US supply of homes below historical median

[Guest kawikaho]

Yeah, I agree on the Tilson statement.  He's way too pessimistic, and borderline irrational.  The only thing that is going to drive prices lower is much higher interest rates.  I don't expect that to happen unless there is a black swan type of event.

[SharperDingaan]

 

Think along 2 tracks

 

Where's the new money coming from? To buy the foreclosure to rent to others somebody had to put in new equity. Either an investor has to allocate more from their portfolio, a consumer has to have saved it, or a government injects it - & a banker allowed a higher debt/equity ratio. Its going to take a while.

 

Where are the losses accumulating? That walkaway loss is a direct write-off to the banks equity, reducing how much the bank can lend. Fewer loans and/or repayment demands that trigger foreclosures & a new round of write-offs. A death spiral.

 

With so much risk, investors are not going to be allocating much of their portfolio anytime soon.

 

SD

 

 

 

[shalab]

With so much risk, investors are not going to be allocating much of their portfolio anytime soon.

 

Well, not all are alike. My friend recently bought a new construction which was 3700 sq. ft. while renting out his old house. He was looking to buy another house but now he paid less price than he would have paid two years back. My friend liquidated part of his equity portfolio to pay for the house. Liquidating the equity was prudent. His rationale is that he doesnt know how to invest in equities and he thinks the houses will work out for him in the long term.

 

Also, the recovery in the equity markets has helped. Vanguards average 401(k) plan is now above where it was two years ago by some 7%.

 

cheers!

Shalab

[shalab]

NYTimes carried an article on the resumption of bidding wars recently.

 

http://www.nytimes.com/2009/11/15/realestate/15Cov.html

 

This is not an aberration. In my place, for a million+ dollar property, there were four bids.

[ERICOPOLY]

Once supply runs out people will either need to buy whatever is on the market or break ground.  Supply will run out in a couple of years because the pace of new construction is too low.   A big sore spot in the economy is all the lost construction jobs, and the lost business selling carpets, appliances, etc...  So how will the economy look when construction rebounds to meet the demands of the growing country?

 

As far as I can tell, the cost of building a new home is higher than the homes presently on the market.

 

Here is a tongue-in-cheek example from Newport, RI -- only $277 per sqft but look at the craftsmanship and materials.  That's a value investor's home:

http://www.realtor.com/realestateandhomes-detail/659--Bellevue-Av_Newport_RI_02840_1108974953

 

[ubuy2wron]

Once supply runs out people will either need to buy whatever is on the market or break ground.  Supply will run out in a couple of years because the pace of new construction is too low.   A big sore spot in the economy is all the lost construction jobs, and the lost business selling carpets, appliances, etc...  So how will the economy look when construction rebounds to meet the demands of the growing country?

 

As far as I can tell, the cost of building a new home is higher than the homes presently on the market.

 

Here is a tongue-in-cheek example from Newport, RI -- only $277 per sqft but look at the craftsmanship and materials.  That's a value investor's home:

http://www.realtor.com/realestateandhomes-detail/659--Bellevue-Av_Newport_RI_02840_1108974953

 

 

Nice house Eric. I live in Vancouver which is in serious bubble territory as far as residential RE is concerned. Here is a typical listing in the wrong part of town. http://www.realtylink.org/prop_search/Detail.cfm?areatitle=Vancouver%20East&ARPK=236,233,241,245,244,242,235,240,246,239,247,237,855,432,238,234,243&ComID=&agentid=&MLS=V789442&rowc=4&rowp=1&BCD=GV&imdp=&RSPP=5&AIDL=243,234,238,432,855,237,247,239,246,240,235,242,244,245,241,233,236&SRTB=P_Price&ERTA=true&MNAGE=0&MXAGE=200&MNBT=1&MNBD=1&PTYTID=5&MNPRC=750000&MXPRC=900000&SCTP=RA

[ERICOPOLY]

Nice house Eric. I live in Vancouver which is in serious bubble territory as far as residential RE is concerned. Here is a typical listing in the wrong part of town. http://www.realtylink.org/prop_search/Detail.cfm?areatitle=Vancouver%20East&ARPK=236,233,241,245,244,242,235,240,246,239,247,237,855,432,238,234,243&ComID=&agentid=&MLS=V789442&rowc=4&rowp=1&BCD=GV&imdp=&RSPP=5&AIDL=243,234,238,432,855,237,247,239,246,240,235,242,244,245,241,233,236&SRTB=P_Price&ERTA=true&MNAGE=0&MXAGE=200&MNBT=1&MNBD=1&PTYTID=5&MNPRC=750000&MXPRC=900000&SCTP=RA

 

 

You've got a problem there.  Here is what you get in Seattle for nearly the same price:

http://www.windermere.com/index.cfm?fuseaction=listing.listingDetailUpdated&listingID=66377289&paginate=true

 

Awesome city views.

 

 

[Santayana]

Yeah, I agree on the Tilson statement.  He's way too pessimistic, and borderline irrational.  The only thing that is going to drive prices lower is much higher interest rates.  I don't expect that to happen unless there is a black swan type of event.

 

So you think we will have historically low rates forever? 

 

I also think that unemployment and inability to pay are going to continue driving prices down.   

[Parsad]

I don't agree with Tilson's assessment.  He's expecting significant further downside in pricing.  I don't think that will happen.  I think you will continue to see pressure in pricing as more homes come onto the market and the second round of ARMS reset, but purchases of distressed properties should ease that pressure over time and banks will continue working with mortgagees. 

 

I think the recovery itself will take some time...maybe several years...but most areas have seen the worst of it, other than commercial real estate and retail services.  Alot of retailers who got bailed out of the 4th Q of 2008 and 1st Q of 2009 in their debt repayments have only delayed the inevitable.  Some of these guys are going to fail over the next couple of years.  Cheers!

[bargainman]

I don't agree with Tilson's assessment.  He's expecting significant further downside in pricing.  I don't think that will happen.  I think you will continue to see pressure in pricing as more homes come onto the market and the second round of ARMS reset, but purchases of distressed properties should ease that pressure over time and banks will continue working with mortgagees. 

 

What are the details behind ARM resets?  My understanding was that they would reset to something close to the market rate at the time.  Since the market rate is about as low as it was 5 years ago, won't they just reset at the same rate, thereby not increasing payments?  The loans I'd be more concerned about were the option ARM(?) ones where people had the option to only pay the interest payment for 5 years and now must pay down principal.  Or are those the ones that are really resetting?

 

Thanks

[prevalou]

extract from the most recent Wells Fargo (big player in the ARM market through Wachovia) 10Q on ARMS recasts:

 

"Due to the terms of the Pick-a-Pay option payments loans, we believe there is little recast risk over the next three years. Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balance prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $1million in the remaining quarter of 2009, $3 million in 2010 and $6 million in 2012."

Much ado about nothing!

[Guest Broxburnboy]

Zerohedge on housing subsidies:

 

http://www.zerohedge.com/article/guest-post-americas-stealth-stimulus-plan-allowing-its-home-owners-be-deadbeats

[Santayana]

extract from the most recent Wells Fargo (big player in the ARM market through Wachovia) 10Q on ARMS recasts:

 

"Due to the terms of the Pick-a-Pay option payments loans, we believe there is little recast risk over the next three years. Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balance prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $1million in the remaining quarter of 2009, $3 million in 2010 and $6 million in 2012."

Much ado about nothing!

 

So basically they are saying they only expect 5-10 loans to recast all of next year?    And why don't they mention 2011?  I think there has to be a bit more too it than this.

[ERICOPOLY]

extract from the most recent Wells Fargo (big player in the ARM market through Wachovia) 10Q on ARMS recasts:

 

"Due to the terms of the Pick-a-Pay option payments loans, we believe there is little recast risk over the next three years. Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balance prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $1million in the remaining quarter of 2009, $3 million in 2010 and $6 million in 2012."

Much ado about nothing!

 

So basically they are saying they only expect 5-10 loans to recast all of next year?    And why don't they mention 2011?   I think there has to be a bit more too it than this.

 

Remember that:

1)  they are only talking about the number of loans reaching the 125% recast trigger

2)   it's pretty hard to grow the original principle balance to 125% if we're talking about a loan that's only a few years old and where the interest rate was very low to begin with (a very low interest rate means that even if you pick the minimum payment option 100% of the time, it will still take a while for the original balance to grow to 125%).

 

 

And they do in fact mention 2011.  Here is the full quote (inclusive of 2011).  I'm also including the part about their portfolio of ARMs recasting:

 

Based on assumptions of a flat rate environment, if all eligible customers elect the

minimum payment option 100% of the time and no balances prepay, we would expect the following

balance of loans to recast based on reaching the principal cap: $1 million in the remaining quarter of

2009, $3 million in 2010, $1 million in 2011 and $6 million in 2012. In third quarter 2009, the amount of

loans recast based on reaching the principal cap was minimal. In addition, we would expect the following

balances of ARM loans to start fully amortizing due to reaching their recast anniversary date and also

having a payment change at the recast date greater than the annual 7.5% reset: $2 million in the

remaining quarter of 2009, $39 million in 2010, $44 million in 2011 and $72 million in 2012. In third

quarter 2009, the amount of loans reaching their recast anniversary date and also having a payment

change over the annual 7.5% reset was $9 million.

 

 

They are also proactively working with the obvious train wrecks to keep them on the rails:

 

 

We also are actively modifying the Pick-a-Pay portfolio. Because of the writedown

of the PCI group of loans in purchase accounting, our post merger modifications to PCI Pick-a-Pay

loans have not resulted in any modification-related provision for credit losses.

We also have taken steps to work with customers to refinance or restructure their Pick-a-Pay loans into

other loan products. For customers at risk, we offer combinations of term extensions of up to 40 years

(from 30 years), interest rate reductions, to charge no interest on a portion of the principal for some

period of time and, in geographies with substantial property value declines, we will even offer permanent

principal reductions. In third quarter 2009, we completed 19,148 full-term loan modifications, up from

18,465 in second quarter 2009. The majority of the loan modifications are concentrated in our impaired

loan portfolio. As part of the modification process, the loans are re-underwritten, income is documented

and the negative amortization feature is eliminated. Most of the modifications result in material payment

reduction to the customer.