As I Made Very Clear In March, US Housing Has a Way to Fall

From Bloomberg, early in the morning you get the usual, inaccurate
analyst chatter: Sales of Existing Homes in U.S. Probably Climbed on
Tax Credit

Sales of U.S. previously owned homes
rose in May to the highest level in six months as buyers rushed to beat a
June tax-credit deadline, economists said before a report today.

Purchases
of existing houses, which are tabulated when a contract closes,
increased 6 percent to a 6.12 million annual rate, according to the
median of 73 forecasts in a Bloomberg News survey. To receive a
government incentive worth as much as $8,000, buyers must have signed
contracts by the end of April and need to complete deals by the end of
this month.

Credit-induced gyrations will make
the underlying health of the market difficult to determine over the next
couple of months. A slump in builder shares since early May signals
investors are concerned the damage caused by the end of government
stimulus, mounting foreclosures and unemployment
will exceed the benefits of lower mortgage rates.

Then the actual report comes out: Existing
Home Sales in U.S. Unexpectedly Fell to 5.66 Million Rate in May

June 22 (Bloomberg) — Sales of U.S.
previously owned homes unexpectedly fell in May, a sign demand was
probably pulled into prior months before a June tax-credit deadline.

Purchases
of existing houses, which are tabulated when a contract closes,
decreased 2.2 percent to a 5.66 million annual rate, figures from the
National Association of Realtors showed today in Washington. To receive a
government incentive worth as much as $8,000, buyers must have signed
contracts by the end of April and need to complete deals by the end of
this month.

The decline raises the risk the
retrenchment following the expiration of the tax credit will be deeper
than anticipated. A slump in builder shares since late April has
exceeded the retreat in the broader market on concern the damage from
the end of government stimulus, mounting foreclosures and unemployment
may cause renewed weakness.

Now, this is the BoomBustBlog version from March of this year where I
made it crystal clear that housing will fall further and significantly.
The governmetn incentives are just market interference and pricing
distortions, prolonging the pain: It’s
Official: The US Housing Downturn Has Resumed in Earnest

Let’s take a look at some charts
sourced from the upcoming BoomBustBlog subscriber “A
Fundamental Investor’s Peek into the Alt-A and Subprime Market”should
be released withing 24 hours or so. This release will include all of
the raw data necessary for users to run their own calculation and draw
their own conclusions. update, which

Click to enlarge

…

In the chart above, you can see where
CA has made some progress interms of appreciation. CA, FL, and NV
account for nearly 50% of nationwide price damage. Let’s take a closer
look…

As you can see, even the effects of
HAMP and QE in California are starting to wear off. Florida never broke
positive ground, it just got worse at a slower pace. California’s
housing market may get hit even harder as that state government is
literally insolvent – and the effects of that insolvency will probably
be taking root in the upcoming quarters in terms of diminished services
and government employment.

These illustrated negative facing
trends were easily discernable 3 months ago when I dissected the Case
Shiller resutls graphically, see
If Anybody Bothered to Take a Close Look at the Latest Housing Numbers…

The chart below illustrates the
seasonal ebbs of month to month price changes.  On a month to month
basis, we see hills in the spring and summer and valleys in the fall and
winter. During the onset of the bursting of the (first) bubble, this
cycle was compressed, but was still there. and lasted throughout the
bubble. With the onset of the government stimulus (ex. housing credits
and MBS market manipulation), the peaks were significantly exacerbated.
Now we are entering into the winter months again, and guess what’s
happening, as has happened nearly every winter cycle before. The only
difference is that this dip is extraordinarily steep! I would also like
to add that the month to month price changes coincide exactly with the
S&P 500 move downward and upward for 2008 and 2009, to the MONTH!
What a coincidence, huh? If this relationship holds,,,, well you see
what direction the month to month lines are going and how steep they
are, don’t you?

As you can see when we drill down
into the month to month  numbers, the improvements either weaken
significantly or disappear into numbers that show further declines – and
this is in the face of government bubble  blowing!

Let’s chop the data up using bar
graphs that give the reader a greater feel for the seasonality of the
moves, and you will still find the latest numbers showing what looks
like a downtrend, again…

Remember, the CS index measures
matched sales pairs. That means that it attempts to follow the same
properties being sold, so the seasonality
will mean much less than if one were simply measuring transactions,
irrespective of the property. The seasonally adjusted numbers look more
positive, but still show a downtrend. Since I could not find the
specific methodology on the “de-seasoning”, and I am easily able to
discern the seasonal trends over time, I am much more comfortable with
the raw index data.

Less than a week later, I expounded on
this thesis with “The
Reality Check for Bank Investors, Mortgage Investors and Home Buyers”

In the meantime, the collateral behind these loans are still trending
downward in value after many hundreds of billions of US tax dollars
thrown at the situation! For residential values, see
It’s Official: The US Housing Downturn Has Resumed in Earnest, –  
If Anybody Bothered to Take a Close Look at the Latest Housing
Numbers… and “A
Fundamantal
Investor’s Peek into the Alt-A and Subprime Market”.
For commercial property values, see CRE 2010
Overview 2009-12-16 07:52:36 2.85 Mb.

Of course, this data invalidates the findings of the government SCAP
stress tests for US banks (see links towards the bottom of this post).

Now, on to the latest data available for Alt-A and subprime mortgage
performance.

The following informative reports, data sets and spreadsheets from which this post’s findings are derived are available to download for paying subscribers. The Alt-A Report is the full text from which certain datapoints were culled to create this blog post. ALt-A and Subprime Loan Performance Summary for Q4-2009: Details and summarizes both the quarterly performance and changes from last quarter for retail and professional subscribers Q4-2009 Subprime Data Sheet: For professional and institutional subscribers, presents the full data sets behind the analysis to allow you to run your own numbers. Q4-2009 Alt-A Data Sheet: For professional and institutional subscribers, presents the full data sets behind the analysis to allow you to run your own numbers.

The Facts as reported by the FDIC and the NY Federal
Reserve Bank
(their numbers, not mine)

• Foreclosures on First Lien Mortgages increased from 11.5%
  as of 31st
  October 2009 to 11.74% as of
  31st January, 2010.
• Mortgage charge-off rates on Prime loans and Alt-A loans
  increased by
  25bps and 21bps to 7.66% and 12.23% respectively over the same period.
• Delinquency rates for first lien mortgages on the other
  hand
  decreased by 7bps to 5.6%, for the quarter ended December 31,
  2009.
• While Net Charge-off rates for Alt-A loans increased by
  2.12% points
  q-o-q to 30.49% as on 31st Dec 2009, delinquency rates
  dropped by
  27bps over the same period to 12.1%.
• In the case of Subprime loans, Net Charge off rates and
  Foreclosure
  rates, both rose to 44.6% and 15.6% respectively during 4Q09, compared
  to 42.9% and 15.4% during 3Q09.
• Delinquency rates declined from 26.4% in 3Q09 to 25.3% in
  4Q09.
• Net charge off rates for HELOCs rose 13bps to 3.34% during
  4Q09 while
  delinquency rates had a negligible decline.
• Net charge-off rates and delinquency rates for Business Loans
  (C&I
  loans) marginally declined during 4Q09 remaining more or less constant
  at 2.5% and 4.5% respectively.

  Delinquency rates under CRE loans remained steady during 4Q09 at
  8.8%
  when compared with 3Q09. While delinquency rates for
  multifamily
  loans did not show any drastic changes in 4Q09, net charge-off rates
  under construction loans increased considerably from 6.3% in 3Q09 to
  8.4% in 4Q09

  Credit cards had a better quarter with net charge off rates and
  delinquency rates showing marginal improvements in 4Q09. Net charge off
  rates declined from 10.2% in 3Q09 to 9.5% in 4Q09, while delinquency
  rates declined from 6.6% to 6.4% over the same period.

• Other consumer loans showed a healthier 2.7% net charge off rate in
  4Q09 as against 3.2% in the previous quarter. Delinquency rate in this
  segment also improved marginally, declining by 19 bps to 3.5% in 4Q09.
• Net charge-off rates and delinquency rates for Other loans
  marginally increased. While net charge off rates increased from 1.7% in
  3Q09 to 1.8% in 4Q09, Delinquency rates remained constant at 1.1% over
  4Q09.

This is all against a backdrop of what was increasing home prices in
many (if not most) MSAs for the quarters in question, which is a
definitively positive development for it was the drop in home prices
that precipitated much of the financial malaise of the last few years. Click
any graph below to enlarge.

The direction of home prices has a very high correlation with
foreclosures and delinquency rates (as well as unemployment), not to
mention the trillion dollars or so of direct and indirect fiscal and
monetary stimulus. While the delinquency data definitely shows a
positive uptrend, when taken in light of what it took to get it and its
correlation to home prices and employment (must read Are
the Effects of Unemployment About To Shoot Through the Roof?), I
believe we are definitely in a wait and see scenario with a potentially
negative outlook.

In analyzing the performance of Alt-A and subprime loans, it is
best to look at things against the backdrop of housing prices for the
comparable period.  As you can see, the trend for pricing is
down for both the last quarter and December of 2009, and from my
anecdotal research and
extrapolation from the data sets will be down Q1-2010 as well as for
some time after that. Thus, it is fair to say that the collateral
behind
these loans will continue to be challenged. As a result of this in
combination with stubbornly high unemployment, there will probably be a
decent amount of pressure on delinquencies. Things have not gotten
better from a fundamental or macroeconomic perspective, thus at this
point I do not see a sustainable upward trend. As I stated earlier, we
are in a wait and see mode.

As you can see, the residential housing uptrend is now apparently
over, and we are resuming the downward decent.

Let’s look at the improvement in delinquencies and losses as compared
to home prices in the grand scheme of things, a birds-eye view so to
speak…

Now, hopefully all can see what I mean in terms of the recent
downtick in 30 delinquencies.

Loss Severity and Potential Loss Severity According to the Most
Recent Data Points

Alt-A Loans

• Total loan value of Alt A loans declined from $615 bn in 3Q09 to
  $590 bn in 4Q09, maintaining an average FICO score of 705 in both
  quarters.
• In 4Q09, nearly 43% of Alt A loans had least one late payment over
  the past year, while 3Q09 had nearly 40.7% of such loans. In Florida
  nearly 57.2% of Alt-A loans had at least one late payment over the past
  year in 4Q09 followed by Nevada with 53.9% and California with 48.7%.
  The percentages were comparatively lower in 3Q09 at 54.5%, 50.9% and
  46.5% respectively.
• Nearly 8.2% of Alt A loans were 30-89 days past due during 4Q09,
  marginally higher when compared to 8.1% in 3Q09. During 4Q09, Rhode
  Island and West Virginia witnessed the highest delinquencies with 11.1%
  and 10.6% of loans 30-89 days past due, respectively.
  Alt A loans 90+ days past due increased to 12.1% of total loans in 4Q09
  compared to 10.1% in 3Q09. Nevada and California had the highest 90+
  days loans past due at 18.4% and 16.9% of total loans, respectively in
  4Q09.
• Total Alt A loans past due stood at 16.3% of total loans as of
  December 31, 2009 (30-89 days past due loans and 90+ days past due
  loans) compared to 14.6% as of September 30, 2009. Additionally, in
  4Q09, 11.5% of Alt-A loans were under foreclosure, marginally higher
  than 3Q09 share of 11.1%. Share of REO loans were 3.0% in 4Q09, compared
  to 3.2% in 3Q09. There was an increase in the share of “Alt-A loans in
  risk of default based on pro-rata share” (based on weighted average
  foreclosure / past due loans and REO loans for each state with weights
  based on average loan outstanding at each state) from 34.3% in 3Q09 to
  36.6% in 4Q09.
• As of December 31, 2009, approximately 43.3% (43.0% as of September
  30, 2009) of Alt-A loan outstanding originated on or before 2005 while
  35.0% (35.2% as of September 30, 2009) and 21.7% (21.8% as of September
  30, 2009) of loans were originated during 2006 and 2007,
  respectively.  With S&P Case Shiller declining by nearly 17% , 28%
  and 28% since 2005, 2006 and 2007, respectively, most of these loans
  are still underwater and there has not been much improvement in view of
  the fact that average LTV at origination for Alt-A loans has been
  constant at 81% in 4Q09 as well. To estimate current LTV for Alt-A
  loans we have used housing price decline for each of these states
  (based on S&P Case Shiller Index with weights based on percentage
  of loan origination for each year) and LTV at origination to determine
  current LTV. As seen from the table below current LTV for Alt A loans
  in U.S is at 111.5% with California and Florida (which together account
  for 53% of Alt-A loans) having one of the highest LTV ratio at 115%
  and 126%, respectively. LTV for Alt A loans remained more or less
  constant compared to 3Q09.
• Note:
  The “total” line is
  actually a simple average.

Subprime Loans

• Compared to 3Q09 when almost 66% of subprime loans had least one
  late payment over the past one year, 4Q09 fared worse with an increase
  in the category to 67.1%.
• This is a very interesting tidbit that many probably did not
  realize. The total value of subprime loans outstanding drifted from $421
  bn in 3Q09 to $403 bn in 4Q09 with a constant average FICO score of
  616 in both quarters.  California and Florida together
  constituted nearly 24% and 11% of total subprime loans
  followed by New York and Illinois. Despite these demographics, in
  Florida and New Jersey nearly 75.9% and 74.5% of subprime loans had at
  least one late payment over the past year. It appears as if the
  California/Florida coastal state combo are no longer the loss leaders
  in the subprime malaise. It is getting worse, and it is spreading!
• As of December 31, 2009, 15.9% of subprime loans were 30-89 days
  past due, an improvement from 16.4% recorded as of September 30, 2009 (I
  sense this mostly due to the acceptance of short sales by the lender,
  which will end up as losses through the income statement – eventually).
  Mississippi and North Carolina witnessed the highest
  delinquencies with 19.7% and 19.5% of loans 30-89 days past due,
  respectively. Loans 30-89 days past due for California and Florida
  stood comparatively better at 11.6% and 11.9%, respectively. Again,
  the malaise is spreading outward and beyond the highly damaged coastal
  states.
• At the national level, Subprime loans 90+ days past due
  worsened materially and significantly in 4Q09 at 20.2% compared to 17.7%
  in 3Q09. Nevada and Massachusetts having the highest
  90+ days past due at 27% and 26.5% of total loans, respectively
  California and Florida were stood at 24.6% and 18.7%, respectively as of
  December 31, 2009. Again, the malaise is spreading outward
  and beyond the highly damaged
  coastal states.
• Total loans past due for subprime stood at 34.3% as of December 31,
  2009 compared to 32.9% in September 30, 2009. Foreclosed and REO loans
  stood at 13.9% and 3.7% (the
  REO numbers are highly suspect due to many reports on the ground
  indicating that banks are refusng to take back delinquent properties),
  respectively in 4Q09 as compared to 13.5% and 2.3% in the previous
  quarter. Overall, in 4Q09, 54.3% of subprime loans are in risk
  of default based on pro rata share (based on weighted average
  foreclosure / past due loans and REO loans for each state with weights
  based on average loan outstanding at each state), a deterioration
  compared to 3Q09 share of 52.6%.
• As of December 31, 2009, nearly 49.5% of current subprime loan
  outstanding were originated on / before 2005 while 35.2% and 15.3% of
  loans were originated during 2006 and 2007, respectively.  These
  percentages stood 49.2%, 35.5% and 15.2% respectively as of September
  30, 2009. With S&P Case Shiller declining by nearly 17% , 28% and
  28% since 2005, 2006 and 2007, respectively most of these loans are
  still underwater and there has not been much improvement in view of the
  fact that average LTV at origination has been constant at 84% in 4Q09.
  As seen from the table below, the current LTV for subprime loans is at
  111%, with Michigan and Arizona having the highest LTV at 147%
  and 141%, respectively (again, the malaise is spreading
  outward and beyond the highly damaged
  coastal states). LTV for Subprime loans remained more or less constant
  compared to 3Q09, due to the short-lived upward blip in home prices.

Note: The “total” line
is actually a simple average.

As can be seen from the
chart below (3Q-09), there are still plenty of losses to be taken in
these loan categories.

So banks are doing well,
after all their stock prices have went up over 100% from last year’s
lows, right? You see, I am a fundamental investor, and the fundamentals
say many of the banks are nothing but big, black, sinkholes. The stock
market has decided to “all of a sudden(ly)” disagree with this
assessment. I wonder why?????. Of course FASB has allowed them to
absolutely ignore everything in all of the charts you see above.

Comments

[barkingbill]

there is nothing wrong with the title, or style...understanding some of the details here is another story, but that is my problem. 

[Sespian]

I appreciate the work. As long as you keep pointing to the facts and correctly analyzing the trend, I don't care what style you post in. Some ZH contributors post half-clad models with their charts, others rant against TPTB incessantly, so you point to the fact that you've been right...it's your post. I say keep on telling it like it is whatever style you want. Besides some newer members may not know your track record before they read one of your posts, but they definitely will by the end. ;)

Anyone hating on accurate FREE analysis is wearing their jealousy on their sleeve.

Thanks Reggie!

[bingocat]

Reggie,
You look at a lot of data, and comment on it, and this is not a bad thing. Your commentary tends to fit what you want to say rather than the data you present, but that is a matter of wanting a headline. You say now that in March you said that "housing has a ways to fall" (while your article quoted above says "I believe we are definitely in a wait and see scenario with a potentially negative outlook", which some might see as a slightly different prediction). The data you presented did show a relatively dire present/past situation, and you noted in at least a few places that this meant the banks were in trouble (without analyzing what the data meant (given cycle-todate changes in both market assumptions, market data, bank reserves, and method of profit generation)). Your analysis concluding that "housing has a ways to fall" (or that we were "in a wait and see situation with a potentially negative outlook")  was based off data which "showed" that housing was getting worse - i.e. the future is going to be worse because the past from 6mos before to 3mos before had data or data trends which were not positive.

Your analysis made a few assumptions which I think are faulty:

1. You assumed the data could be analyzed at face value. I believe this is not the case as banks have avoided declaring foreclosure in many cases simply to avoid having to put it in the stats. Once it gets there, it weighs on housing prices, making mortgage payers feel more 'justified' in resorting to strategic default, and depressing housing prices for the inventory they are trying to get rid of. All of which means that delinquency data will get better before housing clears, but more importantly, it means that one cannot rely on the data provided to show what is really the case, even in the past. Past housing recessions/depressions have been regional, not national. Now both the housing depression is rational and the banks are national. IF the banks are hiding their losses (which seems to be a core assumption around ZH), it means existing housing data does not accurately portray the situation.
2. Your other analytical mistake was simply reading backwards in time. Delinquency data, implied LTV data, Case Schiller "trends" over a quarter ending a quarter or two ago, and other data which spots what someone had decided was "fact" in the past (when in actuality, "data" is only what one collects, interprets, and decides to show) are just that - facts in the past. Such "facts", even if valid, correct, and relevant historically, do not necessarily point to future outcome. It may well be that everything you note is completely correct, AND housing prices continue to fall. However, your analysis of the past will not have been comprehensive enough to show why such a fall in housing prices was indeed likely or inevitable. It is coincidental, not showing cause.

An appropriate conclusion might say something like "BECAUSE housing prices have continued to go down (Case-Schiller) in the face of substantial government housing market stimulus, and BECAUSE there is such substantial inventory (need to show this), and BECAUSE new household growth and personal income growth per household is not rising off its lows (would need to show this), it is highly unlikely that the purchasing power of the mass of households which have not been subject to foreclosure, short sale, income loss, overly significant asset loss, and who have not taken advantage of recent housing stimulus (need to show all these numbers here) and who are somewhat price insensitive will outweigh the selling power of those who are also somewhat price insensitive and feel obliged/forced to sell (either because they HAVE to move, or the bank HAS to sell its foreclosed inventory, or whatever (show numbers for shadow inventory)).

I think good analysis on how prices will evolve will involve investigation into household profile and expected household formation among different income and asset profiles based on analysis of pent-up demand for household formation over the next few/several years based on, among other things, pent-up 'demand' for marriage breakup, pent-up household formation due to adulthood (or school graduation), pent-up household formation due to increase in employment or employment income, etc. matched against shadow supply (in its broadest sense), tempered by perceived affordability and some input as to the expected behavioral constraints of the masses. Example: the households most able to "afford" a new house purchase are the ones who have held their house the longest (low basis, low monthly payment vs income therefore higher expected financial savings, high equity therefore higher ability to buy). They are also the people who have seen their 401ks devastated when that actually means something, their household size is getting smaller rather than bigger (kids leaving the nest), and their countdown to retirement has suddenly been put on hold. These are precisely NOT the people who are likely to be looking to upgrade.

I have zero qualms with the conclusion. I believe housing prices will not see meaningful long-term recovery. However, I think the analysis has to match the conclusion.

Personally, I believe housing prices will not see meaningful long-term recovery because there is an inventory problem (too much was built), and because there is an income problem (lots of people have less income than they want/need to buy/move up/etc). And the cyclical pressure for private-sector delevering (a long-term macro effect) creates financial savings, not asset-based savings. I think this implies a structural decline in the houshold home ownership ratio (and marginal changes here have a HUGE effect on marginal sales over a multi-year period). The combination of the three is too large to combat the pool of capital lying in wait to buy cheap properties unless buyers decide to become long-term rental unit owners rather than flippers, but those financial decisions are really carry-based decisions rather than medium-term capital gains decisions. This required change in understanding of what home ownership and real estate ownership is will take time.

[Thunder Dome]

Only rational explanation for people who actually think housing is turning around---Stockholm Syndrome.

[starfish]

Reggie, go with it, give us more of the funk!

[Trailer Trash]

Reggie,  Thank you for your fine analysis as usual.  And, I don't have a problem with the "I told you so's".  Just like TV commercials, if it annoys, it is remembered.  Also, for me, it has become some sort of game. Do I want to bet with or against Reggie? Anyhow, everybody else at ZH has a personality.  Why shouldn't you? 

[jamesandruth]

"If repentant, a man may be forgiven for being wrong, but NEVER for being right."

Good work, Reggie.

[painequalschange]

Waaaaait a second -

If California LTV is 111%

and prices around me have dropped 15%

THEN - Homes are fairly priced right now and I should go buy one!

Los Gatos, here I come.

[I need more asshats]

Los Altos much better choice or Los Altos Hills even better.

But don't believe everything you read from the ZH contributors.

[painequalschange]

Too rich for me!

[Votewithabullet]

Good work Reggie, perro they dont want you at Bloomberg...nappy hair is not allowed.

[The Franchise]

Reggie, fantastic analysis as always and kudos to you for sticking to your guns and not backing down. I must fifth the notion of the bragging though. Act like you've been here before. Your work speaks for itself, let it. Great work as always and thank you very much for sharing.

[tony bonn]

is there a reader's digest version?

[ColonelCooper]

The Dickens of economic analysis?  Just shittin you Reggie, +1 on the read, -.5 on the title.  BUT, MOST IMPORTANTLY:  Thanks for the FREE analysis.  For what you're charging me to read it I don't care if you name it, "ColonelCooper molests dead collies."

[Sad Sufi]

Reggie,

I appreciate your analysis.  Good to see some reality with respect to the house prices trend.

SS

[starfish]

http://www.urbandictionary.com/define.php?term=asshat

made me laugh...

[Scarecrow]

Reggie your titles suck. Stop with the back door bragging. It's a real turn off and makes me not even want to look at your stuff. It comes off as extremely arrogant. We get it, we all know you're smart and you work hard, and your work shows it.

Why not let your work speak for itself instead of always insisting on a long title with you bragging about how you're always right or how you called it a long time ago?

[I need more asshats]

You actually read his stuff?! I can't make it past the first few sentences. Talk about overly verbose. Reggie could be a redundancy engineer for the space shuttle design team.

I just read the comments. And laugh.

[I need more asshats]

"As I Made Very Clear In March, US Housing Has a Way to Fall"

Of course you did oh grand oracle... You are the Meredith Whitney of the small time bloggers. Care to show us your tits sweetie?

Just joking. hehehaha hum.

[SwapThis]

Reggie

I do read your stuff & enjoy it.  You do a lot of work for those who don't have the time.  It is good, and profitable I might add, to be right.  And I have had many a good laugh while industry pundits try to sidestep the realities you have been so kind as to highlite in your posts.

I dont read your stuff for the headlines anyway.  Continue to get it right, and I will continue to tip my hat.  Thanks to you and a few others who have not drank the 'recovery' KoolAide, I have ridden the SRS to victory today and several other big days since May.

Via Con Dios Amigo

ST