Monday, August 25, 2008


We have been in the second phase of the housing market where sales have started to climb in most markets, but prices are still getting hit hard in the softest markets. We are already transitioning into phase three, in which we will see both rising sales and rising prices.

Talking heads have generally taken the annual numbers to show that nationwide house prices fell 7% year over year last month. This would be the same as saying oil prices went up 79% year over year last month. The 79% is a true number because oil went from $67 to $120 but it leaves out the $147 peak and is thus misleading. The fact is that oil has fallen 20+ % since the peak. The median house bottomed at $197,000 in February. The July median of $212,000 was down 7% from a year ago but up more than 7% from the bottom. As is often the case, the number being reported, a 7% decline in price, is actually the opposite, a 7% increase in price.

Inventories of homes jumped when sales picked up. This was the result of pent up supply. Those who have been willing to sell at a certain price have jumped into the market now that they have hopes of getting that price. Just a minor turn has brought more houses to market. Because there are few new houses being completed, because there is now a tax credit for those who have not owned a home for three years, and because interest rates are falling, the overhang in supply is going to be worked off quicker than most expect.

Yesterday a local renter realized that the purchase price on a similar home would be lower than the rent. Learning about the $7,500 tax credit made the family excited. It remains to be seen if they will qualify for a loan but they are attempting to buy.

Meanwhile the 10-year treasury continues to zig-zag its way down. This morning it has been trading around 3.78%. Financial institutions not caught in the sub prime mess can offer 30 year loans at less that 5.5%. Homes purchased today should offer fat long term returns.

Real estate investors are picking up short sales and foreclosed homes at bargain basement prices. There are many signs of recovery. Some banks never offered short sales and some have stopped. Also, the recent short term bill sales by Fannie and Freddie went well.

The debt holders have bought the words of support from Paulson. The shareholders are at risk and the preferred stocks are yielding 16%. The retort is that the sale of short paper is a liquidity matter and the problem is a capital matter but the capital matter will be improved by using short paper to buy deeply discounted long paper. The irony is that it is the high spreads that will give Freddie and Fannie the ability to make the turn. Many a non government supported firm has operated for long periods with a negative net worth but a positive cash flow. I cannot recommend the shares but I will not be surprised if they survive and if they do they will bounce several hundred percent quickly.