April 28th, 2008

what will shape the bottom

No, not weird exercises. Again with the real estate.

Home loans come in a variety of sizes. Conforming loans (which the Fannies can buy), jumbos (which the Fannies can't buy), and this weird middle territory (which the Fannies can recently buy, at least generated in some markets) which was supposed to help loosen things up, but has failed to generate any private lending and therefore has no real impact on anyone trying to buy and therefore no real impact on anyone trying to sell.

Today, we learn that vacancies across the country are up to 2.9% because of all the stuff somewhere in the foreclosure/bank-owned process. Recently, the NYT ran an article about how _even people in Connecticut_ were suffering from the housing downturn (gosh wow!), but how while the foreclosure process started on rich folks houses, the auction rarely actually went off (yet), because the homeowner (remember, these are rich folks) could figure something out to come up with a payment before things got really dire. An interesting alternative to generating street activism to prevent your eviction, but less sympathetic in my eyes, as many of the houses involved aren't occupied by their owner and/or are entirely empty. Whatever.

Thus far, the houses which would likely be financed with conforming loans (let's call it half a million and down, since someone might come in with a sizeable downpayment from a previous house or remarkable financial planning or whatever and qualify for the $417,000 and under conforming loan) have been selling, but selling at a discount to their list price (and a more sizeable discount from the peak of the market). You may know of a region where this is not the case, but I don't. The houses which very likely would _not_ be financed with conforming loans (let's call it the three quarters of a million and up market), aren't selling so much. There are a few sales, and some of those sales are quite close to list. This has been explained in a number of ways. (a) Cash sales (no financing), (b) rich people with great credit, (c) luxury houses lag the market. In practice, I think what we're seeing is that freeze-up on larger loans, and I think a big part of it is due to the kind of weird and unexpectedly widespread fraud I mentioned in a previous post (people with great credit who walked away and the lenders got zilch).

At some point, some of the Rich Folks will run out of options and _have_ to sell, and at that point, we should see a powerful tendency for homes to cross the line from has-to-be-a-jumbo to maybe-could-be-conforming, which implies something other than an across the board percentage cut.


Here's a quote: "The median price of an existing, single-family detached home in California during March 2008 was $413,980, a 29 percent decrease from the $582,930 recorded one year ago, and 1.3 percent below February’s recorded median."

From: http://www.housingwire.com/2008/04/28/prices-sales-continue-to-fall-in-californias-housing-market-inventory-swells/

That $414K is perilously close to the conforming loan limit, where the one year ago number wasn't even close.

ever so slightly ahead of the curve

I'm actually getting a little tired of this. Perhaps I should readjust my position within the pack. Recently, I posted about R.'s expedition picking up garbage and my ensuing googling for information about how food, beverage, lodging etc. were doing. Lo and behold, NYT has an article about how people are downscaling to save money that collected that kind of information _that I had been looking for_ in one nice, succinct piece.

I spent a fair amount of time futilely trying to read the underlying documentation on how the Iowa Student Loan bond I hold works, and why it wasn't paying any interest, in an effort to understand whether it might ever pay interest again (since it basically isn't going to be sellable until it is paying interest -- and it won't pay interest until it's sellable, which sounds pretty useless to me).

On _Friday_, Bloomberg described exactly that, only instead of reproducing the Max Penalty Rate and so forth, it said, "The bonds pay nothing because of a formula designed to ensure that borrowers don't pay more interest on their debt than they receive from their student-loan clients. The mechanism kicked in as rates climbed above 10 percent since February, when dealers stopped buying securities that went unsold at auctions." and further commiserates with us investors by quoting a guy on how this is hard to understand, how they could hold your money and pay you jack. Well, that's not the actual quote, obviously.

And this explains why there's no mass refinancing, the way there has been for cities, stadiums, etc.


As a result, student loan money is going to be _really_ scarce for the next school year. Parents of high-schoolers and college kids take note: with the exemption expired on the H2B visa program, there are plenty of jobs available this summer that won't be taken by migrant workers from other countries. Maybe your kid can make some money to replace the money that isn't available via loans any more. I recognize this makes me sound like a curmudgeon. On this particular subject, I am one. That's temporary, seasonal, _non_-agricultural work. Think: cleaning hotel rooms on the Cape. My sister-in-law did that in high school and/or college. I have friends who did similar, albeit sometimes in other countries.

The best (and earliest) explanation of the 0% problem on some student loan auction rate securities:


Naming the one I own, no less.