Monday, January 4, 2010

Preshocks in the Housing Market - Alpha

The housing markets took an earthquake in 2007 and 2008, which then slammed into the broader financial markets and the global economy. Today, there are some additional vibrations, and it's unclear whether these are (benign) aftershocks, or troubling and more likely, preshocks for a 2010 earthquake.

A government agency, the OTS, puts out a very interesting quarterly report called the "Mortgage Metrics Report" ( As the economist David Rosenberg (and I) believe, housing is still front and center to economic recovery (as with unemployment), as home buyers and sellers "search" for a sustainable, long-run market clearing price. And housing is still being support by MASSIVE stimulus from the Fed (MBS/agency purchases) and the US Treasury (Fannie/Freddie subsidies) - over a trillion dollars for just 2009 (see the previous post on Fannie/Freddie and the links to Hussman and FedWatch).

Q3 data shows that the rate of change got worse from Q2 to Q3, compared to Q2 to Q1 and 2008 Q4 to 2009 Q1. Interesting data point: the states of Florida, California, Arizona and Nevada have a disproportionate share of the mortgage problems. They had 43% of all foreclosures started in the third quarter (I know they were important, but not that central).

The pipeline of "young" 30-59 day delinquencies is still edging up. Bottom line is that 3.2% of homes are in the foreclosure process as of Q3 end, but another 9.6% could come in over the next 1-2 years. With foreclosures still a large percentage of total sales (~40% nationally, and above 50% in Phx/Lvs), there still a large glut to come onto the market in the next year. Large supply and low demand (due to less mortgage issuance) means housing prices have more to fall.

With bank balance sheets dominated on the margin by residential housing exposure (direct mortgages for smaller banks, CDOs for larger) and the waiting commercial/CMBS timebomb, I'd say we're only in the 5th or 6th inning of the deflationary collapse (barring the eventual inflationary exit)…

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