The State Of Housing, Housing Finance and, Agency Reform

Transcription

1 The State Of Housing, Housing Finance and, Agency Reform Scott Simon Managing Director PIMCO June 8, 2011 Pacific Investment Management Company LLC,840 Newport Center Drive, Newport Beach, CA 92660, , PIMCO. 0

2 Forecasting The Path Of Housing In 2006, It Was Relatively Easy Prices were insanely high by every measure Affordability was awful Creative finance had already turned all the straw into gold 5mm renters had magically become owners Today, It Is Very Difficult Lot s of things/issues that no one has ever seen or knows how to model 1

3 Things We Have Never Seen Before This period looks like no other period Lower prices nationally and negative equity Big possible changes in Mortgage Finance / Government Subsidies - After 70 years of pro-housing Government subsidies, many subsidies are at risk - GSE Reform - What mortgages will be Government guaranteed? - Already tighter credit and higher fees - Already a reduction of mortgage credit availability Massive foreclosures and inventory to be cleared A change in the view of The American Dream - If you are 25% Underwater, are you actually an owner? 2

4 Lower Prices Lead To Negative Equity Case Shiller 20 City = Red FHFA = Blue Loan Performance =Green YOY Percentage Changes 3

5 Huge Negative And Near Zero Equity G:\Comm\ppt\Newport Source: Deutsche Beach\Bridwell Bank, LoanPerformance 4

6 The U.S. Government Has Subsidized Housing For Half A Century Home Ownership Rate (%) SOURCE: IMF 5

7 Ginnie, Fannie & Freddie Are AGAIN Really Important! SOURCE: UBS/SIFMA 6

8 Private Markets Are Creating Almost No Mortgages G:\Comm\ppt\Newport Source: PIMCO, Loan Beach\Bridwell Performance, B of A 7

9 Mortgage Finance Ideas Private Markets What is Professor Jaffe of Berkeley possibly thinking? Covered Bonds Cultural issues Every major securitized fraud has been a revolver Most successful overseas markets are assumed to be Government guaranteed! Government Guarantees The only way to create 30 year fixed rate mortgages anywhere near current rates Bottom Line: If Government Guarantee goes away or is reduced, mortgage rates go up, mortgages become less available, and housing will be lower than it otherwise would have been 8

10 GSE Reform A bunch of Bills, a Treasury proposal, every nut with an opinion putting forth an idea, and GSE reform remains merely a theory As the head of the OCC said: The potential for unintended side effects is higher when the patient is weak. Fannie, Freddie and FHA have already been raising guarantee fees Treasury put forth three proposals (none were endorsed) A purely private market away from FHA/VA A mostly privatized market with FHA/VA targeting during crises Associations that behave like Fannie & Freddie without portfolios 9

11 GSE Reform As guarantee fees increase, and the maximum loan size decreases: credit will become less available home prices will be lower than they would have been otherwise Currently, private markets would create loans with higher rates and higher down payments than the Agencies. credit will become less available home prices will be lower than they would have been otherwise When the Agency to Private window narrows enough, expect PRIME ARM s to be the first products that the private / bank market will originate 10

12 GSE Reform PIMCO s View Housing reform is a 10 to 15 year transition The Government must guarantee most loans for foreseeable future Evolution, not revolution revolution will kill the housing markets A political and philosophical issue, not a right or wrong issue - Be careful: the Government could accidentally DESTROY housing! 11

13 Inventories (and shadow inventories) Remain High SOURCE: NAR 12

14 Really Bad News: Foreclosures For A Long Time SOURCE: Amherst, PIMCO 13

15 At Least Houses Are Not Being Built SOURCE: National Assoc. Of Realtors 14

16 Another Risk: Unemployment SOURCE: BLS, Calculatedriskblog.com 15

17 Most Affordable Ever: Why No Impact? SOURCE: National Assoc. Of Realtors 16

18 Good News: Owning Is Cheap But 17

19 Is The Home Ownership Rate Supposed To Drop Below 64%? SOURCE: Census Bureau 18

20 Conclusion On Housing: It s A Race If the market works off current vacancies and future foreclosures, with the wheels still on the wagon, there is an impending housing shortage on the back side If housing prices go too low before the overhang is cleared, housing could easily COLLAPSE under overwhelming negative equity At what point will the market price in one outcome or the other? Almost all pundits and experts are projecting in between the middle is almost impossible as something or someone will tip it 19

21 APPENDIX (Random Stuff That We Find Interesting ) 20

22 Average Equity Stake Down 54% From

23 3 of 10 Sales Are At A Loss SOURCE: Zillow.Com, Deutsche Bank 22

24 Distressed Percentage Driving Prices Down G:\Comm\ppt\Newport Source: CoreLogic Beach\Bridwell 23

25 Lots Of Truly Vacant Homes G:\Comm\ppt\Newport Source: Census Bureau Beach\Bridwell 24

26 Bad News: Foreclosures. SOURCE: Bloomberg 25

27 The American Dream (or Nightmare) Source: Trulia, RealtyTrac 26

28 A Simple View On Housing 603/ % 778/ % 468/ % 313/250 * SOURCE: PIMCO * $313K home price/$250k loan value are based on a 9% mortgage rate for what you can purchase for a $2000 monthly payment. The 93% and G:\Comm\ppt\Newport 50% represent the increase Beach\Bridwell of home price/loan size based on the same mortgage payment but at a lower mortgage rate. 27

29 Crazy Chart: Housing Is Crazy Cheap Versus Gold 28