The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

“The rich aren’t as rich as they used to be.”

-Alex Rodriguez, a Miami real estate agent with JM Group USA

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Real Estate agents are masters of the obvious, aren’t they? “This is the kitchen” they proclaim as if a buyer couldn’t deduce that from the refrigerator, stove and dining table.

And so too, is that obvious quote up top. Yes, the rich have less money. But so does nearly everyone else. With the rich, the amounts in question are simply much greater, individually and collectively, in terms of assets lost. As David Rosenberg has pointed out, “In 2009, household net worth contracted nearly 20% over the past year and a half. That’s an epic $12 trillion of lost net worth, a degree of trauma never seen before.”

The improvements in Housing appear to be driven by lower end subsidies. The most recent Housing data makes clear the dominance of low end sales. As noted earlier, last month’s existing home sales saw a 60% increase in cheaper condos and coops.

This reflects several ongoing themes that will continue to impact Housing the next few quarters:

1) Credit availability remains tight: The pendulum has swung from giving anyone who can fog a mirror to denying creedit to well qualified applicants. For entry level homes, a strong mortgage applicant has a good credit score, steady income, and can put 0% down. Higher end homes are tougher to finance. Anecdotally, some deals require 30-40% down on a $1 million plus home;

2) Housing Bailouts aim at the low end: Extensive government subsidies (1st time tax credit, low mortgage rates) falls primarily to low end purchasers; The higher end purchaser has the benefit of lower interest rates but pay a 100 bp premium on Jumbo mortgages; Credit for jumbos (> $417k) are especially tight.

3) Homeowners with mortgages of more than $1 million are defaulting at 2X the median rate. Lower-end homes are now decreasing as part of the total foreclosure pie; Zillow.com reports middle- and high-end homes are becoming a larger proportion of defaults.

This is significant, due to the important role more expensive (aspirational) homes play in the food chain. A big driver of sales is the “trade up” buyer. Now that entry level sales are improving, the chain of transactions needs to keep moving on up. The potential for

While its been a huge improvement to see starter homes selling, its primarily been driven by distressed transactions — 30-50% of alle existing home sales — and government subsidies.

The low end bailouts are ill conceived and counter-productive. Foreclosures serve a valid purpose, one that is driving the real estate market back towards its proper levels. These housing bailouts are populist driven, with a quid pro quo in them for the bank bailouts. Both will prove to be counter productive over the long haul.

Case Shiller Index out today at 9am . . .

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Source:
Higher-End Homes Face the Price Pressure
MARK GONGLOFF
WSJ, DECEMBER 29, 2009

http://online.wsj.com/article/SB20001424052748704134104574624661382421076.html

Why 2010 Looks So Dicey
David Rosenberg
BusinessWeek, December 17, 2009,

http://www.businessweek.com/magazine/content/09_52/b4161112222655.htm

Luxury-Home Owners in U.S. Use ‘Short Sales’ as Defaults Rise
Kathleen M. Howley and Dan Levy
Bloomberg Dec. 17, 2009

http://www.bloomberg.com/apps/news?pid=20601214&sid=aQED_96QBBkk