Housing Market

Earlier this week, the news came out that Jaruary new home sales fell to a 309,000 annual rate. This is the lowest number since the 80's. It suggests that the government stimulus has worn off and the market has resumed its contraction. Prices declined by a few % as well. Today this is confirmed as sales of existing homes fell 7.2% in January. Prices fell by 1.6% according to the FHA.

In other news, Fannie Mae and Freddie Mac posted losses in the $5-10 billion range (each).

Also, the spread of 30-year mortgages over Treasury bonds is 20 bips (0.2%). Traditionally, investors have been paid a point or two (1-2%) over Treasuries due to default risk and prepayment risk. This low spread is unsustainable. I expect that this will change later this year as the Fed stops buying mortgage backed securities at the end of this month. This could easily push interest rates to 6% (from 5% right now) by the end of the year.

There is also talk about Obama placing more restrictions on bank foreclosures. If he gets his way, banks won't be able to foreclose until the HAMP program reviews it. Look for banks to move to more short sales, and foreclose as fast as they can before the door closes on them. Also, who's going to lend if they can't get their collateral back?

What does this mean? In summary, falling prices are a buyer's market. Many people realize that if they can buy a house for less than renting, it doesn't matter if prices keep going down, because they're saving on the cash flow. Also, the pressure on banks will create opportunities as they try to get whatever they can and sell quickly.

Oh, and by the way, AIG may need more $. They lost $54/share last quarter, against expected losses of $4. But much better than last year's loss of $287/share. Green shoots, anyone?