A bailout for borrowers?

A couple of interesting developments today:

The Bush administration has outlined a plan to help homeowners facing a jump in their mortgage payments by freezing rates for five years.
Bush to unveil plan to help homeowners


The Bank of England cut its benchmark interest rate by a quarter percentage point to 5.5%
UK interest rates trimmed to 5.5%

Mortgage losses mount

Wells Fargo Plunges Into the Mortgage Muck With $1.4B in Losses on Home Equity Loans

Nothing much new here, just another example of a financial institution confessing to billions in losses on home equity loans, but the following quote helps to put the situation into perspective:

"Wells Fargo's chief executive, John Stumpf, spooked investors even further two weeks ago when he described the current real estate slump as the worst since the Great Depression and reiterated earlier projections that the bank's home equity losses would continue to rise next year."

No bottom in sight for housing

Home prices to keep sliding with no bottom in sight

According to Robert Shiller "predictions for a bottom within the next year or so are probably wrong, with price declines in 2008 possibly worse than those seen this year."

"There is a probability of a continuing decline for a period of years, bringing prices in many cities down in the 10s of percent," Shiller said

"The bottom is hard to predict," he said. "I do not see it imminent and it could be five or 10 years too."

Housing values must decline 40-45% to revert to the mean

They say a picture tells a thousand words.

According to Robert Shiller's index of American housing prices going back to 1890, we are in the midst of a bubble of unprecedented proportions.

Now for some rough, back-of-the-envelope calculations:

Considering only data from the post-war period (which is probably more accurate and relevant), we can assume that the mean post-war housing value is somewhere between 110 and 120 on the index.

We know that all market values tend to revert to the mean, so what can we expect to happen in this case?

Based on these figures a rough estimate of a reversion to the mean would require housing values to decline approximately 40-45% from their 2006 value on this index.

Join the dots, here comes the credit crunch

Conditions in the global financial markets have changed significantly in recent weeks.
Credit is going to be a lot more difficult obtain - all borrowers should be mindful of this, particularly those that are planning on refinancing ARMs.

There are quite a few telling signs that should be raising the concerns of those inside the industry and market regulators alike:

Hedge funds collapsing - The test was a big "If" - and hedge funds failed
Run on the bank in the UK - Chancellor steps in to halt bank run
Central Banks adding excess liquidity to markets around the globe - Fed, ECB inject liquidity as foreclosures rise
Credit spreads widening - Wall Street Credit Costs Soar on Spread to U.S. Rates
Greenspan pointing the finger of blame - Greenspan alert on US house prices

Greenspan warns on interest rates and house prices

Greenspan reportedly warns on rate cuts

"Former Federal Reserve Chairman Alan Greenspan said his successors at the U.S. central bank should be cautious about cutting interest rates because of inflation risks, and he forecast home prices will drop further"

"Greenspan said the U.S. housing slump is likely to deepen more than many analysts expect, with home prices falling by at least a "large single-digit" percentage amount and perhaps by a double-digit percentage"

Home Prices: Steepest Drop in 20 Years

Home Prices: Steepest Drop in 20 Years

S&P Says Housing Prices Fell in 2Q by Steepest Rate Since Its Index Was Started in 1987

"U.S. home prices fell 3.2 percent in the second quarter, the steepest rate of decline since Standard & Poor's began its nationwide housing index in 1987"

"The decline in home prices around the nation shows no evidence of a market recovery anytime soon"

"The median price of a home sold last month slid to $230,200, down by 0.6 percent from the median price a year ago. It marked the 12th consecutive month that home prices have declined, a record stretch."

2007 is going to suck

At last... an open, honest assesment for the prospects of the housing market by someone who should know:

"I don’t want to be too sophisticated here, but 2007 is going to suck, all 12 months of the calendar year"

- Donald Tomnitz, CEO of D.R. Horton Inc., the second-largest U.S. homebuilder by revenue.

House prices fell in most US markets last quarter

Home prices fall in more than half of nation's biggest markets

"NEW YORK: Prices for single-family homes fell in more than half of the 149 biggest U.S. metropolitan areas in the last three months of 2006, according to data released by a trade group for real estate agents."

"The figures from the National Association of Realtors on Thursday show that the housing market weakened noticeably in many parts of the country at the end of last year."

"You have two kinds of weakness here," said Jan Hatzius, an economist at Goldman Sachs. "There is the traditional economic-driven weakness in parts of the Midwest, and there is the bubble-bursting weakness. That's what is bringing down the national home price appreciation rate."

Another myth shattered... yet again

We revisit the 'prices never go down' myth again this month just to hammer home the point.
Following on from last months decline, we see larger fall in prices again this month... seems the correction is gathering momentum.

New-home prices drop 9.7% from 2005, biggest fall in 35 years

"The median price of a new home plunged in September the largest amount in more than 35 years, even as the pace of sales rose for a second month."

"That was the lowest median price for a new home since September 2004 and the sharpest year-over-year decline since December 1970. The weakness in new-home prices was even sharper than a 2.5% fall in the price of existing homes last month, which had been the biggest drop on record."