This from Reuters.com today: The percentage of U.S. homeowners that owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March as home prices continue to fall, according to Deutsche Bank. The biggest damage will be to so-called “conforming” loans that meet the standards of government-supported Fannie Mae (FNM) and Freddie Mac (FRE). 41% of conforming loans will be underwater by the first quarter of 2011, up from 16% at the end of the first quarter of 2009.
That follows the logic I laid out in my 11:57 post this morning. The first mortgages to go in a crisis are those to the least qualified borrowers. As the crisis rolls along these weaker borrowers get washed out first and to the degree that the houses they owned tend to be concentrated in specific neighborhoods and markets, the prices of that real estate falls first and hardest.
But as the crisis goes along and as the economy keeps sinking, better qualified borrowers start to give in and real estate in the places that have held up best finally starts to fall in value.
So cheer up. The fact that prime and conforming mortgages and the price of the homes they financed have finally joined the disaster is a good sign. It means we’re closer to the bottom.
Although as Wylie E. Coyote could tell you, it’s the bottom that really, really hurts.
A few months ago I found what I thought was reliable information (don’t remember where) that about 40% of real estate was owned free and clear. The data was about the same for homes and commercial property. If 48% is underwater, and 40% is free and clear, that leaves only about 12% of mortgages that are paid down to something less than the property’s value. I find that hard to believe.
Thanks Jim. I just read that Wall street banks will make $1billion out of AIG split-up fees from government. (AIG’s market cap is only $3billion even after yesterday’s 60% gain.) I can understand how they make their money.
I am new to you web page. Really like your postings. Thanks.
x, I’m glad you put “strong” in quotation marks. What the banks ar reporting is that they’ve seen big profits from things like trading or mortgage originations that have offset still growing problems in things like credit cards and mortgages. The rally is built on the resulting improvement in earnings because investors, right now, ar impressed that banks aren’t plunging off the cliff. I’m concerned about the quality of that earnings improvement. The source of the revenues that are carrying many banks, certainly the big banks, are very volatile. Tradng gains can quickly turn into trading losses if your traders get it wrong. I think we’re under-estimating the degree to which the banks still have huge problems–and in some segments such as commercial mortgages the problems are still getting worse.
http://articles.moneycentral.msn.com/Investing/CompanyFocus/why-are-company-insiders-selling.aspx?page=1 insiders are getting rid of real estate stocks
The mortgage crisis was one one the major reason’s we have had this recession; however, home prices seem to be hovering around 2003 prices, while the stock market has fallen to 1998 prices. This I don’t understand.
Is this because a home is one “investment” that an individual can own that is leveraged making even a small increase seem huge for the money that is put down. For example a home bought for $100,000 dollars with $20,000 down increases by $5,000 is only a 5% increase to the total home price but is a 25% gain from the money put down. Also, it is a tax free gain if you live in the home for more than two years. This still seems to trump the market every time. It seems to me this is what helped spur the insanity of the housing market and this has not changed. It has also, kept young people out of the market since salaries have not kept pace with housing.
I know all real estate is local, here in the Washington DC area real estate has tripled since 1998 to the highs of 2006. Unheard of in the history of real estate. Now that it has dropped, it has only doubled since 1998. Not bad for for an investment that went up based on lies and deceit.
I don’t know if this is typical since nothing in DC is typical.
Jim glad to have you back.
Hi Jim,
By reading more articles about the real estate market, I am getting more confusing about whether it’s getting better or it’s getting worse. Some are arguing that the real estate market is bottoming or at least it’s stabilizing by pointing out that the homes –sold volume is up and the inventory is down throughout the US. Even the widely followed S&P/Case-Shiller index of housing prices showed a gain in prices in May from April, as you sited in your other blog. Your blog here is saying the mortgage defaults will be spreading and the home price will go further down. I know there are always different schools of thoughts on any subject, but why all other analysts on the ‘up side’ not seeing what you (and others) see? Or do they simply have the different interpretation on the matter of the ‘spreading of mortgage defaulting’? I also noticed that the home builder’s ETF XHB is having about 19 up trading sessions over the past 20 trading days. I am interested in reading more of your post on this subject if you can. As always, I appreciate your knowledge.
– Fan
I am still waiting for the commercial real estate crisis. It was expected to come sometime this year; however, regional banks are still doing OK.
Same question as x Jim. The banks are rallying strong and steadier than almost any sector lately. What’s up with that?
Jed
Why the banks are still posting “strong” earnings? Are these defaults going to hurt them, eventually? When? A lot of analysts on TV are recommending bank stocks. I am a little bit confused.
ar ar