INVESTMENT INTELLIGENCER

Housing Market Still Getting Worse

Henry Blodget submits: According to Asha Bangalore, new home sales declined again in February and are now running at a pace not seen since June 2000 (see March 26 Daily Global Commentary)  The supply of new homes, meanwhile, rose to 8.1 months, a level not seen since 1991.  And the number of completed homes for sale in February set an all-time record. 

Asha's previous commentary, on existing home sales, was slightly less discouraging: the pace of price-declines has moderated.  For three reasons, however, Asha still considers the relatively good news of the past few months in existing home sales to be temporary: tightening mortgage lending standards, less availability of subprime financing, and rising delinquencies.  She also notes that, despite a pick-up in February in the number of houses sold, the total inventory also increased. 

So it seems as though those jubilant shouts about the housing market having stabilized may have been premature.

Are We Already in A Recession?

Recessions are not only hard to predict, they're also sometimes hard to identify until after-the-fact.  For example, as Dan Gross describes in this NYT piece, back 2000, very few economists saw any trouble on the economic horizon.  Many economists, in fact, kept pooh-poohing the idea of a recession until the government figured out (through data revisions) that we were already in one. 

These days, few economists are expecting a recession.  The sub-prime woes, the bull theory goes, are limited to a tiny segment of the mortgage market, the housing recession won't spill over into the rest of the economy, the ever-optimistic consumer is charging right along...etc.  The stock market, of course, is telling a different story.  The market doesn't always get it right, but it probably gets it right more often than economists (which isn't a knock against economists: If predicting the future were easy, everyone would do it).

In any case, given what happened last time (optimistic economists and investors + tanking market + deteriorating fundamentals), perhaps we should stop asking whether we are going to have a recession and start wondering whether we are already in one.

Roubini: Sub-Prime is HALF the Mortgage Market

Nouriel Roubini argues that housing bulls who believe "sub-prime is only 6% of the mortgage market" are hallucinating.  The real figure, he suggests, is closer to 50%.

Roubini's logic?

1. Sub-prime are now 13% of the stock of mortgages, not 6%.
2. Sub-prime mortgages were at least 20% of mortgage originations in 2005 and 2006.
3. The same “monster” lending practices used for subprime mortgages were also used for most “near-prime” and “prime” mortgages.
4. Many pseudo “near-prime” mortgages (such as Alt-A) are undistinguishable from sub-prime ones and have now sharply rising default rates
5. What is defined as sub-prime is subject to highly cosmetic accounting by banks: the rule that FICO scores of 660 or below are sub-prime is often diluted down to 630 or even 620 to exclude many mortgages from a sub-prime classification.
6. Counting all of the categories above, subprime-like mortgages accounted for almost 50% of all originations in 2005 and 2006 not the 6% figure spinned by the industry lobbies.

Will sub-prime spill over into "near prime" and prime"?  Others will no doubt argue "no," but the logic is familiar.  I will never forget the morning meetings in the fall of 2000 when technology analyst after technology analyst argued fervently (and convincingly) that the consumer-Internet meltdown that had clobbered the wacky dotcoms would never spill over into telecom equipment, semiconductors, software, etc.  It took six months, but boy did those dominoes fall...

Housing Has Not Yet Begun To Bust

Two articles support the theory that exuberance about the housing market's "stabilization" is probably premature. 

In the first, Gretchen Morgenson of the NYT explains why the troubles we've recently seen in the mortgage market may be only the beginning.  The key point?  For obvious reasons, banks are loathe to acknowledge that they've either made or bought crappy loans, so rather than pushing for immediate foreclosure, they allow borrowers to delay payments or otherwise enter a "workout" period.  For debtors who couldn't afford the mortgage to begin with, these workouts just delay the inevitable, so loans (and lenders' balance sheets) that look fine may not be.

In the second, my colleague at Slate, Daniel Gross, highlights the similarities between what real-estate analysts and investors are saying now and what technology analysts and investors were saying in mid-2000, when the technology sector had just suffered a "correction." (I'm intimately familiar with the latter, having been one of those analysts.)  In short, many real-estate analysts, led by the ever-sunny David Lereah of the National Association of Realtors, believe that the housing market has hit bottom and that prosperity is just around the corner.  And so did most tech analysts, in the summer of 2000, when the NASDAQ was clawing its way back toward 4000.

About That Housing Market Stabilization...

Amid glowing reports that the housing market has stabilized come anecdotes like this one, about a spike in foreclosures in Massachusetts. 

Mass. foreclosure filings smash record (From Boston.com)

January had the highest number of monthly Massachusetts foreclosure filings in at least two decades as local consumers struggled to hang onto their homes, according to a new report.

Last month, 2,207 foreclosure filings - or 110 every business day - were submitted in Massachusetts, more than double the number of a year ago; filings in January 2007 were up 105 percent from 1,076 filings in January 2006, according to ForeclosuresMass.com, a Framingham firm that provides online Massachusetts foreclosure data to investors, real estate agents, and lenders.

"The flood of foreclosures in Massachusetts is not only continuing; it has reached a new high," company president Jeremy Shapiro said in a statement. "The fact we are starting the year with the highest number of foreclosures we've ever recorded for a single month is more than significant - it's ominous."

Because housing is one of the sectors that could bring the whole economy down (similar to tech/telecom/media in 2000), resolving the "stabilization" question is important.  Although the Massachusetts and other "subprime" anecdotes concern mainly the low-end of the market (and all those poor folks who hoped that interest rates would stay at Japanese levels forever), the contagion could still spread--especially if long rates ever tick up.  Given this, combined with the fact that down cycles in housing usually last about 5 years, not 1 year (and usually trough well below the long-term trend line), the wise conclusion is probably that we're still closer to the beginning of the housing "correction" than the end.