Monday, March 20, 2006
Interesting FRB Paper
It does not take into account the real estate bubble, which will not offer any "soft landing" to those in the most inflated areas. Sucking that much money out of the economy will dampen consumer spending. In these areas, more than a few people have been using their home as an ATM and have been stripping equity from their houses. Many others will find that they now owe more than they can expect to receive from selling the home . The rise in risky loans with resets forces many people to sell or refinance, increasing supply. The overbuilding forces builders to offer incentives, thus forcing down resale prices. The flippers have bailed or are bailing, and smart investors are becoming wary of mortgage securities. Kohn of the Fed warned last week that the Fed was not going to return to an easy-money policy to bail out the housing market.
And banks are just beginning to realize that they cannot immunize themselves from all of this.
No matter how many times the justifications in this article are reprinted to explain why this really is just a pause, a breathless anticipatory interlude before RE prices resume their inexorable upward climb, those interest-only and negative-amortization option ARMs are going to reset. Banks are going to tighten underwriting anyway, which would exert a downward pressure on housing prices regardless of any other factor. There are inescapable and historically unique forces driving the market lower. This is not a bubble of perception popping - that bubble hasn't popped yet for the average homebuyer. This is a "no-can-buy" pop:
According to a report last week by the North San Diego Association of Realtors, prices have risen so high that just 8 percent of San Diego County families in February could afford to buy the median-priced home in North County, which was valued at $635,000.
The median price represents the middle of the price range; half the homes on the market sold for more, and half for less.Those willing to enter the condo market face marginally better numbers. At $371,700, the median-priced townhome was within reach of 25 percent.
At the same time, inventories are building up and sales are slowing.
Gee. When most people can't afford to buy, is it really surprising that sales slow? Banks were writing highly risky loans on the expectation that housing price inflation would insulate them and the borrower from risk. That is no longer true. Many of the new homes were being bought by speculators anyway, leading to a nasty initial shock when reality started to set in and those people started to exit the market.
Home building in hot markets has more of an influence on other markets than you would think. If builders are seeing significant sales lags in hot markets, they may end up pushed to sell more in less steamy markets and so will offer incentives and cut prices, pushing down a quieter market. Centex seems to be doing so in many areas, judging from ads. Go to their website. Click on an area. Look at the houses available, and then click on the item that says "houses available immediately" or something to that effect. It looks to me like some people are walking away from deposits on contracts. You'd be offering incentives too if your cash flow looked this weak (10-Q) and your CFO was leaving.
To end this on a much more positive note, Dingo got married. Apparently realizing that any wedding in the continental states would result in a crowd of raucous, totally socially unacceptable bloggers, he slyly went to Guatemala. So go be raucous and socially unacceptable and congratulate him!
Because of the jump in prices ("which according to all the real-estate junk-mail have nowhere to go but UP UP UP"), everybody I've talked to is stuck in their present places, unable to move anywhere except out-of-state. They just can't afford to buy & move at today's prices.
Plus, we've had about 10 years since the last real-estate crash, and these seem to run on 10-year cycles. I expect a lot of really cheap repos in a couple years, as the "House-as-Bottomless-ATM" types go upside-down before going broke.
It's going to be a fearful awakening. It wouldn't be so bad if most of the loans in some of these areas weren't no equity loans already and didn't have a payment reset within the next 3 years that will require most borrowers to sell or refi. If they are upside down in the house, they will have to sell.
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