Thursday, March 18, 2010

I'm so confused Is USA Real Estate About to Boom or Crash even further?

OK, time for a bit of crowdsourcing on a familiar subject. According to Bloomberg BusinessWeek, the bottom is at hand in the property market:

"Housing Real-Estate Recovery Signaled as Fed Unwinds"

The U.S. housing market is poised to withstand the removal of government and Federal Reserve stimulus programs and rebound later in the year, contributing to annual economic growth for the first time since 2006.

Increases in jobs, credit and affordable homes will help offset the end of the Fed’s purchases of mortgage-backed securities this month and the expiration of a federal homebuyer tax credit in April. Sales will rise about 6 percent this year, and housing will account for 0.25 percentage point of the 3.6 percent growth, according to forecasts by Dean Maki, chief U.S. economist for Barclays Capital in New York.

“I would bet even odds that we’re at a bottom and that we’re going to see improvement in the coming months,” said Karl Case, co-creator of the S&P/Case-Shiller Home Price Index and a professor of economics at Wellesley College in Wellesley, Massachusetts.

Sounds good, right? So, does that mean I should ignore the following:

"Strategic Default: In Come the Waves Again" (Credit Writedowns)

There is a growing divide between delinquencies and foreclosures, which suggests that foreclosure data understate the mortgage distress and delinquencies now building in the U.S. residential housing market.

When Option-ARM and Alt-A interest rates re-set higher, payments will increase dramatically for many borrowers who are hopelessly underwater on their mortgages. This will be a significant driver of defaults in 2010 and 2011.

Moreover, a recent article in the New York Times demonstrates that borrowers with high FICO scores are still at risk of default, opting to pay credit cards off instead of mortgages.

This is all pointing to a coming wave of strategic defaults. Borrowers whose homes are significantly underwater could be looking at losses at sale for up to 6 years. Therefore, many are opting to default strategically. When a borrower defaults and walks away, the loss becomes unrecoverable and the value of the asset must be written down. So while holding MBS paper to maturity has cushioned banks to date, a large wave of strategic defaults would pressure lenders who are under-provisioning for future losses.

Expect this to play out over 2010 and 2011.

"Housing Recovery is Spelled R-E-O" (HousingWire)

Using [Lender Processing Service] data, for all loans more than 90 days in arrears, the average days delinquent is now at 272 days—up from 204 days in early 2008. For loans in foreclosure, the aging numbers are even more staggering: loans in this bucket average 410 days delinquent, up from 260 days delinquent in early 2008.

Ponder those numbers for just a second. On average, severely delinquent borrowers have gone more than 9 months without making a mortgage payment—and yet foreclosure has not yet started for them. For those borrowers who are in the foreclosure process, it’s been an average of 13.6 months—more than one full year—since they last made any payment on their mortgage.

So, can short sales ride in to save the day for these 7.4m troubled borrowers? What about for the many millions more who are current on their loans, but are underwater on property value and unable to sell? For some, short sales will be an important solution—but don’t kid yourself: the hype currently surrounding short sales and the HAFA program will prove to be short-lived, and REO expertise will be prove to be the key to recovery, as it has been in prior cycles.

"Housing Market Sure to Double-Dip: Whitney" (

The US housing market will face another retreat while mortgage-backed securities and Treasurys are likely to go through a "material" correction, Meredith Whitney, CEO of Meredith Whitney Advisory Group, told CNBC Tuesday.

"The housing market surely will double dip," Whitney told "Worldwide Exchange."

Government programs to support housing have been "murky" and when the modifications caused by them come to an end, a lot of supply may come to the market and that's when the real-estate market is likely to go down, she explained.

Hopes that an improvement in liquidity and continuing investment from China in US assets will prop up mortgage-backed securities (MBS) and Treasurys are exaggerated, Whitney also said.

"The asset classes of MBS and Treasurys are priced for a material correction in my opinion," she said. "The only buyers of agency MBS are the Fed and banks so you see how precarious that market is."

"If the Fed pulls back, that's a really big deal... because there's no substitute buyer."

Banks Model Is Broken

The Federal Reserve can't make banks start lending again because the business model financial institutions used before the crisis is broken, Whitney also said.

"I don't think there's much the Fed can do to get banks to start lending again. That's a structural problem, the model is broken," Whitney told "Worldwide Exchange."

"Home Builder Confidence Falls. Foul Weather and Distressed Sales Cited as Reason" (Mortgage News Daily)

[National Association of Home Builders] Chairman Bob Jones says:

“Unusually poor weather conditions certainly had a negative effect on builders’ business in February.....At the same time, the continual flow of distressed properties priced below the cost of production is having an adverse effect on new-home appraisals and also making it tough for builders’ customers to sell their existing homes.”

NAHB Chief Economist David Crowe says:

“The lack of available credit for new projects, the large number of distressed properties for sale and the continuing hesitancy of potential buyers due to the weak job market are definitely weighing on builder confidence at this time....

"Buyer Traffic Forecasting Decline" (Paper Economy)

Comparing today’s new residential construction data to the recently released NAHB housing market indicators appears to suggest that we may soon see a notable declines to housing starts and permits.

The “buyer traffic” index has been declining steadily since September 2009 indicating that home builders are seeing declining foot traffic with an overall level only slightly higher buyer activity than seen in the panic stricken days of late 2008.

This is a notable finding as in recent years the “buyer traffic” series has indicated the trend generally well in advance of the housing starts and permits data.

Further, as Bob Toll has noted many times in the past, the start of the year is typically the strongest period for the new home market so given the latest trends it appears that new housing is off to a particularly weak start.

"Lending Changes Hit Struggling Condo Market" (Daily Journal of Commerce)

Unit No. 100, a completely suitable space at the Trillium Hollow condominiums in Northwest Portland, is up for grabs. Unfortunately, it seems to be completely unsellable, according to Stacy Cooper, principal broker with Portland Condos.

“I have had five buyers interested in writing on this property, and have run the loan package through 10 lenders. Only one is willing to loan, and they will require 40 percent down,” she said. “This was not the case three years ago when my sellers bought the property. It has appraised above the list price, but even fire-sale pricing won’t get this property sold.”

Cooper’s experience is shared by many Portland condo brokers in the wake of the Federal Housing Administration’s new lending requirements for such properties. The new guidelines are dealing a stiff blow to a sector that already is struggling because of the housing market collapse.

As of Oct. 1, 2009, condo developments must meet a stringent new set of guidelines in order to obtain financing through the FHA. The new approval process, part of the Housing and Economic Recovery Act of 2008, is intended to better insure mortgages and slow the rate of defaults.

Well? Then You decide...
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