Tropical Storm Housing - Forecast: Category 5 Hurricane
September 08, 2010
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I can only remember one time on Motley Fool CAPS where I have completely disagreed with FloridaBuilder and that was over the intermediate-term outlook for PrivateBancorp probably something short of a year ago. As I look at the state of things right now everyone is trying to be a pioneer and run out in front of the pack calling tops and bottoms. No one, and I mean no one, has more right to do so in the homebuilding sector than FB. He more than accurately predicted which builders would fail and which would live to dance on the carcasses of their fallen brethren. I am, however, extremely skeptical of his most recent call that housing has indeed bottomed. I am pretty confident that he's jumping the gun just a bit on the national economic data and focusing on a few specific areas to get his data ( though this is my theory, not hard evidence so don't get too excited that I get to look over FB's shoulder as he writes these blogs ). Do I really have any room to speak on homebuilding? Probably not as I'm not in the business and he seemingly has been for decades, but I'm going to present (or should I say regurgitate) the facts yet again as to why housing has yet to see a bottom.
A Wave of Alt-A re-sets have only now begun to hit the marketplace
I know you've heard me profess this before, but the quality of loans out there is atrocious and those currently deliquent on their mortgages is rising. As if 1,658,000 foreclosures is not enough, I would predict this number to grow as high as 2.7M-2.9M before the bleeding finally stops in 2013. Yes, I am calling for the number of foreclosures to nearly double from their current levels due largely to the wave of Alt-A (undocumented income) mortgage resets. The problem here is that the same 6-10 states that have crippled the nation with collapsing home values, high unemployment rates and severe budget deficits are the same states that will experience the highest wave of Alt-A resets (cough that means you California cough). Nearly 1 in 8 people in this country are currently deliquent by at least 30 days on their mortgage, with three states currently showing a better than 3.35% foreclosure rate.
Non-current assets have been consistently rising since 2007 & net charge-offs are up
The most recent FDIC statistics showed a moderation in overall loan deterioration, but down is still down no matter which way you turn the compass! As of Q2 2010, straight from the horses mouths' at the FDIC, the total non-current loans (inclusive of mortgages, commercial and consumer loans) were up sharply from one-year earlier, 7.3% vs. 5.6% in 2009 and net charge-offs showed a moderate tick higher of 0.1% from Q2 2009. Even though this is more of a tangent than anything, one of the most disturbing statistics is the 11.6% charge-off rate for our credit card companies. That is absolutely HORRIFIC by any measure and it is a gross deviation from even the worst recessions we've had over the past few decades. This is just further proof that consumer loan quality and commercial loan quality are still poor and though leveling are continuing to get worse each quarter. Imagine how this will be impacted by a new wave of deliquencies set in motion by the aforementioned Alt-A's? Based on the figures I have it is increasingly likely that 1 in every 3 commercial loans will be underwater by 2013.
A glut of foreclosures is constraining home sales
How you get rid of 1,658,000 foreclosed homes is beyond me. A healthy market (or should I say a functional market) should be running around 300k foreclosed homes so we are well above and beyond that mark. New homes are being built but are there really any buyers? We established that lending has nearly come to a screeching halt with the end of the Obama homebuyer incentives and new home sales crashed in double digit percentage terms the month after that incentive ended. There aren't any catalysts out there which are making the middle class buyer feel like he can afford any more than he could in 2009. Consumer spending remains weak and should continue to be weak well into 2012 while consumer confidence numbers have begun to fall again (not surprisingly coinciding with those ALT-A loan deliquency increases.... am I beating a dead horse here? You bet!). To top this off, the end of the Bush Tax cuts in 2011 could spell disaster for an already teetering middle and upper-middle class. I want to know who will be buying these houses? If you build, I don't think anyone will come... even with a baseball field in the middle of a corn field...they still won't come.
Rates are at record lows and new home sales are fallling
According to recent mortgage data, a 30-year fixed rate mortgage can be had for 4.32%, the lowest on record since records were first kept in 1971 and yet the buyers still won't come. We have no incentives in place to get them to buy a new home, and the market for second-hand/foreclosed homes is a disaster with the anticipation that a secondary glut of foreclosures will hit the market within the next two to three years. Who can take out a loan when nearly 10% of our workforce is out of a job and average hourly earnings are stagnant?
I don't mean to purposely sound like Alstry but there are very few reasons to be bullish on the housing market. Home prices look primed for another 12%-15% decline over the next 30 months on the back of more defaults and a glut of foreclosures. The underlying prospect of deflation could make things even worse and hasten a continually falling market so feel free to just keep printing more money Mr. President! I'm not saying that every housing stock is a sell, but there are a handful of buys and a grocery basket full of sells. I think you need to tread lightly within the housing sector and place your bets to the downside if anywhere.
Normally I would give out a few specific names but this blog was aimed at the entire sector, so break out the bear claws and board up your windows because tropical storm Housing just got upgraded to a category 1 hurricane and it's heading our way.
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