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$: The State Of Housing, Housing Finance and, Agency Reformmmd.cfainstitute.org/pdf/2003_2013/3ScottSimon.pdf · G:\Comm\ppt\Newport Beach\Bridwell… CMBS_Teachin(Mar09) 0 The State$
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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, 800-387-4626. ©2011, PIMCO.


1

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


2

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?


3

Lower Prices Lead To Negative Equity

Case Shiller 20 City = Red FHFA = Blue

Loan Performance =Green YOY Percentage Changes


4

Huge Negative And Near Zero Equity

Source: Deutsche Bank, LoanPerformance


5

The U.S. Government Has Subsidized Housing For Half A Century

SOURCE: IMF

Home Ownership Rate (%)


6

Ginnie, Fannie & Freddie Are AGAIN Really Important!

SOURCE: UBS/SIFMA


7

Private Markets Are Creating Almost No Mortgages

Source: PIMCO, Loan Performance, B of A


8

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


9

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


10

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


11

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!


12

Inventories (and shadow inventories) Remain High

SOURCE: NAR


13

Really Bad News: Foreclosures For A Long Time

SOURCE: Amherst, PIMCO


14

At Least Houses Are Not Being Built…

SOURCE: National Assoc. Of Realtors


15

Another Risk: Unemployment

SOURCE: BLS, Calculatedriskblog.com


16

Most Affordable Ever: Why No Impact?

SOURCE: National Assoc. Of Realtors


17

Good News: Owning Is Cheap But…


18

Is The Home Ownership Rate Supposed To Drop Below 64%?

SOURCE: Census Bureau


19

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


20

APPENDIX

(Random Stuff That We Find Interesting…)


21

Average Equity Stake Down 54% From 1950


22

3 of 10 Sales Are At A Loss

SOURCE: Zillow.Com, Deutsche Bank


23

Distressed Percentage Driving Prices Down

Source: CoreLogic


24

Lots Of Truly Vacant Homes

Source: Census Bureau


25

Bad News: Foreclosures….

SOURCE: Bloomberg


26

The “American Dream” (or Nightmare)

Source: Trulia, RealtyTrac


27

A Simple View On Housing

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

50% represent the increase of home price/loan size based on the same mortgage payment but at a lower mortgage rate.

603/482

+93%

468/374 +50%

313/250

778/622

+149%

*


28

Crazy Chart: Housing Is Crazy Cheap Versus Gold

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