Wednesday, October 5, 2011

"New Price"

I haven't given the condition in the housing market a good beating lately.  So, with a limited amount of time to write today, I wanted to share some thoughts/observations.  To begin with, with interest rates approaching zero in the area of the Treasury curve where mortgage rates are set per Fed policy, one would think that we should be seeing some sort of recovery in the housing market.  I think, to be sure, we saw an ever-so-brief-and-small bounce in prices and volume in some markets early in the summer.  This was likely fueled by a temporary drop in overall inventory in some markets, which occurred from the temporary slow-down/delay in foreclosures while the banks had their wrists slapped by the regulators.

Having said that, we never really saw any real month-to-month or year-over-year "bounce" in overall home sales this summer.  In fact, in the "heart" of the selling season this year sales declined.  As I eyeballed the weekly mortgage applications reports this summer, it looked like there was an occasional week-to-week bounce in the applications for purchases, but the majority of the mortgage activity, since rates were falling, was in refinancing.

The reason I was thinking about the housing market is that, over the last 5 or 6 years, I've grown accustomed to making a visual note whenever I'm driving around the metro-Denver to observe the number of "for sale" signs I see, as I tend to drive through a lot of different areas over the course of any given week.  Denver has always been considered a "homogenous" representation of what is going on demographically economically across the country. What I've noticed recently is that, despite the fact that the primary selling season is over, there are still a lot stale "for sale" signs and - at least in the area of Denver where I live - a lot of new signs have been put up in yards since Labor Day weekend.  And now I've been noticing multiple listings per block.

In addition,  I've been noticing a lot of "new price" or "price reduced" signs.  To be sure, it can be argued that my sample size is limited or not "random."  But I have been noticing this all over the city. One particular house was originally offered at the beginning of the summer for about 10% below the price it could have received at the peak of the housing market (yes sometimes I pull the tear sheet to observe offering prices).  I noticed yesterday a "new price" sign and the new price was 10% below the original price offered and the seller had changed brokers.

Now, there's a lot of "randomness" and statistical "noise" in just one observation like that.  But what the proliferation of signage as we go into the slow season for home sales tells me is that sellers are starting to get nervous/desperate again.  And at some point we are going to see a meaningful percentage of the "shadow" market transform into the actual market and prices will have to be competitively reduced in order for the most desperate to move their home.

Coincidentally, a colleague sent me this article on the precarious financial condition of those still making their mortgage payments and gainfully employed: 
One in three Americans would be unable to make their mortgage or rent payment beyond one month if they lost their job, according to the results of a national survey taken in mid-September...Sixty-one percent of those surveyed said if they were handed a pink slip, they would not be able to continue to make their mortgage or rent payment longer than five months.
Here's the LINK

Unfortunately, it looks like the housing market is getting ready to go into another downward death spiral.  Anyone who thinks that this is the bottom right now is living on another planet.  Even more unfortunate, I expect that Obama will exercise his ability to use Fannie Mae and Freddie Mac to try and prevent this death spiral with a massive Taxpayer subsidized mortgage refinancing program.  He's already hinted that he can do this without Congress.  He also claims that it won't cost this country anything...

Don't believe that any more than you would be willing to believe that the housing market has bottomed.  Obama's ploy will be nothing more than another whorish ploy to get votes as 2012 approaches.  The truth is, however, that we are on the verge of heading into another big systemic black hole that will make the one we went into in 2008 look gold?


  1. kind of the same thing in the chicago area--one apparent strong segment is in the city near north not for big condos or big houses, but smaller townhouses or 2 flats where the owner has less risk of empty units not paying maintenance in a building with hundreds of units.

    Very little on the market in that definition-good stuff, location, quality, well maintained--goes fast--the rest though sits.

    Remember we do have a growing population and not all kids are staying home with parents (just mine)

  2. PS--my kid thrives on saving almost her entire paycheck-and yes-she is into PM.

    She wants to find a place where the current owner would rent to her with her option to buy. Should be doable. She just can't see staying with us too much longer.

  3. No price...

    Banking’s Self Inflicted Wounds

    The bottom line is this: Investors do not really have a clear idea of how healthy any of these banks truly are. We do not know the state of their balance sheets. We do not know what their exposures are to mortgages, to Europe, to Greece, etc. They could all be technically insolvent, as far as any investor can tell.

    And that is exactly how the bankers wanted it.

    But given the trouble in Europe, and the likely problems in housing if the US goes into a recession, Investors have decided they cannot take the risk of a holding an opaque, possibly under-capitalized probably over-leveraged financial firm blindly. They are telling the banks no thanks, we are not interested, we are going to be prudent and we have to assume the worst. Hence, for the second half of 2011, they have been selling off their holdings in these opaque, potentially insolvent too big to succeed entities.

    Bankers, enjoy your beds. You made them, now lay in them . . .

  4. I remember an old rule of thumb
    home value should be 2 times annual income (in the 1970s)
    at that rate I think either incomes need to rise a lot or prices need to fall a lot more.
    the house I live in is worth around 5 times my annual income
    I think most people have too much house

  5. I know of several people who haven't made a mortgage payment in over 2 years and still live "for free" in the same house. If the banks can't keep up with evictions as it is what negative consequences will anyone suffer besides crashing their credit score? Could be "free housing" for years while the banks try to catch up.

  6. (Dave)

    Ya I know of people who are living like that as well. One of them even goes out and pays for $20 glasses of wine. It's appalling. It's a huge moral hazard problem.

    But the worst part of that is that ulitmately the Taxpayer will be footing the bill for that. It's just another symptom of a country collapsing and another symptom that will "treated" eventually with the voting in candidates who implement totalitarian policies.

  7. Is Morgan Stanley's Biggest Asset Their Debt?

    Is MS planning on taking a massive gain on marking their own bonds? There were stories of MS buying back their own bonds - a great move if they though they were cheap, but a critical move if they were planning on taking a gain and didn't want to have to give it back in the future if their credit spreads tightened.

    Guest Post: Dear James Gorman (CEO of Morgan Stanley),

  8. It’s Too Hard to Know Who Is Too Big to Fail: Jonathan Weil

    What gives? One possible explanation is that the government keeps sending mixed signals about its intentions, mainly because it has no idea what they are. The Dodd-Frank Act passed by Congress last year prohibits equity injections of the sort we saw under the $700 billion Troubled Asset Relief Program. Yet it doesn’t end taxpayer-supported bailouts.

    Consider the liquidation plan outlined in Dodd-Frank for dismantling a systemically important bank. The act would let the Federal Deposit Insurance Corp. borrow money from the Treasury to finance a company’s operations for as long as five years, shielding bondholders and counterparties from immediate losses as a way to promote calm and head off bank runs. Putting CIT on the important list would tell creditors they might get special protections unavailable at most other companies.