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Housing: 2007 Thread.

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Slew Foot

Lifer
Sep 22, 2005
12,381
94
86
Before we start the 2008 thread I'd like to remind everyone about what the next few years holds in terms of loan resets.


ARM reset chart, as of Jan 2007 from Credit Suisse

2008- roughly similar to 2007 both in volume and makeup, largely subprime.

2009- a bit of a lull, not much subprime (most of these loans have already reset, and with shorter times to rest most of the ones resetting in 2009 are likely to have been made after the graph was produced). Prime stuff begins to reset.

2010 and beyond- Here we go again, this time with primes, alt-a, and option ARMS leading the way.



Merry Christmas!



 

Phokus

Lifer
Nov 20, 1999
22,995
774
126
Hmmm, this is bad news for my parents, but goods news for me... hopefully i can get a cheepo home in a year
 

mshan

Diamond Member
Nov 16, 2004
7,868
0
71
I think those numbers are skewed by large losses in areas such as Miami and California (where, despite significant price drops, I suspect housing is still very overpriced).

My personal observation is that prices have dropped slightly in most areas, and even then, it depends more upon particular sellers (recent listings are starting at more realistic asking prices, while some MLS listings that have been there for months are still stubbornly hoping to get that one buyer who will pay highest recorded price for comparable home). When people stop thinking that they can just wait this downturn out because they live in their home and start feeling scared that they will never sell their home, even if they drop their price, then perhaps then we will have a true bottom in the housing market.

According to most recent John Burns Real Estate Consulting newsletter, we are just now starting to enter a period of rapid price decline (I'd guess that next winter, probably starting in the seasonally slow time between Thanksgiving and Christmas, that one might be able to find a good deal as a long term home buyer (read a decade) and you can find a seller who is realistic about current market and where it is headed in future):




A Strategy to Navigate the Housing Cycle

We put a lot of thought into our final e-mail of the year, so we apologize for the length of it. We truly hope our thoughts help you succeed in 2008 and become the foundation around which you plan your business in the future. As always, we welcome feedback, whether positive or negative, because we learn from it.

Our New Year's resolution is the same it always is: To become even better at helping executives make informed home building industry decisions. In 2008, this is going to be quite the challenge. We are getting asked many questions we have never been asked before, and we are looking forward to answering them as best as we can.

The housing cycle is usually long and has 5 major stages, which are shown below. I began consulting to real estate executives right before a downturn that began in 1990 and ended in 1995. The subsequent expansion lasted 10 years. After 18 years of observing this cycle and studying past cycles, here is the best general advice I can muster for managing in the cyclical home building business.

Stage 1: The Bottom
Finance Strategy: Cash is king. If public, consider taking yourself private. Start a new company if you can.
Land Developer Strategy: At the bottom, we suggest that you make long-term land investments by buying large assets with cash. Consider buying on the peripheral areas at steep discounts and with your own money so that debt and equity service is not a factor. This is a contrarian view, which is why it is a good view. Opportunity funds want 2-5 year returns and will be buying land in better locations. We suggest being very aggressive here, and avoid generating significant short-term expenses such as interest payments or option payments. In most downturns, you can buy fully entitled land from the banks at less than the cost of the improvements that are already in place. If you are like most and can't bear to think beyond 5 years, don't plan on making much money from market appreciation.
Home Builder Strategy: If you bought land in an outlying area, sit back and wait for the market expansion to head your direction. Focus your home building efforts on good locations, and on perfecting an operating company that is efficient and profitable without the benefit of price appreciation. Value-oriented detached homes sell best.
Debt and Equity Strategy: Lend and invest aggressively. The downside is limited and most of your competitors will be still questioning the business after the losses they just sustained.

Stage 2: The Beginning
Finance Strategy: At the beginning of the up cycle, secure long-term financing that won't mature anytime soon. Throughout the up cycle, continue to push financing maturities out and use multiple sources of capital, from multiple industries (banks, pension funds, offshore, etc.). Don't pay the expenses associated with land banking or option payments unless you are truly so efficient that you can make a great return while doing so.
Land Developer Strategy: Buy land in the next cities that will become the great locations as the market expands. Continue making the long-term land investments discussed above. Underwrite aggressively if needed because your downside is limited. Raise money from diversified companies with long-term horizons, such as pension funds and insurance companies.
Home Builder Strategy: Put some cash back into the business to improve efficiency, and begin pulling some cash out of the business to diversify your investments and improve liquidity. Grow your business slowly with an emphasis on diversifying into new geographies or product types. Hire the right people and structure their compensation to align their incentives with yours over the very long-term.
Debt and Equity Strategy: Keep lending and investing aggressively.

Stage 3: Nearing the Peak
Finance Strategy: Consider selling your company because growth-oriented firms tend to overpay for land and companies during this part of the cycle. You might also want to pay yourself a lot of money by going public, although you will certainly create a lot of expenses and headaches if you choose that route. If you are not a seller, stick others with the downside risk by using joint ventures or off-balance-sheet financing. JV capital will be plentiful. Restructure all of your lots to be based on rolling option takedowns. This expense might cost 12% - 15% per year, which is why we recommend this strategy at this stage of the cycle rather than throughout the cycle. Refinance with more expensive non-recourse debt.
Land Developer Strategy: At this stage, the risk is highest and so is the short-term return. In this last cycle, "Stage 3: Nearing the Peak" lasted for years. You never know for sure when the end of an expansion will occur. Implement an "Asset Light" strategy where you only own the land you need to fund operations, but have plenty of options with well-capitalized land developers and partners so you won't run out of land during a downturn. Concentrate on locations where there are fewer home builders. Shed any high-density attached projects because the builder demand will be high today, but the consumer demand will be low tomorrow.
Home Builder Strategy: Put even more money into process efficiency. Build more cost-effectively than your competitors. Avoid mid-rise and high-rise construction unless you are experienced at it and underwrite it with the additional risk it deserves. Avoid land development for the same reasons.
Debt and Equity Strategy: Sell or syndicate your investments to other institutions. Syndications or participations are a great way to maintain your builder and developer relationships while reducing your risk. Consider a hedging strategy that will be expensive but will be worth it if the market corrects.

Stage 4: The Early Decline

Finance Strategy: Look around. Are competitive levels and/or affordability levels worse than usual? If so, you can count on the downturn being prolonged. Pay down your short-term debt obligations and build up cash reserves by selling your homes and land as quickly as possible, even at a loss, because the loss will be greater later. Many believe that losing money is somehow a sign of failure and disastrous to the balance sheet. They are wrong. This is a cyclical business. Recovering as much of the cash that you have already spent is what matters. Hire a great tax advisor too.
Land Developer Strategy: Sell your land. Early on, there will be plenty of optimists willing to buy it from you at a perceived discount. Cultivate your banking relationships, because they will be the land sellers of the future.
Home Builder Strategy: Develop a site-specific strategy to generate cash. This will not be possible at some communities, which should be halted. As one CEO executive told me, "The downturns are always longer and more painful than people think they will be."
Debt and Equity Strategy: Sell your worst loans to other banks. Use renegotiations due to covenant violations to reduce your exposure. Keep a small percentage of the debt to your favorite clients. Staff your Special Assets Department early with experienced building industry executives - not just bankers - and incent them to act quickly. Raise some money for the future, but don't spend it.

Stage 5: The Steep Decline
We believe we just began Stage 5.
Finance Strategy: All of your preparation should have paid off. While this isn't fun for you, it is worse for others. Pay off all of the debt you are obligated to pay.
Land Developer Strategy: Advise the banks. Help them decide what to do.
Home Builder Strategy: Build homes for troubled banks and equity partners in a structure that provides them most of the upside and, more importantly, protects you from any downside.
Debt and Equity Strategy: Take your lumps. Demand all that you deserve, but don't push your borrower into bankruptcy. If you do, the lawyers will get rich and customers won't buy their homes or lots. Hire outside expertise to provide independent analysis to the loan syndication group because you'll rarely be able to reach consensus. Once you see stability in the market, buy back the loans from the other banks and start planning your expansion strategy.

Conclusion
Many of the smartest companies in our business, which are run by veterans of several housing cycles, have implemented many of the strategies above. The majority of the smaller and younger companies in our business have not. All builders, however, wish they had done more off-balance-sheet or option agreements and sold more land. 2008 is going to be a very difficult year, but you will learn more than you have ever learned and you will emerge a smarter and better company (or perhaps even a new company). The demand for housing will continue to trend upward for the rest of your life, but there will be significant bumps along the way. Managing through the bumps is the challenge, and those who do it deserve the greatest recognitions and rewards.

We have made some significant changes to our business in the last few months in preparation for 2008, the most important of which is that we added three seasoned industry executives to help our clients survive and thrive. I want to thank our clients for continuing to seek our counsel during a very tough year, and I want to thank our team members for all the improvements we have implemented to become better advisors.

Happy New Year!
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
Originally posted by: mshan
Post
Everywhere is down. Here is the latest data


Date Peak Current Appreciation (Dep) from Peak
Phoenix - AZ 227.42 200.72 -11.74%
Los Angeles 273.94 249.5 -8.92%
San Diego 250.34 217.02 -13.31%
San Francisco 218.37 202.03 -7.48%
Denver 140.27 136.08 -2.99%
Washington 251.07 226.71 -9.70%
Miami 280.87 244.35 -13.00%
Tampa - FL 238.09 206.38 -13.32%
Atlanta - GA 136.47 133.79 -1.96%
Chicago 168.6 163.12 -3.25%
Boston 182.45 169.34 -7.19%
Detroit - MI 127.05 108.15 -14.88%
Minneapolis - MN 171.12 161.24 -5.77%
Charlotte - NC 135.88 133.98 -1.40%
Las Vegas 234.78 208.68 -11.12%
New York 215.83 205.48 -4.80%
Cleveland - OH 123.49 115.93 -6.12%
Portland - OR 186.51 185.1 -0.76%
Dallas - TX 126.46 124.44 -1.60%
Seattle - WA 192.3 189.86 -1.27%

Text
 

Slew Foot

Lifer
Sep 22, 2005
12,381
94
86
Originally posted by: LegendKiller
Originally posted by: mshan
Post
Everywhere is down. Here is the latest data


Date Peak Current Appreciation (Dep) from Peak
Phoenix - AZ 227.42 200.72 -11.74%
Los Angeles 273.94 249.5 -8.92%
San Diego 250.34 217.02 -13.31%
San Francisco 218.37 202.03 -7.48%
Denver 140.27 136.08 -2.99%
Washington 251.07 226.71 -9.70%
Miami 280.87 244.35 -13.00%
Tampa - FL 238.09 206.38 -13.32%
Atlanta - GA 136.47 133.79 -1.96%
Chicago 168.6 163.12 -3.25%
Boston 182.45 169.34 -7.19%
Detroit - MI 127.05 108.15 -14.88%
Minneapolis - MN 171.12 161.24 -5.77%
Charlotte - NC 135.88 133.98 -1.40%
Las Vegas 234.78 208.68 -11.12%
New York 215.83 205.48 -4.80%
Cleveland - OH 123.49 115.93 -6.12%
Portland - OR 186.51 185.1 -0.76%
Dallas - TX 126.46 124.44 -1.60%
Seattle - WA 192.3 189.86 -1.27%

Text


And Modesto CA, at -38% leads the way. The CA central valley is ground zero.
 

mshan

Diamond Member
Nov 16, 2004
7,868
0
71
I think that Case-Schiller index creates a false impression of how far (how little) home prices have fallen for many people that don't live in those major metropolitian areas were prices jumped up very very aggressively and are dropping dramatically to still overpriced levels. I suspect that people shopping around right now in other areas will be surprised to see how little prices (so far) have fallen from peak mls levels.

John Burns hasn't released December newsletter, so this is most recent data I've got:
http://www.realestateconsultin...local/local200711.html

Compare your own area from summer to see that for many people there hasn't been much change yet:
http://www.realestateconsultin...local/local200706.html

In above links, housing barometer level of 5 represents historic median levels of affordability for a given area. Modesto California in November was still 7 on historic housing barometer level (it was 8.4 in June of this year):
Modesto 1,373 1,789 28.2% 600 0.4% 8.0% $289,500 49% 7.0
(I think this is supposed to mean that in November overall was still 20% over historic levels of affordability)
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
Originally posted by: mshan
I think that Case-Schiller index creates a false impression of how far (how little) home prices have fallen for many people that don't live in those major metropolitian areas were prices jumped up very very aggressively and are dropping dramatically to still overpriced levels. I suspect that people shopping around right now in other areas will be surprised to see how little prices (so far) have fallen from peak mls levels.

John Burns hasn't released December newsletter, so this is most recent data I've got:
http://www.realestateconsultin...local/local200711.html

Compare your own area from summer to see that for many people there hasn't been much change yet:
http://www.realestateconsultin...local/local200706.html

In above links, housing barometer level of 5 represents historic median levels of affordability for a given area. Modesto California in November was still 7 on historic housing barometer level (it was 8.4 in June of this year):
Modesto 1,373 1,789 28.2% 600 0.4% 8.0% $289,500 49% 7.0
(I think this is supposed to mean that in November overall was still 20% over historic levels of affordability)
Not to mention it's delayed by 2 months. There's no doubt that it might under estimate the degree of fall since it compiles a lot of data that takes a while to "catch up" with other measurements, but it seems very accurate overall.
 

mshan

Diamond Member
Nov 16, 2004
7,868
0
71
Legend and Slew, I am not debating that prices have not come down, just that for many people outside those major metropolitian areas, there really aren't many good bargains yet.

In area where I live (might be particularly strong area because of war on terror), prices are at most slightly down year over year:
http://www.hamptonroadsrealestateblog.com/ (December 20, 2007 entry)

If you're thinking about buying a home in the next years, probably smarter to research newspaper archives for all actual sale prices for homes comparable to what you want to purchase. After you have established a peak fair market value for yourself, you can then discount appropriately, taking into account local factors such as long term prospects for local economy and jobs, historically supply constrained area, etc.

My suspicion is that after a truly dismal spring and fall selling season next year, there might have been enough damage done so that you could find a good long term purchase if you started seriously shopping during the quiet period between Thanksgiving and Christmas (other quiet period is supposed to be last couple weeks right before Labor Day, but this would be before presumably failed fall selling season has even started).

If you find right property, realistic seller, and are a long term buyer (decade?), you might be able to find a really nice property without having to compete with other buyers. Once tv and newspapers start declaring that housing bottom has occurred, might end up in bidding war with other bargain hunters. Uninformed bargain hunters might overpay because they are expecting a V bottom, which I don't think is going to occur. NY Times Rent vs. Buy article said after last housing downturn around 1990, it took about 8 years for home prices to reach nominal peaks (though still might have losses since not inflation adjusted). I would presume that this recovery will be much much worse.
 

Slew Foot

Lifer
Sep 22, 2005
12,381
94
86
Originally posted by: mshan
Legend and Slew, I am not debating that prices have not come down, just that for many people outside those major metropolitian areas, there really aren't many good bargains yet.

In area where I live (might be particularly strong area because of war on terror), prices are at most slightly down year over year:
http://www.hamptonroadsrealestateblog.com/ (December 20, 2007 entry)

If you're thinking about buying a home in the next years, probably smarter to research newspaper archives for all actual sale prices for homes comparable to what you want to purchase. After you have established a peak fair market value for yourself, you can then discount appropriately, taking into account local factors such as long term prospects for local economy and jobs, historically supply constrained area, etc.

My suspicion is that after a truly dismal spring and fall selling season next year, there might have been enough damage done so that you could find a good long term purchase if you started seriously shopping during the quiet period between Thanksgiving and Christmas (other quiet period is supposed to be last couple weeks right before Labor Day, but this would be before presumably failed fall selling season has even started).

If you find right property, realistic seller, and are a long term buyer (decade?), you might be able to find a really nice property without having to compete with other buyers. Once tv and newspapers start declaring that housing bottom has occurred, might end up in bidding war with other bargain hunters. Uninformed bargain hunters might overpay because they are expecting a V bottom, which I don't think is going to occur. NY Times Rent vs. Buy article said after last housing downturn around 1990, it took about 8 years for home prices to reach nominal peaks (though still might have losses since not inflation adjusted). I would presume that this recovery will be much much worse.
I pretty much agree with you that despite the various levels of falling prices, prices still have a loooong way to go. I personally think that 2008 will see the biggest price decline followed by more leveling out in 2009 and 2010. This will probably be an L shaped recovery with a long drawn out bottom. Of course, this assumes no wacky government intervention, but the pessimist in me, sees either a large scale bailout or an inflation run.
 

mshan

Diamond Member
Nov 16, 2004
7,868
0
71
Yeah, when resale home sellers no longer believe they can just wait the downturn out, and start to fear that they might not sell their home even if they drop their prices, then I think we might have a real bottom.

Any buy the dip, V-bottom "investors" who bought at Nasdaq 3000, thinking it was such a great bargain because tech stocks had declined 40% off peak of 5000, are still under water even after nice run in tech stocks over the last year.

 

Svnla

Lifer
Nov 10, 2003
17,945
1,370
126
I don't know about other areas but deep down here <East Tx, North La, South Ar>, prices are barely move down, some even go up a bit. I would say around here the prices are stable. No double digits loss or gain.

Right now, I have the mean <money, job, downpayment, creditworthyness> to buy a house but I think I will wait a little longer.
 

fleshconsumed

Diamond Member
Feb 21, 2002
6,108
1,496
136
New home sales hit 12-year low
Annual rate of 647,000 marks worst level since April 1995 after a 9% drop in November.

http://money.cnn.com/2007/12/2...postversion=2007122812

Sales are declining, however at the same time the article says that the median price went up 4.2% from the last month.... So how come sales are down 9% while prices are up 4.2%. That hardly makes any sense, or am I misunderstanding something here?
 

Slew Foot

Lifer
Sep 22, 2005
12,381
94
86
It's the MEDIAN price of a house that sold. If you have a different mix of homes being sold (i.e. more expensive stuff since people who used to buy cheaper homes cant buy anymore) than the MEDIAN price of a house sold goes up, despite the fact that the same house may have sold for more last year or whatever. And new homes dont take into account "Incentives" which arent reflected in the sale price, and are counted when the house is sold, not when escrow closes.
 

dullard

Elite Member
May 21, 2001
22,855
1,086
126
Bump for new Dec graph. Existing home sales were out today. The number of homes sold has been flat for a couple months now. Price came up, but that was from a revised down price last month.
 

shiner

Lifer
Jul 18, 2000
17,116
0
0
I keep wondering when things will start to slow down here in Tulsa and the surrounding areas. So far there has been no drop in construction from what I can see. We are about to start on a new house and from talking to our builder people are still building at a rapid pace and all the builders are scrambling to find enough help.

 

Slew Foot

Lifer
Sep 22, 2005
12,381
94
86
Originally posted by: dullard
Bump for new Dec graph. Existing home sales were out today. The number of homes sold has been flat for a couple months now. Price came up, but that was from a revised down price last month.
Slight gain in the yearly existing homes sold rate, probably statistically insignificant. YOY price drop was 3.3% for the median, which I thought I read was the second biggest YOY drop.

Nothing really exciting that anyone didnt expect.
 

mshan

Diamond Member
Nov 16, 2004
7,868
0
71
Damn, wholesale mortgage rates (full doc, 20% down, good credit, 30 year fixed) look like they dropped to 5.375% this afternoon.

Home prices may still be inflated, but potentially available mortgage rates for select borrowers appear quite low today.

Congrats to anyone who locked in today and got something like that 5.375% rate, with say 1% loan origination fee, and closing costs at actual costs (not padded with junk fees).


 

Vic

Elite Member
Jun 12, 2001
48,402
9,245
126
Originally posted by: mshan
Damn, wholesale mortgage rates (full doc, 20% down, good credit, 30 year fixed) look like they dropped to 5.375% this afternoon.

Home prices may still be inflated, but potentially available mortgage rates for select borrowers appear quite low today.

Congrats to anyone who locked in today and got something like that 5.375% rate, with say 1% loan origination fee, and closing costs at actual costs (not padded with junk fees).
Yes, rates are going down and likely to continue to do so. However, no seasoned professional in the mortgage industry ever locks on a Friday (unless the customer demands it). Barring some major incident over the weekend, rates will always be just as low or lower on Monday morning and you'll have gained 2 extra days.
 

mshan

Diamond Member
Nov 16, 2004
7,868
0
71
Thanks for the useful tidbit of insider info, Vic! :) (can you explain logic behind not locking on Friday please)

I think 10 year Treasuries broke through recent trading range (?).

Any insights on where charts might say mortgage rates might be headed?
 

Slew Foot

Lifer
Sep 22, 2005
12,381
94
86
Originally posted by: mshan
Damn, wholesale mortgage rates (full doc, 20% down, good credit, 30 year fixed) look like they dropped to 5.375% this afternoon.

Home prices may still be inflated, but potentially available mortgage rates for select borrowers appear quite low today.

Congrats to anyone who locked in today and got something like that 5.375% rate, with say 1% loan origination fee, and closing costs at actual costs (not padded with junk fees).
Yeah I noticed that too, the jumbos didnt move much though. Im not sure how much inventory thatll move, not many people have 20% down. There are rumblings of a 75 basis point cut this month, is a Japan style long term housing depression in the works? Stay tuned.

 

GrGr

Diamond Member
Sep 25, 2003
3,204
0
76
Originally posted by: Slew Foot
Originally posted by: mshan
Damn, wholesale mortgage rates (full doc, 20% down, good credit, 30 year fixed) look like they dropped to 5.375% this afternoon.

Home prices may still be inflated, but potentially available mortgage rates for select borrowers appear quite low today.

Congrats to anyone who locked in today and got something like that 5.375% rate, with say 1% loan origination fee, and closing costs at actual costs (not padded with junk fees).
Yeah I noticed that too, the jumbos didnt move much though. Im not sure how much inventory thatll move, not many people have 20% down. There are rumblings of a 75 basis point cut this month, is a Japan style long term housing depression in the works? Stay tuned.
Yup. I think that is where this thing is headed. The Fed/politicians will be desperate to get the economy running, they will flood the market with freshly conjured money. But this leads to inflation that needs to be controlled, so just like in Japan it is the workers and retirees that will be crushed flat.







 

mshan

Diamond Member
Nov 16, 2004
7,868
0
71
Uneducated question:

Was it government intervention, and/or the fact that Japanese apparently save so much (vs. American consumer who always seems to spend everything they earn) that led to prolonged Japanese housing depression?

I'm hoping lame duck Bush's poll ratings are so low that he can do the right thing and just let both Republicans and Democrats blame him for any recession that we might be in / headed for.
 

Slew Foot

Lifer
Sep 22, 2005
12,381
94
86
Originally posted by: mshan
Uneducated question:

Was it government intervention, and/or the fact that Japanese apparently save so much (vs. American consumer who always seems to spend everything they earn) that led to prolonged Japanese housing depression?

I'm hoping lame duck Bush's poll ratings are so low that he can do the right thing and just let both Republicans and Democrats blame him for any recession that we might be in / headed for.
Thats actually a point of discussion on another financial blog I visit, they cant come to a good conclusion yet either. One one hand, being prolific savers allows the Japanese to overcome drops in equity. On the other hand, Americans spend everything they make and more which leads them to default faster. Plus bankruptcy isnt viewed as a bad thing in the US. My opinion is that since many Americans have no savings, theyll take the easy way out and just file bankruptcy. Itll shake the banks up for a while, but recovery will come sooner, after a shorter, more severe downturn.

 

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