Today’s links: The Housing Market

(cross posted at Risk and Return)

Paper Economy has taken a close look at what it will take to get inflation adjusted housing prices in Massachusetts back to trend over a five year period. It should be noted that for this to happen sooner the decline would have to be deeper (due to inflation doing less of the work for us.)

The following chart (click for much larger version) shows that in order to bring Massachusetts “real” home prices (as tracked by the OFHEO home price index for Massachusetts) in-line with the average annual return of 2.5% seen since the early 1970s, nominal prices have to complete a 16.8% decline (or 28.8% in “real” terms) from the latest peak.

Housing Massachusett's

To date, prices have only come off 3.5% so more downside seems inevitable.


Although the forecast I have provided shows prices declining through 2012, it’s always possible that the decline will either be slower or faster likely based on wider economic events (recession etc.) so I will continue to update this chart monthly with the latest actual data to get a sense of how the adjustment is actually occurring.

I believe that using the 2.5% average “real” rate of appreciation represents a very conservative guide as there is no evidence to suggest that this rate of appreciation can’t fall to 2.0% or even lower.

Consider for a moment that with the complete 16.8% decline, nominal home prices would simply revert back to where they stood during Q4 2003.

To put it another way, if prices do go back to trend it could be even worse. Massachusetts is not where the worst damage is likely to occur:

I will provide the same analysis and charts for many other areas around the country but with just a cursory look, there are areas like Miami, Phoenix, and Las Vegas that look simply hideous with truly tremendous corrections in store to put those markets back in-line with their historical averages.

Is that too pessimistic? Maybe, but this little tidbit keeps my optimism in check:

William Lyon Homes is a builder that operates in California, Arizona and Nevada. It just sold Resmark Equity Partners a portfolio of 604 home sites and five model homes in a handful of Southern California communities. The properties are finished or near-finished home sites. Resmark says the homes were being carried at a book value of $210.7 million as of November 30. The firm paid $90.6 million. That’s a 57% discount for those of you keeping score at home.

If you’ll recall, this post noted that at least one other real estate deal was done at 40 cents on the dollar. The “good” news? Real estate buyers are stepping up and purchasing residential property. The “bad” news? They’re paying dimes on the dollar for it, a sign that new and existing home prices have more room to fall.

Or this:

Lennar Corp.’s November sale of 11,000 properties in eight states set a price that may mark the bottom for the U.S. housing market: 40 cents on the dollar.

“That’s how much Morgan Stanley Real Estate paid for an 80 percent stake in the 32 communities, 60 percent less than the price at which the properties were valued just two months earlier. That’s also what some investors say they would pay for distressed land, communions, homes and whole developments, whether it’s now or later this year.

That doesn’t mean prices in general will go that low, but some markets are seeing these events. Here is a look at the overall market in California. Individual homes may not be there, but obviously they will likely go lower.

As for the view from the investment banks trying to get a handle on this UBS gets points for honesty, at least on this:

We cannot, at this time, accurately predict the future development of US residential mortgage markets and therefore the ultimate impact on our positions in sub-prime mortgage related securities.

Given Merrill Lynch is staring at another $15 billion in write offs and Citigroup is writing off another $20 billion I would suggest they are right about their ignorance.

Undoubtedly there will be more, as many of these losses cannot be written off given regulations designed to avoid “managing earnings” until they can satisfy regulators that the losses can be documented. Thus investors clamoring for firms to just come clean and get everything out in the open are unlikely to be satisfied. Since many of these loans will not start turning bad until the latest rounds of mortgage resets occur, and until the pain has gone on much longer and prices drop even more, we have a long way to go.

One effect, declining employment in finance. Despite the latest jobs numbers, which through statistical estimation (which usually lags turning points in employment) showed a gain in financial sector jobs, actually looking at the sector produces a rather different take. For example check out this headline:

Nearly 90,000 mortgage jobs eliminated
Countrywide shed most jobs in mortgage disaster;California hit hardest; more cuts expected.

What is frightening is that there are loan losses not directly related to the mortgage and housing mess that are still to come. More on that later.

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