Linear growth in subprime defaults

Too many of the REIC insist that we'll see the rebound just around the corner. Take a second to look at that graph. My profession involves a heck of a lot of time looking at 'squiggly lines' and figuring out exactly what is happening. So I look at that graph, fair use from WSJ (below) and read it:

http://tinyurl.com/2gfjpt

What I see is linear growth in the subprime late payments. Maybe its going to slightly less than linear, but there is no way that ~16% defaults (going up) will help restart the market. Sorry Mr. bond trader, its going to get worse.

Also take a minute to look at Alt-A. Is it linear on a lesser slope or long term still accelerating? Now, the fact it is less than 4% makes it... not yet of concern. But look closer, it shot up when subprime left its 2nd saddle-point. In other words, they are not independent.

My prediction? We'll find a peak in subprime default rate(if for no other reason than defaulted loans will go through the foreclosure process) in the future. How far? I can see another saddle point, but the peak occurring in 2008. (I've blogged the credit Suisse graph before.) Credit Suisse shows the peak reset rate happening just before the end of 2007... but there is a time lag between reset and delinquency.

With Alt A, the peak reset is in 2010... gulp. That is probably in the trough... Alt-A is just going to be a long grinding pressure down on the market. Subprime is the kick that undermines the market.

If defaults even were to remain constant, the price declines would accelerate. Those graphs show that defaults will continue to rise. Thus I see the pressure on home prices to accelerate. (Oh look, rain is wet!) But this will be one trend I watch to see when prices might be near the bottom. It will lead the bottom in prices by 6 to 18 months. So there just isn't any rush to run in and buy.

Time for me to go jogging.

Got popcorn?
Neil

Aircraft, boats, and homes

I know I haven't been the best at keeping up the posts since the wedding. Mea Culpa.

Ok... no new information on Aerospace jobs in/out of California.
Other blogs are doing a better job of the inventory buildup and credit crunch. (If you haven't been following the bond market... you're not going to know what's about to happen.)

So I'm doing a little personal post on what the attitude is among the many people I run into.

Home sellers: Quite a few in my day to day selling. Most are arrogant; they *know* they'll get they're price. Funny... none of those guys talk about having sold a property... One coworker just cut his price $50k, sold, and knows he got lucky. Another sat down with me and has agreed to start cutting his price to move the place. Another is just paralyzed. He isn't ready to admit his home has lost $50k to $100k of value... so he just quotes his realtor.

Planes: I work in aerospace, so it shouldn't surprise you that I run into pilots day in and day out. They're always talking planes. "I'm now commuting in a commander as its 20 knots faster than my old cessna... yea, moved the engine over..." Normally, there are photos on the walls of the planes they're thinking of buying... Not today. Every is selling. Some really neat planes have been sold by my coworkers (including a WWII soviet YAK!). All are putting their planes on the block.

boats: The discussions on boat buying are just gone... even those that race have stopped talking about it...

I'm thinking the indefatigable American consumer is taking a breather.

When will they start up again?

No stats... but a definitive change from 6 months ago...

Got popcorn?
Neil

ABX in new territory

The ABX market has dropped into new uncharted territory.

http://www.eurobondonline.com/abx-HE-BBB-06-2.Htm

Anything below 82.5 cents is tough to trade.

This implies that the Bearn Stearns issues are NOT contained.

Expect credit to continue to tighten. Thus home sales to continue to drop.

Got popcorn?
Neil

Deep thoughts: Christmas is going to suck.

Today on the HBB I read about Germans being net sellers of Florida properties.

“Peter Feuerstein, an Anna Maria Island real estate agent who caters to German buyers, said taxes already are causing his compatriots to sell their houses and head home. One of his clients just sold his Anna Maria house for $455,000 because he was paying $11,0000 in taxes and another $10,000 for insurance and maintenance.”

“‘He told me that for $20,000, he can travel all over the world,’ Feuerstein said.”


While on vacation in Hawaii I read about how the Japanese are net sellers of Oahu real estate. (Sorry, dead tree edition of a local paper.)

Several years ago I was in NYC and *every local* was bragging about how the Europeans were buying floors of this building or that building.

The LA Times had an article on how Chinese investors (mainland), were buying California property on speculation...

Right now the sales are a trickle (until they get their Florida property tax bill...). What happens when they want their money back in their original currency? I have a feeling the dollar will hit a pretty low support level.

Now, this is all going from memory... But does anyone have a link to a graph of foreign owned property with time? Hopefully going back to 1970 or so...

All of this will be exacerbated by the Spanish real estate market (its going to spook international property investors). When? I'm still thinking not much until late Fall.

1. So combined with the ARM resets...
2. Foreclosures...
3. Foreclosures returning to the market
4. Jump in multi-family construction
5. Drop in Construction employment (look at Western Union Payments to Mexico. Its down $600 million/month and supposedly they send an average of $1,000/month each... Yes, wages in construction are down, so it might not be a cut in employee count...
6. Weak car sales (read Detroit layoffs)
7. Negative savings rate (that will bite us some day...)
8. Home afford ability in LA at 2% per Wells Fargo...
9. Credit tightening
10. Down payment requirements creeping up
11. Interest rates creeping up
12. Stagnant wages (certainly in real terms)
13. Rapidly dropping MEW (which supports our trade deficit).
14. Rising credit card debt (expensive debt...)

I'm officially predicting that Christmas 2007 will suck.

2008 will be worse.

None of us want this. Even bears lose money in bad bear markets.

But I think foreign real estate sales of US residential market could prick the bubble in Florida, California, Hawaii, and New York. Probably Boston and DC too...

Got popcorn?
Neil

Real Estate Emotions June Update

I'm finally back long enough to update my "real estate emotions" series. The purpose, for me and my friends, is to get a better idea of when to buy and how this market is progressing.

The emotions:

1. Optimism
2. Excitement
3. Thrill
4. Euphoria (market price peak) Peaked in late 2005/early 2006
5. Anxiety (I'm a long term investor, not a speculator.)
6. Denial (Reached in October of 2006 until mid-May of 2007)
****7. Fear (Reached in mid-May of 2007). *****Current state****
8. Desperation Predicted to start in mid-October/November/December 2007
9. Panic: Early 2008 looks to be the start. Exactly when? Depends on the credit markets.
10 Capitulation Could it be summer 2008?
11 Despondency (start of market price bottom)
12 Depression (end of market price bottom) Not before summer 2010
13 Hope (hey, this investment has picked up off its bottom)
14 Relief (Its almost what I paid for it...)
15 Optimism (cycle starts again)

We're really staying on the same timeframe. Compared to early predictions of mine, the market bottom has shifted to the right.

This is an article from one of my favorite blogs:
http://calculatedrisk.blogspot.com/2007/06/fannie-mae-on-228-delinquencies.html

Notice something? Mortgages that reset in 2006 have ~12% that are "problem children." For Mortgages that reset in 2007 its 18% (and the resets just accelerated).

For the 76% of the mortgages that reset in 2006, how many were sold to solvent end users? How many were refinanced?

I believe it will get very ugly post "back to school." Tighter mortgage markets, more inventory, and seasonally slow sales piled onto a declining sales line.

Also don't forget the ARM resets:
(Fair use of the image from the famous Credit Suisse report):
We're still in month #6 (June 2007). My "calibrated eye" reads ~$37billion resetting this month. In October/November/December where each month breaks $45 billion... could be interesting (hence my prediction on the transition to desperation).

I should note in the last downturn it took ~3 years to go from fear to Despondency. It took the Northridge earthquake to rush people into Capitulation. I believe we will hit a hedge fund margin call mania in 2008 that will accelerate the process.

I could be wrong... in which case the emotional states will linger.


Got popcorn?
Neil

ps,
I'm very disappointed in my apartment complex selection. For one reason only: they started letting in section 8. (I should have realized that when they cut rents to *just* below the section 8 threshold in this townhouse complex... Why didn't I find out what that threshold was before signing a lease... My mistake.) I believe in 8 months I'll be posting about another move. (Heck of a lot better than if I had purchased a house...)

pss
We're still settling in to married life, so expect less frequent updates.

I'm back! Impression of Hawaii

I'm back a bit early from the honey moon; a side trip was canceled, you see yours truly is sick and the wife chose to go back to work to preserve vacation. No biggie.

Ok, update on Hawaii.

Kauai: Lovely island, well worth the visit. However, say good bye to so much of the green space. The ranch where we zip lined (east side, near Priceville) is being sold off to Bill Gates and friends to create a retreat for the uber rich. (They even stretched the Princeville airports runway so that small business jets can get in an out rather than being limited to prop-jobbers.) The amount of construction everywhere was mind boggling.
Kauai emotions: Anxiety (the 9% uptick in tourist dollars, primarily from west coast fliers has them thinking they're ok. They probably are for a few more months ok too... but lots of properties for sale. In some condo complexes as much as five units.

The big Island of Hawaii. My favorite Island of this trip (even though we did more activities on Kauai). Some concern... tourist dollar growth is below inflation and they know it. The USA's largest new suburb is going up on the big Island (under the volcano... sell it to me baby!). A huge fraction of building being built, many for sale.

Emotion big Island of Hawaii: Denial


Oahu: Fun island even when you are sick. ;) Fast passed. The economy appears to be driven by big-spending Japanese tourists. However, the number of Japanese tourists is down 10%. We stayed in an awesome hotel, Prince Hawaiian, that caters to the Japanese customer (but lately has been forced to switch to Priceline/business customers that pay 33% to 66% of what the Japanese tourists were paying. The staff of this hotel is amazing. They also will happily chat with you. The kid who drove the courtesy van was quite worried. He gave the following reasons for the Japanese slowdown (and that is all that is hurting Oahu right now).
1. ANA and Japan Airlines have raised faires.
2. Cheaper vacation alternatives for them in Asia/Australia.

He also noted the Japanese were selling their Oahu properties to reinvest elsewhere.

Emotion on Oahu: Fear No doubt about it. Tables were available in restaurants that never have tables available post memorial day... something is up.

Yes, no statistics, just a few observation. I was enjoying an incredible honeymoon. :) My favorite part? The helicopter tour. All the stats are from a big Island newspaper that is somewhere in my laundry filled luggage. ;)

Got popcorn?
Neil