INVESTING IN FUNDS: A MONTHLY ANALYSIS
Real-Estate Investing
Homesick
Star manager sees steep price declines looming for once-hot regions -- but no U.S. recession
By DAISY MAXEY
September 10, 2007
online.wsj.com
...On the financial side, the vulnerable mortgages are not held on a broad scale by the banking system [but instead are] held by pension funds, hedge funds [for institutional accounts and wealthy individuals] and foreigners. There could be some effect on the Manhattan and the Greenwich, Conn., economies [where many hedge funds are based], but no broad effect on the U.S. economy.
On the housing side, [last year] I talked about a 50% decline in the inflated coastal markets; I think we will get there.... If you listen to home builders' conference calls when they talk about the concessions they make in the form of extras at no cost to the buyer, they can be 20% to 30% of the house price. So we may not see the full 50% show up in the [S&P/Case-Schiller U.S. National Home Price] Index, because it may come in other forms.
I think the decline in housing prices will be broader and deeper than I originally thought. I have been surprised to see how weak [the housing market in] Detroit has gotten. We didn't realize the extent to which exotic mortgages have been used to finance houses. In 2006, about 40% of the mortgages were broadly defined as exotic, including pay-option ARMs, second mortgages or subprime.
In the next six months, I think there is going to be another meaningful leg down in housing. Builders need to sell about one house a week to stay cash-flow positive, so they'll just cut the prices. Additionally, foreclosure activity hits the market with a lag.
We've got to bring house prices down to the level where buyers who would use traditional mortgages can buy them. The need for housing has not gone away. It's just that, going back in time from the low to the peak in 2005, there has been increasing activity with exotic mortgages, which got people to bid the prices up to where the traditional-mortgage buyer could not participate.... |
