Is This (Finally) the Bottom? Part III

I think it is; I think it is. Maybe if I say it twice it will make it so. On March 20, I asked the "bottom" question for the first time. My reasons for asking were mainly technical in nature, although I said I believed the enormous under-girding of the banking system by the Fed and other governmental agencies was starting to have an effect.

I asked the "bottom" question again on March 26. This time I explained that my reasons for leaning to the affirmative were not only based on the technical action of stocks, but most importantly on the fundamentals. The last two weeks of March saw four economic releases for February housing data that were all better-than-expected.

Good grief surely housing could not be turning, especially when home prices were still falling and defaults were still on the rise. But yes, new housing permits, new home sales, exiting home sales and pending home sales all turned higher in February and beat estimates by between 6% and 22%.

I think Thursday's Wells Fargo (WFC) pre-announcement of better-than-expected earnings validates the February housing data. It was clear from Wells Fargo's earnings pre-announcement that a big increase in mortgage originations was driving their good results.

Now for some additional good news. I'm hearing anecdotal reports from realtors that I know around the country that March real estate readings in many of the most troubled areas of the country, such as Florida, California, and Arizona are turning up. In almost all cases, the year-over sales are up substantially, and the inventory of homes is shrinking. Home prices in all areas are still falling, but unit sales are increasing and walk-through business is growing rapidly.

I have said many times before that real estate got us into this mess, and improvements in real estate will need to get us out. Increases in unit sales are good news for real estate and the economy, but we need for real estate prices to stabilize. That would seem to be many months off. However, the Fed's purchases of long-term Treasury bonds and mortgage backed securities have driven down 30-year mortgage rates to about 4.75%. That is proving to be a boon to refinancings as well as new buyers.

My brother in Indianapolis says he has a number of buyers who are ready to buy, but they cannot sell their houses. That may not sound like good news, but it is. Just a few month ago, he said things were completely dead. The fall in mortgage rates is definitely putting more people in the market, and I'm hoping that one of them is interested in one of my brother's clients' homes, so a fortuitous chain reaction can begin.

My sister-in-law in Arizona says she has had more activity in the last few weeks than she has seen in months.

Comments

[toobad41:]

You see a glimmer of hope and that is what I see as well. Checking the pulse of people in other parts of the country you get different viewpoints. My viewpoint in western Texas is entirely different than those in other parts of the country. The oil patch is doing real good. Not great but really good. Housing is still on the up-swing as it has been for several years. We tend to look at these cycles as just blips on the upward trend of the past 80 years. As I have pointed out in other blurbs we need to look at the bigger picture and that is not being done. Who really cares if we are at the bottom? I sure don't. Why? Because I am not a trader. In fact, I don't know anyone who is a trader. Also, I see people have purchased homes as an investment rather than a place to live. That is a mistake and will always be a big mistake.

Apr 12 09:43 AM

[bonderman:]

Its difficult to see how a bottom can form when the worst is yet to come. Alt-A loan resets don't peak until 2011, which when added to the other trash loans will make 2011 as bad or worse than anything we've seen yet. See a widely circulated graph and Barry Ritholtz's anaylsis here:
www.ritholtz.com/blog/.../

The author's antecdotal evidence, while interesting is just that. Put your faith in real data.

Apr 12 10:01 AM

[20dollar:]

I agree that we are at or near the bottom. I have been a real estate investor for over 25 years. I have recently purchased 3 investment properties, all of which make sense. ( Cash flow )

It is at this point that real estate finds equilibream. If anything, we may be over correcting. ( Prices falling too low ) So with prices where they are today, i will be buying quality properties that pay for themselves. I believe there is a 99.9% chance that these properties will appreciate dramatically in a reletively short period of time.

There has never been a better time to buy!!!

Apr 12 11:27 AM

[CautiousInv...:]

We are seeing a couple of green shoots here and there but if you flood the country with enough money and fiscal spending you should expect something to result.

The key question is whether is whether these are susutainable results and will the private sector take the torch from the public sector and continue the run. In the bankiing sector we are seeing more mortgage activity and purchases of slightly more new and exisiting homes. Banks are picking the low hanging fruit and lending to those with downpayments/equity.

The other issue is the health of bank balance sheets and many informed observers suggest we can be looking forward towards additional losses of $.5 trillion to $1.0 trillion. If this is the case it will only add to what Treasury will need to inject into banks through its CAP.........something the House and Senate may resisit.

We probably have found a maket bottom but the economic bottom may well be in front of us.

Apr 12 11:44 AM

[John Wake:]

bonderman, that Ritholtz is misleading and needs to be updated. Many of those Option Adjustable Rate loans that the graph shows as resetting in 2010 and 2011 have already been foreclosed on. So the graph underestimates the problem in 2008 and 2009 and overestimates it in 2010 and 2011.

If an Option Adjustable Rate borrower only makes the minimum payment, and many do, the loan will automatically reset long before the scheduled reset date.

Apr 12 12:15 PM

[sickofthehype:]

Precisely - read the Notes and anyone can see that once the LTV hits a certain threshold that the 'minimum' or 'interest only' payment options cannot be used. Those LTV's were hit last year and this year, so many are truly already foreclosed and gone.


On Apr 12 12:15 PM John Wake wrote:

> bonderman, that Ritholtz is misleading and needs to be updated. Many
> of those Option Adjustable Rate loans that the graph shows as resetting
> in 2010 and 2011 have already been foreclosed on. So the graph underestimates
> the problem in 2008 and 2009 and overestimates it in 2010 and 2011.
>
>
> If an Option Adjustable Rate borrower only makes the minimum payment,
> and many do, the loan will automatically reset long before the scheduled
> reset date.

Apr 12 02:31 PM

[Old Trader:]

I question how durable the uptick in home sales is/will be. Its my understanding that there's quite a "shadow inventory" of homes overhanging the market. Banks are hanging on to foreclosed homes, rather than dumping them onto an already depressed market. At best, that would indicate a VERY long, dragged out "bottom" in home prices/sales as this inventory dribbles into the market.

Apr 12 02:36 PM

[football frank:]

Interesting how far we have come where any little bit of good news
and the market cheers. Yes the worst is over, and the recovery
will continue with some bumps along the way. In two years most
of the economy should be back to full tilt. Oil will be alot higher too,
and the government will be deeper in debt. So starting buying
with a long term view

Apr 12 05:40 PM

[Smalltownba...:]

No. It doesn't matter how many times you say it. Watch foreclosure stats over the next 6 months and you will see that the bottom you think you are feeling is the crust over the quicksand and it will crumble under you pretty quickly in the next few months.

Apr 13 07:49 AM

[HardwoodFlo...:]

Well, the backs have a huge amount of backlog in the FHA loan catagory. The JUMBO thing is a -problem as backs don't want to write them.

I see home sales continuing and people working through the inventory issues. Again remmeebr that not all areas hae inventory issues. For example: Denver was one of the first markets into this mess and they are out. Chicago has one leg in and one leg out. There are lot's of places where the invontroy overhang is not what it is elsewhere. I think that need to be taken into account.

You will see modest gains in housing starts over the next quarter then returing in the fall. The U.S. can't prodcue jsut 400,000 units when the demand is 1.5 MM per year and we've been at 50-25% of that demand capacity for over 1 year.

Don't expect huge numbers out of housing but I know that banks are doing a land offcie business with repects to FHA loans. So the number of sale is going to remain impressive for the cheap stuff. I do question the JUMBO scene. From what I hear it's impossible to get a JUMBO.

Building is happening on a small scale in many markets. Remodel will absolutley surge this year. The reason remodel is going to take off is that for 3 years people haven't been able to get a home equity- they still can't. So they have been saving. Some will put that money to work in the stock market and others will put that money into thier homes- not for investment reason's but just to make thier lives better- redo that kitchen bed room etc.

Apr 13 03:49 PM

[HardwoodFlo...:]

The whole ARM reset thing is totally 2006. Three years ago. Most of that stuff is over.

Apr 13 03:51 PM