Posted by Ray on August 21, 2009 under Main | 
All of this information about a housing recovery is just plain false. The biggest perpetrator of the housing recovery myth is CNBC and they actually ran this story today showing it is the lower priced homes moving, all other homes are just not moving, period.
There is simply no recovery in housing at this time and if this chart tells us anything is that the market will, at best, be flat for some time to come. However, I am inclined, as indicated in numerous other pieces I have written, that we still have a long way to go on the downside before things begin to level out. This means that banks, 81 YTD, are going to continue closing because they are losing money on these mortgages as people just walk away from homes that they cannot sell and are underwater in.
A full one third of all sales in July were of foreclosed properties, and as more foreclosures hit the market, you can only expect more downward pressure on prices. Foreclosures are only increasing, as we saw from yesterday’s Mortgage Bankers Association report, and that will mean more inventory.
I think that is proof enough that things are just not that good. I may have missed out on a couple of percentage points over the past week, but the market is going to come crashing down in the near future. Why, because all of the data supporting a bull run is over hyped and inaccurate at best. Housing is one of the data points supporting the bull’s case, but look at the data point and tell me that there is a recovery taking place.
Take a look:
|
U.S. Existing Home Sales Yr/Yr
|
| $0 – $100,000 |
Up 38.8% |
| 100,000 – $250,000 |
Up 8.7% |
| $250,000 – $500,000 |
Down 6.2% |
| $500,000 – $750,000 |
Down 8.9% |
| $750,000 – $1,000,000 |
Down 10.6% |
| $1,000,000 – $2,000,000 |
Down 23.3% |
| $2,000,000 + |
Down 32.4% |
|
Source: National Association of Realtors
|
As I have said numerous times before, burying and hiding problems through bogus accounting will only make the problem worse long-term. Enron tried it, MCI tried it, now we have the banks trying it through lax mark-to-market regulations. The FASB enacted the mark-to-market because it made sense, if you had to sell a security today you cannot just wait for a nonexistent price to come along, which is what the new regulations let banks do for accounting purposes.
One last point about this, ever since mark-to-market went away bank earnings have all been good. Do you see the problem? Frankly, real estate is still their biggest problem and the above information supports that theory.
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Posted by Ray on August 20, 2009 under Main |
This has been our main concern for some time, in the residential market, as Prime and Jumbo loans are getting ready to reset in the coming years. This, of course, is if they have not reset already because once the LTV, loan-to-value, reaches a certain point the interest rate automatically can reset. I am going off of memory, but I believe the LTV is about 120% or so that causes these loans to reset. We are there and then some.
Here is a disturbing figure, 1 in 8 homeowners are either delinquent or entering the foreclosure process in America, according to the Mortgage Bankers Association, MBA for short. That is pretty scary to say the least and with unemployment initial claims increasing over the last few weeks this number may increase. The good news is that sub-prime loans are being foreclosed on at a lesser rate than before, eventually everyone will be out of their homes and this number will go to zero soon.
However, we are talking about prime loans, these are fixed rate conforming loans with 20% down and good credit. This, my friends, is a major problem and one that we knew was coming for some time now. What this means is much more bad news in the coming months as many of these loans are securitized. However, the intervention of the government will more than likely lessen the impact of the growing problem, but it will drive the deficit higher, so much for Obama cutting his $1.8 trillion dollar deficit last night.
Here is what Jay Brinkmann, MBA’s Chief Economist, has to say:
“The rise in prime fixed-rate foreclosures can largely be attributed to unemployment” he said.
The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24 percent of all loans outstanding as of the end of the second quarter of 2009, up 12 basis points from 9.12 percent the first quarter of 2009, and up 283 basis points from 6.41 percent one year ago, the MBA said in its National Delinquency Survey.
The delinquency rate breaks the record set last quarter. The records are based on MBA data dating back to 1972.
So, nothing to see here, just move along as I am sure the media will spin this, somehow. I suspect they will point out that the sub-prime loans are not defaulting as bad anymore, they can’t go beyond zero, and completely ignore the prime mortgage problem. However, add this to commercial real estate, which is down 36% year-over-year a much further decline than residential real estate collapse, then the problems just keeps growing. Again, unemployment is the problem and until that turns we will continue to see further deterioration of the credit markets.
To illustrate this point, corporate defaults are through the roof this year, which is why I sold my high yield funds last week. According to the Financial Times corporate bond defaults reached 201 this year with $453B of debt. Compare that to last year where we had 126 defaults with a total of $433B and I think you can see the problem. The current default rate on high yield bonds is 8.58% this year, so far, and is expected to climb to 14.53% in 2010 taking out the prior record of 12.54% defaults in 1991 when junk bonds blew up big time.
As you can see, everything is fine, no problems at all. The markets are sure to continue its steepest market rally ever rising 49% since march, outpacing the 1929-1933 44% rally. I guess the new normal of a high unemployment, revenue-less, earnings-less, and growth-less recovery means that the markets can have the greatest percentage gain ever, in only 5 months, and should continue forever. I am kidding of course, this thing looks ugly and makes me question what is really going on.
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Posted by Ray on August 13, 2009 under Economy, Markets |
Correct me if I am wrong, but hasn’t real estate hit its bottom? According to CNBC, TV, Cramer said that real estate hit its bottom, ‘early’, in June and all other reports yesterday everything is fine and prices will go up,up,up! However, as usual, CNBC.com has conflicting stories for example, CNBC TV says bull market with hot economic growth and there is no risk in this bull market, but CNBC.com is awash with stories about the global markets are in trouble and real estate is in pretty bad shape. This is what makes me question the integrity of CNBC commentators, who I once respected.
Regardless, real estate is a mess and July was no exception with foreclosures setting yet another record. Remember this is ‘another’ record meaning it was worse than June which means more pressure on the residential market when or if banks put those homes on the market. That is the crux of the matter, banks are holding properties, often referred to as the shadow market, and we have no idea exactly what their inventories are. Therefore, the sales numbers and inventory numbers mean nothing as there is hidden supply out there, unless they continue to destroy foreclosed home, yes banks are doing that.
All of the programs in place are simply not working and I would chalk this up to a waste of time and money considering most modified loans still defaults. As hard as this is to say, we need to let these homes be foreclosed upon, yes I am serious. This is one way of cleaning up malinvestments and people need to understand how to live within their means instead of trying to keep up with the Jones’s. Now, before you call me cold hearted or insensitive I need to let you know that I did have a family member lose their home with horrible consequences, but it was a matter of too much house without enough resources.
The foreclosure rate for July was up 7% month-over-month and up 32% year-over-year. What this means is more moratoriums are on the way and more federal rescue plans which are merely a waste of money. These programs only postpone the inevitable and will make future reports look OK in the short-term, but longer term it will simply create more bad data points. The market is telling us to let housing depreciate and propping it up will only prolongs the pain moving forward.
This data also feeds into my belief that the markets are overbought to such a high degree that I fear the next leg down will be horrific. This is why I moved mostly to short treasuries, non US dollar assets and cash only keeping 35% total in equities, enough to let me participate if I am wrong, but if I am right it will not destroy my portfolio. Either way you feel I would strongly suggest you invest defensively for the short-term. As usual, do your own homework and invest according to your goals and needs.
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