"I got two words for you, shut the **** up" Robert De Niro, Midnight Run
Am I the only person who has had it with all the "housing" and "subprime" talk? My god, it is almost as if nothing else is happening out there. When the media get stuck on something they are like Rainman obsessing about Wapner being on in 5 minutes. Let it go gang. For two years all we have heard is "housing must slow down" and "there are too many risky loans out there". Now that the housing market has slowed down and the home buyers with those risky (subprime) loans did exactly what we knew they would do, default, this is suddenly a big deal? Just in case you are not already sufficiently nauseated by the deluge of housing rhetoric out there, here is my one and only "two cents" on it. I want to go on record and say I am only posting on this topic as a response to emails I have gotten so I do not plan to comment further on this except to update this post much later to test its accuracy. Why? This is not really the big deal it is being made out to be. Some numbers:
- Approximately 80% of the mortgage market as "A" credit
- For "A" paper, the delinquency rate is in a comfortable 2.5% range.
- 20% of the market as "subprime" of all types and terms.
- Of the 20% slice, the Mortgage Bankers Association reported this week that some 13% of those loans were in some stage of delinquency, a number which has steadily risen over recent quarters.
- While alarming, the flip side is that some 87% of subprime loans are performing fine
- Only 6 percent of homeowners hold subprime ARMs (adjustable rate)
- Even if we hit a 20% default rate among subprime ARM holders -- a rate twice as high as the foreclosure peak after the 2001 recession, that is only about 1% of the national mortgage market.
Simply put, for homeowners out there 95 out of 100 of us are having no problems with their mortgages (or at least are not delinquent). So why the hysteria? Easy, we have 24 hour news coverage to fill and saying the housing market is "slowing down like expected" just does not capture a headline like "subprime carnage threatens to lead US into recession", does it? But it is as good an excuse as anything though, right? In mean, most people cannot follow (nor do they want to) the intricacies of the Japanese yen carry trade that the talking heads blamed the market sell off a few weeks ago on but, most people own homes so lets go with that, at least they can relate to it.
The reality is that unless you are one of the unfortunate "subprime folks" who are stuck, these headlines will have no effect on you. What is of note here is in the majority of excess defaults are the "no documentation" loans. These were mortgages given to folks whose credit was so bad they were not forced to provided credit histories and in return agreed to pay interest rates in many cases more than twice the national average. So, we are now supposed to be surprised they defaulted? Another oft overlooked detail of many of these loans is that those taking them were not required to provide proof of citizenship. While the exact number may never be known, how many of these defaults are people just walking away from homes after some of the immigration raids that have littered the news lately? Chances are these were bought with invalid social security numbers anyway so there is no actual risk to their credit rating or future ability to purchase another house in another town as fake social security cards are as easy to get as a ham sandwich. Basically you have a mess of subprime mortgages created by lenders who gave money to anyone with a pulse (I am sure we will get reports of dead people getting loans soon enough). Faltering home prices are likely to blame for another portion of the default of loans. Borrowers with little equity (5% or zero down loans) who face difficult economic times or rising monthly payments (adjustable loans) have little chance to refinance their mortgages or sell their homes in hopes of making full repayment if the market hasn't produced any "instant equity" for them to utilize. There is no easy way out, except to mail the keys back to their lender.
Now let's look at housing. Personally the gauge I look at the most closely is inventory. It is the most basic economic law, supply and demand. High supply is bad for sellers (this includes home builders) because the more homes sitting out there for sale, the lower the prices they then command. Since homes are valued on a "comparative" basis, the lower the price of the home for sale next to you, the less your home now becomes worth. The lower the supply, the higher prices homes then command and then all the above issues become moot as they resolve themselves. So, for me, inventory rules. Let's look.
Inventory (months of supply, New and Existing homes):Year --------------New------------- Existing
2002 ---------------5.8------------------ 4.7
2003 ---------------5.5------------------ 4.6
2004 ---------------4.1----------------- 4.3
2005 ---------------4.8----------------- 4.5
2006 (Jan) --------5.7 -----------------6.5
2006 (July)-- - 7.2----------------- 7.3
2007 (Jan) -------6.8------------------ 6.6
What can we deduce from these numbers? It would seem that the worst of the housing market was in July of 2006. It is my opinion that we in a trough now and probably will remain here until the new home inventory is worked off. As the new home inventory falls, buyers will begin to automatically work off the excess existing home inventory as by default less new home are available. The economy is strong and unemployment is low so there are no exterior factors pushing the market lower. The problems now were created by excesses on the part of lenders and homebuilders. Once they have taken their medicine, things will turn around.
Builder confidence in the market for new single-family homes receded in March, largely on concerns about deepening problems in the subprime mortgage arena, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. After rising fairly steadily since its recent low last September, the HMI declined three points from a downwardly revised 39 reading in February to 36 in March. This too is good news as pessimistic builders will refrain from new projects, further reducing inventory.
I hope housing turns around soon, if for no other reason I won't have to read or hear about it all day long....