Delinquency Rates

Foreclosure rates

Loans at or near negative equity

Related articles by Zemanta

• Here’s Why Jumbo Mortgage Delinquencies Are 50% Above Average And Rising (businessinsider.com)

Image via Wikipedia

Just back from the Fisher Center for Real Estate and Urban Economic’s semi-annual symposium on all things real estate.  (FCREUE is the real estate department within UC Berkeley’s Haas Business School.)

Ken Rosen is the Center’s oft-quoted co-chair and quietly advises real estate investment funds with over $300 million in assets.  Most of the time these symposiums take a very high-level view of real estate:  it’s an asset class to be compared to other assets, and the focus is usually on institutional investors and broad real estate segments.

But with the housing melt-down, recent symposiums have been very much about the lowly residential market, both national and local, albeit within the wider context of the economy as a whole.

Rosen almost always delivers a fact and slide-packed economic forecast. It’s a big part of why I go.  Here are some of his current observations and predictions:

• The Shape of the Recovery:
  • Chances of a fragile recovery:  55%.  We’ve already had a big bounce; he expects a slowdown for the rest of the year (This is  a broken “W”)
  • Chances of a moderate recovery:  35% (This is the “U”)
  • Chances of a mild recession:  10%, (Think an “L” with a sinking bottom.)

• Jobs: He thinks the job situation will turn around by the end of 2010 (other speakers weren’t so sure.)  San Francisco has already started adding jobs.

• Interest Rates:  Rosen thinks that the Fed is already missing the boat on inflation and that it’s inevitable.  Just as important, he thinks that the Fed should already be raising short-term interests, though he thinks it’ll keep them at near zero for another six months or so.

“Two years from now, short term interest rates will be back up to 4%.”

As for 30 year fixed mortgages, if rates go up to 6%, the real estate market will probably still be ok.  If they go to 7%, we’re in trouble.

• Home Prices. US Single family home sales will look good for the next few months but then will slow towards the end of the year.  Lots of people are coming back on to the market because they see movement and because of the tax credits.

And now the takeaway:

“If you feel secure [in your job], now is a good time to buy because interest rates are going to go higher and prices probably won’t go much lower.”

Oh, and one last thing:  Short China real estate. They’re in a massive bubble of their own.

Related articles by Zemanta

• The View From Space: 2010 (pegasusventures.net)
• No bubble in the real estate – Shaun Rein (chinaherald.net)

Back in the still-uncertain days of September 09, every market pundit had his or her own letter for what shape the recovery would take. I blogged about Ben Bernanke’s “U,” Liz Ann Sonders‘ “V,” and Nouriel Roubini’s “W” here. Though one could argue the jury is still out, I think it’s fair to say that Liz Ann won round one.  The recovery is looking and feeling like a “V”  — and in fact is falling pretty much within historical patterns. (Full disclosure — I had my money on Nouriel.)

I recently spent 20 minutes listening to her most recent webcast, and it all sounds pretty seensible.  What I like about Sonders in particular is that she’s basically a contrarian. So many people are betting against the stock market’s phenomenal rise right now — and in favor of bonds — that she thinks that the bears are refusing to accept the fact that a solid recovery is in place.  I like the way she puts it in a related article:

Skeptics are often the loudest folks in the room, and the bear case is often the more “intellectual” case, but the market has a tendency to reward the minority view, not the majority view.

What’s all this got to do with San Francisco residential real estate?  One of her points touches on a theme that I’ve sounded here recently. As everyone knows, interest rates are likely to rise as the economy starts to strengthen and the Fed starts turning off the easy credit spigot.   Sonders is not predicting the stratospheric rates that occurred in the early 1980’s.  Nevertheless, it doesn’t take much of an increase in rates to have a significant impact 0n the amount of house you can buy.

Say you’re thinking about borrowing $700,000 on a 30 year fixed rate loan at the current rate of 5.25%.  Your payment would be just under $3,900 a month.  Now say that interest rates increase by just half a percent to 5.75%.  Your monthly payment would increase to just under $4,100 a month.  Maybe a difference of $200 a month doesn’t sound like that much:  a couple of fancy restaurant dinners would would cost the same.

But look at it this way.  Say that the the maximum you’ve decided — or the bank’s decided — you can afford to pay each month on your mortgage is $3,900 a month.  Now that half percent increase in rates means that the maximum loan you can qualify for is around $662,000.  That’s a loss of $38,000 in the amount you can borrow and the amount of house you can buy.

It’s also a heck of a lot of fancy dinners.

Related articles by Zemanta

• Investors Should Give the Recovery Some Respect — but Watch for Rising Rates (dailyfinance.com)

For the record, I’ve never suggested to anyone that buying a home is a good “investment.”  You can do much better in the stock market and probably even in bonds.

However, I am beginning to think that if you’re going to shackle yourself to a home, now may not be a bad time to buy.  And I think the NY Times article supports my position.

Why do I think so?  Most of the articles I’ve been reading suggest that the worst is over in terms of price declines, this article included.  That doesn’t mean that prices couldn’t drop another 5 to 10%.  But it’s a fool’s errand to try to predict the bottom (or top) of any market.

At the same time, the consensus seems to be that interest rates have nowhere to go but up, given the huge stimulus that the government’s been giving to prop up the economy.  One can argue whether and when the government should choke off the spigot of easy credit, but when it does, rates are going to have to go up.

Here’s the takeaway from the NY Times article:

“Instead of betting on home prices, you make a bet on whether money will become cheaper or more expensive, allowing you to buy more or less house.”

Now  it’s true that increasing interest rates ultimately lead to declining prices as tighter credit drives down demand.  That’s the theory anyway.  But after the huge declines we’ve already seen, it’s anybody’s guess as to when, where, or how that will happen.  As the article says, “don’t go there. Maintain your focus.”

Here’s a graph from mortgage-X.com on historical blended (ie. fixed, arms, etc.) mortgage rates.  Should make people who can qualify for a mortgage in this still-crazy market feel pretty good, no?

Condo/TICs hit their all-time highs about a year later than homes did — in July 2008.  But they’ve fallen from their highs almost exactly as much as homes have.  Condos/TICs were down 17%, just one percent better than single family homes.

For those who prefer their data on a per square foot basis, the picture is pretty much the same.  The all-time high was $711 — reached in November 2008 and the price per square foot stood at $592 at year’s end, also a drop of 17%.

While condos/TICs ended the year at the same point, the pattern has not been the same. Condos/TICs have been stuck near the bottom of their 2009 range after bouncing up in the first quarter. Homes, on the other hand, appear to have bounced up and stayed up.

What’s in store for 2010 remains anybody’s guess, but on the streets it certainly feels like spring is in the air.  There are more listings coming onto the market and more people looking at them.  Will that translate into sales and higher prices?  That’ll depend on macro-economic trends I’ve discussed elsewhere, but one thing’s pretty clear:  interest rates are heading higher, as evidenced by the Fed’s recent increase in the discount rate. If the economy continues to strengthen, that trend will continue.  And, for many people, that will result in less buying power and reduced affordability.

The View From Space

The View from Space – 2010

Ken Rosen is a smart guy.  He’s the co-chair of the Fisher Center of Real Estate and Urban Economics at the Haas School of Business at UC Berkeley and the investment adviser of choice to some of the biggest players in real estate, from banks to insurance companies to REITS. Ken might not be able to appraise your house, but he could tell you how each sector of the real estate economy has fared anywhere in the country, and probably in many parts of the world.

Once or twice a year I spend the day in a windowless hotel conference room listening to Ken and some of the biggest heads in the real estate biz expounding on the state of real estate. These guys (and they are mostly guys) look at real estate through the lens of global macro-economics and finances.  Want to know where interest rates are going?  They study yield curves on T-Bills and monetary policy in the capitals of Europe.  This is “the view from space.”

I reported on Ken’s predictions from November of 2008 here. (Remember, we were already in deep doo-doo, though things got worse through the first quarter of 2009.)  Before moving into his predictions for 2010 and beyond, I thought it would be useful to see how well he did on on his forecasts for 2009:

The Ken Rosen Scorecard for 2009

• Chance of a deep recession: 70%. Bingo.
• S&P 500 at year-end under a deep recession: 850. Actual:  1115.   Woops (but who said the market was rational?)
• The dollar: “Will continue to do well.” Nope, it lost ground.

Not a great batting average you say?  Truth is, I’m cherry-picking here.  Overall, Rosen’s message in November 08 was that things were improving, but that there would be volatiility and a long, slow recovery in housing.  Notwithstanding our brush with death in March  — Rosen put the chance of a deep recession at 5% — his prediction on that aspect of the market seems to be holding up well.  As for the dollar, given the gaping chasm that faced the global markets in the early months of 2009 – led by crashing and burning US financial institutions – the dollar’s decline shouldn’t be a surprise.

And as for the stock market and its amazing recovery, given what still seems to be looming on the horizon, I just can’t figure that one out at all.

Rosen’s Predictions for 2010

In terms of the shape of the recovery, Rosen estimates the chances of a “broken W”  — read fragile recovery – at 65%.  This is where I’m putting my money folks.

He estimates the chances of a more robust recovery at 25%, and that of a long , Japanese-style recession at 10%.

Expect a slow, fragile recovery, a bottoming out of the housing market, and rising long-term rates.

Estimates for the Stock Market, Year End 2010

S&P  1150; Dow 11,000

Advice for the Home-Buyer:

If there’s any good news here, it’s that Rosen thinks that the sector will come back fastest is single family housing.

Here’s the takeaway quote:

“Take advantage of the windfall tax credit and low interest rates if you’ve got a good job”

Rosen thinks that prices have bottomed (I’m not so sure).  But it does appear that

REO’s (properties taken back by the banks) have declined as a percentage of all sales, and that should help to stabilize prices.

From a socio-economic perspective, housing affordability has increased significantly due to low interest rates and price declines, and that can only be viewed as good if you believe that widespread home-ownership is a public “good.” (I do.)

What could go wrong?

In a moment of brilliant serendipity, Rosen’s co-chair at the Fisher School, Bob Edelstein — no small brain himself –  happened to sit next to me at lunch.  In the next 30 minutes we covered everything from wine to Waziristan.  His outlook was not as sanguine as Rosen’s.  We didn’t get into details, but my impression was that Edelstein was more concerned than Rosen about a jobless recovery coupled with higher interest rates driven by enormous deficits.

Once again, the magic eight ball says:  “Ask again later.”

Ask again later