http://blogs.moneycentral.msn.com/topstocks/archive/2009/07/09/housing-crisis-just-beginning.aspx
More trouble ahead for housing
Although Wall Street's focus has turned to other matters, the housing crisis continues to smolder and burn like an abandoned campfire ready to reignite. Heck, the banks are even restarting the mortgage repackaging business -- once again turning questionable loans into "investment grade" securities.
But just as we look the other way, the next phase of the housing crisis is about to begin according to new analysis by hedge fund owner and value-investing guru Whitney Tilson. Since home prices peaked in 2006, the Case-Shiller Home Price Index has fallen 34%. This, of course, was driven by a huge spike in defaults and delinquencies among subprime borrowers as interest rates and payments reset.
In a recent update to his housing overview from last December, Tilson says the next phase will be driven by prime and Alt-A borrowers who owe more than their house is now worth. The catalyst will be ongoing job loss, falling wages, and rising interest rates. Add to this a huge wave of Alt-A loan resets over the next five years. The result: Home prices will fall another 10%, possibly more.
What's worse is that according to new research, the likelihood of a borrower making a "strategic" decision to default -- in effect, mailing the keys back to the bank and walking away -- increase greatly depending on how deeply underwater they are and whether people they know have done the same. This means there is a very real possibility that home prices declines reaccelerate as hope is lost and it becomes socially acceptable to give up on your mortgage.
It's true that there have been are a few positives for housing: The Obama Administration's efforts to restructure mortgages and the increased affordability of houses for first-time buyers. But in reality, these rationales are weaker than they seem.
A study by the Federal Reserve in Boston finds that since the housing downturn began, only a small fraction of mortgages have been renegotiated to prevent foreclosure -- some 3% of seriously delinquent loans. But this isn't because these loans have been securitized and sold off to investors; banks have modified a similar number of loans still on their books. The evidence says it's just not worth it for the banks to do it: Nearly half of all modified mortgages fail anyway, and a significant portion of delinquent borrowers "self cured" and started repaying within a year.
As for the hope that first-time buyers will swoop in and save the day, just look at the chart above. Research by fellow TopStocks blogger Andrew Horowitz shows that there was a significant increase in the number of young homeowners during the housing bubble as credit standards eased. Until these percentages fall, there just won't be enough new buyers to support the huge overhang of existing home inventory.
Overall, this is just more terrible news for homebuilders like Hovnanian (HOV) and KB Home (KBH). I'm adding short positions in both to my portfolio at Wall Street Survivor. I've included Tilson's slides below. They're worth a look.
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Ale to niedługo tąpnie...