Wednesday, March 14, 2007

"Lack of Escape Routes"

From the Sacramento Bee:

A meltdown in the subprime mortgage lending market might mean trouble for a Sacramento-area market many believe is slowly coming out of its housing slump. Last year an estimated 27 percent of area buyers took out subprime loans, which have higher interest rates reflecting the risks of lending to people with blemished credit histories. Now, many here and across the country are having trouble making payments, threatening the companies that issued the loans.

That has many worried that the resulting financial implosions among subprime lenders, along with newly tightened credit standards, could reduce the number of potential homebuyers.
...
Contractions in the recently highflying subprime business also have implications for refinancing, limiting options for homeowners with mortgage trouble. Analysts say the lack of escape routes for homeowners under financial stress almost certainly will push more into foreclosure, aggravating an oversupply of resale houses and possibly prolonging a regional housing slump now nearly 2 years old.

"Now the ones who can't refinance will downsize, and if anything, the move-up market will see the pain," said Alexis McGee, president and co-founder of Fair Oaks-based ForeclosureS.com, a Web site that tracks foreclosures for investors.
...
"We're getting this substantial credit contraction at a time when supply is at an all-time high, which is not good," said Eric Landry, an analyst who tracks the nation's home building industry for Chicago-based investment researcher Morningstar. In a note Tuesday to investors, Landry warned, "It's probable that an entire (portion) of buyers has been taken out of the available pool of homebuyers and won't return for several years."
...
Nationally, mortgage officials expect the number of subprime loans in 2007 to fall 30 percent from last year. Locally, that might mean thousands fewer loans.

"That takes a whole group of purchases and stops the food chain," said John Fabish, a former lender and president of the Sacramento chapter of the California Association of Mortgage Brokers. Fabish, who now works in the risk management sector, said removing "that whole tier of no-equity folks, pretty much all first-time homebuyers, from the buying pool" can easily start a negative domino effect. "Business will slow way down. Move-ups will slow way down. If nobody's there to buy your house, there's two transactions that don't happen," he said.

11 comments:

Patient Renter said...

It's nice to see the mainstream media and the people they quote are starting to figure it out.

Gwynster said...

The best part about the article is the accompanying picture of the stock broker hanging his head in despair.

The funny thing I bet against all the funny money in the market and now i'm starting to see returns - woot!

Patient Renter said...

gwyn: who/what did you short? I know that a lot of people cleaned up on LEND, New Century and Fremont.

Patient Renter said...

From reading the comments for the SacBee article, it's looking like the prevailing sentiment is looking more negative on housing. For a while it was split. We still have a long way to go, as most people are probably still completely oblivious to what's going on.

I say this after having just heard that a friend went out and bought a half a million dollar house in the Bay area, with 100% financing, on top of the one they already own here, all with a very modest income. Insanity still prevails.

Gwynster said...

Bingo - let's just say TxChick is my hero. I'm offically out of the market and my gains are going into yet more treasuries.

Steven said...

This is the part of the story that people are so slow to grasp. The shrinkage of the first time buyer pool is only the first step in a chain reaction.

I wish I had the guts to short housing related stocks like gwynster.

Gwynster said...

I bit my nails the entire time! I'm not a high-wage earner like most of you. Normally I invest like a grandma. I just happened to have the means at the right time. I'm not getting back on that horse ever.

Patient Renter said...

gwyn: glad you did well during all of that. i read all of txchick's posts attentively although i didn't have the means at the time to go after any of the sub-primers, so i basically missed out. i'm still bearish on all of the alt-a lenders though, and am going after a few of them. for one thing, alt-a loans weren't given the same insurance or hedging consideratios that subprime loans were, since they weren't so obvioulsly risky. but as we're starting to see, they might turn out to be just as bad. we'll see how this pans out.

Diggin Deeper said...

Inflation running hot. Released PPI showed 1.3% vs a .5% expectation. Food had a big increase in the numbers. IMHO Fed and real estate funny money noteholders are now in a jam. Don't expect Bernanke to come to the rescue anytime soon. He'll have a hard enough time fighting rising prices. Rather than rate cuts, look for rate hikes sometime before year's end. Not good for bonds, stocks, but normally good for real estate. The only problem would be that we've got a huge overhang of housing supply and lot of it distressed, and still overpriced.

Gwynster said...

1.3 is a big number. If only salaries were increasing by that much.

I never understood the urge to to buy then the cost of everthing was going up yet wages were essentially flat.

"hey Martha, with the increasing cost of living, we have even less available income these days! let's go over-extend ourselves into a new house!"

Diggin Deeper said...

In my opinion the Fed picks its battles and fights to the death of the theme they are trying to control. After the dot.bomb washout and 9/11, they chose to pump liquidity into the financial markets for the sake of restarting the economy. They achieved their overall goal but kept cutting to just to make sure. Ordinary people, businesses, and governments took advantage and in some cases are feeling the pain. With the world awash in dollars, the fed will pick its next battle. I'm betting its inflation because it negatively affects a large populus in the US, we're heading into a presidential election year, and its the only way to reel in the dollars needed to fund our debts. Its looks like one of the bears ate Goldilocks, so the "not too hot, not too cold" adage probably dies with her.