A periodic blog dedicated to providing commentary and encouraging debate on topics in Economics and Finance.

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Age: 26 Occupation: Private Equity

Wednesday, October 24, 2007

Home Sales in Full-Fledged Rout: Disaster Continues

Courtesy of the Wall Street Journal... I guess it turns out that people really didn't plan on paying these ridiculously high mortgage payments after all. The market dried up after buyers ran out of "greater fools" to unload houses to. Oh yeah... and people actually have to pay something up-front to buy after all the piggyback (second mortgage) lenders croaked... (Can I put that 20% down-payment on my credit card?)

If you are thinking about buying - don't try and catch a falling knife - you'll probably end up with a nasty cut. Most analysts are not expecting housing to stabilize until 2009 at the earliest. The length of the "down-cycle" has a lot to do with the length of the "up-cycle," which leads me to believe that even these estimates are too optimistic. We had a 4-year boom... we may have 3 years left in a 4-year bust.

Why? Unlike stocks, people are very slow to take losses on their houses. They'll just "rent it out" until the market "comes back." These people represent "phantom inventory" that will jump into the market at the first sign of strength... creating even more downward pressure on prices. By not getting out when the can, these people end up riding the market all the way down to the bottom. To add insult to injury, they usually can't cover more than 60% of their "carrying costs" with rent, so they are losing money every month even as their house declines in value.

Let's make this another chapter in the vanquishing of the "housing tragedy" that locks young families out of homes in order to further enrich baby-boomers, whose national debt we'll have to repay in addition to funding their retirement.

Existing-Home Sales Tumble 8%

October 24, 2007 10:04 a.m.

WASHINGTON -- Demand for previously owned homes slid more than expected in September amid continued problems in the mortgage market, with single-family sales hitting their lowest sales pace in nearly 10 years.

Overall home resales declined to a 5.04 million annual rate, an 8.0% decrease from August's downwardly revised 5.48 million annual pace, the National Association of Realtors said Wednesday.

The August existing-home sales level came in well below Wall Street expectations for a 5.25 million rate.

The 5.04 million pace is the lowest since the association started accounting for combined single family and condo sales in 1999. Based on single-family sales of 4.38 million, the September figures are the weakest since January 1998.

"The credit freeze in August definitely impacted sales in September, particularly the jumbo [loan] side, so we have seen a large sales decline in the upper end of the market," NAR senior economist Lawrence Yun said.

The median home price was $211,700 in September, down 4.2% from $220,900 in September 2006. The median price in August this year was $224,400.

Mr. Yun said conditions in the jumbo loan market have improved, so he still expects 2007 to rank as the fifth-best year in terms of existing home sales. Prices are expected to ease about 1.5% from record high of last year of $221,900.

Inventories of homes rose 0.4% at the end of September to 4.40 million available for sale, which represented a 10.5-month supply at the current sales pace. There was a 9.6 month supply at the end of August, revised down from a previously estimated 10.0 months.

Existing-home sales tumbled in all regions. Sales dropped 7.0% in the Midwest, 10.0% in the Northeast, 9.9% in the West, and 6.0% in the South.

The average 30-year mortgage rate was 6.38% in September, down from 6.57% in August, according to Freddie Mac.

Write to Tom Barkley at tom.barkley@dowjones.com


dxm113 said...

With all of the weakness in the housing market, is it now a good time to go bargain-hunting for mortgage-lending stocks? I mean - some of the mortgage lenders have solid business fundamentals...right Or am I wrong - is the mortgage lending business too bubble vulnerable?

eternitus said...

There are exceptions to every rule (maybe the value is just too compelling)... but...

As a general rule, unless you are a sophisticated investor, I'd steer clear of any mortgage-lenders right now. The downside is just too ugly and too likely to occur to jump in.

I (and most analysts out there) think housing is going to be ugly for quite some time... remember, people actually have to be able to afford (and want to pay for their) houses over the long-term now that the "housing ponzi scheme" is over. People were willing to be "house poor" because they believed that someone else in the pyramid scheme would buy their house for even more in 2 years and make them rich. What now? Consider what happens to housing (and the economy) when all these ARMs reset, especially given super-high energy costs... It's just going to squeeze people even more. You need to wait for a bit more clarity before jumping in...

There have got to be better places to put your money to work (similar upside potential, way less dicey on the downside.)

Other considerations:

First, as with any investment, you have to have detailed knowledge of what the company actually does and have a grasp for the dynamics of the business (ever try to read a bank financial statement? You could have a Ph.D. in finance and really not be able to figure out what is going on.) second, nobody wants "non-prime" paper anymore, so that profit machine is gone (like dead forever gone). You can't expect pure mortgage lenders to return to their former profitability any time soon.

Full Disclosure:
I own Newcastle Investment Corp (NCT)(A Mortgage REIT).

Mortgage REITs basically own bunches of mortgages. NCT has been thrown in with all of the rest of the mortgage REITs who own lots of subprime sludge, even though subprime amounts to less than 6% of their loan portfolio (actually, most of their loans are commercial, not residential), and they bought the subprime securities at super-steep discounts.

Given NCT's investment profile, I'll take the 19% yield, which compensates me quite nicely for the "mortgagey" risks that I mentioned above, thank you very much.