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Thursday, August 02, 2007

Alt-A Does Seem To Be Going Fast

(Setting the tone: Jim Rogers says that the finance-related collapse of the last couple of weeks wiped out over 2 trillion in global share values in this Bloomberg article. That sounds about right.)

Non agency Alt-A products are being yanked right and left. I think Deutsche Bank stopped quoting today. Taylor, Bean Whittaker (TBW) stopped. Try this broker thread. I'm sure agency Alt-A and portfolio Alt-A will still be around, but these are more carefully underwritten.

Without the stated Alt-A product CA and some other high-priced areas are toast. Any area with very high median price/income ratios is in deep trouble. That includes a chunk of the DC area, NJ, NY and some MA.

It makes me wonder what Countrywide is going to do. Their attempts to expand into new lending niches seem to be falling apart. The other thing they were doing was a lot of commercial, and that market is due for a sharp pull-back.

Also see Calculated Risk, for example here and here. The result of the changes in financing to date has been more to chop out about 12% of entry-level buyers, but the upper level buyers kept going. They are usually older and not first-time home buyers, and frequently had equity of some sort or another. Now some of that cohort is going to get a nasty shock, especially on refis. We are nearing the inflection point where the economic drag that was coming from the bottom 30 percent of income earners suddenly gets reinforced by a drag from 5-10% of the 70-95% income earners. These would be persons with high incomes and a high debt load who abruptly find that their debt-juggling act has fallen apart on them. About 1.5-2.2% of this group was already in trouble, but these were mostly those in the RE business. Now it will spread out quite rapidly in some areas.

I have the ugly feeling that the impact on the DC area will be major. There could be an event in some neighborhoods similar to the meltdown in list prices in the Salt Lake City area. The three-month median list price drop there really is over 7%, as bizarre and outlandish as that sounds. It's speculators racing for the exit, and the door is quite jammed.

What surprised me the most about the walkabout was the the conditions in North Carolina, which seem to be worsening rapidly. List prices in Raleigh have turned in the the last couple of months too. Now in that area prices only need to get back to about 2.7-2.9 price/income to stabilize, and they are currently somewhere around 3.3 - 3.1. But what about areas like Los Angeles and Orange County, CA? Orange County needs to go from a ratio in the eights at least down to the sixes, which is why in the last year list prices for the median (50th percentile) home have dropped approximately $60,000. There is a world of pain ahead in real estate.

The impact of these lending changes can best be seen by looking at the DC area. After a bad period, it had been stabilizing earlier this year. Now it has turned around and taken another sharp step downward, and problems and changes with Alt-A financing are going to reinforce the trend. What does a seller do when listing prices are dropping around 1% a month and the seller really needs to get out? Drop by 5%, right? So there is no end in sight...

If you doubt what I am saying, stop by Jim Klinge's Bubbleinfo.com. He's an excellent realtor in the SoCal area, and his last post is a large helping of reality. Anyone who has to sell anywhere and doesn't have a lot of experience in real estate would benefit by spending a few weeks reading his site. This is the kind of information and perspective a really good realtor can provide, and if you have to sell in many areas, you need to find a really good realtor providing this type of service. I have talked to quite a few screamingly delusional would-be sellers in the last few weeks in the NE. Unfortunately, the reality for them just got a bit worse.

One of the persons I spoke to was an older widow. Her home is appraised for about $500,000 by the delusional local municipality. Needless to say she cannot afford the property taxes. However, the house is obsolete and needs major updates, so in these circumstances a lender won't be able to extend a mortgage for more than about $270,000. To sell, she will need to list in the lower three hundreds, and she will have to keep cutting the price by about 3% a month to get out. It's rough news, and I don't think she will accept it. But if she doesn't, she will either lose the house to a tax sale or have to sell for a much lower price in the next couple of years. I feel sick at heart. Her other option is a reverse mortgage, but it will put her into a significantly worse financial situation overall. At her age, she may well have to go into assisted living (she really should be there now, or have a live-in caretaker or daily assistance) and she really needs to get as much out of the property as possible in order to have money to buy into a decent facility.

I wonder how many other areas in the NE have pushed themselves into the same situation? The big run-up in housing values, combined with an older population that really cannot afford to live there, has produced a situation in which home values are almost forced to break downwards because of demographics. The younger population simply cannot afford to buy at the current prices in this lady's area, and the older population cannot afford to stay in their own homes due largely to inflated property taxes. These municipalities have run up their costs and are now destroying their own property values.

DC area...I would have thought prices in this area would have had substantial support given the large and stable employment base in the federal government and its related contractors, lobbyists, etc. But it doesn't look that way from the data at the link...
There was a huge amount of speculation, and apparently debt load is an issue.
I heard on CNBC this morning that Wells Fargo has increased its rate on jumbo mortgages from roughly 6.7% to 8%. This will make homes in CA and other pricey areas that much more difficult to afford.
Oh, the price increases for risk are very real and escalating rapidly.

If you want to get an eyeful of this (which is new and startling), check out the differences in one-year ARM rates between the funny-money mortgage states such as CA and FL compared to the soberer states at the weekly HSH Trends release.

A lot of people are able to get similar products to the ones they were looking for in Alt-A, but at rates over 8-8.5%. So the carnage should be moving pretty swiftly through the Alt-A world. The GSEs will win the day, but of course no one really knows what they are sitting on either. It's a slam-dunk that some of their subprime written since mid-2005 are uglies.
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