Housing Bubble Bursting?

[Randolph Kinney]

Historical Ownership of Treasury Debt

I found some historical information on what percentage of U.S. Treasury debt is owned by foreigners.

In the 1960s, foreign ownership of the debt was less than 5 percent. This crept up to about 20 percent in the late 1970s.

During the Clinton administration, the amount of the national debt owned by foreigners roughly doubled, from 18 percent in 1992 to 35 percent by 1999.

As of the end of 2004, foreign ownership of U.S. treasury debt reached almost $2 trillion, 44 percent of the total held by the public.

Purchases of Treasury notes by foreign investors exceeded sales by $6.59 billion in July 2006, a Treasury Department report released Monday showed. Overseas investors own nearly half the Treasury market.

 

[JSmith43]

As of the end of 2004, foreign ownership of U.S. treasury debt reached almost $2 trillion, 44 percent of the total held by the public.

Good info, Randolph. Do you think that is enough that they will start to be afraid of pi$$ing us off? After all, we could nationalize the debt held by select foreigners. They probably wouldn't play with us again for a hundred years or so, but....

 

[hastalavista]

After all, we could nationalize the debt held by select foreigners.

We could borrower that strategy out of Venezuela's book. Call it the Chavez Doctrine.
Or, modify one of our older strategy names: Instead of the "Big Stick" policy, we could call it the "Big Stick Up Your ***" policy.
(will that get me censured on the forum?)

 

[Randolph Kinney]

Good info, Randolph. Do you think that is enough that they will start to be afraid of pi$$ing us off? After all, we could nationalize the debt held by select foreigners. They probably wouldn't play with us again for a hundred years or so, but....

It is clear that the rising foreign ownership of U.S. Treasury paper mirrors the rising trade deficit and the lack of domestic savings or no savings or negative savings.

It is interesting to observe the rising mortgage debt level on homes. It is also interesting to observe the easing of credit standards and conditions along with new mortgage products that didn't exist 10 years ago. It is further interesting to observe the expansion of the secondary mortgage backed securities market and new trading instruments.

The investors that are buying this paper (treasury and mortgage) are mostly foreign. Interesting to note how the interest rate trends in both markets over time look similar. Foreign investors in mortgage backed securities are getting too low of a return for the risk. I believe foreigners are looking at mortgages as being backed or guaranteed by the U.S. government. The surprise comes when there is a significant default and none payment of debt on mortgages and the government does not make whole the investor's losses.

At that time, either mortgage interest rates rise abruptly to reflect the new expectation and reality that there is risk not accounted for or the government steps in and makes the investors whole again.

When that happens, investors are going to realize where the money comes from: investors will buy more treasury securities that are issued to replace the mortgage securities that went bust.

 

[Randolph Kinney]

Report: House Prices

http://www.globalinsight.com/gcpath/Q22006report.pdf

Above is a link to the most current data on house prices and analysis for the U.S. It makes some interesting points and observations. Summary as follows:

• Overvaluation became more pervasive during the second quarter of 2006. Seventy-nine metro areas,
accounting for 40 percent of all single family housing value, were deemed to be extremely over-valued at
that time. That represents an increase from 68 markets, and 37 percent of all single family market value,
during the first quarter.
• Sixty-seven metro areas suffered price declines. The Midwest — largely exempt from the boom —
exhibited the highest concentration of falling prices. Additionally, parts of California and New England
experienced price declines.
• Slower appreciation rates were pervasive: 219 metro areas — 69 percent of our total, showed a decline in
appreciation over the past year. The appreciation slow-down correlates powerfully, and inversely, with our
assessment of metro area house price valuations. California, Florida and the northeast corridor, from
Washington, D.C. to southern Maine, are demonstrating the most rapid slowing.

 

[Randolph Kinney]

New Lending Guidelines for Exotic Mortgages

http://www.mortgage-info.com/blog/

The item that has the most impact in the new guidelines is that mortgage lenders most now qualify buyers at the fully indexed mortgage rate for interest-only and payment-option loans.

We will use this example: Qualifying at 2.00% start rate or fully indexed 7.625% based on $8,000 gross monthly income and $800 in revolving debt.

Mortgage Qualifying Differences:

at 2% Maximum Mortgage: $432,878
at 7.625% Maximum Mtg: $226,055

Assuming normal qualifying guidelines regarding income to debt ratios of 30/40.

That is over $206,000 difference in qualifying. If a large percentage of home buyers over that last three years used these types of mortgages to qualify and their new loan adjusts to the higher rate.... they can no longer refinance. This will create some significant issues in the near future.

Some of this properties will go to foreclosure or the owners will need to do a real estate short sale. Either way these properties become comparable sales as far as appraisals are concerned and this will apply downward pressure on home prices.

Additionally, these changes in mortgage qualifying will affect current home buyers who can no longer for a mortgage large enough to purchase a home, which will force property values down.

 

[Randolph Kinney]

Housing Slowdown Costing Jobs

http://news.morningstar.com/news/DJ/M10/D06/200610061054DOWJONESDJONLINE000705.html?t1=1160159868

[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-1]10-06-06 10:54 AM EST

[/SIZE][/FONT] [FONT=Times New Roman, Times, serif] WASHINGTON (Dow Jones) -- The U.S. housing slowdown is beginning to be felt in the job market.


The number of workers employed in residential construction dropped by 13,000 in September, while the total hours worked in construction fell by 1.7%, the Labor Department reported Friday.
[/FONT]

 

[moh malekpour]

Housing's hidden headache

http://online.barrons.com/public/ar...ZKQYW2yRLsDWJTxJQi_vjQ_20061030.html?mod=mktw

Housing's Hidden Headache

By JACQUELINE DOHERTY

HOME BUILDERS HAVE THRIVED IN THE PAST five years as easy money fueled enormous demand for houses -- as well as abundant supply. The role of low interest rates and novel loan structures in helping buyers enter the market -- or trade up to McMansions -- has been well-documented. Less understood is the potentially problematic financing that has enabled developers to increase their supply of land to meet, and perhaps exceed, this unprecedented demand.

Unlike in past housing cycles, when they borrowed heavily from banks, home builders today also use options and off-balance-sheet joint ventures to buy land. When times were flush, these financing vehicles enabled the industry to expand without bulking up its debt. But now that the housing market has weakened, land options and joint ventures could come back to haunt some companies, their financial partners and the broader economy -- not to mention stockholders.

The pain could be twofold: If orders dry up and home builders are forced to write off their option deposits or joint-venture investments, which are considered assets, some could face substantial hits to book value. Alternately, builders' earnings could be nicked if joint-venture gains turn to losses.

Housing bulls argue that concerns about the deteriorating health of the residential real-estate market largely are reflected in building-company shares. After all, the Standard & Poor's Supercomposite Homebuilding Index is down 41% from its high of July 2005. If the housing recession proves mild and short-lived, the stocks could rally, much as Barron's argued in a cover story in late August ("Big Ripple," Aug. 28, 2006). So far, that's been a savvy call: Most are up almost 20% from their lows this past July.


Fun While It Lasted: For three years, home-building shares left the market in the dust. Now most are down about 40% from their highs, but some might fall further.
If the downturn is severe and protracted, however, as it may be in locales where home prices and speculative development have soared, the industry's use of options and joint ventures is likely to prolong the pain. "The home builders are going to abandon a significant amount of their options and attempt to dissolve the joint ventures that no longer meet their return requirements," Ivy Zelman, an analyst at Credit Suisse, predicts.

Most housing companies today trade at slight premiums to book value, which is considered a more reliable indicator of their worth than price-earnings multiples. And any impairment to book (roughly defined as assets minus liabilities) could result in similar markdowns in the companies'

There's also reputation risk. "Companies with 50 homes built don't want to walk away from [unfinished] communities. It would kill their reputations," says John Burns, president of John Burns Real Estate Consulting in Irvine, Calif.

Joint ventures, too, have allowed home builders to buy land, and even other builders, while keeping both the land and leverage off their balance sheets.

For example, a developer seeking to purchase a $100 million piece of land with 40% equity might put up $19.6 million, or 49% of that equity stake, with a partner contributing $20.4 million, or 51%. The JV would fund the remaining $60 million with debt, which, because the builder's equity stake is less than 50%, would not appear on the company's books. Private-equity funds have been active participants in such deals.

The Bottom Line

At NVR, Lennar, Hovnanian and Beazer, land-option deposits represent a hefty chunk of book value. At Standard Pacific and KB Home, joint ventures account for much of book value.Lennar used a joint venture to purchase the 3,718-acre El Toro Marine base in Irvine last year, with equity partners including MSD Capital, the investment vehicle for Michael Dell; Rockpoint Group; and Blackacre Institutional Capital, the real-estate arm of Cerberus Capital Management, a hedge fund.

Hovnanian likewise used a joint venture in 2005 to acquire the assets of Town & Country Homes, a Lombard, Ill., home builder. Its equity partner: Blackstone Real Estate Advisors. Hovnanian's total investment in unconsolidated joint ventures was $217 million at the end of the July quarter, about 11% of its book value.

So far, none of the nation's top 13 home builders, save Lennar, appears to have written off equity in joint ventures. On the other hand, earnings from joint ventures have declined at some companies. Beazer's share of income from joint ventures declined to $127,000 in the June quarter, from $2.95 million a year earlier.

Some home builders guarantee the debt of their joint ventures, which could come back to bite them if market conditions worsen. Lennar, for example, guarantees $1.2 billion of debt for its JVs and enters into option contracts to buy land from them. When the builder is also the guarantor, industry insiders say, a joint venture tends to get more favorable terms from lenders. But if things unravel, the company could wind up with a lot more debt than it discloses on its balance sheet.

In a worst case, or one close to it, the home builder might opt to prop up a joint venture with additional equity financing. If its interest exceeds 50%, under accounting rules it would have to consolidate the JV, with all its liabilities, into its own operations.

Every real-estate cycle is different, and it's too soon to tell whether this one will end with a whimper or a bang -- one that rivals, and maybe exceeds, the Nasdaq's collapse in 2000. Land options and off-balance-sheet joint ventures are designed to mitigate corporate risk in the event of calamity. If market conditions worsen, however, they might provoke it

 

[Brad Ellis]

Randolph,

Thanks for the National City list. Interesting how it looks so mcuh different from Moody's in so many areas (of course if worng, Moodys will point to their longer time frame projections).

National City, by the way, has been wrong as much as it has ben right- but I will give them credit for their efforts.

Brad

 

[murray stroupe]

RE;cycle

http://online.barrons.com/public/ar...ZKQYW2yRLsDWJTxJQi_vjQ_20061030.html?mod=mktw

''every cycle is different''
===================

Probably see much deeper opportunities/problems in this cycle;
Investors Business Daily website,
investors.com
has a 2 year foreclosure chart in a big UP trend.

30 year mortgage chart % rate downtrending;
foreclosure chart uptrending