Subprime Loans: Buyer's Remorse Hitting Home?

A really interesting report out from Karen Weaver, et al, at Deutsche Bank does a great job of showing how the national home price “decline” number means absolutely nothing to the greater housing market. It’s a number that all you bloggers out there claim we in the main stream media like to throw around to try to scare everyone, and let’s face it, it drives the hype. But this report shows how local large MSA’s (metropolitan statistical areas) are ground zero for price corrections thanks to a change in the profile of the subprime borrower.

“The subprime mortgage borrower was really the marginal buyer, and if you remember from econ 101, the marginal buyer is the one who very much set prices so this borrower was the marginal buyer of real estate,” says Weaver. “Last year for example, subprime and Alt-A was about 40% of all purchases. Now the marginal buyer, the subprime guy is running into a lot of trouble. We see foreclosures rising rapidly in that subset and that marginal buyer is now becoming the marginal seller, and that's enough to re-price the whole housing market, it's a very important catalyst.”

AP

Los Angeles California skyline

Check out the percentage of subprimes in some of the largest cities:
Los Angeles: 35%
Phoenix: 44%
Las Vegas: 38%
Sacramento: 23%
Miami: 36%

These, not surprisingly, are the cities seeing some of the steepest price declines, from 8-15%, forget that 1-3% national price drop we all keep hyping. Subprime borrowers, who were once thought to populate less wealthy or disadvantaged markets, in the last 5 years moved head first into some of the priciest, or what Weaver calls, “unaffordable” markets. Consequently, this correction, unlike others based on fundamental economic factors, is being driven by a whole new set of variables. So, all those housing prognosticators throwing out all those predictions of a “bottom” in housing, really, in my view at least, have nothing to base their beliefs on. That's until this slow moving freight train of a subprime crisis shows us whether or not it’s going to rumble slowly into its destination--or crash through all the indicators with far more damaging effects.

Citigroup
It was just this past April that I chatted with Stephen Kim of Citigroup at a conference at the National Association of Home Builders. He thought the fundamentals of home building were still strong, the companies undervalued by the market. This, despite the fact that the brochure for the conference had a picture of an arm grasping a life ring.

Today Mr. Kim decided, maybe not so much. “We are downgrading our stance on the homebuilders to reflect our view that the homebuilding stocks will likely remain range-bound through the year-end,” says the report. “It is becoming increasingly likely that order trends may remain in negative territory through year-end, thus postponing this catalyst for another 6 months.”

Okee dokey. But Kim writes that although he is now less optimistic for the market, it’s all about “timing.” “We continue to believe the home building stocks are undervalued relative to their longer-term fundamentals, and investors with a 2-year time frame will do extremely well buying into the group at current levels.”

In other words, we’re all still waiting for the freight train. It’s all about the mortgages. It’s all about the buyers who never should have been brought into the housing market or never should have upgraded, but who were lulled, tricked, dragged, boosted (however you want to characterize it) into homes they simply could not afford--by bankers and brokers who saw potential dollar signs in fantasy credit. I said it at the start and I’ll say it now, it’s all about greed. Greed got us all into this housing boom, and greed, as it always does, will inevitably take us down.

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