As usual, Alan Abelson wrote a fantastic piece in Barrons this weekend.  The topic du jour was the recent rally and the “bottom” that many are calling in the real estate market.

BACK IN MARCH OF LAST YEAR, WE RAMBLED on about a piece on housing by T2 Partners, a New York money-management firm. The report weighed a ton, but its heft was made more than palatable by a profusion of easily accessible bold-face tables and charts and a lucid text happily free of equivocation. We waxed enthusiastic about the analysis (and no, we hadn’t been drinking). It was, of course, quite bearish.

Well, the T2 folks recently issued a follow-up to that prescient analysis, again festooned with nifty graphics and graced with straight-from-the-shoulder narration. They’re still bearish and still, we think, on the money. That original report, incidentally, has blossomed into a book by Whitney Tilson and Glenn Tongue, who run T2 (you’ll never guess how they got the name for their firm); the book is called More Mortgage Meltdown and is slated to be published next month (end of public-service announcement).

In their latest tome, the T2 pair begin with a crisp summary of why and how housing collapsed, in the process wreaking havoc on both the credit market and the economy. Among the usual culprits, most of which by now have had the cruel harsh spotlight of publicity turned mercilessly on them, Wall Street comes in for special mention and, in particular, its critical role in disseminating collateralized debt obligations and asset-backed securities, or — as they’re respectively, if no longer respectfully, known — CDOs and ABSs.

Those structured monsters, note Tilson and Tongue, were a “big driver” of the surge in financial outfits’ increasingly bloated profits. To produce ABSs and CDOs, Wall Street needed “a lot of loan product,” of which mortgages proved a bountiful source. It’s unfortunately quite simple to generate ever-higher volumes of mortgages. All you need do is lend at “higher loan-to-value ratios, with ultra-low teaser rates, to uncreditworthy borrowers, and don’t bother to verify their income and assets.”

The only catch is that the chances of such a mortgage being paid off are just about nil, a trifling caveat that bothered neither lenders nor pushers one whit. The result of that cavalier approach, as we all have reason to lament, in the end has been anything but happy: Today, mortgages securitized by Wall Street represent 16% of all mortgages, but a staggering 62% of seriously delinquent mortgages.

As for home prices, the T2 duo reckon, the unbroken monthly decline since they peaked in July 2006 will continue to make buyers hesitant and sellers desperate, while the “tsunami of foreclosures” will maintain the huge imbalance of supply over demand. In January, they point out, distressed sales accounted for a formidable 45% of all existing home sales and, they predict, there will be millions more foreclosures over the next few years.

They expect housing prices to decline 45%-50% from their peak (currently, prices are down 32%) before bottoming in mid-2010. They warn that the huge overhang of unsold houses and the likelihood that sellers will come out of the woodwork at the first sign of a turn argues against a quick or vigorous rebound in prices. Nor is the economy likely to provide a tailwind, since T2 anticipates it will contract the rest of this year, stagnate next year and grow tepidly for some years after that.

The first stage of the mortgage bust featured defaulting subprime loans and their risky kin, so-called Alt-A loans. Together with an additional messy mass of Alt-A loans, the next phase will be paced by defaulting option adjustable-rate mortgages, jumbo prime loans, prime loans and home-equity lines of credit.

All told, Tilson and Tongue estimate losses suffered by financial companies from mortgage loans, further swelled by nonresidential feckless lending, will run between $2.1 trillion and $3.8 trillion; less than half of that fearsome total has been realized. Which is why, they contend, we’re only “in the middle innings of an enormous wave of defaults, foreclosures and auctions.”

This reminded me of the T2 presentation back in December.  I highly recommend having a read as its one of the few incredibly thorough and realistic housing outlooks around.  T2′s outlook is essentially in-line with my own outlook.  The rate of depreciation is certain to slow going forward, but only a fool believes that home prices are going to go from -20% declines per year to stabilizing over night as many people are now calling for.  Real estate is not a typical market.  It is a massive and slow moving market.  It does not move quickly like a stock market or commodity market.  An analogy I like to use is a snake eating a deer as opposed to a drive-thru trip at McDonald’s as your typical day in the stock market can be akin to.  This is a process, not an event.  Beware those that say housing is done going down.

Cullen Roche

Bio - Coming Soon.

More Posts - Website

Follow Me: