Banking and housing analyst Meredith Whitney has been very accurate with her past predictions. Now she is predicting a double dip in home prices. Is she right?
We get dressed up and we go out, baby, for the night We come home early burning burning, burning in some fire fight I’m sick and tired of you setting me up, yeah Setting me up just to knock-a knock-a knock-a me down I’m goin’ down...
Could a double dip in the housing market be on the way? That's what influential banking analyst Meredith Whitney told CNBC's Squawk Box yesterday.
And while the news is not all gloom and doom, Whitney -- one of Wall Street's best-known bears -- sees what she calls some "scary" behaviors by consumers that will continue to keep home prices low and a full housing-market recovery far into the future.
Whitney -- who rose to fame by predicting Citigroup's problems in 2007, long before others saw them coming -- has been admittedly bearish for the past year as others looked for the good news in the economy. She cites several reasons for her continuing feeling that the housing market and the rest of the economy will not be trending up anytime soon, including the fact, she said, that the state and federal governments will be shedding close to 2 million jobs.
What's behind Whitney's prediction for housing?
Adding to her skepticism of a recovery, said Whitney, is that more and more, people are choosing to not pay their mortgages, which is something she would not have predicted a year ago.
"What has happened in the last year," she said, "has been the government and banks have provided a lot of mortgage modification programs, and a lot of consumers have been smart enough to say, 'I can get a better deal on a modification program if I wait two, three, six months. So I will pay the things I need to pay the most -- my credit card bill, auto bill, even home equity.' And they've been not paying their mortgage."
This has created, she said, "a massive, rotting pool of assets on bank balance sheets that have provided the consumer excess cash."
The amend-pretend-extend policy has fostered moral hazard and caused more people to default, and as a result of their not making payments, they can spend money in the economy. Does this seem like sustainable economic growth to you?
That cash has allowed people to spend more freely in stores and restaurants, creating the feeling that the economy is, while not completely recovered, moving forward.
Just the opposite, said Whitney, who expects a double dip in housing to be inevitable. Those delinquent payers will soon have to answer for their actions, she said. In the second quarter, banks were becoming more aggressive about foreclosing on delinquent borrowers, she said. More houses on the market means still-low home prices.
"How can house prices grow?" she asked. "There's no other way to look at it, they are going down again."
It is difficult to argue with her conclusions. People are not working and the squatting stimulus can't go on forever; eventually, we have to pay for all this.
She wouldn't go so far as to commit to a double-dip recession, but a tough housing market has never been good for the economy. She concedes that news in credit card lending, and hiring in large corporations, has been good this past year. But she doesn't believe it's enough when so many people are still out of work.
Indeed, today a report on housing sales for May showed that sales of new homes sank 33 percent -- the slowest sales pace since records were kept in 1963 -- after tax-credits for homebuyers expired at the end of April.
While no one expected May's housing numbers to be great, the more optimistic watchers of home sales predict that sales will level out as the summer buying season takes hold. But Whitney points out some underlying problems in the U.S. economy that have yet to be reconciled, with a still-uncertain job market and continuing personal debt. Without buyer incentives, it could be another tough year for the housing market.
A double-dip recession? There's a chance, said Whitney. But a double-dip in the housing market? "No doubt," she said. What's most scary is that what she is telling us isn't anything we don't already know. The job losses, the mortgage defaults, the high personal debt are things we have been talking about for two years. It's how you read those signs. And Whitney's track record in reading those signs is pretty darn good.
Chronic Unemployment?
Lenders have been willing to work with people with equity in their homes rather than force a trustee sale. The result has been years of squatting for some delinquent borrowers.
Today's featured property was purchased for $408,500 on 2/22/2002. The owners used a $326,800 first mortgage and a $81,700 down payment.
On 3/9/2004 they refinanced with a $328,000 first mortgage and a $150,000 second mortgage.
On 2/8/2005 they refinanced with a $396,000 Option ARM with a 1% teaser rate. This refinance required them to pay off a significant portion of their second mortgage.
They have been squatting for at least 27 months.
Recording Date: 03/09/2010 Document Type: Notice of Sale .
Foreclosure Record Recording Date: 01/05/2009 Document Type: Notice of Rescission
Foreclosure Record Recording Date: 12/09/2008 Document Type: Notice of Sale
Foreclosure Record Recording Date: 08/25/2008 Document Type: Notice of Default
Foreclosure Record Recording Date: 07/01/2008 Document Type: Notice of Default
The balance of the first mortgage plus late fees stands at $502,000. The bank is content to allow this owner to squat since they are consuming their own equity to do so. Since banks are trying to withhold inventory anyway, I expect they will allow this owner to stay there until their equity is fully consumed before they foreclose.
Home Purchase Price … $408,500 Home Purchase Date .... 2/22/2002
Net Gain (Loss) .......... $202,500 Percent Change .......... 49.6% Annual Appreciation … 5.3%
Cost of Ownership ------------------------------------------------- $650,000 .......... Asking Price $130,000 .......... 20% Down Conventional 4.80% ............... Mortgage Interest Rate $520,000 .......... 30-Year Mortgage $131,541 .......... Income Requirement
$2,728 .......... Monthly Mortgage Payment
$563 .......... Property Tax $0 .......... Special Taxes and Levies (Mello Roos) $54 .......... Homeowners Insurance $50 .......... Homeowners Association Fees ============================================ $3,396 .......... Monthly Cash Outlays
-$463 .......... Tax Savings (% of Interest and Property Tax) -$648 .......... Equity Hidden in Payment $238 .......... Lost Income to Down Payment (net of taxes) $81 .......... Maintenance and Replacement Reserves ============================================ $2,605 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $6,500 .......... Furnishing and Move In @1% $6,500 .......... Closing Costs @1% $5,200 ............ Interest Points @1% of Loan $130,000 .......... Down Payment ============================================ $148,200 .......... Total Cash Costs $39,900 ............ Emergency Cash Reserves ============================================ $188,100 .......... Total Savings Needed
Property Details for 14 LACONIA Irvine, CA 92614 ------------------------------------------------------------------------------ Beds: 3 Baths: 3 baths Home size: 1,800 sq ft ($361 / sq ft) Lot Size: 3,083 sq ft Year Built: 1988 Days on Market: 93 Listing Updated: 40323 MLS Number: S609561 Property Type: Single Family, Residential Community: Westpark Tract: Othr ------------------------------------------------------------------------------ According to the listing agent, this listing may be a pre-foreclosure or short sale.
3 Bedroom and 3 Bathroom Home located in San Carlo Park. Hardwood Flooring and Berber carpet.
In preparation from my vacation, I created posts through July 6th. These are a combination of news stories and property profiles without my commentary. I plan to resume posting with my commentary on July 7. I will return with a renewed energy for this fun and creative endeavor. Until then, I will be off the grid enjoying life on a Northwoods lake.
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.
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