Home Prices May Be Nearing Bottom, Bank Equities to Follow?

I remain optimistic that housing is nearing a bottom. Collapsing prices have created very good buying opportunities and a pick up in home shopper traffic. Add to the fall in prices, the recent sharp reduction in 15 and 30 year mortgage interest rates (now under 5%) and housing is becoming very, very cheap by any standard, including replacement cost.

My optimism on housing encourages me to be optimistic on banks, even in the face of all of the bad news about loan losses. In my judgment, most banks in the US have been trying to get out ahead of their actual losses by setting aside reserves greater than they believe will be necessary to cover their losses. They have been doing this, not to deceive investors, but to take the loan loss reserve issue off the table. If they can do this, then bank stock prices will turn higher for good because it will be clear that the worst of the housing debacle is behind us.

It is with this in mind that the upcoming earnings reports from the banks are of keen interest to me. There will be gains and losses on a reporting basis, but my eye will be zeroed in on what the banks do with the loan loss reserves. If they increase them appreciably, the turn in the banks is months away. If reserves stay near their current levels or rise only modestly, the turn in bank stocks may be near.

Today JP Morgan (JPM) reports. They are as important a bank as there is in this country. They will set the tone for those that are to come.

Over the next two weeks the following banks will report earnings. Marshall & Isley (MI), First Horizon (FHN), Bank of America (BAC), Northern Trust (NTRS), US Bancorp (USB), Bank of New York (BK), BB&T (BBT), Fifth Third (FITB), Key Banks (KEY), and Sun Trust Banks (STI). My guess is that there will be a mix of adjustments to reserves among these banks, but the stocks will all be treated alike. If JP Morgan and Bank of American report tame loan loss reserves, all the banks will rally. If the big banks have worse than expected numbers, all the banks will get hit.

Having said this, even if the loan loss reserves numbers are not good, I still believe the high quality banks are near a bottom. I believe this because I believe that real estate has gotten cheap enough that drive-by shoppers will increasingly stop in for a look, and when they do, the combination of price and mortgage cost will turn shoppers into buyers.

Disclosure: This blog is for information purposes only. Do not make buy and sell decisions based on this information. Please consult your own financial advisor regarding any issue discussed here.

Comments

[Rhett:]

Padon me, but - BULL!
Housing is nowhere near bottom. It has at least 20% more to fall to become "reasonably" priced.

Jan 14 08:53 AM

[msoori:]

Lets hope the housing is getting close to the bottom. However, the foreclosure rate rose in Gwinnet county, GA, according to teh county new paper. xmplary.blogspot.com/2... Rise in foreclosures is not a sign of hitting the bottom unfortunately.

Jan 14 08:54 AM

[The End is ...:]

Stop it, no, no more LOL, how many times have you thought this already, LOL, please stop, LOL

Jan 14 09:15 AM

[nobull:]

This is why I know housing is nowhere near bottom. There's still people like this who believe housing can only go up - any downturn is just a hiccup. Heck, genius Cramer even called a bottom in 2007!!!


On Jan 14 09:15 AM The End is Near wrote:

> Stop it, no, no more LOL, how many times have you thought this already,
> LOL, please stop, LOL

Jan 14 09:22 AM

[Can'tSpotAB...:]

I'm getting real tired of every pollyanna trying to call the housing bottom. Here's an easy way to tell we have reach normal, sustainable pricing:

1) I by a property with 20% cash down, no fudging on this amount of any kind or assistance.

2) I rent said property to a tenant at a market rate

3) I have positive cash flow day one after P.I.T.I and associated costs

Until that day is reached (and we are no where near it) we are no where near a bottom.

Period.... End of story.

Jan 14 09:44 AM

[Chemist29:]

omg an optimist! stop publishing! doom and gloom! 50% more to go from drop! Anyways, I hope you are right, but I might pick up a little BBT if this downturn keeps up, valuation is too compelling

Jan 14 09:52 AM

[Bill W.:]

Holy Moley! Now I get it! The fed is holding a huge amount of toxic MBS from the banks and the only way they can make these debt instruments viable is to induce inflation into the mix. If interest rates do, indeed go to 3.5 % then it is not a strech to see home prices increase at an accelerated level. For folks that have houses under water (mortgage greater than current market value) lower interest rates won't help much, but if low interest rates are sustainable, then the creation of a new housing bubble will certainly float all boats.

However, I think it is too early in the game to be placing any bets on housing. I think about six months from now, we will have a better picture of how things will work out.

Respectfully,

Bill W.

Jan 14 11:56 AM

[brpinion:]

One big reason loans will continue to default in mass is that no one can afford to sell their home. I live in a booming area of atlanta where a hugely successful residential/retail/hot... development broke ground 4 years ago. At that time condos sold by lottery (because there were so many willing buyers) for $430,000 to $490,000 are now being sold in foreclosure between $199,000 and $235,000!

Therefore, no one can afford to sell at a quarter million dollar loss. People can't move for new jobs or if their family expands. I have watched this disaster unfold and wonder if this is happening elsewhere. If you don't believe me look up "Atlantic Station" and the condo/hotel "Twelve" in Atlanta. Check out the prices on realtor.com

Jan 14 11:57 AM

[hoover:]

I can't count the number of times during the past two years that "housing is bottoming". Maybe it is, or maybe its getting ready to drop another 20%. But, I do agree that replacement cost, which is not dropping much, is a theoretical price support for housing. One could of course argue that in time even replacement costs may drop (caused by falling material prices and falling labor). Another thing that helps support housing prices psychologically is government regarding property taxes -- counties will overvalue assessed values to rake in as much taxes as possible. Buyers (assuming there are any) do look at assessed values in determining what fair value is.

Jan 14 12:58 PM

[ArnoldCountry:]

You said: "I believe that real estate has gotten cheap enough that drive-by shoppers will increasingly stop in for a look, and when they do, the combination of price and mortgage cost will turn shoppers into buyers."

The only buyers are really investors, this does not make a market. You need mainstream buyers to come forth, but they can't. Unemployment is too high, many of the folks who would buy have lost their homes and have damaged credit, rent is still cheaper than buying, credit requirements are way too stringent and consumer sentiment is running too low. Its like having a great sale and no one is showing up. Which equates into even lower prices in the long run. Its the perfect storm.

Jan 14 01:48 PM

[Stewie:]

Geez look at the retail numbers............A commercial real estate meltdown is just starting, most commercial banks have a huge exposure. This guy is kidding himself.

Jan 14 02:14 PM

[John Bates:]

Where does he get the data to come to the conclusion housing is "cheap"? In San Diego, cost of monthly payment plus taxes and Mello-Roos is 20-30% higher than equivalent cost fo rent. Last I checked, tons of vacant homes in SD area, so rents aren't rising any time soon, which means house prices still have lots to fall.

Jan 14 02:36 PM

[Rhett:]

Hoover, replacement costs are falling. Lumber, for example, is at its lowest price in years.

Jan 14 06:18 PM

[ArnoldCountry:]

Lumber is cheap because the demand has dropped significantly with building stopped and remodels way down.


On Jan 14 06:18 PM Rhett wrote:

> Hoover, replacement costs are falling. Lumber, for example, is at
> its lowest price in years.

Jan 14 06:45 PM

[WAKEUP:]

Newly unemployed people are going to be losing homes, in 2009, at a record pace; their homes will be dumped onto the market. There will be a large number of these houses. Mortgage resets will dump many others onto the market. Hence, the already obscene glut of houses will swell to a near-bursting point. Falling prices will cause the few who can afford to buy, to wait, instead. Bottom? Nowhere in sight, for years.

Jan 14 06:51 PM

[sickofthehype:]

I think we're at a bottom, and the 100% negative comments are a nice indicator.

Here in Phoenix the suburbs are seeing homes sell at 1999-2000 prices. Tell me the pendelum hasn't swung too far...

When properties, res/commercial, are selling at half replacement cost, I'm sorry but that's a deal. While you guys are crying about how we have 50% more to go, the smart money will be picking up steals. And when the inflation hits that IS GOING TO HAPPEN, this will all be a memory. Low prices AND low rates.

Now kick back and keep renting if you wish, but in reality we're bouncing along the bottom.

One last thing: Just watch after Obama is inaugurated. A new housing bill will suddenly come about, and consumer sentiment will rise, and the following turn in events will shock 99% of the population. Banks are only adding to balance sheets because of the requirement to match foreclosed loan balances, but once the inventory starts diminishing and the flood gates open, look out.

Don't let the sky hit you on the head.

Jan 14 07:08 PM

[WAKEUP:]

sickofthehype, are you perhaps (!) a real estate agent, or somehow tied into the real estate market? (Hmmmmmmm?) Never mind. We know, already.

Jan 14 10:52 PM

[johngonole:]

I think from here on out home prices movements will be influenced by local economic conditions. In places with rising unemployment prices will continue to fall. In places of rising unemployment they will hold steady and may even rise a small amount. In places with steady to slightly down employment oppurtunities look for a continued slow decline in housing prices. Low interest rates may bring some first time buyers back into the market.

Jan 14 11:51 PM

[Urbane Gori...:]

I just received a 'price estimate' from Zwillo.com. There were eight comparables listed on the market right now. Every damn one of them was a foreclosure with 'no listed price' and each was within .3 miles of my home... Tell me the market is close to a bottom.

Give me a break! jegan

Jan 15 12:42 AM

[driftwood2:]

Housing prices are still above historical norms relative to income. They are also still high relative to rent. We still have a ways to go for housing prices to find a bottom. However, I think prices in the inner cities and outer developments may have already hit bottom. The inner cities is where the worst of subprime is and it was the first to go. The outer developments are the least in demand and the most speculative so it was the next to go. The burbs are still only minimally affected. I expect that they will experience a slow but unrelenting decline over the next 2 years as alt-a and option arms reset. Commercial real estate will probably crack this year.

Jan 15 03:41 AM

[BlueOkie:]

Housing is regional! Those that went up fast are coming down just as fast.

Jan 15 04:17 AM

[sickofthehype:]

Thanks for your concern, but actually I'm in IT. I have nothing to do with real estate, except watch it for fun.


On Jan 14 10:52 PM WAKEUP wrote:

> sickofthehype, are you perhaps (!) a real estate agent, or somehow
> tied into the real estate market? (Hmmmmmmm?) Never mind. We know,
> already.

Jan 15 08:51 AM

[poor&unempl...:]

How did you come to that conclusion? Crystal Ball maybe?

What would you call a stable rate of return on the traditional housing with 20% down?

Using Case Schiller index - what kind of appreciation would you justify since 2000?

If present level of index is sustainable, why no one is buying?

Jan 16 02:35 PM

[Chamois16:]

You guys are probably right that housing has more downside; how much more likely depends on location. But the more important point in the article is that good banks are over-reserving for losses and have possibly fallen too far.. The continued decline from here being in large part sentiment-driven and somewhat unrelated to operating cash flow expectations for 2009 and forward.

If everyone agreed this is a good time to get serious about banks, it would be too late to exploit what is arguably an oversold situation among retail and commercial banks with well-managed risk. JMO

Jan 19 10:21 AM

[traders india:]

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Apr 08 02:38 PM