Saturday, March 1, 2008

Foreclosures rising at an alarming rate

The chart above comes from Mish's site which I highly recommend. Link below.

This is a picture of a screen from Washington Mutual showing the performance of a section of their loan portfolio. Keep in mind this is not representative of all of WAMU's loans.

That being said these numbers are frightening. Everyone wants to know how bad the foreclosure crisis is. Well I think these numbers say it all. What is frightening about this is the fact that these loans were done with tighter lending standards. The credit scores were all over 700 which is considered to be excellent credit. These are not your average subprime buyers folks.

Take a look at the increase in foreclosure rates over the past 7 months. The foreclosures have gone from under 1% in July '07 to over 13% in Jan. '08. These type of numbers are flat out frightening!!! The scariest thing about this is the high credit scores of the buyers!!!

If these types of foreclosure rates continue then you are bound to see an all out depression in the housing market. This is why I ask all of you to be be patient and don't listen to the realtors telling you "prices have dropped and now is the best time to buy!!!".

My take is now is the worst time to buy!!! Its just a matter of time until prices are affected by these alarming increases in foreclosures. Think about it for a second. If you live in a neighborhood where everyone bought for 500k and then there are 3 people that lose their house in the neighborhood to foreclosure. What does the bank do with these foreclosures??? They want to dump that house as fast as they can. The fastest way to do this is to drop the price dramaticaly sometimes by 30-50% and find a quick buyer either through an auction or a realtor. Banks do this because they have no desire to keep these houses on their books. The result of this is the comps in these neighborhoods will then be 40% lower.

The most frightening part of this chart to me is not the foreclosure rate. Its the drop off of the percentage of people that are 60 days late versus the percentage that are 90 days late. 3.24% were 60 days late on their mortgage payments in JAn. '08 while only 1% were 90 days late. What this tells you is people are walking away from their house when they are 90 days late. With the loose lending standards at the time where people had no downpayments the smartest thing to do is just walk away and mail the keys back to the lender.

Charts like these are what keep me up at night. If I was an honest realtor I would advise my clients "please do not buy!!!". I would be a broke realtor with this approach but at least I could sleep at night knowing that I gave my clients good advice.

Friday, February 29, 2008

UBS expects bank losses to reach $600 billion

Wow what a day in the markets today. The DOW ended up down over 300 points today. This was the fourth straight monthly loss on the DOW. this hasn't happened for 5 years. Much of the losses are a result of housing related issues.

UBS started the day out with some "wonderful" news. Banks are expected to lose more then 600billion dollars as a result of the subprime collapse.

As you can see banks have only written off $181 billion to date. That means we are only about a third of the way there folks. This also does not include the expected CC defaults as a result of the consumer being swallowed up in debt.

What this means to you and the housing market is there will be less money to lend because your banks have lost billions.
It was reported on CNBC(or CNBS as I like to say) that the banks will cut lending by 2 TRILLION dollars. Thats Trillion with a T not a B. Needless to say this is not good for the housing market. How does that effect the buyers? It means they will tighten lending standards and they will further scrutinize mortgage apps. because they are staring off the edge of a cliff.

I fully expect that a year from now it will take 20% down and excellent credit scores in order to buy a house. So when you are in Cali or Florida or in Baltimore/DC ask yourself one question when a realtor is showing you dozens of houses listed at $700,000. How many people have 20% to put down which would be $140,000 plus an excellent credit rating to be able to qualify and buy these houses. The answer? Not many.
As a result, you will have a much smaller potential buying pool of homebuyers and they will have massive inventories to pick from. When you combine these two forces and combine it with the massive increases in foreclosures it creates "The Perfect Storm". As these banks continue to pile up foreclosures and their capital keeps shrinking with huge writedowns they will be forced to sell these homes at HUGE discounts. So you may ask how much worse can it get? Look at the Arm reset chart above and you can see the subprime resets peak in March of this year and continue throught 2008. This does not include the Alt-A and prime mortgage defaults that I plan on discussing later this weekend.

The bottom line? The banks simply can't afford to take anymore risk because they are in debt up to their eyeballs and bordering on insolvency. As I said yesterday you will see many banks fail because their books of mortgages are larger then their capital base. If too many of those mortgages on their books fail then their capital is GONE.
I suggest you look at your personal banks mortgage exposure and see how involved they got in subprime. Banks in the bubble areas like CA, NV, FL are vulnerable. Try to stick with a larger instituion or a smaller conservative bank that didn;t do a lot of subprime.
Well $181 billion in losses down and it looks like another $320 billion to go. This will only put more pressure on housing prices. The weakening market isn't helping either!!!

Thursday, February 28, 2008

Ben Bernanke warns of bank failures

What a day in the stock market today. Ben Bernacke testified in front of Congress today and warned that some smaller banks could fail as a result of the credit/housing crisis. This can have ripple like effects when it comes to purchasing a house. Its great if you're looking. Its BAD if you are selling.

Why?? Because this will most likely result in rates going higher. A 30 year mortgage rate today is 6.05% vs. 5.47% a month ago. These are still below historical norms. I expect them to go much higher. Why?? The bond market is keeping the rates on the 10 year elevated and a new risk that has crept up in the last few weeks. INFLATION.

Oil closed at over $102.00 a barrel. If oil stays over 1$00 a barrel then this will mean $4.00 gas this summer which will put further pressure on the consumer. there is usually a 2-3 month delay for increases in oil prices to be fully priced into what you will pay at the pump. Gold was also over $970 an ounce reaching yet a new record high.

Inflation is now everywhere milk is now $4.00 a gallon. this is 30% higher then a year ago. Inflation is increasing prices everywhere. Higher oil,food, mortgage payments in combination with higher interest rates will eventually result in a massive drop in housing prices because the average american can only afford so much. If inflation continues to grow then the FED will be forced to do something that will destroy the housing market. The FED will have to raise interest rates in order to strengthen the dollar and keep inflation in check. this will be a devestating blow to anyone holding a home or building them.

The next step in this cycle:


It will be here soon so be patient. Incomes are simply not keeping up with inflation and the banks are tightening their lending. Consumers can only do so much. Many are paying two mortgages because they cannot sell their old home and have already moved into a new one.

Housing inventory is now over 10 MONTHS. This is the highest level ever since they started keeping track of inventories. Be patient fellow buyers. The price drops have just begun!!!

Tomorrow I will talk about what signs of what to look for in terms of finding a bottom.

Wednesday, February 27, 2008

What to do with your money while you wait to buy your house?

As a potential homebuyer I have often struggled with what to do with my downpayment as I wait for housing prices to drop. I have read many trading and investor reports and there are many different opinions on how to approach this.

The first thoughts many may have is to put your savings into a money market fund. During this period of market volatility I would advise against this. Many money market funds have tried to increase their returns by purchasing CDO's that are filled with subprime mortgages. These CDO's during the housing boom were very attractive to money market funds because they offered a tremendous return to these funds. Since these CDO's were AAA rated money market funds assumed they were safe. As the housing bust hit this turned out to be a huge mistake!!! Many of these CDO's will eventually end up being close to worthless because the forclosure rates are so high both in subprime and even prime mortgages.

As a result many of these CDO's are unable to be sold in the credit markets and will eventually be written down as losses. When this happens money market funds will have to write off all of their CDO exposure and as a result take huge losses to their capital. Some of these funds could become insolvent due to the subprime exposure!!!

If you are looking for a safe money market fund then I would advise you to invest in
Vanguard Prime Money Market Fund ticker symbol (VMMXX). they have virtually zero subprime exposure and is one of the most conservative money market funds out there. Treasury funds like symbol (SHY) are also good because they are made up of government backed treasuries.

Another thing to consider is putting the money into a CD at your bank. CD's are FDIC insured up to 100k. This means the government will insure your money if the bank happens to go under. If you have more then 100k then spread it out over many banks because the FDIC will not insure anything over 100k in any one account!!!

If you are looking to speculate in the market with your savings I would suggest making it a very small percentage of your overall cash and make sure its diversified. My current trading account is many made up of about 10% precious metals, 30% long in some biotechs and the rest is in short funds which offer returns if the stock market goes down. These funds are highly leveraged so if the sector you shorted drops 1% then on average your ultra short fund will increase 2% in value. My current short holdings are symbol (QID) Which shorts the Nasdaq top 100 technology stocks and symbol (SDS) which shorts the S&P index.

I am currently short because I don't think the market has fully priced in all of the losses of the financials and I am short tech because I think the consumer is tapped and does not have the money to go out and buy a $500 I-phone when their overpriced housing payment is due every month!!

I must stress that the majority of your holdings should be in cash and/or treasuries because the market can be very unpredictable. I hope some of you find this usefull and if you have some more ideas then feel free to share them in the comments section!!!

Tuesday, February 26, 2008

Case Shiller index home prices dropped 8.9% in the Q4

The Case-Shiller index is one of the best guages when looking at the trends in home prices. Today the Shiller index shpwed that nationally prices dropped 8.9% in the fourth quarter versus last years Q4. There were only 3 markets that showed flat or rising prices of the top 20 US markets that the index uses to come up with its price analysis. the three cities that showed growth were Portland, Charlotte, and Seattle was flat.

This was the WORST decline in the 20 year history of the Case-Shiller index. this is an excellent tool to use when trying to guage how the housing market is trending. I am sure that many of you have realtors telling you"now is the time to buy" because "prices have never been so low!!!".

To put this in to perspective the last housing bust was in 1990/91. Housing in some areas in California dropped 30% plus in value. This means whats happening now is a worse then 1990. IMO the declines have just begun and its never smart to try and time a bottom. Especially when its one of the biggest financial decisions you will ever make in your life. This trend downward has shown ZERO signs of slowing based on this data.

Until you see a trend of several months where prices have flattened you should find a nice place and rent. Remember, When you buy a house you are still renting except its from a bank. You own nothing until its paid off. So who cares wether you rento from a bank or a landlord.

Put your money that you saved for a house into a CD and wait. It will be well worth your while.

Monday, February 25, 2008

How much should I pay for a house?

As a potential homebuyer I was always confused as to what is a fair price to pay for a house. After many readings and years of research I learned that historically the average homebuyer typically pays 3 times their income for a house.

In some of the bubble areas on the coasts homebuyers have paid 10 times income for a place to call their own. The only way this happened was through poor lending standards. Banks and mortgage brokers started to approve loans without documented income and offered "subprime loans" that offered very low payments for two years at a low interest rate but then escalated to higher interest rates that became unaffordable for the average buyer.

This type of lending is now gone. Banks have had high foreclosure rates which has resulted in tighter lending standards because a lot of their assets are tied up in loans that are going to never be paid back.

My advice to all of you is to wait until the lending standards have had a drastic effect on home prices. Many sellers have not realized the credit crunch and its effect on peoples ability to lend. When you are looking for a house make sure your offers are close to 3X income and don't hesitate to lowball sellers!!! Many are starting to get desperate and you might get lucky and they will accept your offer.

I expect these offers to be taken at a much higher rate as we get into the colder months of 2008. when the spring/summer housing sales are a bust sellers will start to panic.

In a nuthsell, be patient, underbid, and don't be in a rush. According to the most recent housing stats 30% of homes are underwater versus what people payed for them.