Housing Bubble Bursting?

[Randolph Kinney]

I would tend to agree with the end statement, but the opening line does not seem to mesh with previous posts on this thread concerning the percentage of homeowners going into foreclosure... and, $110 billion is not as big a loss as what I have read evaporated in the tech stock debacle.

We do not know how many homes will ultimately go the full route of foreclosure, auction and sale. I am talking to many MBs who have clients upside down. They are working with banks like WAMU, who have a program to convert the low interest rate ARM loan to a 30 year fixed rate plus 2% over the ARM rate, so long as they can make the payment. The other workout solution is a short sale. These programs mitigate the foreclosures and ultimate loss to the lender. However, even with this kind of help, many people are going to lose their homes. Many bought multiple homes.

The $110 billion is only an estimate. After the passage of years, one might discover the true loan loss to either the lender (assuming they hold the paper) or investor. The investor losses can be magnified and multiplied depending on what they bought; RMBS or CDO. For example, just one Bear Sterns hedge fund investing in CDOs was wiped out. Losses are expected to top well over $3 billion.

Real estate, as you know, tends to be illiquid. People who have to sell, sell at whatever the market conditions are. It is not like the stock market in the ease of split second trading or hedging that occurs. But like I was indicating above, mortgages have been securitized, most of them and sold to investors. No one knows the value of these securities. They are not actively traded nor are the whole marked to market when some do trade. IBM's value at the end of the trading day is known because of the last trade. Home values or loan values are not known at the end of the trading day.

There it is! Where you do not have unreasonable speculation, you do not have a run up in prices. When you do not have a run up in prices, there is no bubble to burst. (Note that is not the same thing as saying that prices cannot decline.)

It is not over yet, but it appears the larger MSAs are or will be affected. With so much liquidity and easy credit for residential real estate, money poured into houses across the country.

The root of the problem in many, if not most, locales, IMHO. But, I couldn't help but notice that there was no statement as to the culpability of HO's who also pressured appraisers in many, if not most, of these situations.

There is plenty of blame to go around to everyone involved with residential real estate.

Thanks for the link, Randolph. This is one of the best pieces I have read on the subject. Here's another:

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/HousingTroublesBeginToSnowball.aspx?vv=450

Funny how slow motion implosion works. People have time to look and gather data over time. Events that are yet to happen can be discovered before they happen. The news reporting is blamed for the hysteria and hype, a cause and effect occurrence. These things wouldn't happen if the news would quit analyzing and reporting day after day.

 

[Terrel L. Shields]

now’s a good time to get in

Have you ever heard a Realtor say anything else? Ever hear one utter a word of caution? Nope. It is biologically impossible for some of them to do so.

Many bought multiple homes.

No sympathy here. You roll the dice. You play the game. There is a winner and a loser.

The $110 billion is only an estimate. ...For example, just one Bear Sterns hedge fund investing in CDOs was wiped out. Losses are expected to top well over $3 billion.

Just the tip of the iceberg

Real estate, as you know, tends to be illiquid. People who have to sell, sell at whatever the market conditions are. It is not like the stock market in the ease of split second trading or hedging that occurs.

I think that RE is quite liquid although people like to say otherwise. It may have applied in decades gone by when bankers required 50% LTV and cash buyers were risking 100%. Graaskamp pointed out 25 years ago that the fungible nature of RE and the zero down 100% loan makes real estate a 'perfect hedge'. You sell if it goes up and makes money. You let the bank have it back if you don't. That's exactly what we are seeing. Many investors made no effort to lease their house. They only intended to hold for a year and flip for a profit. Now it isn't that the house WON'T sell. It is that it WON'T sell for what they have tied up in it...ie-they are upside down. That is the price premium of the option. The problem with this straddle is that there is no short position to 'stop' a catastrophic loss. With the lending standards of today (100% LTV and low interest), the premium is low, payoffs were increasingly better because values were zooming upward, and a call option is something where you bet the price will rise. A lot of people bet wrong.

 

[Austin]

Interesting local development in Virginia: My Sunday ritual is to cut out the real estate transfers for the city and surrounding county. The city reports buyer, seller, address, and consideration. The county reports buyer, seller, acreage, county district and consideration.
At the beginning of the list of transfers in the paper was an editor’s note! “According to the city clerk of court all considerations (meaning sales prices) under a new Virginia Law that took affect July 1, 2007, either the sale price or tax assessment will be reported in the paper with no indication of which is which.”
What does this mean?
Clue # 1: Up until now the state grantor’s tax was charged based on the sales price or tax assessment whichever was higher. This came about when assessments started exceeding sale prices around the year 2000.That being the case, then why would the Virginia Legislature write a law to report misinformation in the newspaper? Essentially what they are doing is reporting for public consumption the sale price or tax assessment whichever is higher for public consumption which is a totally transparent misrepresentation of facts obviously for some devious purpose. Any ideas on who could benefit from that? Could this be an attempt to mask tumbling property values?
Clue # 2: What this amounts to, among other things, is a state real estate tax. It is no longer a state grantor’s tax based on actual consideration; it is now a state real estate tax based on assessed value that predicated on properties that decline is value. In other words, if property values decline state revenue declines so they use the old assessed value derived from a bubble market sale numbers. Me thinks something is rotten in the State of Virginia.

 

[Greg Bell]

Yes , In Kansas they just raise the mill levy and poof , instant graft money for future office renovations and spiffy new Crown Victoria's.

 

[Greg Bell]

Have you ever heard a Realtor say anything else? Ever hear one utter a word of caution? Nope. It is biologically impossible for some of them to do so.

No sympathy here. You roll the dice. You play the game. There is a winner and a loser.

Just the tip of the iceberg

I think that RE is quite liquid although people like to say otherwise. It may have applied in decades gone by when bankers required 50% LTV and cash buyers were risking 100%. Graaskamp pointed out 25 years ago that the fungible nature of RE and the zero down 100% loan makes real estate a 'perfect hedge'. You sell if it goes up and makes money. You let the bank have it back if you don't. That's exactly what we are seeing. Many investors made no effort to lease their house. They only intended to hold for a year and flip for a profit. Now it isn't that the house WON'T sell. It is that it WON'T sell for what they have tied up in it...ie-they are upside down. That is the price premium of the option. The problem with this straddle is that there is no short position to 'stop' a catastrophic loss. With the lending standards of today (100% LTV and low interest), the premium is low, payoffs were increasingly better because values were zooming upward, and a call option is something where you bet the price will rise. A lot of people bet wrong.

Where do you get the idea Real Estate is Liquid?The first thing we are tought in Broker school is Real Esate is an imperfect market , lagging the economy up or down.Try and sell your home when the mortgage is upside down.

 

[Randolph Kinney]

Have you ever heard a Realtor say anything else? Ever hear one utter a word of caution? Nope. It is biologically impossible for some of them to do so.

No sympathy here. You roll the dice. You play the game. There is a winner and a loser.

Just the tip of the iceberg

I think that RE is quite liquid although people like to say otherwise. It may have applied in decades gone by when bankers required 50% LTV and cash buyers were risking 100%. Graaskamp pointed out 25 years ago that the fungible nature of RE and the zero down 100% loan makes real estate a 'perfect hedge'. You sell if it goes up and makes money. You let the bank have it back if you don't. That's exactly what we are seeing. Many investors made no effort to lease their house. They only intended to hold for a year and flip for a profit. Now it isn't that the house WON'T sell. It is that it WON'T sell for what they have tied up in it...ie-they are upside down. That is the price premium of the option. The problem with this straddle is that there is no short position to 'stop' a catastrophic loss. With the lending standards of today (100% LTV and low interest), the premium is low, payoffs were increasingly better because values were zooming upward, and a call option is something where you bet the price will rise. A lot of people bet wrong.

Lets take a rapidly rising market. How fast can you list your property for sale, how fast can you get the offer? 7 days? Lets see, how fast can you close in an up market? Maybe 3 weeks? Okay, in a really favorable environment, maybe you can turn your asset into cash in 30 days.

Now, lets take the same with a stock on the NYSE. Any questions about liquidity?

Now lets look at the same in a down market. Even if you default, the lender is going to give you at least 90 days. And if it goes to foreclosure and the lender takes a loss, they will fill out a 1099 to report the IRS your imputed income based upon the difference in the loan value plus expense minus the net proceeds after sale. Maybe 6 months later? And when April 15 rolls around, you get to pay the income tax on the loss!

No matter how you slice that cheese, real estate does not liquidate that quickly.

 

[Greg Bell]

New York defaults can take over a year from start to finish.Hard to foreclose in time for the market to reflect value . A lot can change in a year.

 

[Randolph Kinney]

Housing market 'wilting in the heat'

BOSTON (MarketWatch) -- Home builders had hoped the spring would provide some relief to a troubled housing market, but that key selling season has been a bust and demand has weakened even further so far this summer, Wall Street analysts said Monday.

"Our recent conversations with builders around the country find that housing demand has continued to wilt in the summer heat, with conditions sequentially worsening in the past four to six weeks," wrote Deutsche Bank analysts Nishu Sood, Lou Taylor and Rob Hansen in a research note.

"Pricing pressure persists, with many markets in list-price reduction mode, as builders struggle to find demand that continues to slow as a result of mortgage-market contraction," they added.

Economists are still trying to get a handle on the fallout from the subprime-mortgage meltdown, which is hitting consumer confidence in every link of the housing chain and almost wiping out some hedge funds that made bets on mortgage-related debt.

With the resulting tighter lending standards, fewer buyers are qualifying for home loans, which is one reason why cancellation rates have surged. Rising mortgage rates are also taking a bite out of demand.

 

[Randolph Kinney]

Credit tightens on subprime lending

Wells Fargo pulls popular subprime loan from mix

NEW YORK (Reuters) - Wells Fargo & Co., (NYSE:WFC - News) the fifth-largest U.S. bank, on Monday said it stopped offering a popular subprime mortgage product in response to market and regulatory pressure.

The company in an e-mail said it ended on Friday retail offerings of so-called 2/28 loans, which at 65 percent of all subprime mortgages last year are the staple of the industry. Payments on 2/28 adjustable-rate mortgages (ARM) are based on rates that are fixed for two years and then are adjusted twice a year for the remaining 28, if the loan is not refinanced.

Decisions were partly driven by the $583 billion market for subprime mortgage bonds, where sales rely on opinions of rating companies such as Moody's Investors Service, Wells Fargo said. Rating companies in the past two weeks have unleashed a flood of downgrades on subprime bonds in response to rising delinquencies and increased their assumptions of losses that new loans will produce.

Other big lenders including Countrywide Financial Corp. (NYSE:CFC - News), Washington Mutual Inc. (NYSE:WM - News), Merrill Lynch & Co.'s (NYSE:MER - News) First Franklin and H&R Block Inc.'s (NYSE:HRB - News) Option One Mortgage have also said they would stop making 2/28s.

 

[Terrel L. Shields]

Where do you get the idea Real Estate is Liquid?

I was quoting the late Dr. Graaskamp. "As a fungible commodity, it has become a speculative commodity that permits the investor to go short or long in a specific market ...Purchase of a building on a land contract with a minimum downpayment has become virtually a perfect hedge or straddle..."

REITs are another example of fungilbe RE assets. I can buy a house on credit and if it goes up, sell for a profit, if it goes down I let the bank have it. That's about as fungible as it gets. Options trading is exactly the same thing. The Straddle is a two way bet. You are simultaneously buying a put and a call with 100% financing. Your upside is unlimited and your downside is limited to the closing costs that you pay.

The notion that you have to hold real estate for long periods is nonsense. If you want rid of your house, refi under some pretext to the max amount. Stick the cash in your pocket and let the bank have 'er. That's about as liquid as it gets.