The Housing Problem: What Inning is It?

Are we the only ones getting tired of the "What inning?" question? When we think baseball, it is better to enjoy the early success of Chicago's two teams, especially the suddenly slick-fielding White Sox.

For several months financial television asked everyone about recession chances. Prior training or experience not required -- all opinions welcome.

The question du jour is now, "Which inning of the mortgage crisis are we in?"

John Hussman's Answer

The widely-read and respected John Hussman complains as follows:

One of the fascinating aspects of Wall Street is the ability of analysts to provide opinions without the faintest backing from evidence. Among the latest topics of opinion is how far the mortgage crisis has to go. Evidently, the idea is that the recession that these analysts didn't forecast is already over, so it is time to “look across the valley” on the belief that most of the writedowns are behind us.

Hussman's own approach is to take a schedule of resets and integrate the curve to show a cumulative effect. From this, he concludes that we are still in the early innings, with each inning lasting three months. The worst is yet to come, etc. Check out the entire article.

Two Errors

The Hussman analysis makes two serious errors. First, he uses data from nearly a year ago. This is assuming that ARM resets are a stationary target. In fact, many mortgage holders have already refinanced.

This was reflected in a recent AP-AOL survey, the subject of an article we wrote for Real Money (subscription required). Two survey results were especially relevant to this question:

1. Only 11% of those with mortgages have adjustable rates; 18 months ago, the figure was 22%. This suggests that there has already been a lot of refinancing.
2. Among homeowners with adjustable-rate mortgages, those who are worried about making their payments after an increase is 36%, exactly what it was in the prior survey.

We are hesitant to mix two different methods of measurement and two different time periods, but surely there has been some change since the stale chart cited in the Hussman article. If he is going to use some fancy analysis to impress and frighten the average reader, at least he could update the data.

The second Hussman error is quite common. He is focused on the problem while completely ignoring any solutions. The loosening of restrictions on Fannie and Freddie (including the conforming loan cap and the overall portfolio cap) will help to encourage refinancing that was difficult a few months ago.

Jordan Kahn at In the Money, one of our featured sites, writes as follows:

I think the news from Freddie Mac (FRE) today was pretty significant, although it received little attention.

In the press release, Freddie said it will buy jumbo mortgages in high-cost regions from Wells Fargo (WFC), JPMorgan Chase (JPM), Citigroup (C) and Washington Mutual (WM). The government-sponsored enterprise expects to finance between $10 billion and $15 billion in new jumbo mortgages in 2008.

He points out that the old caps were ridiculous in some areas, a theme we have also argued. Jordan calls it "big news" which will help us get closer to a bottom in housing.

[Jordan sat in the hot seat yesterday, covering for Doug Kass on his daily investing blog, The Edge. Doug is doing a lecture at the Harvard Business School! We hope that the Wharton man gets the appropriate respect from the Harvard crew. Meanwhile, Jordan did his usual great job as a substitute.]

Conclusion

Ironically, John Hussman did exactly what he accused others of doing. The evidence he adduces for his answer to the "innings question" is no more plausible than anyone else's.

Our own answer? We do not know. Neither does anyone else. It is going to depend upon the ability of people to refinance, where fixed rates go, how quickly Fannie and Freddie and the FHA provide help, and whether a foreclosure assistance bill passes Congress and gets signed by the President.

We do not know the answers to those questions, but at least we know what to look for.

Comments

[AmesTiedeman]

This all depends on how you look at the problem. As for the falling prices, we are in about inning 5. I think we can fall another 20% in cities like San Diego and else where. Demand is just not there at these current price levels. I think we will see more trouble until 2010 , at least.

[karchad]

I let the market judge. ITB bottomed at 13.41. It's now sellling around 20. I bought in at 17. That's my answer. Nobody seems to notice this. Good. I'm making money on homebuilders while y'all wait until you hear good news from the sector. TOO LATE.

[NO DooDahs]

Hussman says "Evidently, the idea is that the recession that these analysts didn't forecast is already over"

I say "Evidently, Johnny boy wants the recession that he predicted for three years to last as long as Hussman had to wait to finally see it - assuming it ever eventually 'officially' gets here."

[vrspace]

Interesting article – what I find a bit frustrating is the lack of proper citations e.g. “a recent AP-AOL survey” and separately a link to a subscription service to an article written by the author.

At least Hussman provides the full text of his article both on SA and his own site along with appropriate backup data.

[Gary Meade]

Hussman sounds and feels less than an honest person to be sure. Often commenter's let their personal biases get in the way of reality whether it is genetically or environmentally mediated. The reason he does not walk his talk is anyones guess...only he can perform meta cognition on himself to discover this for himself...if he is willing and able.

[JohnPseudonym]

Predicting where we are is guessing at best...

When home prices stabilize nationwide and start to rise in the worst hit areas, that's when the bottom has passed; for homes anyway...

[DingoJoe]

The subprime mess is probably in the 6th inning or so, the mess with prime mortgages is just beginning (Arms or no Arms, or other exotic loans like pick-a-payment). Both JPMorgan and Wachovia noted sharp increases, both YOY and in the last quarter of mortgages in their delinquent prime mortgages and since that's a much bigger pool, that means plenty of pain out there.

blogs.wsj.com/developm.../


It's all about income to debt and people just got too stretched across all income spectrums. And if that debt is on a declining asset, what do you do? Throw in some job cuts and the run up in mortgage rates this week and there is no reason to expect any improvement in the next 6 months and probably not til 2010.

[NO DooDahs]

vrspace:

Blame Seeking Alpha's editorial staff for the lack of citation on the AP-AOL survey. Jeff is VERY good about linking articles, and the citation is clearly linked at the original page -
oldprof.typepad.com/a_...

[Malkiel]

To say that the old jumbo mortgage cap (of $417k) was ridiculous simply because it denied recognition to markets priced beyond a reasonable relationship to income, and then to buy the new uncapped jumbo mortgages in high-cost areas, shows a total lack understanding of the critical relationship between incomes and housing cost and a total lack of respect for the power of the market to correct those imbalances. To issue jumbos on houses whose price must inevitably continue to fall is a recipe for disaster and a red flag to stay away from the companies that do it. Analysts who believe prices can be propped up at astoundingly high levels against local income without some form of subsidy are resolutely ignorant of the essential facts of their market...

[Griz]

I thought we had to regress back to the mean in terms of real housing prices still. In reviewing the 10-city Case-Schiller composite index, I think we're just at the bottom of the third inning as far as home price correction in concerned (i.e. -14% from peak). That still leaves a long 6 innings (or 30% more) left to go. The first third of this was frightening, just think how bad the next two thirds will be...

[curley55]

To determine the inning lets look at some of the facts. The sub prime mess started a long time ago. Last August it came to a head when a lot of lenders and their funding dried up for sub prime mortgages. Most sub prime mortgages are 3 year notes. A lot of the sub prime people will default on their mortgages in the first 12 months. The ones who pay will have to refinance when their notes mature. Either you pay and refianace or you do not pay and go into default. Pretty simple.

Since very few new sub prime mortgages are being made I suspect the sub prime mess will be over by August 2008. Foreclosures will linger a little longer and perhaps by spring 2009 we will see declining foreclosures and a more stable real estate market. Some states that are not growing jobs and population will still have problems but most of the country should be ok.

[gordon]

First of all, here's Hussmans mutual fund chart, showing if you invested with this BLOW-HARD at any time since January 2004, you made ZILCH!
finance.yahoo.com/q/bc...=

So, he's an expert on housing? I work for Lennar, and have provided architectural services to every major homebuilder since 1980. In Riverside County, So. Calif, LEN is only opening one new project in all of 2008. They have finished pads and improvements (streets) ready to go in many projects where they built model complexes and 1-2 phases, and they didn't sell. Now, as in all recessionary times, the initial buyers who overpaid, want "something " built next door. They can't fund parks, rec centers, or even vote in a (non-builder) homeowner's association, without enough homes built, so they are pulling cheaper architecturals and in-filling whatever plans sold, and thereby placating the initial new-home community buyers. They are consolidating offices, slashed in-house marketing, and are entering the bunker to hunker-down for at least well into 2009 before our phone starts ringing again. 50% of architects will go out of business or depend (hopefully) on other income. 1990 all over again.

[WAKEUP]

It's the top of the first inning, and the first three batters walked.

[fabian]

With $ 90/k a year, a wife and a kid I still can't afford in a nice part of LA (at least 10% down and 30 years fixed). I'd have to put $ 6.5 k a year just for taxes for nothing fancy! That's ca. 34% of the rent I put for my 3 bd townhome and I don't have to pay for water (another $ 300/Mth). If it doesn't drop another 25% I don't buy, that's it.

[The Mayor]

Dear fabien_hug,

>I'd have to put $ 6.5 k a year just for taxes

We must cut government spending. Vote for fiscally responsible elected officials. I live in Illinois and it is completely out of control here. The teachers' unions are killing us with their out of control pensions(do you get a pension at your private sector job) and the school districts build unnecessary schools and then adorn them with fake $10,000 bells all at the taxpayer's expense. In my community of Naperville, Illinois, we are about to build a $150 million high school that isn't even needed. Government gone wild with tax and spend are killing this country.

[300mph]

It never ceases to amaze me that people put any stock at all in so called experts like John Hussman. John manages the Hussman Strategic Growth Fund which has been so heavily hedged that he has had trouble beating money market returns. Let's see how well John manages money: Total returns for 2006 and 2007 were 3.5% and 4.2% respectively, and he does this all for an expense fee of 1.1% per year. Does this sound like a money manager I should listen to?

[Scott Teresi]

300mph and gordon, if you look at John Hussman's returns since the fund's inception in 2000, the picture looks much better. Do you know of another fund that uses hedging to time the market that has been able to do better over the last eight years, with similar risk (bond-like risk)? Hussman's fund returned 10.9%. This fund may have a long-term place in a sort of "lazy portfolio," in place of part of a bond allocation.

[sopocistudio]

300 mph,

From what I've been able to ascertain, an absolute return will lag in a strong bull market....the hedges will see to that....the point is much less volatility over a full market cycle.

jan

[pairadox]

I've been house hunting in the Sacramento, CA area since Nov 2007, and in the last 6 weeks, homes started selling like hot cakes, many with multiple offers and over the asking price. Asking prices have gone up forcing me to shop in a higher sales price category. Fact, not opinion.