Wednesday, January 20, 2010

Housing starts vs permits

Recovery skeptics are making a big deal of the fact that housing starts fell 4% in December (seasonally adjusted). Recovery fans are excited about the 10.9% rise in building permits, which would point to higher starts next month. I look at both these series and see signs that activity has probably stabilized and may be rising. If things have only stabilized, this would be a very good sign for the residential construction sector, because it would signal that the supply of and demand for housing was coming into balance. That's an important ingredient in the stabilization of prices. And stable home prices (and they may actually be rising on average) would do wonders for the value of many hundreds of billions of subprime mortgage-backed securities that are priced, I'm told, to the assumption that nationwide housing prices are going to fall another 15%. If home prices don't fall 15%, then the prices of those securities must perforce rise significantly; that in turn would generate huge gains for the portfolios of institutional investors and financial institutions that are holding them.

We don't really need to see housing turn up to be optimistic about the future; we only need to see signs that housing has finally stabilized.


brodero said...

Is the securities that are pricing a further fall of of 15%... ALT-A securities or could you
tell us the type that you are talking about?

Scott Grannis said...

Unfortunately I don't have any specifics on this. I got the information from a trusted source. We were talking about non-agency asset-backed securities in general and how prices have been moving up impressively over the past few months. We then turned to the housing market and he mentioned that default assumptions built into the current prices of non-agency securities were driven by a view that prices will fall another 15% nationwide on average. So if housing prices don't fall, then the prices of the securities have further upside potential. I would think that the 15% price decline assumption is a generic assumption that holds for most if not all mortgage-backed securities with default risk.

brodero said...

Thank you I am an old bond trader
and sometimes getting information on some of these esoteric securities is very difficult. I wish there was greater transparency on these securities so
that more of the investing public
could understand.

Bob said...


Won't the number of foreclosures coming on the market continue to not only depress prices but also limit new home construction? Do you have numbers or can you point to a resource that addresses the number of homes in foreclosure and preforeclosure (there is term for that which I have forgotten). TIA


Cabodog said...

Scott, somewhat off-topic, but what are your current thoughts on interest rates and TBT?

Scott Grannis said...

I think I've mentioned before that TBT was not working out as well as I had hoped. It hasn't done very well for quite awhile, and is not designed to do well in an environment where rates see-saw up and down even in a rising trend. My enthusiasm for TBT has gone down, even though I continue to think T-bond yields are in a rising trend.