benjamin_bear

Property Values Set to Fall 43% from Current Depressed Levels

It's true that home owners can choose not to sell and thus reduce dropsin property values. However, this cuts both ways. In LA, affluent home owners have decided to hold on to their homes and thus property values are showing very modest declines in neighborhoods like Santa Monica and Brentwood. But if the only homes being sold are at drastically reduced prices doesn't that bring down the entire area's property values?


On Nov 02 10:34 AM JS Partners wrote:

> Consumers, investors and all other people who are not underwater
> (which remains a segmented question) do not want to realise the loss
> on their home but instead would rather choose to use it for practical
> reasons or seek yield however small.
>
> This could certainly prevent a further 40%+ slide in the residential
> market. And when you see the forced sellers exit the market (like
> now) there should be a degree of stabilisation. The same way that
> the market got exhausted from buying, there will be an exhausted
> seller who would rather sit on a house for 10 years than lose 40%.

Beginning of Stabilization in Housing?

I am surprised there are so few comments about rent vs. buy. Home prices won’t stabilize until the premium for mortgage payments comes down (there will always be some premium because of tax benefits and life style preferences).

A drop in mortgage payments could happen in a number of ways: (a) lower home prices (likely) or (b) lower interest rates (unlikely). Stricter lending guidelines have probably had the most dramatic effect thus far on home prices. Simply cutting out all the fake demand created by exotic mortgages (negative equity, interest-only, Alt-A, etc.) has been bringing home prices back to 2004 levels since people can afford much less home with traditional mortgages.

The next step and bigger unknown will be the impact of excess supply. All these homes on the market (new construction incentives, speculators walking away from their homes, foreclosures) will continue to pressure home prices. How much prices drop depends on the urgency to sell.

Ironically, as home owners leave the market and become renters, there is a stabilizing effect on home prices. More rental demand drive up rental prices, which cuts the premium on ownership vs. remaining a renter.

The biggest variable on the horizon, in my opinion, is how much inflation we will experience in the upcoming years. How would high inflation affect our low interest rate mortgages? You can bet that there would be plenty more downside in home prices at that point.

So where are we now? Fortune says we are on the order of 20% over-valued in the formerly hottest real estate markets. NY Times says that home prices would have to go up 5% a year for 5 years to make buying a home a clear-cut decision. Over-valued? Yes. Grossly over-valued? Not really.

And to those thinking there is something catastrophic going on in our economy that will hit home prices further, I would add that most of the macro-economic numbers are still fairly strong. GDP Growth is anemic but ok. Unemployment is STILL historically low which is the key to consumer spending (2/3 of GDP). Most likely, we will just kind of bounce around this level surrounded by lots of fear and uncertainty for a few years. Then we’ll just get used to it.

Mannkind: Overlooked Biotech With Excellent Prospects (Part II)

Can we really dismiss the lung cancer risk so quickly? The two points raised are (1) the incidence of lung cancer in trials is similar to the general population (G.P.) (2) the number of cancer events in the study population was not large enough to prove a statistical, much less causal, relationship

The question is whether the general population (G.P.) an accurate comparison. I would expect the study group (including the placebo group) to skew younger than the G.P., where the incidence of lung cancer is lower. Hence, the incidence of lung cancer in the study groups may be elevated when adjusted for age.

The rate of [former] smokers in the study group compared to the general population hasn't been clarified. It may be different but I would expect smokers to be represented roughly equally between the drug and placebo study arms. Having 5 times the incidence of an adverse event, even a rare event should be a concern. There are a number of ways the FDA could respond to this (approvable letter, restrictive language on label, etc.) particularly with a relatively new modality of administration (‘deep lung’). The most positive point to consider here is that Exubera was approved so to the extent that Mannkind’s approval process parallels with Pfizer, this bodes well.

Ultimately, the biggest variable may be the level of market acceptance post-FDA approval. Will competitors be able to out-market them? Will doctors be hesitant to try the product? (medical advantages alone do not win the market)

The Case for AIG - Patience Required

Interesting post but logically flawed. Main question is where AIG stock is headed. Probably up, eventually, given how negative the sentiment is. More importantly, insurance is a pretty good industry. AIG is protected by regulation that serves as a barrier to new competitors. Plus, they have plenty of scale to drive earnings out of every incremental dollar of revenue. The long-term prospects are decent.

However, banking on "write-ups" does not make sense. The point about write-downs being reversed is not well-presented here. Derivatives based on residential loans face a permanent valuation hit. It might come back a little but with the highest default and foreclosure rates in years coupled with severe housing price declines most of the value is gone.

If it is gone, where did the value go? First, loan payments stop or decrease when a loan goes into default/foreclosure or gets renegotiated. The riskier loans (alt-A, subprime, etc.) with the higher interest rates are the ones that take the hit first. I don't know if these were the most profitable but they definitely paid a higher interest rate than the prime loans. Some will argue that there are still many performing loans and that the ones in default are a relatively small percentage. This is true, but if you then add 10:1 leverage and even minor increases in default will completely and permanently wipe out the value of those fun-loving CDO's.

Thoughts?

Is there value still there? Sort of. There's still a house standing and someone still owns it. Unfortunately that's of dubious benefit to AIG's derivative portfolio.