Housing and Financials: The Worst May Soon Be Over

by: Vahan Janjigian August 28, 2008 | about stocks: XHB / XLF    

Vahan Janjigian

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The latest (June) S&P/Case-Shiller figures provide a little (and I emphasize little) comfort that housing prices are bottoming out. With year-over-year prices down a record 15.92% on average in 20 major markets, that may sound like an odd thing to say. But that decline is only a little worse than the previous month's figure. In fact, if you look at the rate of change of the rate of change of the rate of change (what a mathematician would call the third derivative), things have been improving since February.

By no means does this imply that price drops are a thing of the past. On the contrary, housing prices will likely keep falling for another 12-18 months. However, the evidence suggests that the rate of decrease is about to slow. In fact, there is a good chance that the year-over-year decline in prices for July (to be reported at the end of September) will be less than it was for June.

Because almost all of the problems in the financial sector have been related to falling real estate prices, a stabilization of prices is critical for the health of our financial institutions. And because real estate prices will keep falling on an absolute basis for many more months, banks will continue writing down assets. Yet it is encouraging to see that the worst may soon be over for both the housing and finance industries.

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This article has 11 comments:

  •  
    Aug 28 07:56 AM
    With banks returning to the old lending standards,either wages must go up subtantially or house prices must come down more.This is especially true in area that have been spared the big declines..
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  •  
    Aug 28 08:00 AM
    This sounds more like a desperate cry for help. Between the ARS, the CDOs' the idiot bankers who bought FRE and FNM and have not marked to market yet, AND the credit card defaults, I'd say we're still deep in the compost.
    Reply | Link to Comment
  •  
    Aug 28 08:13 AM
    Rate of change of rate of change? Last time I checked, that was the Second derivative.
    Reply | Link to Comment
  •  
    Aug 28 09:40 AM
    listen carefully: there will BE NO REAL ESTATE RECOVERY... WHY: even if houses are 50% off their previously inflated values...THERE IS AN EVER INCREASING MINORITY OF BUYERS...get it... price is only one factor...THERE HAVE TO BE BUYERS!!! Now, because of Nafta and WTO, the multinationals ARE STILL MOVING "HIGH PAYING JOBS OVERSEAS... the remaining people with even good jobs are TAPPED OUT ON THEIR CREDIT and are already switching from shopping at Macys to shopping at Walmart. Also, you need 20% down plus a secure job...no more cheap ARM mortgages...so the banks will continually HAVE POOR PROSPECTS GOING FORWARD...ALSO, THE SPECULATIVE DAYS OF MAKING A 10-20% GAIN ON YOUR 5-1 LEVERAGED DOWN PAYMENT ARE HISTORY...so there is LITTLE INCENTIVE TO BUY A HOUSE except as a "place to live" as opposed to renting...more people will CHOOSE THE FLEXIBILITY OF "RENTING" since their is little potential to make money on Real Estate Appreciation...the mkt and gov spin doctors are once again TRYING TO PROMOTE THE "RECOVERY ILLUSION!" ...AIN'T GONNA HAPPEN... LIKE "NEW ORLEANS" ...during the 20th century it always RECOVERED after multiple major storms...BUT NOT THIS TIME...NEW ORLEANS IS YOUR "WAKE UP CALL" for the future...it did not recover this time, nor will it EVER! It's OVER FOR U.S. REAL ESTATE...unless they open up the flood gates of immigration and allow CASH BUYING FOREIGNERS to purchase...and will have 20 living in a house to pay the rent on their speculative investments...like 20 low wagers paying the rent...that's about the only possibility for BUYERS..."GET IT!" flashrob
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  •  
    Aug 28 10:01 AM
    Well.. I can understand why there is a decline in the real estate market and it needs to happen (and I am long on FNM). I did a real estate comparison last year with what you got for the buck in LA. A looked at a number of “starter” home in El Monte, CA and compared them to a number of homes in La Canada, CA…Comparing a 1000’ sq home in El Monte selling for $500k to a 3800’sq home in La Canada selling for $1.8M… The El Monte home sat on a 5000’ sq lot the La Canada home sat on a 48,000’ sq lot…. Setting aside the lot size, high end appliances, pool, better schools etc…with the home in La Canada it does not take a rocket science to figure out that the “starter” homes in general are not comparative just based on sq footage… btw.. from further review the homes in higher end areas in CA (e.g. South San Francisco, LA…) are not declining in cost but it is the “Starter” homes… Humm, once again I feel that the general population is not getting the entire story but hype and manipulation for the media at the cost of the waning middle class…
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  •  
    Aug 28 10:15 AM
    Who has provided evidence that the fall in prices will decelerate at a steady pace? What principle says can't it re-accelerate? True, as the value approaches zero the rate would tend to slow down. Use some common sense, please.
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  •  
    Aug 28 11:15 AM
    While the worst may be over, the bad will persist.

    I think housing prices will remain moribund for at least another year, perhaps more in the highly speculative markets (which everyone knows is CA, FL, NV and AZ).
    Reply | Link to Comment
  •  
    Aug 28 02:10 PM
    Has the 3rd derivative brought the price to lon term trend line and then a little some to reflect the market dynamics?

    Keep on going for slow grind for some time to come.
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  •  
    Aug 28 05:01 PM
    Mortgage Fraud up 42% accoriding to latest MARI numbers. Maybe we can just pretend the the market is getting better.
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  •  
    Aug 28 08:31 PM
    I refer all to Barry Ritholtz and his very recent persona: anti-Cassandra. Could be Mr. Jinjigian is wearing her dress. And he ought to wipe that confident smile off his bio photo face. When has one month established a trend? Is this man actually ignorant of the forthcoming slew of mortgages to be adjusted shortly? First buy a cardboard box. Then take his investment advice.
    Censeo
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  •  
    Aug 29 08:23 AM
    A nice theory...pity it misses out in a grounding in the normal market cycle seasonality. In a "flat" year the price differential between the slowest real estate months (Nov-Feb) and the peak moving months (Summer) is 3-4%. Hence, a decrease in the rate of price changes from February into August could well be the normal market dynamics and nothing to do with the bottoming post bubble...we will know soon when the weak months hit and if the rate of change continues to slow then this hypothesis will have some validity.
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