Three Sides to the Housing Story

A good lawyer (apologies for the oxymoron so early on a Friday morning) will tell you there are three sides to every story; the plaintiff’s, the defendant’s and the truth.

This is easily translated into market speak as there is the way the bulls interpret the facts, the way the bears interpret the facts and then there is the price of whatever it is that is under discussion.

Relating this to the housing market, two recent headlines in the WSJ fit perfectly as examples. One read: “Loan-Modification Plan Hits Target” and the second one read: “Foreclosure Plan Ill-Suited for Changing Crisis, Report Says”. The third side of this coin was a report by RealtyTrac Inc. of Irvine CA yesterday that said that foreclosure filings rose 5% in 3Q09. Another way to look at this is that one out of every 136 housing units had a foreclosure filing in the quarter. I was thinking when I was writing that, that maybe the company should be called Reality Track.

The first article in the WSJ states that on October 8th the federal government said that 500,000 financially troubled homeowners had begun trial loan modifications. It cites Treasury Secretary Tim Geithner as saying that the rate of modifications is rising faster than the rate of the people needing them for the first time since the crisis began but that the number of at risk families is still “unacceptably large”.

The second article cites a report from the Congressional Oversight Panel (that’s two oxymorons in one day, very sorry) that says that the loan modification program is not set up for the “current drivers of foreclosures – borrowers with good credit who have lost their jobs and those with complex mortgages.” “The result for many homeowners could be that foreclosure is delayed, not avoided,” the report said.

RealtyTrac chief economist, Rick Sharga, echoed the COP report saying, “More and more foreclosure activity is related to job loss, and the wave of defaults caused by unemployment probably won’t peak until the fourth quarter of 2010.”

Adding to the good news, Zillow.com, a real-estate website recently published statistics showing that about “30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the crisis started.” The site also said that, “The bottom 1/3rd of housing markets, by home value, now account for 35% of foreclosures, down from 55% in 2006.”

So, you ask, how is the Construction sector taking all of this news of foreclosure? Well, besides KB Home (KBH) which recently disclosed that the SEC is taking look at its books, not too badly actually. XHB, the SPDR S&P Homebuilders ETF opened at $14.15 on 10/2 when the last set of employment statistics was released. Since that point the highest close was on Wednesday of this week at $15.68 or up 10.81%.

KBH started higher with the rest of the homebuilders on 10/2 but news of the investigation has added some volatility to the share price while the CDS spread has moved from 193bps on 9/23 close at 291bps last night. It might be surmised from this that the credit markets don’t like to hear that the SEC is reviewing how you account for things.

Enjoy the weekend.

Comments

[JaysonNHS:]

Nicely put, it's absurd to look at all the information out there and think that anyone knows what to expect. In my opinion, we're far from recovery, but I hope I'm wrong. There's too much going on with delinquencies, foreclosures and unemployment to think we're in the clear.

Hopefully, the govt. will stop propping up the market so we can see where we are.

Oct 16 01:01 PM

[MLKlein:]

More to think about. In the Los Angeles and Ventura County markets only about one in five foreclosures are going to auction. That means about 800 of the 1000 or so homes that go to auction each day are finding their way back to an investor's balance sheet or remains in some form of protracted work out. That translates into a fair amount of non-earning or impaired assets.

On the commercial real estate side, values are down about 40% from peak. Some product types and markets are somewhat worse and some are somewhat less impacted. But 40% is quite a Tsunami to overcome. So far banks in our markets, unless forced by their regulators, have not recognized this loss (A loan originated at 75% LTV would have a 20% loss if 40% of the value is deducted). More impaired assets.

It is my belief that until the banks realize their losses and move them off their balance sheets (which will result in a probable loss of 20% or more of the banks), a true recovery is unlikely because lending capacity will remain impaired because human and capital resources will be fully absorbed fighting the lost battle of working against the massive Tsunami of deleveraging.

Oct 16 02:00 PM

[rockerchic:]

"...maybe the company should be called Reality Track" –that was great!

Oct 16 06:17 PM

[Living4Divi...:]

Good post

Oct 19 03:59 PM