Making Wall Street wobble | Robert Gottliebsen | Commentary | Business Spectator 21/08/10 7:15 AM

Commentary Comment

Making Wall Street wobble

Robert Gottliebsen
Published 8:26 AM, 20 Aug 2010 Last update 10:19 AM, 20 Aug 2010

When I saw Wall Street falling last night under the weight of disappointing economic data it was
clear that the housing crisis in the US is still affecting the economy in a way many Wall Street
analysts can’t understand.
So I called an old Australian friend of mine, Simon Cobbin from Texas-based Vantium capital. I
have found Simon knows more about the US mortgage/housing market than most in the US
because he is on the front line of trying to prevent foreclosures. It’s a losing battle because
there are not enough Simon Cobbins in the US.
I wanted an update in a few words to pass on to you to help explain last night’s Wall Street
data. What I got was a look at the US housing market that explains why consumers in the US
are so reluctant to spend. Cobbin explains that “at best” the outlook could really only be
described as weak. There is no short-term respite in sight because the so-called “shadow
inventory” of foreclosures continues to loom. That inventory consists of loans in 90-plus day
delinquency or already in the foreclosure process. There are 2.4m loans in 90-plus day
delinquency and another 2.1m in foreclosure, totalling 4.5m in the shadow inventory. .
Cobbin says: “Where the market goes over the next 6-12 months is 'nowhere'. Inventory has to
clear, maintaining severe pressure on house prices in most geographies. There still may be
some downward price pressure in specific markets which will glut with additional foreclosures,
particularly bedroom communities in places like California, Arizona, Nevada and Florida. The
mid-west (“rust belt”) will also feel some pressure with additional job losses. No areas will really
be spared, but I would be surprised if the worst of the fall isn’t over in most areas. What I mean
by that is that the next level of pain isn’t as bad as the last one. When someone owns a house
that has already lost 25%-40% of its (apparent) value, how much worse does the next 10%
feel? I don’t mean that there is no more room to go down. The fall is now a relative
measurement.
“There is no real respite. Mortgage interest rates are at all-time lows yet loan originations in
2010 will likely be about $1.475T. This is off from $2.103T in 2009. 2011 will likely drop further
to $1.174T before a possible recovery in 2012 to $1.373T Little confidence therefore that the
economic situation will change leading to significant increases in real estate financing, either for
purchase or refinance.“Incentives in the real estate markets are not really working (homebuyer
tax credits, etc only really move next week’s sales into this week) or have expired.
Terms under which mortgage finance is offered allow only pristine credits to qualify further
dampening sales activity. The credit pendulum has swung way past reasonable conservatism
and now is highly restrictive. Good for bond investors and with rates this low durations will kick
way out and CPRs are obviously extremely low.
“At the global level the future of housing finance is murky. Freddie and Fannie have some role
to play, but there is no clear vision what that is. 'Ideas' on reform are committed to be provided
by Treasury in early 2011 – that’s IDEAS on reform, not actual initiatives for reform. Treasury
has no clue what to do with Geithner saying in one breath 'But this Administration will side with
those who want fundamental change' yet stacking the deck at this week’s housing finance
summit with (Administration friendly) like-thinking contributors (exception was Bill Gross of
Pimco). But enough of the macroeconomic stuff and Simon’s political opinion.
“I know, I’m just full of good news ... hope this helps your readers.”
You can feel the frustration that comes about from someone who has a mountain of
foreclosures to handle. And until Simon’s workload is reduced the US will not boom as so many
on Wall Street are hoping. But it will take a new force to send it back into recession. Thanks
Simon

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Making Wall Street wobble | Robert Gottliebsen | Commentary | Business Spectator 21/08/10 7:15 AM

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