On "Rock Bottom" Housing Prices

For all who claim that rampant inflation is up next, and home price deflation is over, I present the following charts for readers to ruminate on just how much higher existing home sales inventories are relative to some semblance of a trendline, in addition to a long-term chart comparing CPI with the median home price. Not only is there massive oversupply still, but the leverage induced price boom over the past 30 years still has a ways to go before it catches up with CPI, absent the impact of cheap credit (which is why Geithner will soon be personally handing out limitless Diner's Clubs, backed by the full faith of the worthless dollar).

P.S. the phrase "rock-bottom housing prices" was uttered 5 times on CNBC in the past 3 hours. Curious what the hourly quota is.





hat tip Lev Sphere: Related Content

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False recovery continues on the back of housing numbers

On today's release of housing numbers, Bloomberg reports more false positives on the economic recovery path. On the second straight month of pending home sales rising (up 3.2%), many are calling this the bottom, pretty much THE leading indicator that we are close to out of the woods. I mean, come on... housing got us into this mess, it'll get us out, right? A little noticed follow up though was that the Housing Affordability Index was also at record highs - basically, after a long period of restrained consumption people are reacting to lower home prices. 

Of course, this is not the basis for a sustainable recovery. With unemployment numbers climbing, mortgage spreads still significant and the threat of a deflation/inflation bounce, this is unlikely to change much of the reality of the situation we are facing. None of this is new to ZH readers but merely another indication of the false rally we're going through. 

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The Deteriorating Housing Backdrop, And Why The Wells Rally Won't Last

When thinking about banks, start with housing. The Homeowner Affordability and Stability Plan may slow foreclosures, and homebuyer Federal tax credits are stabilizing sales. But what matters more are home prices and defaults on existing loans:

* We expect additional home price declines of 15% at a national level. It has taken 35-40% home price declines in California to get sales moving up.

* For securitized mortgages, delinquencies continue to climb, and recovery values are tumbling (first charts). $750 bn in Option ARMs are deteriorating rapidly, as negative amortization must be paid down at reset (60% are in California, 10% in Florida).

* National Notices of Default are at a new peak, and a cycle-high 74% of such Notices are moving to auction (third chart), despite foreclosure prevention programs. In some cases, vacant homes are benefiting from the foreclosure moratorium; that does not seem logical, or sustainable.

* Bank-held mortgages generally perform better than securitized mortgages, which are 15% of the total, and 51% of all delinquencies. However, banks carry their mortgages at ~90 cents on the dollar, so there's little room for underestimating losses.

* Globally, financial institutions have lost ~$1 trillion of capital and raised ~$1 trillion. Whether it’s the IMF or the ubiquitous Nouriel Roubini, remaining writedowns are expected to be as large as losses already taken. As discussed last week, some banks will be able to earn their way out, but if their capital ratios are too low, it will be quite a tightrope.





The Wells Fargo divot and bank stress tests

With that backdrop and ISI Group's provisioning estimates, WFC provisions and charge-offs appear 30%-40% below expectations. WFC has the largest commercial real estate portfolio ($142 bn), the largest Option ARM portfolio ($93 bn, net of writedowns), $129 bn in second liens and $15 bn of exposure to off-balance sheet CDOs. So one would expect its provisioning and capitalization policies to be conservative. But when looking at loan loss reserves and a common measure of capital adequacy (next chart), WFC ranks in line or lower than other banks. On the chart, it looks like their ball hit a divot of some kind. Other bank provisions and earnings may stand up better to scrutiny. But the "World Cup" Stress Test announcement might not pass muster with markets if everyone ends up in Group A (*). The U.S economy is already worse than the Stress Test "Base Case", turning the test into something of a take-home exam. We expect more stress on US banks later in 2009, with Q1 perhaps being the high water mark for bank earnings this year.



(*) Newspaper reports indicate that the Treasury is considering a World Cup format for categorizing banks: Group A is fine and will be allowed to repay TARP. Group B is considered to have no major problem but "their ability to raise capital should be watched carefully" (i.e., no TARP repayment). Group C is short of capital and may need government capital. Group D is considered incapable of operating on their own (and usually includes, at least in the soccer context, such countries as Switzerland, Trinidad & Tobago, Korea, when not hosting, and Romania... PS to our European readers who lack the sense of sarcasm, Zero Hedge (full disclosure) is a big fan of Hagi and Popescu).

Big hat tip Mike and JP Morgan. Sphere: Related Content

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Housing numbers are starting to come in line

Housing numbers were just released and the message seems to be that the market is finally starting to reflect reality (at least with regards to housing starts). As you can see below, the "Authorized but not started" numbers are finally coming down - this reflects the gap between the market's leading demand expectations vs. actual demand and it is a good sign that the number has been decreasing especially in the 5 units or more category. 

"Housing started" numbers are roughly halved on a YoY basis but we still think there is room to fall on this as housing inventory months continue to increase. As David Rosenberg pointed out, even if housing starts fell to zero it will be a few years before housing prices stabilize; on that basis, it still seems prudent to see housing starts remain weak, if not dip down a bit more. 

As you would expect, home builders are taking it on the chin. Below, we track housing starts vs. the home builder ETF (ITB); even though it's an already low level, we don't see much hope for home builders going forward on a 6 month time frame.

Overall, it is a good sign that the housing market is closer to reflecting reality and should help alleviate some of the price pressure that we have been seeing, especially in the foreclosure market. However, we want to caution that this is far from a bottom; housing continues to be along for the ride and until household balance sheets clear up, it is likely to plod along supplied only by minimal demographic-driven demand.

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Housing isn't just bad, it's really bad

As Zero Hedge has already discussed, last month's housing numbers are hardly something to cheer about. Nouriel & Co. are cautiously optimistic - not outright calling a bottom but definitely seeing a glimmer of hope.

The problem is the story that the numbers tell; the current purchase numbers are strongly driven by foreclosure sales (45%) and with the significant price drop in average home price(15% YoY), it's clear that it's a case of buyers trying to call the bottom and catch the proverbial falling knife. Much like the equity guys who got excited by every mini rally in the DJIA over the past year, this is far from even being close to showing signs of life. Sphere: Related Content

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More bad news in good numbers

Existing home sales number were released this morning and on the surface, it seemed to be a solid win for the US - about time right? MoM existing home sales were priced into markets about a -0.9% clip but the numbers came out at 5.1% in the green. The NAR's numbers are pretty solid drivers for the USD and these numbers were being carefully watched as January clocked in at a buzz-killing -5.9% MoM.

However, the deeper story painted is not a promising sign.

Consider:
- over 45% of the sales were foreclosures or short sales
- median existing home prices fell 15.5% (in one month)
- inventories rose 5.2%
- most of the increase was concentrated in the Northeast, with the South also doing ok

The picture painted is one where newly desperate homeowners are joining the existing desperate homeowners selling into a terrible market and the market is flushing itself out with increasingly severe price cuts. February should be viewed as a brief break before the housing market continues to plunge. The significance of the increases being located mostly in the Northeast can be attributed to many things but one explanation that seems the most credible is that the unemployment picture is not as bad as the industrial heavy MidWest or the tech heavy West coast.


This is a key number to watch in the upcoming months as it will be a key indication of the effectiveness of the Fed and Treasury's recent moves. A housing market does not a recovery make but the story it tells should be a strong indicator of the bottom. Sphere: Related Content

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