EYE OF THE STORM
This week ended with a seemingly endless torrent of bad financial news sharply knocking the financial markets around. And by all indications it'll be more of the same next week, as the financial markets decide what to make of the turmoil in housing stalwarts Fannie Mae and Freddie Mac, with a back-drop of ever-rising oil prices.
So it was startling to see this cover story in Barron's this Saturday, titled "Bottoms'-Up: This real-estate rout may be short-lived". Kind of like spying a teeny bit of sun in the darkest of rain-storms. Here's a piece of their argument:
"Home prices are down nearly 18% from the market's peak, according to Case-Shiller, and inventories of unsold homes are at near-record levels. Foreclosures are mushrooming on "subprime" properties, or homes whose purchase was financed with subprime debt. Blowback from the crisis has left mortgage-finance giants Fannie Mae (ticker: FNM) and Freddie Mac
(FRE) financially strapped, while many other lenders lack the stomach -- or money -- to offer new mortgages. Noted market experts such as Pimco bond-fund manager Bill Gross and economist Mark Zandi of Moody's Economy.com predict the meltdown in housing will continue for many months, with home prices declining by 10% or more from today's depressed levels.
Yet, such pessimism appears overdone, based on much recent data. Sales of existing homes are showing tentative signs of increasing, while the plunge in prices likely is nearing an end. Total inventories fell in May to 4.49 million existing homes for sale, or a 10.8-month supply at the current sales pace, down from an 11.2-month supply in April, according to the National Association of Realtors, in just one statistic emblematic of the nascent trend.
YES, THE SUPPLY OVERHANG still is humongous, but at least the numbers are moving in the right direction..."
Still other numbers suggest prices are close to bottoming. The S&P/Case-Shiller Index for April, released just last month, showed the biggest year-over-year price decline yet, of 15.3%. Buried in the numbers, however, and widely ignored in the media, was the news that home prices actually rose, albeit slightly, between March and April, in eight of the 20 markets covered by the index (Boston, Charlotte, Chicago, Cleveland, Dallas, Denver, Portland, Ore., and Seattle). This was in sharp contrast to the readings for March, which showed prices falling in 18 of the 20 surveyed markets. Also, the pace of monthly price declines is starting to slow in most of the markets with negative readings."
The piece goes on to cover a whole lot of reasons why the broader real estate market back-drop is still bad, and doesn't get carried away with the bullish case. But the very attempt to go through some reasons that not all the news is bad, is notable in a period where the successful trade has been in one-direction, down.
We now go back to our regularly scheduled torrent of relentlessly bad economic news.
I don't understand any argument that essentially downgrades the importance of the inventory overhang. This seems to be saying that supply/demand imbalances are not relevant. As long as there is oversupply, there will be pressure to reduce prices to clear the overhang. Maybe some of that overhand can be absorbed by converting to rental units, but price pressures will apply there too. Belief that we have reached a bottom, expressed many times in the last 18 months, seems to me to be wishful thinking.
Posted by: Alex Tolley | Monday, July 14, 2008 at 07:40 PM