A Bear's Questions: Floyd Norris

From a Floyd Norris post called A Bear’s Questions comes an excellent quote from David A. Rosenberg, a Merrill Lynch economist:

Finally, the question must be asked: if the first 7 percent downleg in home prices could manage to trigger …
1. Almost $100 billion in write-downs in the banking sector;
2. A 65 percent year-over-year surge in foreclosures;
3. The highest residential real estate loan delinquency rate in 20 years; and,
4. A 20 percent plunge in S&P financials …
… then what, pray tell, will the next 20-30 percent have in store?

I think this is dead on. There are tons of people out there catching falling knives.

Disclosure: I added new shorts since January 1 as a recession play: Harley-Davidson (HOG), Macy's (M), Ford Motor (F), Tiffany (TIF), CROCS (CROX). Short the consumer and long Lehman 1-3 Year Treasury Bond (SHY) and Lehman 13 Month TBill ETF (BIL) is a great trade in my book.

Comments

[chush.net]

Sounds like a fallacy. How about this statement:
If #1,2, 3 cause 7% downleg in home prices, what has to happen to cause a 20% slide?

[NoFate]

Ummm Exchange3D I think your tail is wagging your dog. Homes caused the current financial crisis and are likely to continue to cause problems.

Home prices doubled in the last 6-7 years ...the idea of a 20-30% slide in housing prices over the next few years is very possible. This would leave millions underwater in their mortgage debt and many will walk away.

Considering $5-6 trillion was added to home values in the past 6 years, $2-3 trillion in home values could simply evaporate as prices drop. This will have the following effects:
- MEW is gone reducing GDP
- ARM resets and underwater LTV will cause huge numbers of foreclosures. Many people will mail their keys to the bank and walk away.
- Bank margins will be triggered causing additional credit restriction.
- Mortgage backed securities will implode around the world as fewer mortgage payments are made.
- Companies insuring this debt will burn through their margins and then go bankrupt.
- And on and on.

There will be blood flowing in the streets if houses take a 30% haircut.

[NoFate]

Home price depreciation WILL be caused by the following by the way:
- 10.5 month supply of homes.
- Home price fundamentals out of whack compared to rental cost, construction cost and median family income. All three of these remained fairly flat as housing prices shot to the moon.

[Poor andUnemployed]

Thanks to the banks! We lived past few years using our homes as credit card. Most of the increased value generated by the real estate was shipped off to Oil producing countries and China. Dollar will have depreciate further by 30% to briing that back to US.

Private equity will buy the condo buildings and turn then back to rental properties. People will have to start renting and start saving for the down payment the old fashion way. No more $50 K cars parked on the street and TV screen size will have to come down to 32" max. No more $4.00 coffee at Starbucks and no more cruises to nowhere.

Just like our neighbors from south have to live from time to time......

[chush.net]

NoFate, my point is that #1 $100 billion in write-downs in the banking sector is caused by mortgage defaults rather then by 7% home price drop. You can argue that the slide in home prices caused mortgage defaults. Indeed, if the prices did not fall, mortgages would not have been defaulted. But... if a borrower took a mortgage wich he/she is not able to pay unless the price of the house grows - this is bad judgement on behalf of both the lender and the borrower. Hence, my argument is that the root cause is not the downleg in prices but bad lending and bad borrowing. Furthermore, the foreclosures and unloading of properties by real-estate investors creates a snowball effect pushing the prices even more down.

[chush.net]

And yes, the home prices were out of control partly because it was as cheap to buy as it was to rent, thanks to zero-down-subprime-ARM... Now that this option is gone, we shall see the rents continue to grow and home prices continue to slide down untill they reach equilibrium.
I wonder why does everyone forget yet another factor that caused the housing bubble - stock market bust. You can say, how come? People lost money. Why would they start buying houses? But the thing is not everyone lost and not all the money ;) After so many stocks became vapor, a "brick-and-mortar... investment suddenly became much more attractive then a share of a dot-com. Therefore, investment activities shifted towards real-estate development. Anyhow... buy gold now.

[WAKEUP]

Ah, yes, now comes the excess verbiage, trying (desperately, and obviously so) to dodge what "Poor and Unemployed"'s reply has stated. It's going to be Hell, for several, or more years. Back to basics, like (Gasp!) "...renting, and saving for the down payment..." Once again, I ask: where the hell did the greater fools think this situation was heading, when they bought that house which they KNEW they could not afford?

[Rhett]

Seems almost everyone is in denial about declining house prices. Fact is, they have to come down to their approximate (inflation-adjusted) levels before the bubble. That is the level at which current salaries can support them.