Monday, March 29, 2010

A Sign of the Times…and of the Future

So it is that a bank office in what was close by (but not in) Ground Zero of the Housing Bubble no longer advertises itself as the place to go for Alt-A, No-Doc, Liar-Loan mortgages.

Instead, as the photographic evidence (courtesy of sharp-eyed reader Chris Wagner)demonstrates, the Novato, California bank branch has been turned into a “Home Preservation Center.”

Novato happens to be on the Redwood Highway where it leaves behind San Pablo Bay and heads north to Petaluma and beyond, past the horse farms and rich fields of Cotati and other farming communities.

And this photograph, we think, is worth paying attention to, because, like all Bubbles and their aftermath, what happens on Main Street ultimately gets reflected on Wall Street.

Indeed, just a few years ago it seemed that every other building on our own Main Street was being turned into a bank.

In the space of the few short years that encompassed the peaking of the Housing Bubble, HSBC, Washington Mutual, Wachovia and others all opened spanking new branches in our small New England town. And we already had plenty of bank branches here.

No matter: where once a small food market, a deli and a local store had sold basic necessities to people who could afford them, the new bank branches—along with the old—peddled mortgages to people who could only afford them if they a) lied about their financial position on their application, b) were charged a below-reality interest rate, and c) the Housing Bubble did not pop.

In hindsight, of course, our glut of bank branches turned out to be not only a sign of the times—but a sign of the future.

And by a curious stroke of coincidence, today’s Wall Street Journal tells us what the photograph from Novato says: the damage those bank branches did to the American home buyer might be mainly behind us.

Mortgage Increases Blunted

The struggling housing market appears as if it will sustain less damage than expected this year from a spike in the monthly payments on hundreds of thousands of exotic adjustable-rate mortgages.

The number of such loans scheduled to adjust to higher payments this year has shrunk. Lower-than-expected interest rates, coupled with efforts to aggressively modify loans, are likely to mute payment shocks for some borrowers. Many others already have defaulted on their loans even before their payments adjusted upward.

“The peaks of the reset wave are melting very quickly because the delinquency and foreclosure rates on these are loans are already very high,” says Sam Khater, senior economist at First American CoreLogic….

—Nick Timiarao, the Wall Street Journal, March 29, 2010.

What will become of all the new “Home Preservation Centers” if this happy “melting away” continues?

We’re not forecasting a housing boom, but it does seem like a good time to buy: interest rates are low and so are prices. Those Home Preservation Centers could, perhaps, become “Banks” once more.

Perhaps, too, small town stores will make a comeback after years of being snuffed out by new bank branches. For this Novato location, may we suggest an organic food store offering great produce from local farmers?

Alder Lane Farm of Cotati comes to mind. We hear they have the best eggs in California.

Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


The Inscrutable Chicken said...

JM, why is it a good time to buy when interest rates are low? Isn't it better to buy when interest rates are high?

Jeff Matthews said...

The Inscrutable C: Sure, you should be able to get a better price when rates are high, because the cap rate would theoretically also be high. But your cost of money is likewise high.

Right now, interest rates are at generational lows. I don't see why an investor would not want to a) lock low rates in and b) buy an asset class that has been hammered by forced selling, where sellers outnumber buyers.

My opinion only.

[And for the record, in August 2005 I wrote in these pages 'Anyone who buys a house they don't need to live in is a moron.]


The Inscrutable Chicken said...

thanks JM.
I agree that if interest rates are low (and you can lock in that rate like you can in the US) AND prices are low then that is the optimal scenario for a buyer.

However, since prices are ultimately determined by affordability, the higher the interest component, the lower the principal component. If interest rates go down in the future, then a buyer can refinance at a lower rate but still have the advantage of the lower initial pricing.

Similarly, a cash buyer will have less competition when bidding because the high cost of credit will rule out some buyers (opportunity cost of investing that cash aside).

Since we're in a period of historically low interest rates, I guess the people that are best off are currently those that bought in the past at pre-bubble prices that are no able to refinance at a cheaper rate.

The current low interest rates is what makes me think that house prices still have another leg down.

Jeff Matthews said...

The Inscrutable C: (I like the sound of that...reminds of The Tenacious D, I suppose)--I wouldn't argue too hard with that.

Seems to me we are now so levered to rates that the bond market is a natural thermostat, and even a mild rise in rates will keep a lid on housing prices.

I had a 12% variable rate mortgage when I bought my first house in 1985, so locking in sub-5% for the next 15 years seems like a long-term nice thing.

But, hey, if we become Japan, anything is possible!


wcw said...

Cheap? Not only did the onetime REO around the corner sell recently for right around that 2005 bubble price that spawned a default, but a few listings are also coming in at 20-30% *above* 2005-6 prints.

I grant, we live in a weird locality. I looked up the 2008 ACS data recently: our PUMA's Gini coefficient is worse than Haiti's.

The Inscrutable Chicken said...

I really have to hope that the US doesn't become Japan - otherwise house prices will never fall!

Keep up the good work!

Anonymous said...

Today GenVec (GNVC) shares crater, from $2.81 to 77 cents.

Their drug in testing was a failure. Roth Capital cuts their rating to "Hold" from "Buy"

Very helpful.