Wednesday, August 25, 2010

Are You Ready For This?
Pimco's Bill Gross estimates mortgage rates would rise 300 to 400 basis points without government owned Fannie Mae and Freddie Mac assisting the housing market.   This is because the two agencies guaranteed, through mortgage purchases and subsequent inclusion in mortgage backed securities, 95% of the mortgages created during the past year.  Fannie and Freddie don't guarantee a borrowers mortgage payments, which would create moral hazard, they buy mortgages from banks and include the mortgage in huge mortgage pools, which are sold as bonds.  Fannie and Freddie therefore guarantee the bonds, not the underlying mortgages. 

Without the agencies' mortgage securitization program, there would be much less capital for mortgage lending.  Banks would have to hold the mortgages in their portfolio, leaving much less capital for new mortgages, and borrowers would be subject to strict underwriting due to limited capital.  This makes the assumption that private mortgage securities would not replace the agencies' role of buying mortgages from banks.  But even if private mortgage pools emerge, it is unlikely they'd completely fill the void of the agency debt, and they would not have the guarantee of agency debt.  I have been telling people that while no one likes the idea of government in the mortgage business, are they ready for mortgage rates 300 to 400 basis points higher than current rates?  This weeks' poor housing numbers would look like like boom times compared to numbers if long term mortgage interest rates suddenly jumped from 4.5% to 8.5%.  The price adjustment to housing would obliterate the economy and wipe out the wealth of even those that did not buy in the bubble period of 1998 to 2007.

Tuesday, August 24, 2010

More Housing
This morning's exisitng home sales numbers for July were bad.  The decline was worse than projected, but in line with the "whisper"numbers.  Calculated Risk has a good summary of the sales figures and excellent supporting graphs.  The jump in inventory stood out to me.  There is now 12.5 months of supply, where the average is closer to 6 or 7 months, which is going to hinder price increases.  I am trying to look at the bright side.  The annualized home sale rates was 3.8 million homes, which breaks down to 316,000 homes sold.  I am not 100% positive, but think I remember hearing on Bloomberg radio earlier this year that the normal housing demand. based on demographic factors alone, is closer to 500,000 or 600,000 home sales per month.  July's figures were well below the sustainable demand. Homes sales have to start increasing just to reach their sustainable average.  Mortgage rates are historically low, and I don't see this changing in the near future.  Low rates will attract buyers at some point.  (Existing home owners that refinance at current low rates will have extra monthly cash, which is positive for the economy, but this is not a subject for this post.)  The housing market will benefit in the coming months from low mortgage rates and pent-up demand (i.e. home sales reverting to their mean), at least that's my opinion.

The impact of the first time home buyer tax credit, which expired in April, inflated sales figures last year and earlier this year, and are weighing down numbers now.  Calculated Risk said all along that the tax credit was providing an unsustainable boost to the housing market.  But I didn't read or hear too much else about impact of the artificial demand.  CR was correct, and today's numbers should not too shocking.   I hope the government resists the urge to step into the housing market again.  Potential home buyers waiting for further government assistance are going to miss a great opportunity.

Monday, August 23, 2010

Housing Article
Here is a New York Times article I have seen linked several places this morning.  The article jumps right to the point:
But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.
I hate "new paradigm" thinking.  When experts say "never again," that's a sign that there will be an "again."  I remember sitting through a number of presentations in the late 1990s where "experts" said that the tech stocks were experiencing a new paradigm,  and that traditional equity valuation methods were a thing of the past, or that technology was its own asset class, and that income investing made no sense, to name just a few absurdities spawned by the tech boom.  These experts' advice looked reckless when the stock market tanked in the early 2000s and tech companies without revenue or earnings went away.

Reading the article reminded me how the tech pundits overreached.  There are no new investing paradigms, just variations on existing principals.  Investment bubbles and bubble thinking are an investing paradigm and have been around for thousands of years.   Housing experienced a bubble in the 2000s (much like tech in the 1990s), and people used their homes to finance lifestyles, counting on rising market values and easy credit.  Real estate gurus, like tech stock gurus, were a dime a dozen.  Those days are gone, and the home prices dropped significantly.   People that bought homes during the bubble will have a long hold period, but home buyers today should fare well, especially if they take advantage of current low interest rate mortgages.

People used to buy a home, paid their mortgage, and at the end of mortgage owned the home and all its equity, which was either passed on or helped fund a retirement.  The notion of waiting thirty years for equity evaporated in the 1990s and 2000s.  Banks and mortgage brokers invented methods that allowed homeowners to tap their home equity, which effectively turned homeowners into renters.  A return to patience in home ownership is not a bad thing and will prove rewarding.

Tuesday, August 17, 2010

American Crapital Development
I received an email solicitation from a secondary tenant in common market maker this afternoon.  The information was on an American Capital Development deal originally syndicated in June 2006.  The email did not offer too much data on the deal - 212 units in Washington State and the equity is being offered at $67,591  -  but what stuck out to me was it was not paying a distribution.  Why is that not a surprise coming from this sponsor?
10-Q Season Is Here
How exciting!  I will be reviewing select 10-Qs over the next few days and will pass along any interesting information.
Freddie and Fannie
Here is an interesting article I saw this morning.  Both Freddie and Fannie are fun political whipping boys, but this paragraph underscores their importance to the housing market:
More important, shutting down Fannie and Freddie and having the private market step in, as politically popular a sound-bite as that may be, is economically unfeasible. For better or worse, Fannie, Freddie and Ginnie Mae were behind 98 percent of all mortgages in this country so far this year, according to the Mortgage Service News. Pulling the rug out from under them would be pulling the rug from under the entire housing market as it continues to struggle.
I think we're stuck with these two firms, in some form, for the near term, unless everyone is ready for a huge drop in housing prices due to lack of financing.  PIMCO's Bill Gross had some provocative comments on Freddie and Fannie this morning that I need to read.