How far are we from a bottom in U.S. home prices? There are many estimates that there could be another 10% or more for the national average and median prices to decline. This author estimated that 2010 had a most probable decline around 11% from December 2009, with further declines possible in 2011. Little decline has actually been seen as prices are quite near where they were nine months ago. However, in the past couple of months predictions of further price declines have increased. Two weeks ago I pointed out that the outlook for home prices may be degrading.
20% Price Decline to the Bottom?
Barry Ritholtz provides the following chart, originally from the New York Times, but updated for The Big Picture by Steve Barry.
For larger image, click on graph.
This decline is certainly within the possible limits I have discussed earlier in the year (see here and here) but the projection curve drawn by Steve Barry shows a much more gradual drop to the bottom than I have envisioned. I estimate that he is showing another 3.5 to 4 years to get 90% of the way there and 5-6 years to fully bottom out. My thinking has been that the drop to the final bottom will be much quicker, driven by the weight of foreclosures over the next one to two years. However, current market conditions are causing me to reconsider.
Could Housing Go Below “Normal”?
What has not been considered by either Barry or me is the recurrence of another depression for housing, such as occurred from WW I to WW II. What sort of economic disaster would cause home prices to decline 55% to 60% from here? That is what would happen if the decline reproduced the 1920 bottom.
Or, asking a different question: What sort of economic disaster would result if home prices declined 55% to 60% from here? In such severe deflation, most mortgagors would default and every mortgage lender would be insolvent. There would be no future TARP or other shenanigan that could accommodate that eventuality. This will be discussed further later in the article.
Under Water Mortgages
Calculated Risk has an excellent post about underwater mortgages. CR states that 4.1 million homeowners owe 50% or more than their house…
In February 2007 I suggested a 4% mortgage delinquency rate could trigger a decline in the entire housing market. Since that proved prescient, we should revisit the analytic tool behind that call: the Pareto Principle.
There is a whiff of euphoria in the housing market, a heavily touted confidence that "the bottom is in." It’s all roaring back--rising sales, multiple bids by anxious buyers, 3.5% down payments, low mortgage rates and the bonus of an $8,000 first-time home buyer credit (a gift from U.S. taxpayers). Housing Lifts Recovery Hopes (Wall Street Journal)
Foreclosure-related sales account for over 30% of all sales nationally, and over 70% in hard-hit markets such as Las Vegas, but like piranhas feasting on a school of weakened fish, nobody in the real estate business mentions the huge losses of capital and equity which created all these "bargains."
All we need for a complete bubble reflation is people avidly gaming the system… oh wait, we have that, too. A recent Time magazine cover story on Las Vegas contained this informative tidbit (courtesy of Michael Goodfellow):
(Realtor) Boemio specializes in short selling, in a particularly Vegas way. Basically, she finds clients who owe more on their house than the house is worth (and that’s about 60% of homeowners in Las Vegas) and sells them a new house similar to the one they’ve been living in at half the price they paid for their old house. Then she tells them to stop paying the mortgage on their old place until the bank becomes so fed up that it’s willing to let the owner sell the house at a huge loss rather than dragging everyone through foreclosure. Since that takes about nine months, many of the owners even rent out their old house in the interim, pocketing a profit.
Hmm, isn’t this the same recipe of froth, low down payments, cheap, easy mortgage money and scamming which got us in trouble the last time? Only the lenders lose, but then now that Ginnie Mae and FHA have stepped up to replace the disgraced, bankrupt shells of Fannie Mae and Freddie Mac, then it really isn’t the lenders taking the risks, it’s the U.S. taxpayer (again).
Note from dshort: Following up on yesterday's preliminary report on U.S. Light Vehicle sales, I've update the charts below.
For the past few years I've been following a couple of transportation metrics: Vehicle Miles Traveled and Gasoline Volume Sales. For both series I focus on the population adjusted data. Let's now do something similar with the Light Vehicle Sales report from the Bureau of Economic Analysis. This data series stretches back to January 1976. Since that first data point, the Civilian Noninstitutional Population Age 16 and Over (i.e., driving age not in the military or an inmate) has risen 61.7%.
Tens of thousands marched Sunday through Central Moscow to honor Boris Nemtsov, outspoken opposition critic of Vladimir Putin who was murdered Friday night and thousands more mourned today at his funeral (though notably not Putin himself) and more pointedly, The BBC reports,several EU politicians and Russian opposition leader Alexei Navalny were barred from attending the funeral. Hours later, Mr Navalny accused the Russian authorities of responsibility for the murder, adding to slew of competing theories involving everything from the CIA to Islamic militants and Ukrainian nationalists...
In an effort to arrest hyperinflation and general panic over rising food prices, Ukraine's Central Bank Hikes Benchmark Rate to 30 Percent. Ukraine's central bank will raise its benchmark refinancing rate to 30 percent from 19.5 percent, the head of the central bank said on Tuesday, as the bank tries to rein in rocketing inflation and persistent currency weakness.
The new interest rate, which comes into effect on Wednesday, is the highest for 15 years.
Central bank chief Valeriia Gontareva said in a media briefing that the decision was taken because the bank saw the "threat of inflation had risen strongly due to negative consequences from currency market panic".
The bank will also extend a rule obliging companies to sell 75 percent of their foreign currency e...
Despite low trading volume, a strong dollar, mixed economic and earnings reports, paralyzing weather conditions throughout much of the U.S., and ominous global news events, stocks continue to march ever higher. The world remains on edge about potential Black Swan events from the likes of Russia, Greece, or ISIS (or lone wolf extremists). Moreover, the economic recovery of the U.S. may be feeling the pull of the proverbial ball-and-chain from the rest of the world’s economies. Nevertheless, awash in investable cash, global investors see few choices better than U.S. equities.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then ...
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Chris Kimble's chart for KOL shows a recently beaten down ETF struggling to pull itself up from the ashes. As the chart shows, KOL has recently drifted down to levels not seen since the financial crisis of 2008-9.
Bouncing or recovering with energy in general, coal prices appear to have stabilized in the short-term. Reflecting coal prices, KOL has traded between $13.45 and $19.75 during the past year. Bouncing from lows, KOL traded around 2% higher yesterday from $14.26 to $14.48 on high volume. It traded another 3.6% higher in after hours to $15, possibly related to ...
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PSW Members - well, what a year for biotechs! The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down! The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months. What could go wrong?
Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys...it is time that something is put together for PSW on biotechs in 2015.
Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies. A number of companies have gone IPO which have drugs/technologies that fight cancer, includin...
Stocks got off to a rocky start on the first trading day in December, with the S&P 500 Index slipping just below 2050 on Monday. Based on one large bullish SPX options trade executed on Wednesday, however, such price action is not likely to break the trend of strong gains observed in the benchmark index since mid-October. It looks like one options market participant purchased 25,000 of the 31Dec’14 2105/2115 call spreads at a net premium of $2.70 each. The trade cost $6.75mm to put on, and represents the maximum potential loss on the position should the 2105 calls expire worthless at the end of December. The call spread could reap profits of as much as $7.30 per spread, or $18.25mm, in the event that the SPX ends the year above 2115. The index would need to rally 2.0% over the current level...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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