Housing Bubble Bursting?

[The Warrior Monk]

David,

Not sure of your market but I think assumptions that all RE activity is being fueled by RE activity is a narrow view. Second home purchases are somewhat fuled by income increases as well as higher prices for the primary residence and some of those are paid off.

Home prices are fueled here my whatever wherever a quick buck can be made, currently RE. It's been that way for a few years now.

About 2/3 of the US mortgage market is in fixed rate 30 year terms and about 2/3 of the market has a loan balance that is below 70%. I think what will happen will revolve around the other 1/3 for the most part.

That has always been the case. What I've noticed though is the shift from large down payments to minimum down payments in the past several years. People buying homes 5 years ago had LTV positions of less than 70% when they bought the house. That's changed. Why?

 

[moh malekpour]

Moh,

I think it was you who suggested that the banks would need to be bailed out. Note that the overwhelming majority of mortgages are owned by investors thru Wall St. Directly, they are about 48-49%. Then add Fannie and Freddie at 24% +/- and FHA/VA insured loans for the balance and those also get securitized like the GSE stuff, so the street owns almost all of it.

They are the ones who have the risk- not the banks.
Brad

Brad,
You may need to revise your opinion and think again as it said in this bloomberg article:
Banks Have No Exposure to Mortgages? Think Again: Caroline Baum
http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_baum&sid=agNJxDCsErEY

 

[JSmith43]

Most of the time, the banks cherry pick their portfolio loans:icon_smile:
Sometimes, they look like they give the store away in their relationship banking activities, but I don't think that is often the case.

For some of them, you'd need a crow bar to pry a nickel out of their cold, dead hands. It kind of makes me proud to be a part of the USA financial industry:new_usa:

 

[Randolph Kinney]

Good article Moh. The probability of the loans or mortgages defaulting has not been ascertained for the zero percent down, interest only, or negative amortization. At least not in any of the articles I have read. So the argument becomes one of fear; something that has not happened yet but may happen in the future. That is what becomes laughable about any soft landing scenario I have read. It assumes that the default rate for these unique mortgages are going to resemble that of owner occupied single family residences. The second home mortgages also assume the same.

The other assumption for a soft landing scenario is that the lack of future demand from investors and second home buyers is not going to materially impact on the price of homes.

As interest rates in general and mortgage rates in particular continue rising, it will impact on people's ability to pay their variable rate mortgages or mortgages due to reset, ability to buy properties or refinance existing properties. All these problems are estimated to have a significant impact in 2007 and that is some time away. And no one really knows for sure how big that impact is going to be.

Turning to the type of loans used to finance home purchases, interest-only and negative amortization ARMs were almost 42 percent of the market last year, ...

The good news is that to date, the delinquency rates for loans on owner-occupied homes and second/investment homes are almost the same, according to LoanPerformance.

 

[JSmith43]

It assumes that the default rate for these unique mortgages are going to resemble that of owner occupied single family residences. The second home mortgages also assume the same.

My 2 cents: Lenders have plenty of data on VA zero down loans, and they are underwritten loosey goosey credit wise in comparison to 80/20 A paper.

 

[Randolph Kinney]

My 2 cents: Lenders have plenty of data on VA zero down loans, and they are underwritten loosey goosey credit wise in comparison to 80/20 A paper.

Roger, what is your take on the mortgages with zero down that are not VA? There are the 80/20 but not A paper. What about ARMs? Are you inferring that the VA data is relevant to these types of loans or indicative of default rates?

 

[JSmith43]

Give me a definition of A paper to work with.

80/20 loans are typically underwritten more tightly than 80/15/5 scenarios and certainly more tightly than 20% down scenarios. Where did we lose the A paper definition? The first mortgage rate is higher for 80/20, slightly higher for 80/15/5 scenarios than 80/10. The second mortgage rate typically is higher as debt/equity ratio approaches 100%.

Arms are underwritten more tightly. I'm sure there is a risk premium in there as well. The bloodshed will probably have been worth it:icon_mrgreen:

My view: Macro-economic events can easily overpower the finest underwriting. 5% equity can be gone in a heartbeat, but it isn't realized immediately. If the masses keep working productively, I'm not worried. If we stumble down a path toward unemployment like France & Germany, then I am heading for the hills.

 

[Randolph Kinney]

Give me a definition of A paper to work with.

80/20 loans are typically underwritten more tightly than 80/15/5 scenarios and certainly more tightly than 20% down scenarios. Where did we lose the A paper definition? The first mortgage rate is higher for 80/20, slightly higher for 80/15/5 scenarios than 80/10. The second mortgage rate typically is higher as debt/equity ratio approaches 100%.

Arms are underwritten more tightly. I'm sure there is a risk premium in there as well. The bloodshed will probably have been worth it:icon_mrgreen:

My view: Macro-economic events can easily overpower the finest underwriting. 5% equity can be gone in a heartbeat, but it isn't realized immediately. If the masses keep working productively, I'm not worried. If we stumble down a path toward unemployment like France & Germany, then I am heading for the hills.

Roger, as you probably know, I haven't the background or knowledge in banking and lending or what constitutes A paper. That was a term you used, I just threw it back.

From the appraisal work that I do, most of my business for purchases this year have been 100% financing with 80/20 mortgages and these people go with Long Beach, Spectrum, New Century, MIT, etc., not your prime paper lenders.

From Merrill Lynch research:

For a sign of where the next deflation wave is going to come from, have a look at page W1 of last Friday's WSJ: "Where the Buyers Aren't". The high end of the residential real estate market is coming under some heavy selling pressure, and price discounting increasingly the norm.

Financial strains surfacing in the household sector: according to the MBA, mortgage delinquencies are starting to edge up – the delinquency rate rose to 5.7% in Q4 from 4.4% in Q3. According to RealtyTrac, the number of mortgage loans that entered some stage of foreclosure in February rose to 117,259 – up a huge 68% y/y. LoanPerformance reports that sub-prime delinquency rates (90 days past due) have already moved to 3.0% in Feb/06 from 2.84% in Feb/05. Even high-quality credit delinquency rates have risen to 0.76% from 0.67% a year ago.

 

[Terrel L. Shields]

Brad,
It was me who posted speculators are 20-30% of the market. This was a conservative estimate.

Doing some newer subdivision analyses, I found over 1/3rd were sold to corporations or LLC's. They are paying a premium on some properties. One builder is selling houses for $115,000 to a guy who peddles them to Californias as rent houses for $135,000. My closest town has platted almost 1000 lots since June of 05. This is a town of 2,300 whose population doubled since 1970. And we are supposed to absorb 1000 new homes (i.e.- double the size of the town) in the next 2-3 years???

 

[Steve Owen]

Moh,

I cannot agree on your premise of artificial and natural components. Real estate is a commodity like any other; it is simply less liquid than say a bond future.

I do not know how old you are but I do remember when mortgage rates (29 year terms back then with almost no exotic products) were below 5%. In 1955 my Dad bought his first house for $19,800 with a 4% VA mortgage (about market back then). Borrowed $1000 from my Mom's Aunt for the down payment. When I bought my first house in the early 70's the rate was 7.9.

We are still not there yet.

But investors always ultimately react to economic realities, en masse. When they have massive disposable income they will do things like buy second homes. When the stock markets dump they look for alternatives. We saw that clearly over the past 5 years in the runup of 2-4 unit properties.

I see nothing that is artificial or unnatural about that.

While what we say here will not amount to a hill of beans as regards market perceptions by participants, it still reminds me of a self-fulfilling prophecy. It is a little bit like me asking where is the stampede, where is the stampede? And then, not seeing one, I start shooting my revolver over and over again until the herd hears it and thinks, maybe I am supposed to run. And so they do; hence the stampede.

...RE value is created by 4 factors - scarcity, purchasing power, utility and demand. Demand is still high, utility has not really changed much, land is still becoming less available. What you are suggesting is that the purchasing power decline due to higher rates will impact everything else. I do not see that.

I see increasing population- CA is still projecting a 40% increae by 2020; many other states are as well. Demand WILL increase. Supply WILL decrease. So, the net impact of lower purchasing power, while it will mitigate price increases as it should, and perhaps even cause declines for a while, it is still only 1 part of the puzzle.

Brad

Actually, I think that Moh should have used more economically correct terminology, but that still doesn't mean his basic premise is wrong. The better terminology would have been elastic and inelastic.

Generally, demand for housing that will be owner occupied is pretty inelastic (natural) while demand for SFR investment properties is somewhat more elastic (artificial). I too, don't like the word artificial, Brad, but consider that no matter what happens, you have to have a place to live, which makes housing demand more inelastic than many other commodities. But, if immigration came to a standstill, and population growth slowed or reversed, then there would be less demand for housing in that region. To the extent that demand is being fueled by the government's lack of response to illegal immigration, it is somewhat artificial. Additionally, we have been through a period where low interest rates and cheap foriegn products have spurred the purchase of second homes, increased equity draws from first homes, and caused many new investors and builders to enter the housing markets. Therefore, the elasticity of this rather inelastic demand (for SFR housing) has been increased in recent years. Artificial might not really be the right word for it, but the forces at work are relatively transparent.