Is the Housing Bust Over?

We can all breathe a sign of relief. The housing crisis is over.

At least that was the headline on the editorial page of the Wall Street Journal earlier this month when Cyril Moulle-Berteaux, a managing partner of Traxis Partners LP, a hedge fund firm based in New York made his case that the housing market is hitting bottom right now.
Some of what he says makes sense; some sounds more like tip-toeing past the graveyard; but his arguments are worth looking at so we can look back in six months and judge his claims historically.
Remember, while we review Moulle-Bereaux's arguments, that the Journal's news pages are known for straightforward and bias-free reporting, but the paper's editorial pages are widely regarded as being in the service of politicians and corporate America.

Moulle-Bereaux prefaces his arguments with the caveat that he does not expect prices to return to 2005 levels; in fact he feels that may not happen for another 15 years. He is merely stating that the downward trend in sales and pricing is not intensifying as the financial and mainstream press would have us believe.

The current housing bust, he says, is actually nearly three years old. Sales hit their peak of 1.4 million annualized sales in the summer of 2005 and have dropped 63 percent since then. Housing starts are down more than 50 percent which, when adjusted for population growth, takes them back to the previous lows of 1982.

But, Moulle-Bereaux argues, the very factor that caused the bust in the first place is going to save the market: affordability.
Americans enjoyed virtually unprecedented access to homeownership during the 1990s and early 2000s. It took 19 percent of average monthly income to service a conforming mortgage on an average home purchased during that period. But, as prices increased by double-digit percentages in many parts of the country during 2005 and 2006, mortgage costs rose to 25 percent of monthly income. And for first-time homeowners the cost of homeownership went from 29 percent of income to 37 percent and buyers who actually intended to live in the houses they were purchasing began to pull back.

The good news, bad news is that prices have now fallen an average of 10 to 15 percent - much more in some previously hot markets - while incomes have continued to rise; (while there is a school of thought that would argue strenuously that real wages have actually been stagnant, we will grant Moulle-Bereaux his point) while mortgage rates are down 70 basis points from their peaks. Guess what, housing has returned to the 19 percent of monthly income level for repeat buyers and 31 percent for the first-time homebuyer.
"In other words," Moulle-Bereaux says, "homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in."

Inventories are being brought down because construction activity has been falling for such a long time that new home sales are about on a par with home completions, and sales should be pulling ahead, perhaps by as much as 50 - 100,000 units annually, in a matter of months. He speculates that inventories will drop even faster to 400,000 - or seven months of supply - by the end of 2008 which will impact on prices, although they won't stop falling entirely until inventories reach five months of supply, a level that has historically signaled tightness in the market, sometime in 2009.

When the rate of price declines comes down "there will be a wholesale shift in market perceptions." The market is valuing houses, i.e. the collateral for existing and future loans as though the declines will continue for another two to three years. When this perception changes it will have significant impact on the view of future delinquencies, foreclosures, and credit losses that lenders expect they will face.

Fewer homeowners will be underwater on their mortgages and will thus have less incentive to walk away from their obligations.
Reaching further out, a slowing house-price decline could stabilize if not increase the value of a lot of the securitized mortgages that have ravaged the financial markets with write-downs and subsequently reported losses. "Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy."

So is Moulle-Bereaux a prophet or merely unduly optimistic. Let's mark our calendar to take another look at his predictions in six months to see how well they hold up.

Foreclosures Cost Lender, Homeowners, the Community and You BIG BUCKS

Reprinted from the Morgtgage Daily News:
The cost of a foreclosure, it turns out, is pretty staggering and we wonder why lenders and the investors they represent aren't jumping at a solution, any solution, that would allow them to avoid going to foreclosure whenever possible.
According the Joint Economic Committee of Congress, the average foreclosure costs $77,935 while preventing a foreclosure runs $3,300.

The cost of preventing a foreclosure is not easily categorized.
We have seen figures from non-profits that the cost of averting a foreclosure through the use of credit counseling from a non-profit agency approved by the Department of Housing and Urban Development can range from a bit under $1,000 to $14,000 and we don't quite know what to do with that large and disparate range.

But the $77,934 cost to foreclosure figure seems fairly easy to document and, compared to others that are widely bandied about - from $58,000 to 30 percent of the pre-foreclosure value of the house - seems reasonable.
First of all, the cost does not accrue totally to the lender. The homeowner has a typical loss of $7,200 which includes loss of equity in the property, moving expenses, and perhaps some legal fees.

Those neighbors living in close proximity to the foreclosed house suffer $1,508 in losses from the decrease in the value of their own home.

The local government loses $19,227 through diminished taxes and fees and a shrinking tax base as home prices decrease.

Investors who buy short sales tell us that the big lenders are unwilling to sell property or take payoffs for more than a 15 to 20 percent discount so these numbers are closely in sync.

There is a figure that is usually not taken into account - cash reserves. Bank regulations require that lenders put aside a percentage of their capital to cover potential losses. That amount, whether $100,000 or $500,000 is that much less that the bank has to loan to others and means more lost revenue.
It is obvious that no one is a winner in the foreclosure game. But we wonder if lenders and their real estate agents are not exacerbating the situation for all involved through their property management and marketing policies.

Car Loan Delinquencies
Seen as result of mortgage woes

DETROIT - Rising delinquency rates on car and truck loans have some industry analysts concerned that subprime mortgage troubles could spill into the automotive finance business.

Lehman Brothers analyst Brian Johnson said his analysis of auto loan-backed securities sold by Ford Motor Credit Co. and GMAC Financial Services showed some higher delinquency rates for October and September compared with recent years.

"As unemployment remains low, this deterioration in the auto ABS credit conditions may be evidence of a likely spill over of the mortgage woes onto the auto credit world," Johnson wrote.
With the housing market continuing to sink, investors are bracing for more write-downs at financial institutions, which have already written down tens of billions of dollars this year.

John Casesa, managing partner for the Casesa Shapiro Group, an auto industry financial advisory firm, said there's no question the mortgage woes will spill into car and truck financing.
"The only question is how big a worry it is," he said.

We are pleased to announce
that

BRIAN J. SPILLANE, ESQ

HAS JOINED

as "OF COUNSEL"

Formerly with Cushing & Dolan, Brian J. Spillane, Esq. will continue to focus his practice in Residential and Commercial Conveyancing, representing buyers, sellers and lenders and resolving complex title issues.

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