Mark Kiesel from PIMCO

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waitingtill08_IHB

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This is the guy who sold his house in spring '06 because he thought the housing market was going down. Here is an update:





http://www.pimco.com/LeftNav/Global...ves/2007/U.S.+Credit+Perspectives-+5-2007.htm





You can see his letter from last summer when he sold his house by clicking on the link in this article.





I think it is an excellent analysis covering all of the things we housing bears have been saying for a long time now. One new piece of information that I hadn't seen before is the break down of dollar amounts for sub-prime and prime mortgages that are about to reset. I thought others might be interested. He makes the point that this is not a sub-prime issue, but an ARM reset issue. He also talks about inventory, affordability, etc.
 
Any excuse to repost my favorite chart.





<img src="http://www.irvinehousingblog.com/wp-content/uploads/2007/04/adjustable-rate-mortgage-reset-schedule.jpg" alt="" />
 
That is a great chart! So, it looks like the largest number of Subprime ARMS will reset 10 months from January '07, which would be this November, and continue strong until November '08 (about 22 months out). And, the largest number of Prime ARMS will reset 30 months from January '07, which would be July '09. The Alt-A looks like the highest number of resets will be around 44 months from January '07, which would be September '10, and stay strong through December '11 or January '12, about 59-60 months out. The Option ARM category looks like it will have a lot of resets 41-58 months from January '07, although these could reset earlier if they reach their recast points when the unpaid interest is added onto the principle (correct?). Does this category include subprime, alt-A, and prime loans? If so, do you know the breakdown on them? Also, what are agency and unsecuretized arms used for and who uses them?





Based on this chart, it looks like I may have to change my name to "waitingtill09or10or11or12" or maybe just simply "waiting". I guess we'll just have to keep telling ourselves "patience is a virtue" and "good things come to those who wait".





P.S. Irvine Renter, I love all of your posts -- very well thought out, well written, and informative. Thanks for all of the hard work!
 
waitingtill08,





Personally, I can't imagine buying before 2010, and I may wait until 2012 based on the chart above.





The breakdown on the chart is a bit odd as it seems they broke it down between apples and oranges, but it certainly does tell a great story.





Thank you for the compliment.
 
<p>IR - I have to admit that the thought of waiting until 2010 to buy would probably result in my figuring a way to move out of CA entirely... or clinical despondency.</p>

<p>Let me ask your opinion; If I will need to buy a new home in the next 12 months (give or take, with more take... since my growing family is climbing over each other in our little condo)... does the chart above suggest that I may see some decent opportunities in the Nov-Dec area as the housing market goes through the traditional slow cycle and as 50B in martgages start to reset (and cause panic in the existing mortgagee) or is there really a time lag between the rate rest and the panic?</p>

<p>I guess I am trying to ascertain what variable is going to "peek out" in Nov-Dec (as the mortgage resets come home to roost) to prevent homeowner panic and and further reductions (please don't say homebuyer stupidity)... I suppose that I am kind of focusing on what Rumsfeld decribed as the "unknown-unknowns"...I am also trying to gauge the value of my time in waiting (eg. wait 3 months, see a 5% reduction; wait 12 months, see a 10%...) Thanks to all in advance.</p>
 
GrewUpInIrvine,





Nothing happens quickly in the real estate markets. I think we will begin to see panic among the weakest borrowers this fall. We already have a great deal of inventory on the market priced at or near breakeven. When this fails to sell, some will panic, but some will try to take their medicine and see if they can stay in the house. They will borrow from every conceivable source to make their house payments until they finally collapse. Then, and only then, will they quit making payments. Six months later the house will appear as an REO, then the bank will take 3 months to mark the price down to "fire sale" prices. So there is a built-in lag time that varies with each borrower. The sub-prime resets over the next two years will push the market sharply lower, but then the remaining Alt-A and prime borrowers will take longer to go under. Don't be surprised to see big drops in 2008 and 2009 followed by 5 years of slow drips similar to the 90's.





That is why I suggest waiting until the cost of the home equals the cost of a rental. There will be no appreciation to bail you out.





I would also suggest doing what I do: rent a really nice home. Renting doesn't have to be a bad way to live. The house is just a house, the home is where you make it.
 
WaitingTill08....great article. I read it last night and I think it adds even more validity that the analyst that wrote the article actually is practicing what he is preaching. As for the name change maybe waitingtillinfinity could work since infinity is not a defined number.





IrvineRenter.....this is an off the wall question, but I would have to assume with home prices going down that the tax base is going to shrink. Would you foresee Orange County or any of its municipalities actually raising some other tax to try and mitigate this? I think you said you had spoke with a gentleman that works for the Riverside municipality and they were experiencing a 6% decrease. Just hard for me to imagine that local govts can keep up with the same spending pace when the base is shrinking.
 
<p>I would love to wait till 2009 or 2010 but my wife gave me a heard deadline - December 2008. She has read through the blogs and understands that housing will fall. However, she just doesn't want to raise a family in rented housing with the hassle of having to move. She moved around a lot as a kid and maybe thats why she hates the idea of living in rentals.</p>

<p>Hence, I am going to keep an eye out on REOs in Fall of 2008 to at least get a relatively good deal. I know it doesn't make the most financial sense but we aren't planning on moving and this will be the house we raise our family in. </p>

<p>If any one has any ideas on how to convince the significant other out of this, please do share! </p>
 
mino2126,





There will be hell to pay for local governments. I think the unions which have been raping the municipalities over the last several years will see some benefits reduced. San Diego will have problems first. There will also probably be some layoffs. There isn't much they can do to raise taxes other than play with the sales tax. There is a process whereby one can reduce their property tax assessment if you overpaid in the bubble. I suspect municipalities will work to make this very cumbersome.
 
IrvineRenter....I know Mello-Roos are very popular and since you do have so much insight into the market place could their ever be a situation that the municipalities could impose Mello-Roos on older home sites to offset the variance?





I don't think the sales tax will have an solvance on this situation. Considering that inflation is already very understated and that increasing the sales tax only means people have less disposable income could mean that you start pricing people out for other goods. I wonder if they will increase the sales tax at hotels, resorts, theme parks....etc. This would could damage the tourist economy but it helps the OC residents not get dinged with the bill. They did this in Seattle to pay for the new ball parks. Their is a special hotel and airport tax....it's ridiculous.
 
rkp - re: "If any one has any ideas on how to convince the significant other out of this, please do share" ; We sold our home in August of 2005 with the biggest obstacle being my wife's hesitancy. She is feeling much better about our decision now because we are renting a home which is almost as nice as the home we sold. For patience, I would suggest taking her to see her dream homes and then making an agreement that you will buy the same type of home of her choice when you have a pre-agreed upon percentage saved up as a down payment. We are waiting until we can buy ours for cash.
 
mino2126,





"could their ever be a situation that the municipalities could impose Mello-Roos on older home sites to offset the variance?"





No, a CFD floats bonds for infrastructure improvements. The Mello-Roos fees are payments on these bonds. State and local governments cannot float bonds for general operations.





I agree they can't do much to raise sales taxes, but I bet they try.
 
IrvineRenter.....wow the more I think about this the more I am starting to feel the the OC municipalities are going to be in real trouble. Not only are property taxes going to be reduced but as more and more people are either layed off or has their salaries reduced in the corporate structure that is even more taxes that are going to be missed. Do you know how much tax revenue is brought in from the local RE Economy? I would love to see what Irvine and some of the other local municipalities are projecting in the future for tax revenue.
 
<p>mino2126 - I posted this stat to make a point on how much estimated gross revenue that would be lost on a 5% real estate agent's commission for OC. "I have to add this stat as well lets consider 2005 median price and the amount of sales with a 5% commission this would be $1,429,400,000 in revenue. The 2006 median price and amount of sales with a 5% commission would be $1,120,072,800 in revenue a loss of $309,327,200 in revenue. The 2007 median price and taking a 25% reduction in sales with a 5% commission would be $842,734,200 in revenue or a loss of $586,665,800 in revenue from 2005. Add the loss from construction, escrow, title, appraisals, inspections and finance and I now need a couple of billion dollars."</p>

<p>I can only imagine how much revenue the state is not going to see this year. Arnold has been warned but as usual he ignored the warning.</p>
 
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