Whitney Tilson: The Housing Market Is Still in Trouble 17 comments
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Here is an excellent presentation by Whitney Tilson of T2 Partners - embedded within his monthly investor letter. While others have done a better job of self-promotion, Tilson actually made many prescient calls on the housing market the past 24 months (much like a certain blogger) - essentially he believes we are in the eye of the storm.
While a lengthy presentation, the housing market section is a great overview loaded with graphs, charts and for those of you old enough - similar to how Ross Perot tried to educate the masses about the federal budget circa 1992. It begins on page 9 and many pages are simply 1 chart or another - worth a look through.
He also has a large section on why the unemployment situation is awful; unfortunately, he uses government data which we know is a bald faced lie open to serious debate. [Oct 2, 2009: True September Unemployment in America Reaches 14%] But the economic conclusions are similar to ours.
As always click "fullscreen" for an easier read (I believe email readers will need to come to the website)
Hat tip to Marketfolly
Whitney Tilson T2 Partners October09
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This article has 17 comments:
I agree 40% peak to trough is about right and there is 10% to go, i.e. the index is rolling over, I arrived at that conclusion by a different logic.
When you come up with the same answer by two different approaches that tends to reinforce both conclusions.
I have challenged the AIA to list unemployment for Architects on their website, as it isn't, and I have heard figures of around 50% unemployed.
bald face lies.....a classic example I don't like the data so therefore
it must not be true....
gloomy forecast to be right continued ( i think substantial )job losses and price declines in
home prices.....a lot of his data is lagging.....no doubt we have an inventory problem in housing but as each quarter goes by it is making
it harder for these guys to support their bearish thesis....
Study these charts and graphs until your eyeballs pop out. The bottom line is residential real estate is affordable again. For example, in many suburban areas of Phoenix the median price for a home is under $100,000. A family with a household income of $40,000 can easily afford the $775 PITI. Even if interest rates went above 8% this home would still be affordable.
On Nov 06 07:03 AM Marty Boardman wrote:
> From the real estate investor perspective this report is welcome
> news. Only 10% more in declines to go before we reach bottom? Excellent.
> Whether buying one property or a portfolio a simple strategy would
> be to create an additional 10% margin of safety when putting the
> deal together.
>
> Study these charts and graphs until your eyeballs pop out. The bottom
> line is residential real estate is affordable again. For example,
> in many suburban areas of Phoenix the median price for a home is
> under $100,000. A family with a household income of $40,000 can easily
> afford the $775 PITI. Even if interest rates went above 8% this home
> would still be affordable.
Current bottom is seasonal and a head fake
10% more downside
Bottom in mid 2010
No quick rebound after that
I think that is a very fair assesment. He also points out the gloomy job market, with only 65.2% participation in the labor force... the lowest number in 22 years.
As a BRK-B shareholder, he also points out how undervalued Berkshire Hathaway is. He says it has never been more valueable, yet the price doesn't reflect that. He says Brk-A is worth 35% more than it's currently trading for.
I agree with a lot of this guys stuff. Anti-housing, home builders, pro berkshire, he seems to be of the school of the new normal as well...
On Nov 06 07:30 AM User 378060 wrote:
> Phoenix, SoCal, Vegas and Florida....sure, but what about the parts
> of the country where most people live BOSNYWash? Illinois? They
> have fallen, but hardly in a punishing manner. Look at the rent
> vs. buy analysis for NYC? It is still ridiculous. I think real
> estate is more regional than ever.
Iridium is a different story. Sure the company appears profitable now, but this is because it was purchased for $25M out of bankruptcy and prior to being brought public again via the SPAC. In other words, the reported $3.4 billion MOT put in plus the billion plus debt the company defaulted on which drove it to chapter is off the balance sheet. With respect to funding NEXT - another $3 billion project - the company's press release touting Goldman as lead financial advisor is strangely riddled with claims that they can finance most internally. If they don't need Goldman, why hire Goldman? And the extraordinary subscriber growth? Total subs as of 2008 were 320K. Granted, it's high ARPU, but for a company in business since the 1990's 320k is terrible, irrespective of ARPU. The company touts its world wide coverage, especially polar, reminiscent of the old Iridium commercials with the guy on Mt. Everest! I'm sorry, but the market for which coverage at the north and south poles is important is unlikely to be material. This stock is a sell despite the fact that near-term numbers will probably be decent. Unlike the current sat infrastructure, the one they are scheduled to launch will be on the balance sheet. And now, like the 1990s, it is a very high fixed cost business with limited commercial appeal.
about 3 hours before we saw unemployment rate jump 0.4%
and yes that unemployment rate is a bold faced lie.
And no more people dont need to become unemployed for these things to be come true (although more will) An extended period of joblessness (guaranteed in our economy) followed by any form of market based interest rates or lack of government subsidization$i.e. $8000 or $6500 handouts) will do the trick.
That said, it appears there is no end to government and central bank interference so many of Tilson's projections are simply going to take longer to reach.
Our real unemployment rate is mid teens and "marginally attached" is another 4-6%. We dont need any more job losses for all these outcomes to happen. Try to think where job creation will happen outside of healthcare and federal government. Many people are now structurally unemployed... their jobs are gone, period. They are not in the market for home purchases nor will be for a very long time.
On Nov 06 05:38 AM bbro wrote:
> Read Whitney Tilson's report...he requires two components for his
>
> gloomy forecast to be right continued ( i think substantial )job
> losses and price declines in
> home prices.....a lot of his data is lagging.....no doubt we have
> an inventory problem in housing but as each quarter goes by it is
> making
> it harder for these guys to support their bearish thesis....
However prices are being artificially inflated still... I don't know if its 10% or more... but yes it won't be another 30-40% drop from here so the worst is behind us. However those expecting a return back to the good ole days have not lived through a bubble. NASDAQ stocks still at a fraction of peak... housing prices need a whole new class of suckers.... plus households to fill the nearly 19 million empty homes.
When mortgages get back to 6% on a 30 year and the government stops handing out my money so others can buy homes, let's see where prices are. I still think CA prices make no sense and people rushing in now are like NASDAQ investors in late 2001.
On Nov 06 07:03 AM Marty Boardman wrote:
> From the real estate investor perspective this report is welcome
> news. Only 10% more in declines to go before we reach bottom? Excellent.
> Whether buying one property or a portfolio a simple strategy would
> be to create an additional 10% margin of safety when putting the
> deal together.
>
> Study these charts and graphs until your eyeballs pop out. The bottom
> line is residential real estate is affordable again. For example,
> in many suburban areas of Phoenix the median price for a home is
> under $100,000. A family with a household income of $40,000 can
> easily afford the $775 PITI. Even if interest rates went above 8%
> this home would still be affordable.
On Nov 06 07:30 AM User 378060 wrote:
> Phoenix, SoCal, Vegas and Florida....sure, but what about the parts
> of the country where most people live BOSNYWash? Illinois? They
> have fallen, but hardly in a punishing manner. Look at the rent
> vs. buy analysis for NYC? It is still ridiculous. I think real
> estate is more regional than ever.
off in a few months and we are going to get some blockbuster numbers to the positve side besides people think every unemployed
is throwing a mortgage holder out into the street.....I stand even more by my analysis....Unemployment rate is a not a statistical tool
for predictive analysis....
On Nov 06 12:56 PM TraderMark wrote:
> I see you wrote your comment at 5:30 AM
> about 3 hours before we saw unemployment rate jump 0.4%
> and yes that unemployment rate is a bold faced lie.
>
> And no more people dont need to become unemployed for these things
> to be come true (although more will) An extended period of joblessness
> (guaranteed in our economy) followed by any form of market based
> interest rates or lack of government subsidization$i.e. $8000 or
> $6500 handouts) will do the trick.
>
> That said, it appears there is no end to government and central bank
> interference so many of Tilson's projections are simply going to
> take longer to reach.
>
> Our real unemployment rate is mid teens and "marginally attached"
> is another 4-6%. We dont need any more job losses for all these outcomes
> to happen. Try to think where job creation will happen outside of
> healthcare and federal government. Many people are now structurally
> unemployed... their jobs are gone, period. They are not in the market
> for home purchases nor will be for a very long time.
'However prices are being artificially inflated still... I don't know if its 10% or more... but yes it won't be another 30-40% drop from here so the worst is behind us. However those expecting a return back to the good ole days have not lived through a bubble. NASDAQ stocks still at a fraction of peak... housing prices need a whole new class of suckers.... plus households to fill the nearly 19 million empty homes. '
They won't fall another 40%? So what does happen when the Government props are kicked away?
All the support is fudge, and the situation has barely started unwinding, as in the interests of kicking the can down the road vast debts have been taken on in the taxpayers name, whilst there has been no real reform.
This is unstable, and at some point the props will drop away, with the whole house of cards awaiting the first nudge to tumble.
Fannie and Freddie Mae are the only things holding up the market, together with the $8k credit.
Propping it up has put the credit worthiness of the US Governement on the line.
Whatever the push that causes it all to unravel, plummeting Commercial Real Estate, continuing huge gambles on the derivatives market and rapidly escalating unemployment as firms reassess the alledged recovery and adjust accordingly mean that a real bottom for the market in housing or in stocks is nowhere in sight.
I wish it were not so, and perhaps collapse is six months or a year away, but I cannot see how it can be avoided.
Hence why I dont think we have another 30-40% type of downdraft. I do think we have another leg down when all these stimuli go away but at this rate we might be talking 2030 before the government stops trying to interfere.
My comments differ for areas where the median is still $250-$400K. Aside from a few places like San Fran where housing stock is limited those prices make little sense ... only so many people with income that supports a $350K house. And it's less by the day. I expect the next wave to be "sludge like" rather than the hellacious straight down drop we've just gone through.
So many defaulting homeowners still sitting out there where the bank refuses to foreclose because it will hit their balance sheet, plus at some point the American "savers" have to throw their hands up and asy NO MORE housing handouts, and eventually mortgage rates go back to "normal" ... even 6% 30 year is going to wreck havoc since we've been drunk on easy money. A long slog ahead.
On Nov 08 09:07 AM Davewmart wrote:
> Trader mark said:
> 'However prices are being artificially inflated still... I don't
> know if its 10% or more... but yes it won't be another 30-40% drop
> from here so the worst is behind us. However those expecting a return
> back to the good ole days have not lived through a bubble. NASDAQ
> stocks still at a fraction of peak... housing prices need a whole
> new class of suckers.... plus households to fill the nearly 19 million
> empty homes. '
>
> They won't fall another 40%? So what does happen when the Government
> props are kicked away?
> All the support is fudge, and the situation has barely started unwinding,
> as in the interests of kicking the can down the road vast debts have
> been taken on in the taxpayers name, whilst there has been no real
> reform.
> This is unstable, and at some point the props will drop away, with
> the whole house of cards awaiting the first nudge to tumble.
> Fannie and Freddie Mae are the only things holding up the market,
> together with the $8k credit.
> Propping it up has put the credit worthiness of the US Governement
> on the line.
> Whatever the push that causes it all to unravel, plummeting Commercial
> Real Estate, continuing huge gambles on the derivatives market and
> rapidly escalating unemployment as firms reassess the alledged recovery
> and adjust accordingly mean that a real bottom for the market in
> housing or in stocks is nowhere in sight.
> I wish it were not so, and perhaps collapse is six months or a year
> away, but I cannot see how it can be avoided.
'Hence why I dont think we have another 30-40% type of downdraft. I do think we have another leg down when all these stimuli go away but at this rate we might be talking 2030 before the government stops trying to interfere.'
I agree that Governments will not stop interfering, which is what makes me think that a catastrophic collapse is likely.
In a normal recession I would have thought that you have called the amount of the fall perfectly.
However, all the stimulus money, not just in the US, has been predicated on the notion that they can stimulate a V, or at least U, shaped recovery.
I feel that when it hits that that is not going to happen, a further stage of collapse will ensue.
They have radically increased the potential instability of the system by issuing more and more credit, and, for instance, derivatives are entirely unconfined.
The smallest disruption will cause these highly leveraged bets to collapse.
Triggers could be many.
Off the top of my head they would include problems in Japan, Spain, or the UK, or even just a below expectation set of figures.
Either a fall or a rise in commodity prices might be enough.
To look at the country I am most familiar with, the UK, any failure to ignite growth would lead to re-evaluating the sustainability of the levels of debt, whilst cutbacks to control this would result in a severe re-assessment of how much demand there would be in the UK economy, and hence further cutbacks in investment and employment.
I feel that in addition to a normal recession, several fundamental realignments are taking place.
The first is a shift in productive potential from West to East.
Present income levels in the US and UK appear to me to be unsustainable. In reality the Chinese exchange rate should be perhaps 20-30% higher, and in the Anglo-Saxon countries we have to loose a commensurate amount of 'false buying power'.
Kicking in powerfully at the same time, cheap oil which has been behind the present levels of income is now in the past - or rather in the absence of depression it is.
Unfortunately when we do get low oil prices due to recession this restricts investment in new oil fields leading to still more shortages in the future, and can also cause turmoil in the producing countries.
On top of all this is the disastrous mismanagement of the financial industry.
For me this all means a fall in income in the West of pmaybe 20-30%.
How that reflects into house prices I am not sure, as of course you can either have outright deflation or an inflationary situation with ever less purchaing power, although I incline to Stoneleigh's view at Automatic Earth that the pressures of deflation will overwhelm the inflationary pressures, at least for the moment.
If this analysis if right, then Stoneleigh puts the top to bottom fall in US house prices at around 80%.