I remain optimistic that housing is nearing a bottom. Collapsing prices have created very good buying opportunities and a pick up in home shopper traffic. Add to the fall in prices, the recent sharp reduction in 15 and 30 year mortgage interest rates (now under 5%) and housing is becoming very, very cheap by any standard, including replacement cost.
My optimism on housing encourages me to be optimistic on banks, even in the face of all of the bad news about loan losses. In my judgement, most banks in the US have been trying to get out ahead of their actual losses by setting aside reserves greater than they believe will be necessary to cover their losses. They have been doing this, not to deceive investors, but to take the loan loss reserve issue off the table. If they can do this, then bank stock prices will turn higher for good because it will be clear that the worst of the housing debacle is behind us.
It is with this in mind that the upcoming earnings reports from the banks are of keen interest to me. There will be gains and losses on a reporting basis, but my eye will be zeroed in on what the banks do with the loan loss reserves. If they increase them appreciably, the turn in the banks is months away. If reserves stay near their current levels or rise only modestly, the turn in bank stocks may be near.
Tomorrow JP Morgan reports. They are as important a bank as there is in this country. They will set the tone for those that are to come.
Over the next two weeks the following banks will report earnings. Marshall and Isley, First Horizon, Bank of America, Northern Trust, US Bancorp, Bank of New York, BBT, Fifth Third, Key Banks, and Sun Trust Banks. My guess is that there will be a mix of adjustments to reserves among these banks, but the stocks will all be treated alike. If JP Morgan and Bank of American report tame loan loss reserves, all the banks will rally. If the big banks have worse than expected numbers, all the banks will get hit.
Having said this, even if the loan loss reserves numbers are not good, I still believe the high quality banks are near a bottom. I believe this because I believe that real estate has gotten cheap enough that drive-by shoppers will increasingly stop in for a look, and when they do, the combination of price and mortgage cost will turn shoppers into buyers.
Tuesday, January 13, 2009
Home Sales May Be Nearing a Bottom, Banks to Follow?
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4 comments:
Greg,
I think this is overly optimistic thinking on both fronts. If the issue with housing was a simple supply/demand issue, where the prices got higher than people were willing to pay, I would agree, but it isn't. First we're still near historic levels of home ownership for the country, which would lead one to believe demand is satiated. However, let's then assume embeded in the homeowners are people who'd like to upgrade and people who'd like to downsize. At this point, they want to be able to exit their current situation (a house) without having to settle up with the current mortgage, which is an issue for anyone whose bought in the last 3-4 years. Then there are psychological issues. How stable is, and likely that your job is secure to enter into a new mortgage situation? What about credit scores? Only prime scores are currently qualifying for mortgages, and the nations average is well below the prime score. In addition, in many areas with the "best deals" the homes above conforming prices, so then you are looking at mortgage rates 200bps+ over the quoted 15 and 30 year conforming rates. So the bottom in housing is not close. There are a sundry of other important reasons that I could forward to you in research form so I don't mis-quote anymore than I already have...
Banks. Same deal. Still deeply in balance sheet repair. Seeing a number of research reports with lists of banks that are likely to cut dividends. See further TARP support being directed at people, not banks thanks to congressional interference. See a whithered consumer whose focus is paying down debt and extinguishing it, not creating more. The December reduction in consumer revolving credit was a shocker to most of the street... Hearing that although credit is being extended to businesses it is a much longer process as everything goes to committee and is overpapered. These CYA moves are slowing business to the speed of molasses in January--and hey-- it's January!
Be careful friend. The worm will turn, but don't be a hero and try to anticipate it...
It is way too early to be optimistic that on the housing market. What we have seen so far in housing has been mostly related to problems with the "balance sheet" of the consumer. We will now see what happens to housing as people lose jobs and the "income statement" of the consumer has a negative impact on housing. Add to that the very difficult issue that huge numbers of very credit worthy people are "upside down" on their mortgages and you have a housing problem that will continue for years.
But it might be true that banks have been aggressive in establishing loss reserves. A housing recovery will probably assume an L shape rather than a V and when that happens the banks will be able to breathe a little easier.
The problems are inter-related, and it amounts to a lack of capital in the system. While most of the world views these problems as "liquidity" concerns, the liquidity issues that stemmed over the past year precede the larger issue of too much debt in the system, compounded by the lack of both capital and income.
While the TARP program gave a starting point, banks don't lend capital. They lend deposits. The media is missing this key point - they are also missing the fact that it takes two to tango with respect to credit - a producer and a borrower. Lastly, with respect to banks' equity prices, if the USB, BAC, JPM, and WF's of the world are wise (which historically they have been), the will issue common before its too late (ala Citi). Dilution is not the solution for equity holders.
I have more than enough for a 20% downpayment and a prestine credit score - simply put, I'm what the banks want; and that's not too boast, that's to put out a real world example. And i won't go near buying a condo here in Chicago because: a) prices are way too high (due to the observations made by Indy) and b) my job is at risk.
It's a painful process, but until more debt gets taking out of the system, and more savings and capital are put into the system, will both banks and housing find a bottom. Unfortunately, that looks to be years, not quarters away.
Best,
Dave G.
Homes Sales may be nearing a bottom is the half-truth. This may be the bottom in activity of purchases but not the bottom of home prices. The ratio of homes for sale compared to the homes sold is at a 13.8-month supply and growing every year since 2006 in Middle Tennessee.
Realtor 301 says home price stabilize when the homes for sale to sold is approximately a six month supply. Prices decrease when the homes for sale exceed a six-month supply. Conversely prices will increase with a three or four month supply.
The real question is what will stimulate home sales? Homes sales activity will not increase until we have a direct stimulus for the homebuyer. Providing the Buyer with a tax credit or other significant monetary benefit. If not the recovery will take five years and all equity will be gone from the purchasers of homes in the last seven years.
Michael Worsham
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