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February 20, 2010
Issue 84  -  Let's Talk About Real Estate
As I mentioned last week, real estate looks like it is starting to turn down again.  I've shown and talked countless times that this was very predictable.  The whole key to this is mortgage resets:

I've shown many versions of this chart and this is a new version I've found. (If you want to see the other versions just click on the charts tab to left)  What you see is the various types of mortgages that will reset each month.  The higher the bar, the more people who must have their mortgage adjusted to a new rate.  In almost all cases this adjustment is up.  Looking forward, the resets have just bottomed and are now starting up.  This really starts to accelerate in May.  What does that mean?  More people who won't be able to afford their new mortgage payments which leads to more foreclosures.  After the reset occurs, it takes about 6 months for the foreclosure, so the real impact is delayed.  If we have just started to get more resets, what does this story imply about the future:
US mortgages foreclosing, delinquent at 15 pct Q4-MBA

NEW YORK, Feb 19 (Reuters) - A record proportion of U.S. mortgages were in foreclosure or at least one payment past due in the fourth quarter, according to industry data showing the fragile state of the recovery in the housing market.
The Mortgage Bankers Association said on Friday the combination of loans in foreclosure and at least one payment past due was 15.02 percent on a non-seasonally adjusted basis, the highest ever seen in the survey.
However, the delinquency rate for mortgage loans on one-to-four-unit residential properties fell to a seasonally adjusted rate of 9.47 percent of all loans outstanding as of the end of the fourth quarter of 2009, down from 9.64 percent in the third quarter, but up from 7.88 percent in the same quarter a year earlier, the MBA said in its National Delinquency Survey.
The percentage of loans on which foreclosure actions were started fell to 1.20 percent in the fourth quarter, down from 1.42 percent in the third quarter, but up from 1.08 percent in the same quarter a year earlier, the MBA said.  The U.S. foreclosure inventory rate for all loans was 4.58 percent in the fourth quarter, up from 4.47 percent in the third quarter and from 3.30 percent in the fourth quarter of 2008.  The records are based on MBA data dating back to 1972.
So foreclosures are at a record with the resets at a low?  That doesn't bode well for the rest of the year.  In fact, this GUARANTEES that real estate prices are headed lower.  It is time to sell real estate, not buy.  If you can sell now, you are going to get the best price for your home.  When will the prices bottom?  From looking at the chart that will be late 2012 or early 2013.  This doesn't mean prices will start back up then, just that prices are likely to be near the ultimate lows.  Why else do think prices are far from a bottom?  Take a look at this chart:  (from contrary investor)
This chart is very illuminating in regards to where housing is headed.  The top of the chart is the vacancy rate of houses which is basically a measure of total houses that are "empty".  Believe it or not this equates to over 2,000,000 empty homes.  Think about that.  Now there is an average amount of empty homes as there are always transitions, but the average is only 1,115,000 so there are nearly 900,000 empty homes that shouldn't be empty.  Rental vacancies are also near all-time highs.  Not encouraging either.  Lastly the home ownership rate is still about 2% above the norm.  This was caused by the insane government policies encouraging EVERYONE to own a home.  This is lunacy.  Everyone doesn't need a house and in fact, many shouldn't have a house.  To retrace back to the norm, home ownership must drop another 1.8%.  That doesn't seem like much but it amounts to over 1,300,000 homes that shouldn't be owned by the occupant.
The government is on a very slippery slope with their programs to keep people in their homes.  Some of these people shouldn't really own their homes and this will lead to issues in the future.  You can only delay the inevitable grinding back to the long term mean.  Lastly, here is a part of an interview with a guy who is a large real estate investor:
An Insider’s View of the Real Estate Train Wreck
by David Galland, Managing Director, The Casey Report
February 9, 2010

David Galland
No one has been more right on the housing market in recent years. So, what’s coming next? Some of the housing numbers in the last few months look a little less ugly. Could housing be getting ready to get well?
MILLER: I don’t think so.
For all intents and purposes, the United States home mortgage market has been nationalized without anybody noticing. Last September, reportedly over 95% of all new loans for single-family homes in the U.S. were made with federal assistance, either through Fannie Mae and the implied guarantee, or Freddie Mac, or through the FHA.
If it's true that most of the financing in the single-family home market is being facilitated by government guarantees, that should make everybody very, very concerned. If government support goes away, and it will go away, where will that leave the home market? It leaves you with a catastrophe, because private lenders for single-family homes are nervous. Lenders that are still lending are reverting to 75% to 80% loan to value. But that doesn’t help a homeowner whose property is worth less than the mortgage. So when the supply of government-facilitated loans dries up, it's going to put the home market in a very, very bad place. 
Why am I so certain that the federal government will have to cut back on its lending? Because most of the financing is done via the bond market, through Ginnie Mae or other government agencies. And the numbers are so big that eventually the bond market is going to gag on the government-sponsored paper.
The public doesn’t have any idea of the scale of the guarantees the government is taking on through Fannie, Freddie, and FHA. It’s huge. If people understood what the federal government has done and subjected the taxpayers to, there would be a public outrage. But you can't get people to focus on it, and it's very esoteric, it's very hard to understand. But it’s not something the bond market won’t notice. The government can’t keep doing what it has been doing to support mortgage lending without pushing interest rates way up.
Refinancings of single-family homes are very interest-rate sensitive. Consumers have their backs against the wall. They have too much debt. Refinancing their maturing mortgages or their adjustable-rate mortgages is very problematic if rates go up, but that's exactly where they’re headed. So anyone who’s comforted by current statistics on single-family homes should look beyond the data and into the dynamics of the market. What they’ll find is very alarming.   
On that topic, recent data I saw was that something like 24% of the loans FHA backed in 2007 are now in default, and for those generated in 2008, 20% are in default, and the FHA is out of money.
MILLER: Fannie Mae had a $19 billion loss for the third quarter of 2009, and they are now drawing on their facility with the U.S. Treasury. We have all forgotten that Fannie and Freddie are still being operated under a federal conservatorship. On Christmas Eve, the agency announced that they were going to remove all the caps on the agencies.
So the housing market has, for all intents and purposes, been nationalized.  Freddie and Fannie have had their funding caps removed which ensures that the U.S. will go further and further into debt.  This will eventually lead to more economic problems.  The best advice I can give, and I'm not a financial professional, is simple.  If I had a house on the market right now, I would do everything I could to get rid of it.  Prices are headed lower.  This is assured by simple supply and demand.  Selling now will save you a minimum of 10% of it's value and probably more.  Don't rent your house in hopes that it will "come back".  The timeline for the comeback could be loooooooooonnnnggg.   Take a look at this:
This chart shows prices in Japan for residential real estate.  Notice that prices went down for 15 years!  When you push something up in price too fast the aftermath can be extended considerably.  Our prices peaked in 2006.  If our prices tracked that out, we wouldn't see our prices start up again until 2021!  That's not to get back to even, that's to stop going down!  Notice that even with a nice little up tick in prices since 2005, Japan's prices are still down 60%.  As a comparison, our prices are only down about 30% from their peak.  I'm not saying we're Japan, but it's something to consider.  I'll conclude my talk about real estate with this:  if you are selling a house, get rid of it.  If you want to buy a house, rent, you'll be able to buy cheaper later.
One last related item:
Drowning in Debt: What the Nation's Budget Woes Mean for You
Economists Predict Cutbacks, Tax Increases That 'Aren't Even Imaginable'
WASHINGTON, Feb. 17, 2010—
American political and economic leaders have sounded the alarm for years about the red ink rising in reports on the federal government's fiscal health.
But now the problem of mounting national debt is worse than it ever has been before with -- potentially dire consequences for taxpayers, according to a report by the nonpartisan Peterson-Pew Commission on Budget Reform.
"It keeps me awake at night, looking at all that red ink," said President Obama in Nashua, N.H., on Feb. 2. "Most of it is structural and we inherited it. The only way that we are going to fix it is if both parties come together and start making some tough decisions about our long-term priorities."
Obama will sign an executive order tomorrow that establishes a bipartisan National Commission on Fiscal Responsibility and Reform to make recommendations on how to reduce the country's debt.
Over the past year alone, the amount the U.S. government owes its lenders has grown to more than half the country's entire economic output, or gross domestic product.  Even more alarming, experts say, is that those figures will climb to an unprecedented 200 percent of GDP by 2038 without a dramatic shift in course.
"Within 12 years&the largest item in the federal budget will be interest payments on the national debt," said former U.S. Comptroller General David Walker. "[They are] payments for which we get nothing."
Economic forecasters say future generations of Americans could have a substantially lower standard of living than their predecessors' for the first time in the country's history if the debt is not brought under control.  Government debt, which fuels the risk of inflation, could make everyday Americans' savings worth less. Higher interest rates would make it harder for consumers and businesses to borrow. Wages would remain stagnant and fewer jobs would be created. The government's ability to cut taxes or provide a safety net would also be weakened, economists say.
While much attention has been focused on the government's deficit-spending surge during the recession, many economists agree short-term budget overruns -- as ominous as they may seem -- are not particularly problematic.  "What threatens the ship are large, known and growing structural deficits," said Walker, a problem that few politicians seem eager and readily able to fix.
There is another way out....inflation, and that's what I think you'll see eventually.  As a note, this "inherited" stuff from Obama is getting really old.  This is especially true when talking deficits as he has increased the debt THREE times faster than Bush.  You can't run up the deficit that fast and blame on someone else.  That dog won't hunt.  In case you forgot or never saw how fast he is increasing the debt, here's a video I've shown before:
So please, President Obama, stop with the inherited nonsense unless you're making it better.  You're not.  I'll end with a video that I found a few years ago, not financially related but quite amazing.  Have a great week!