The Mortgage Guru

According to a gentleman by the name of Cyril Moulle-Berteaux, a managing partner of Traxis Partners LP, a hedge fund firm based in New York, it is.

Moulle-Bereaux prefaces his arguments with the caveat that he does not expect prices to return to 2005 levels; in fact he feels that may not happen for another 15 years. He is merely stating that the downward trend in sales and pricing is not intensifying as the financial and mainstream press would have us believe.

The current housing bust, he says, is actually nearly three years old. Sales hit their peak of 1.4 million annualized sales in the summer of 2005 and have dropped 63 percent since then. Housing starts are down more than 50 percent which, when adjusted for population growth, takes them back to the previous lows of 1982.

In addition, residential construction now represents only 3.8 percent of Gross Domestic Product; a 15 year low, and will probably set an all time low by the fourth quarter of 2008.

But, Moulle-Bereaux argues, the very factor that caused the bust in the first place is going to save the market: affordability.

Americans enjoyed virtually unprecedented access to homeownership during the 1990s and early 2000s. It took 19 percent of average monthly income to service a conforming mortgage on an average home purchased during that period. But, as prices increased by double-digit percentages in many parts of the country during 2005 and 2006, mortgage costs rose to 25 percent of monthly income. And for first-time homeowners the cost of homeownership went from 29 percent of income to 37 percent and buyers who actually intended to live in the houses they were purchasing began to pull back.

The good news, bad news is that prices have now fallen an average of 10 to 15 percent - much more in some previously hot markets - while incomes have continued to rise; (while there is a school of thought that would argue strenuously that real wages have actually been stagnant, we will grant Moulle-Bereaux his point) while mortgage rates are down 70 basis points from their peaks. Guess what, housing has returned to the 19 percent of monthly income level for repeat buyers and 31 percent for the first-time homebuyer.

“In other words,” Moulle-Bereaux says, “homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.”

But what about all of those unsold houses? Can prices stop falling with so many houses in foreclosure or standing vacant and unsold? Moulle-Bereaux relies on history to assure us they can.

He references five past market corrections and claims that in each, when home sales bottomed, “the pace of house-price declines was halved within one or two months.” This because, by the time sales stop dropping, inventories have usually already dropped as well.

That, he says, is the case right now. New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March, an 11 months supply. And while this is a 25-year high, it is similar to the situation in 1974, 1982, and 1991 when such data was followed by slowing in home-price declines within the next six months.

Inventories are being brought down because construction activity has been falling for such a long time that new home sales are about on a par with home completions, and sales should be pulling ahead, perhaps by as much as 50 - 100,000 units annually, in a matter of months. He speculates that inventories will drop even faster to 400,000 - or seven months of supply - by the end of 2008 which will impact on prices, although they won’t stop falling entirely until inventories reach five months of supply, a level that has historically signaled tightness in the market, sometime in 2009.

Here he is overlooking any impact of inventories of existing homes. In March, the last month for which data is available, the National Realtors Association estimated a backlog of 4,058,000 unsold homes or a 9.9 months supply. This was a 1 percent increase over the February number. Unlike with new homes, there is no convenient spigot to turn-off the number of previously-occupied homes coming onto the market. People continue to be transferred, downsize, or die while forced sales and foreclosures appear set to continue for the short term. But assuming that Moulle-Bereaux reading the housing tea leaves correctly, how will all of this affect the broader economy? MOULLE-BEREAUX lays out a number of positives:

• The housing market has been subtracting a full percentage point from GDP for almost two years. Any improvement in the market should stop this bleeding.
• When the rate of price declines comes down “there will be a wholesale shift in market perceptions.” The market is valuing houses, i.e. the collateral for existing and future loans as though the declines will continue for another two to three years. When this perception changes it will have significant impact on the view of future delinquencies, foreclosures, and credit losses that lenders expect they will face.
• Fewer homeowners will be underwater on their mortgages and will thus have less incentive to walk away from their obligations.
• Reaching further out, a slowing house-price decline could stabilize if not increase the value of a lot of the securitized mortgages that have ravaged the financial markets with write-downs and subsequently reported losses. “Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets’ perception of risk related to housing, the financial system, and the economy.”

It is this writers opinion that Cyril’s comments are extremely optimistic (which we really need right now).  I will definitely agree with one of his points, and I have been saying this for months. The housing market will re-bound when people begin buying homes again. This is the only way to chip away at the surplus. Unfortunately the negativity of the media has the uninformed potential home buyer too scared to buy right now.  We were spoiled with easy mortgage financing for so long now that you have to qualify for a home loan old school style most home buyers are not prepared for the change in lending guidelines. But like my dad says, in my day you couldn’t buy a house without at least 20% down and good credit scores.  I understand that due to pressure from special interest groups the government wanted to allow less qualified home buyers the opportunity to own their own home, which is a great thing. Unfortunately we went too far and the highly qualified buyers who earned the right to buy a home the right way are left holding the bag for those who did not earn the right to buy a home but were allowed to regardless.  How long will it take for people to start buying homes again?  It’s virtually impossible to predict how long it will take for consumer confidence to rise to the point of making a serious dent in the surplus of homes.  If you are in the Las Vegas, Henderson Nevada area I will tell you this, go find one of the numerous bank owned properties and get yourself a good FHA 30 yr fixed loan. This way you can walk into your new home with plenty of equity and then just sit back and watch your investment grow.

For more information on how to purchase a bank owned property (REO) call or e-mail me directly at 702.526.3133 or mgarnes@garnesmortgage.com or matt@BuyLasVegasRE.com.

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