Is Wells Fargo's Latest Memo a Sign Real Estate is Bottoming?

Reuters published an article yesterday highlighting a memo that Wells Fargo (WFC) sent to its wholesale brokers on February 25th.  Below is an excerpt from the story:

Wells Fargo said it has identified more than 200 U.S. counties with troubled housing markets, showing how falling home prices and rising defaults are no longer concentrated in particular regions.

Wells Fargo is tightening its lending standards in the affected markets effective Feb 29, in many cases by limiting the maximum size of loans as a percentage of home values. In some markets, it will not allow prospective purchasers to borrow more than 75 percent of the value of their homes.

Congrats to the super sleuths at Wells Fargo for realizing that housing markets have declined!  Now that prices are down significantly from their peaks in 2005, they've finally begun tightening lending standards, making it harder for potential buyers to make purchases at much lower prices. 

Even though we are highly respectful of Sam Zell's track record, this news has got to be an even better buy signal than Zell's recent call that real estate is bottoming.  It would be fitting that just when banks finally tighten their lending standards, the real estate market begins to turn around, leaving them stuck on the outside when potential gains are to be had.

Comments

[NoFate]

This memo means Wells expects housing to drop up to 25% more in non-overheated markets. That is hardly a bullish indicator.

Based on the CS Index housing prices are falling faster than any time in US history. Catch a falling broadsword?

And yeah, they are way late ...along with everyone else. They probably don't have much margin left to make loans anyway though ...and they sure can't sell the mortgages to anyone else.

[markg]

The comments about how fast the RE market is falling are usually not compared to how fast it went up, which was about the same rate for several years.

When other markets have a long run-up, a 50% correction isn't a surprise, why is it so for real estate?

[mavericks]

A 50% housing correction is not in the cards because people and families have to live somewhere. You DON'T have to own stocks. Certain overinflated markets in California have further to fall but I think you will be surprised how well other markets hold in this year. If unemployment ratches up significantly then all bets are off but I don't see that with a fairly strong global economy.

[red5]

I don't see that excerpt as any indication that Wells Fargo thinks the market is bottoming out. Further, Wells Fargo has been one of the most repsonsible lenders throught this whole crisis and I don't think your description of them as "...realizing that housing markets have declined!" is accurate. They have realized the situation a lot longer then the other major banks. There's a reason their the only one with AAA rating.

Dislaimer: red5 owns shares in WFC

[Wisco]

Requiring a 25% down payment simply eliminates the put option banks have been giving homeowners with LTV ratios of 100%. Are homeprices really likely to drop 25% in non-overheated markets? ...Not a chance

[Fat Arby]

when i see the diy network and TLC and all that, and I see these flippers going in and renovating and then asking an arm and a leg, I think to myself, how did we get to this point?

I suppose that since a house is , like, the most expensive thing on earth due to the staggering amount of commodities and goods inside of it, including copper, silver, etc etc, it's bound to be very expensive.

However, certain locations are pure *excrement*, xcuse the expression, and even then prices are outrageous.
Labor, interest rates, and location all determine a house's value.
It's a strange world, that's for sure, but I just hope that at some point we get some kick-ass regulation which will stop speculators from pushing prices to the sky and honest , hard-working people who deserve a good place to raise their kids don't have to be stuck next to a freeway or in a crime-infested area.
It's also obvious that there's a lot of corruption in the contracting arena. These little things need to be much more carefully regulated so that a house doesn't end up costing zillions and zillions of dollars. Ever heard of the MILLION DOLLAR RV? C'mon, how insane IS that?

[jigs]

are you on crack ? Prices are falling like crazy, investors are all stuck either in the stock market or in housing. There is no money out there. On top of it, banks are really tightening loan standards. How many middle class people in OC have $150,000-$200,000 in cash to buy a decent OC median home priced home at $600,000-$700,000.

You must be getting some kickback from the pigs at NAR to come up with what you did.

Like GS and MerrillLynch said, home prices are still overvalued by 30-35% in many parts of US. In CA, annual house hold income is around $70k and prices will continue to come down to the affordability levels of 4x (around $280-$300k). Or in other words, prices should come down to 2002-03 levels. Currently they are at 04-05 levels.

And mark this post, they will !

[buyerwannabee]

I see things as a potential buyer that I am here in East Tennessee as "nothing is going down near 10%" let alone more.Contractors must have thier heads in sand.
Just One Example: A contractor who had his newly built spec. house on the market with a minimal listing $ outfit for approx.3 months (a nice house priced $319,900 reduced from $339,?00) Just listed it with a full serv.broker $349K.
In this same area other contractors are also listing comprable new homes about the same $ and the turnover is abissmal.
Yet there are price reductions on existing homes.
what do the posters here think my chances of seeing
a 25% reduction are?

[Johns]

prices will come down atleast 20-35% in all areas before we can even think of a bottom and it will likely take another 1-2 years(possibly late 2009) for that to happen. There are many stubborn sellers/builders still holding on to false hopes of making a big profit out of any innocent buyers that they can trap. But they will start panicking very soon when the ARMs reset in June 2008 when there will be a flood of homes in foreclosure process as the economy continues to weaken. I give you an example of a house in Atlanta area where it was listed for more than 600,000 and I looked at all the homes in the surrounding 2 miles area and there was not even one home worth more than 325,000. We should expect to see a big drop in housing prices in 2008. But buyers have to be very careful now as there is a potential for a big downside and also the Sellers and builders tend to inflate prices as they know that potential buyers are likely to bargain. I would wait atleast 1 year before I can even think of looking at any home to buy and even at that time do extensive research and bargain before I settle the deal. I am not a rich person and cannot afford to lose any equity on my home after I buy it in this artificially inflated bubble environment.

[Indyvest]

If there is a lesson that I hope all Americans learn from this housing/credit fiasco is that you cannot and should not buy more house than you can afford as measured by the House Value to Household Income Ratio. History has taught us that this ratio in healthy markets should not exceed 3x. I suspect that the 200 counties that WFC identified as requiring 25% down payment to make a loan are probably those above the 3x. Counties like San Diego, OC in CA and Dade in FL are still hovering in the >5x range, so yes, they have a ways to go down. The excerpt simply tells us that WFC is notching up their already prudent underwriting standards and realizing that the housing bubble is limited (from an underwriting perpsective) to specific markets.

[DanH]

I agree with MEXX and jigs; housing is a commodity that in stable appreciation is priced 3x average area income or 160x monthly rental income. Any other thinking is speculative or magical. Palo Alto prices are currently 13x average area income, most markets are around 6x average area income. Correction is inevitable. Also, affordable housing a a good thing, right?

As of last week we saw a 9.1% average annual decline in prices nationally, and most markets are only one year into a possible three or four year down-leg. Zandi and Schiller predict an overall 20% decline, but it seems we've reached the halfway point awfully quick.

When financing is conservative, 20% on a fixed loan is the standard. I see Wells Fargo positioning themselves to work with customers who are able put skin in the game and not walk away from a loan, nothing more nothing less.