As strange as it may seem, there might be some things to be learned from the age old conundrum regarding the chicken and the egg with regard to the housing market and mortgages.
From a historical perspective, you bought or built a house when you had the money to do so. Now that might seem odd given the amount of various kinds of debt consumers have grown accustomed to carrying, but before the FHA, FNM and FRE, heck, even before your local Savings & Loan lent you the money and held the debt themselves, the only people who owned their homes were people who had the money in the bank to do so; stoop to chimney.
That is where the story started and we’re living through the current chapters; which I hope for all of our sakes, is the part where the happy ending starts. So how do we tell if it has?
David Crowe, chief economist for the National Association of Home Builders, expects the industry to begin construction on 610,000 single family homes this year, a 38% rise over 2009. Edward Sullivan, chief economist for the Portland Cement Association, has a slightly lower forecast of 512,000, equaling a 20% increase over last year. This might seem as crazy as a chicken trying to cross Rt. 95 during rush hour but in California, one of the states hit hardest by the housing meltdown, the supply of unsold single family homes is down to 3.8 months vs. 5.6 months a year ago and 16.6 months in January of 2008, according to the California Association of Realtors. The 3.8 number is the lowest since 2005 for anyone out there keeping track.
On top of this lower supply, people like Jody Kahn, a VP at John Burns Real Estate Consulting, believes, “We’ll probably be seeing a fairly strong spring selling season” in most of the nation. Jody’s belief is lent credence by the latest Case/Schiller 20-city home price index which rose 0.2% in November from October. That rise comes as prices are still down 5.3% from a year ago and down 29% from their 2006 peak.
I’m not sure if the housing side of this is the chicken or the egg but whichever it is , financing and foreclosures is the other. Frank Nothaft, chief economist at FRE, doesn’t think the number of people behind on their mortgage payments will peak until sometime in the second half of this year. According to the Mortgage Bankers Association, 14% of American home-mortgage holders were at least 30 days behind on payments or in foreclosure as of September 30, 2009. Barclays expects as many as 1.2MM foreclosed homes to be for sale by June of this year.
The Government’s efforts to put people into homes they couldn’t afford is probably the only effort larger than their current one to keep them there. The poor folks who believed Uncle Sam are now going back with their hands out for help and that help is coming in the form of HAMP or the Home Affordable Modification Program. The official goal of this program is to reduce monthly loan payments for distressed borrowers so they can afford to stay in their home. This, if you’re following the logic, is the home they couldn’t afford in the first place, which is what got them into this mess.
Of the 7.5MM households that were behind on their mortgages as of September 30, 2009, according to the Mortgage Bankers Association, HAMP has modified 900,000 loans - albeit many of these are still in the trial phase. The ultimate success of HAMP was recently questioned by analysts at UBS Securities in New York who think HAMP’s real purpose is “a vehicle to delay the timing of new foreclosures hitting the market”.
So, where does that leave the question of the chicken and the egg? Louis Amaya, COO of National Asset Direct Inc. says, “The reality is that most people aren’t going to qualify for a load mod” and that HAMP is just “dragging out” the foreclosure process. He believes it would be better if “we just let the market correct itself”.
Now there is a novel concept, get Uncle Sam out of the way and let the market figure it out on its own. Unfortunately that has about the same probability of occurring as figuring out which came first, the chicken or the egg.
The CEC Strategy is currently long 16 of the 21 names it follows in the homebuilding sector. The market action of the last week has not been kind to the P/L but the moves off of the highs have been within risk limits and as such the positions remain intact.