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Saturday, February 28, 2009
Friday, February 27, 2009
A Decade of Delinquency and Charge-offs
According to data from the Federal Reserve the Delinquency Rates seen by US Banks in Q4-2008 reached 10-year highs in Q4-2008.
The Delinquency Rate on Single Family homes in Q4-2008 was 6.29%---Up 107 basis points from Q3-2008's 5.22%. Clearly as unemployment continues to rise, delinquencies will continue to rise.
The Delinquency Rate on Commercial Mortgages rose from 4.74% in Q3-2008 to 5.36% in Q4-2008---Also a rate much higher than anything we have seen in the past decade.
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What is interesting is when you look at the Charge-Off Rate for Single-family homes. Q4-2008 mortgage charge-off rate was only at 1.58%--compared to 1.46% in Q3-2008. I believe this is because many more banks started to try "work-outs" with the delinquent consumers and also wanted to "wait and see" what Obama's plan would be help out homeowners behind in their payments. I predict that Q1-2009 (Data to be released ~May 2009) will show continued slow growth in charge-offs, but sooner or later the banks will have to pay the piper and charge-off rates on single family home mortgages will spike up (Likely Q2 & Q3-2009).
The Charge-off Rate for commercial real estate was up from the 1.16% in Q3-2008 to 2.04% in Q4-2008. This is the highest rate since 1992, and could continue to climb as businesses fall on hard time and demand for office and retail space dwindles making the leverage taken out on such properties much more difficult to service, and much more likely to be charged-off.
The Delinquency Rate on Single Family homes in Q4-2008 was 6.29%---Up 107 basis points from Q3-2008's 5.22%. Clearly as unemployment continues to rise, delinquencies will continue to rise.
The Delinquency Rate on Commercial Mortgages rose from 4.74% in Q3-2008 to 5.36% in Q4-2008---Also a rate much higher than anything we have seen in the past decade.
Click for a Larger ImageWhat is interesting is when you look at the Charge-Off Rate for Single-family homes. Q4-2008 mortgage charge-off rate was only at 1.58%--compared to 1.46% in Q3-2008. I believe this is because many more banks started to try "work-outs" with the delinquent consumers and also wanted to "wait and see" what Obama's plan would be help out homeowners behind in their payments. I predict that Q1-2009 (Data to be released ~May 2009) will show continued slow growth in charge-offs, but sooner or later the banks will have to pay the piper and charge-off rates on single family home mortgages will spike up (Likely Q2 & Q3-2009).
The Charge-off Rate for commercial real estate was up from the 1.16% in Q3-2008 to 2.04% in Q4-2008. This is the highest rate since 1992, and could continue to climb as businesses fall on hard time and demand for office and retail space dwindles making the leverage taken out on such properties much more difficult to service, and much more likely to be charged-off.
Wednesday, February 25, 2009
History 101---Comparing Japan's Real Estate Bubble to our own
Recently, I was watching TV and a commercial for the National Association of Realtors came on saying something to the effect of, "There has never been a better time to buy a home"---Obviously the were referencing the recent price drops in property values---But what's to say that they can't drop even more.
Just this week,JP Morgan cut its dividend so that it could be prepared for a 40% Peak to trough drop in housing prices in the united states---But what if things get worse.
So I went to the trusty source of Wikipedia and found the following chart from the Economist in June 2005.
The article starts off hitting the nail on the head--stating, "The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops"
The Chart Compares Japan from 1980 - 2005, and an index of US, UK & Australia from 1995 - 2005. If you look at Japan---House prices dropped for at least 15 Years! (1990 - 2005)
It's also important to note 2 things (1) The UK & Australia had higher home appreciation from 1998 -2005 (2) The US Market continued to appreciate in 2005, 2006 and 2007.
Looking at this chart and better understanding what happened to Japan, I'd say Caveat Emptor--Buyer beware---Prices were being inflated for over 12 years in the US, UK and Australia, and it will likely take longer than just 2 years to make the National Association of Realtors correct in their premise that, Now is the best time to buy a home.
Just this week,JP Morgan cut its dividend so that it could be prepared for a 40% Peak to trough drop in housing prices in the united states---But what if things get worse.
So I went to the trusty source of Wikipedia and found the following chart from the Economist in June 2005.
The article starts off hitting the nail on the head--stating, "The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops" The Chart Compares Japan from 1980 - 2005, and an index of US, UK & Australia from 1995 - 2005. If you look at Japan---House prices dropped for at least 15 Years! (1990 - 2005)
It's also important to note 2 things (1) The UK & Australia had higher home appreciation from 1998 -2005 (2) The US Market continued to appreciate in 2005, 2006 and 2007.
Looking at this chart and better understanding what happened to Japan, I'd say Caveat Emptor--Buyer beware---Prices were being inflated for over 12 years in the US, UK and Australia, and it will likely take longer than just 2 years to make the National Association of Realtors correct in their premise that, Now is the best time to buy a home.
Monday, February 23, 2009
JP Morgan's Dividend Cut Announcement cites Unemployment Rate & House Price Decline Estimates
This afternoon JP Morgan announced that it is cutting its dividend from $0.38/share per quarter to $0.05/share per quarter. What is interesting what they shared as their rationale for cutting the dividend.
Below, I have attached Slide #2 from the presentation in which JP Morgan provides a "highly stressed environment" in which they model a:
Click for a Larger Image (Red highlight box, added for emphasis)
Should this "stress case" come to a reality, many more mortgages will be underwater and millions more homeowners will lose their income and possibly lose their homes---This will cause the mortgages and mortgage securities that JP Morgan holds to lose value a pressure their capital base.
Below, I have attached Slide #2 from the presentation in which JP Morgan provides a "highly stressed environment" in which they model a:
- 2 Year Recession
- 10% Unemployment Rate
- 40% Decline in Housing Prices (Peak to trough)
Click for a Larger Image (Red highlight box, added for emphasis)
Should this "stress case" come to a reality, many more mortgages will be underwater and millions more homeowners will lose their income and possibly lose their homes---This will cause the mortgages and mortgage securities that JP Morgan holds to lose value a pressure their capital base.
Conventional 30-Year Mortgage Rates reach 40 year lows
According to a chart from the St. Louis Fed the interest rates on 30 year-fixed conventional mortgages has hit all time lows in February 2009. (Or at least since the beginning of the chart---1970's).
What is also interesting is that for every recessionary period (highlighted in gray), the mortgage rate dropped.
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What does this mean? If you haven't yet looked into refinancing your mortgage, you may wish to consider it---However, given that unemployment continues to rise I think it's safe to say that the recession will continue for a few more months (or quarters). So there's a chance that mortgage rates could drop further---But if you can refinance, definitely look into it--and be sure to get 3 or 4 quotes from competing mortgage lenders.
What is also interesting is that for every recessionary period (highlighted in gray), the mortgage rate dropped.
Click for a Larger Image
What does this mean? If you haven't yet looked into refinancing your mortgage, you may wish to consider it---However, given that unemployment continues to rise I think it's safe to say that the recession will continue for a few more months (or quarters). So there's a chance that mortgage rates could drop further---But if you can refinance, definitely look into it--and be sure to get 3 or 4 quotes from competing mortgage lenders.
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