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Seth Chalnick
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As a seasoned real estate broker and registered mortgage advisor, I enjoy helping people buy, sell, and finance San Diego real estate, while delivering uncensored take on trends behind the headlines. I stand fiercely committed to separating commission from advice and believe this value is the... More
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  • 10 Reasons Why Real Estate Won't Bounce 2 comments
    Jan 7, 2010 8:07 PM | about stocks: XLY, SPY, XLF, KBE, IYR

    1. At best, maybe 25% of all mortgages that have defaulted since the beginning of the subprime crisis has been dealt with via foreclosure and subsequent resale or short sale. 

    2. Since the record foreclosure statistics we saw two years ago... we have only had an increase in loan defaults, not a decrease. And yet closed sales do not reflect anything near this quantity. Heck, we don't even have the inventory of homes for sale because the banks have not yet foreclosed on them. Where are some folks are getting the idea that this has been resolved? The only resolution has been relaxation of mark-to-market accounting standards and sweeping the crap under the rug.

    3. As of Tuesday, in my area, there are a combined 19,453 active foreclosures that haven't hit the market yet. That's more than twice as many homes that are currently on the market.

    4. The homes in some stage of active foreclosure are only a small minority compared to the homes that have defaulted that are not yet in active foreclosure.

    5. Prime loan defaults are just now starting to default. The rate is up almost 20 percent from the previous quarter and more than double a year ago... right on schedule and perfectly aligned with this chart, which opponents argue presents "very stale 2005 CSFB data".

    6. The magnitude of the prime pool is approximately 3x that of subprime.

    7. The payment shock on a 5% five year interest-only loan, that re-sets to a 5% 25 year principal-and-interest loan... is 40%. This means a dude with a $400k loan will watch their payment increase from $1,666/mo to $2,338/mo overnight. This means a dude with an $800k loan will watch their payment increase from $3,333/mo to $4,676.

    8. All of these woes exist despite unprecedented stimulus and zero interest rate policy. Imagine what happens when rates rise!

    9. Some folks who complain how stale this re-set chart is may benefit from a quick glance at their own mortgage repayment terms. They may be sick of looking at the chart, but it's the only one that seems to be telling the true picture these days. Seems to me this stale chart gains relevance every day.

    10. For all the hoopla we heard about derivatives as potential weapons of mass destruction... not only has there not been a resolution, but as far as I can tell, it seems they're still writing them!

    Our fearless leaders just voted to raise the limit on our countrywide credit card, so that other countries won't stop lending to us. Wouldn't it be great if we could all do this? Only problem is, at the rate we're spending, we can only float that sick new countrywide jetski for another 8 months or so. I guess we'll just raise the limit again when we need to bailout the next big bank.

    Disclosure: None


    Stocks: XLY, SPY, XLF, KBE, IYR
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  • Michael Clark
    , contributor
    Comments (11732) | Send Message
    Another good article, Seth. I have another reason:
    Historical average gains in housing are 2% per year, 3% tops.


    From 2001-2007, some housing markets gained 200-250%.


    Math suggests these gains from 2001-2007 should have been 21% at the high end.


    200% minus 21% suggests we should see a pullback in housing prices of much more than 30%, if we are returning to the averages.


    A $180,000 house that appreciated by 200% from 2001 to 2007 would be valued at $540,000 in 2007. A decline of 30% (considered by most quite steep) would bring the price down to $378,00, a loss of $162,000.


    But, considering that the house 'should' have been selling (by historical norms) at $201,000 in 2007, instead of $540,000, that is a discrepancy of $339,000 NOT $162,000. This house, in fact, needs to decline $177,000 more.


    The housing market is NOT the stock market. Housing MUST BE BASED on affordability factors (salary being the prime issue, interest rates also, to a minor extent). Housing appreciates 2-3% a year BECAUSE this is historically what salaries appreciate. This isn't rocket science.


    Wall Street tried to turn housing into another stock market -- and we are now experiencing the results of that. We have to have prices return to the norm, or we all have to receive raises in pay and retirement pensions of 200%, so we can again afford American housing.


    The geniuses on Wall Street miscalculated.
    8 Jan 2010, 07:29 AM Reply Like
  • Seth Chalnick
    , contributor
    Comments (172) | Send Message
    Author’s reply » Hi Michael,


    The reason you added is another good one indeed, and likely one of numerous other ideas, which should probably be added. I had a couple of others too but thought 10 was a nice round number... ha!


    I was hopeful the editors would publish this piece as an article so that the exposure would give lots of contributors the opportunity to add their two cents, as well as stimulate some debate.


    Anyway, thanks a lot for following my shizzle and if this piece does switch to article status, I'd encourage you to re-post your well thought out contribution for others to see.


    8 Jan 2010, 11:28 AM Reply Like
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