Monday, March 24, 2008

Simple Math on Housing and Mortgages

According to Bloomberg, existing home sales rose more than expected this morning to an annualized rate of 5 million. That is good news. The median sales price, however, dropped to $195,000. That is maybe not such good news, but at least homes are selling and inventories are decreasing.

According to the article, FHLB announced that it will purchase up to $150 billion of MBS to help alleviate the strain in credit markets. Add in $200 billion from FNMA and FRE and you get a total of $350 billion in added demand for MBS. If you assume that 6 million houses (5 million new + 1 million existing) will change hands this year at a median price of $200,000, that adds up to $1.2 trillion dollars in total purchases. Suppose they are financed by traditional 30 year fixed mortgages with 20% down (because really, can anyone get a 5% no doc, option arm anymore?) and total mortgages slated for MBS issuance would be $960 billion. My question is, if FHLB, FNMA, and FRE buy $360 billion, who's gonna buy the $600 billion balance?

2 comments:

Stephen said...

Here in lies the problem.....I write this exactly a week later after we had all financial markets in complete disarray. We had a rally in stocks and spread product...the dollar is bouning and people are selling treasuries with reckless abandon. All of this price action to me is indicating that the problem has been solved in a blink of an eye. I have to firmly disagree with this analysis. The Fed has taken some unprecedented steps in trying to calm markets and rightly so. Who knows what would have happenend last Monday if we walked and people decided that as counterparties no one was safe. You could of had a run on the entire financial system as we know it. The Fed has temporarily solved the liquidity crisis. But they haven't solved the long term problem. The securities are still sitting on people's balance sheets and given the economic outlook I don't see how they are going to just "trade up." Right now the losses stand at 195 bln and most houses on the street think the final number is 500 to 600 bln. So, if a 195 bln in losses managed to do this...what is another 300 bln going to do? I hate to think about that but it looks like we are getting the normal "corrective trade" across all markets. People would be well served to look at levels across commodities, currencies, treasuries and stocks and see what those prices were. If we get back to those and don't hold then my guess would be we're in for another leg down. If we get thru them then I guess people (the markets) believe we are thru the worst. I didn't say that trading is easy and trying to decipher thru all the stuff is almost mind numbing but in the end the market is always right and for me I would rather sit back and watch to see what happens when we get to those levels b/c you better believe that all the problems are gone if you are going to push thru.

jack said...

i don't know what the market is going to do next, but i know this: i sold a house in SF in 2002 higher than what i'd paid in 1999. all the dot-coms were dead and SF's population declined by 10% in that time. but you know what? the market never went down. never. and hasn't gone down since. (well, until recently, i guess!) all i'm saying is that was one of the 5 most-obvious trades of my life, & i couldn't have been more wrong. just when you think you've got it all figured out...