the marketplace. That surprises me, by the way.

And it’s not just one area, it’s right across the country. [slide 5] Because this is … only in Las Vegas was the last datapoint negative, so it’s not just a few parts of the country.

In terms of affordability, which is this chart. [slide 6] This is a combination of home prices, interest rates and income. But certainly what’s happened here is this decline in the overall prices around the country has had a significant impact, as has the Fed and the Treasury keeping a lid on mortgage rates, which is pretty instructive here. When that goes away, this won’t look quite so good.

And this chart, [slide 7] if you take a look at that right-hand chart, it shows — the right hand statistic — is the percentage of the securitized market which is made up by non-Agency securities. And historically the non-Agency, which was subprime, Alt-A, prime, Jumbo, etc. used to run 19 or 20 percent — jumped up like 50 percent during the bubble, and now it’s down to 2 percent. And that 2 percent is mainly just re-securitizations of old loans that were out there. That business doesn’t exist, basically.

The securitizations, which used to be upwards to half of our market in America doesn’t exist right now, so in terms of your view of where the housing market goes, it’s still very hard to get a loan. It’s very … still very difficult to take out a loan unless you have a super-high FICO score and a lot of money. So that’s one of the big negatives, which is still here. That hasn’t changed.

And one of the big questions facing the mortgage market is going to be, "How do you wean us off of a total US government product?" And that’s basically what we have — HFA, Freddie, Fannie, etc., that’s it. There’s very little private mortgages going on.

Of course, the foreclosure numbers are astronomical. [slide 8] We’ve all heard about this on the front page of the paper. But this chart is pretty instructive. What you see in the paper, you don’t go back and see the history. But this is really an outlier from the last 30 years here in terms of foreclosures. Very significant number.

And one of the problems — This is the biggest … 2 big problems facing the market as I see it.

Some of that positive data we looked at. It’s a very sharp seasonal pattern to the housing market, and once you go into the fall and winter months both prices and sales might not look so good. So I would be prepared for some pretty negative numbers. It’s already started, by the way. The last couple of weeks you saw some numbers coming out which reflected the … according to the new … to the home builders it reflects the fact that this $8,000 stimulus tax refund might be … well, it’s due to expire in November 30th, whether they renew it or not I don’t know, but if you notice in the paper the last couple of days, there have been a number of articles about … criticizing that program. I think … and it was an amazing number: it’s something like 1.2 million Americans have signed up for this $8,000 credit. That’s like every house that was sold. Like, everybody thinks that they can get this credit.

I just read an article today, that in the investigation they found out that there’s quite a few people under the age of 18 who signed up for it as well, so … [laughter] it’s a classic example of … I mean, it’s an amazing program, but they’re planning on renewing it, I think, as part of the … Keep America Going.

But in any event, part of the problem is that this chart [slide 9] is a roll rate chart which shows the … this is for non-Agency product, which we’ve followed pretty closely at our shop. And what it shows is the percentage of loans … this particular part of it shows the percentage of loans which are in this 90+ day delinquency bucket, which is really a bad, bad bucket. And as loans age from 30 to 60 to 90 and they roll into foreclosure, and they get liquidated, what’s happening is that the servicers, mainly for political reasons, are not pushing these people through. So what happens is, this roll rate, i.e. the percentage of loans that are in a 90-day bucket, which get rolled into foreclosure, has slowed down pretty dramatically. And you can see it in this data right here. It’s still going on, by the way.

So one of the problems is the build-up of delinquent loans in 90 days and foreclosure, etc. which don’t get pushed through and pushed out to the system.

That earlier chart, we saw the inventory of unsold homes. Those are the homes listed on MLS. That’s not all this stuff. This stuff is back there waiting to come out, and that’s one of the biggest problem’s we’re going to have to deal with.

He’re another example of that, [slide 10] just of the different services, and you can see that some people are doing more and better than others in terms of these 90-day buckets getting pretty big. But I won’t spend much time on this.

But here’s a broader picture of these 4 parts of this non-agency market. [slide 11] And what you’ll see is this … the blue line is REO, and it’s kind of coming down in some of these sectors. This orarge line is foreclosure, and the yellow line is 90+ day. [0:20:00]

That 90+ day and that foreclosure bucket you’ll see in all these sectors is still rising, even though the total may be going down. That amount of … the amount of loans that are in this 90+ foreclosure bucket is growing.

This is a big question mark for the market for the next year, I would say.

This [slide 12] is our best estimate of what can happen over the next few years in terms of tracking these delinquencies as they go through the pipeline. And the solid lines are stock figures, the dotted line is a flow figure. The solid lines are showing 60+ day delinquency on the top, will peak out somewhere towards the end of next year, the REO and foreclosure numbers a little later. And then this dotted line is what we estimate are the liquidations out of the foreclosure bucket going into … out of the REO bucket, and actually being liquidated.

And so you can see that this chart says that the bad stuff continues all the way up through the … almost the end of next year.

So the housing market has a lot of wood to chop to get through this cycle. We’re not over by any means in terms of the negative part of the housing market, even though you’ve seen some positive indicators in the past 3 or 4 months. We have a long ways to go in the housing market.

This is a chart which shows the number of people who are underwater. [slide 13] If you add all those to the right in the negative side, it comes up to about 30-some percent, so more than 30-some percent of Americans have homes which are underwater right now. Not a good sign.

And finally, [slide 14] this program that’s in effect right now which the government’s pushing, the HAMP program. This is like the 3rd or 4th go at this. As you know, the first three didn’t work very well. And this program has lots of detractors, if you talk to the servicers and what’s going on.

Part of it, and I’ll talk about it in a minute in terms of lessons learned in this cycle, it’s not a new lesson, but the government has a problem in dealing with problems like this where you can’t be sloppy about how you deal, because you get criticized for allowing … just like the problem I mentioned earlier, about this refund program. They’re getting 18-year-olds signing up for it. So they … for this modification program, to save the American housing market, the Treasury and the IRS created this nightmare of paperwork to be done. So basically, they have 2 parts of this program. A trial period for 3 months; after 3 months of making your lower reduced payment you go into a full modification. Well what’s happening is during this 3 month trial period, the people are are not filling up all the documentation they require to go into a full modification, because of all the complex nature of this program that was established.

So here we have something announced back in March, launched in May, now they’re finally last month decided to streamline the documentation process, because it’s so complex no one could do it.

So this is a perfect example of things government doesn’t do very well.

So I don’t hold a lot of hope that this will really … this big program, although you’ve heard a lot about it, is going to have a really major impact on the foreclosure numbers that we looked at earlier.

And I’m going to jump through a couple of things here and go on to lessons of the bubble. [slide 18 ... 15-17 not used]

And just … how much time do I have? …

voice: … three minutes …

Tom Zimmerman: … three minutes … OK, lessons in 3 minutes.

This is … Alex and I have talked about this. You’ve got to have regulation, but it’s necessary but not sufficient. It’s people and politics that run this thing.

The rules and regulations are out there. It was a bubble, pure and simple. It’s not so pure and not so simple, but I mean it was a bubble. And I don’t care what regulatory environment you put together, you’re still going to have bubbles.

I think the bank regulatory effort to go toward a single regulatory body is probably a wrong thing to do. I like to have different people competing with the process; different ideas, different … I think we’re better off in this crisis having 3 or 4 different agencies who are able to deal with different parts of this problem. And if one didn’t do it, somebody else picked up the slack — and they did it outside their jurisdiction, but they did it anyway.

So I prefer to have several big players able to help solve these problems than just one person, one agency that might not get it right.

The government is great at some tasks, it’s terrible at others. I think the way they solved that bank liquidity problem, after all those efforts the Fed did to bring the banks back on-stream lending to each other was fantastic. I don’t think anybody can criticize that. But as I just said, that HAMP program is a disaster, and most of these big programs that they’ve launched in the housing market are disasters.

So government can do certain things well, certain thing they don’t do very well at.

The pendulum theory — it’s always there, this is not new. In terms of consumer finance, they stopped the subprime lending 2 years ago with that regulatory … it was done, it was dead. There was no subprime or Alt-A lending after they said, "fully indexed, fully amortized, that’s the way you qualify a loan." End of story, end of subprime, end of all that craziness. That was done two years ago. Now you’ve got Reg Z coming on-stream, you’ve got the new bank card regulatory thing.

Believe me, the consumer’s in good shape. We don’t need [0:25:00] a Consumer Finance Protection Agency. All you’re going to have is an enormous bureaucracy that doesn’t change things very much.

We’re just too far, too much, but that’s typical. Pendulum swings too far. And they’re talking about this pre-emption of Federal rules which I’ve seen in the paper today that they’ve backed off a little bit on that. That would be a nightmare. Talk about your bankers here. Talk to any banker about this, trying to meet 50 different rules and regulations instead of one or two is crazy. I mean this would really cost a lot of money, if you had to had to deal with every State and locality in the country.

And finally, [slide 19] just a couple of obvious things about lessons, you know, [laughter] they’re hypocritical … during the crisis, everybody in this room was so glad when BofA bailed out Merrill Lynch for gossakes. You know, my grandmother has her account with Merrill Lynch. Who’s going to save her. I mean everybody was glad when these things happened, and when the Fed bailed out the whole system, and then, you know, 6 months later they’re killing the banks and the Federal Reserve? That’s ridiculous, you know.

There’s two different worlds. When a war is on, you just get it done, and then later on — don’t go back and criticize the generals for what they did, just do it.

Anyway, that’s just my own thing.

And then, the last thing. I’ve been into Wall Street for a number of years. I’ve seen a lot of these cycles like some other people up here. And when things are really, really going good, you know it’s not going to last. It’s the old seven fat years and seven lean years. So don’t be too happy the next time you’re in a really good part of the market, because it won’t last forever. Thank-you. [0:26:24]

Notes and References

[1]: "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis", AEI event homepage, October 22, 2009.

[2]: "The Deflating Bubble, Part VI: The Lessons of The Bubble and Crisis" (PDF slide deck), by Thomas Zimmerman, UBS, October 22, 2009.

0. Title
1. Existing and New Home Sales Appear to Have Bottomed
2. But Sales in the West Raise a Question
3. Inventory of Existing and New Homes Has Dropped
4. Home Price Indices Have Turned Positive
5. Case Shiller 20 MSA Indices Gained 1.6% MoM in July
6. Affordability Has Reached an Historic High
7. But Non-agency MBS Market is Almost Non-existent
8. Foreclosures at Record Level
9. Monthly 90-day to Foreclosure Roll Rate Still Falling
10. Delinquency Buckets By Subprime Servicers
11. Loans in Delinquency Buckets by Product Types – Total Non-agency
12. Expect 5 MM Defaults In 4 Years Plus 2 MM in Delinquency
13. Distribution of Homeowner Equity
14. Government Programs Have Had Little Impact So Far
15. Debt Burden Still Elevated
16. In Spite of Fundamentals, Toxic Assets Have Rallied
17. 1-4 Family Mortgages Outstanding
18. Lessons of the Bubble and Crisis
19. Lessons of the Bubble and Crisis – (cont’d)