Geographic Distribution of House Price Risk
Yesterday, we looked at a heatmap of Foreclosures; This turned out to be rather timely, as indicated by a front page article in today's WSJ, In Home-Lending Push, Banks Misjudged Risk:
"In a surprise announcement late yesterday, HSBC said its subprime-mortgage problem was worse than previously indicated. It said the capital it sets aside to cover all bad debts, including the soured mortgages, would be 20%, or $1.76 billion, higher than analysts' consensus estimates. "The impact of slowing house price growth is being reflected in accelerated delinquency trends across the U.S. subprime mortgage market, particularly in the more recent loans," the bank said."
You can see the HSBC docs here. It turns out that "The percentage of HSBC mortgages more than 60 days past due is climbing. Fraud by borrowers has been higher than expected."
Since its doubtful that HSBC is the only bank that will be increasing its reserves to deal with accelerating foreclosures, let's consider the parts of the country with the highest concentrations of at risk home prices. Fortunately, PMI has already done the heavy lifting for us: They created a map that depicts the geographic distribution of house price risk for all 50 U.S. states and DC.
Now for your homework assignment: Review the maps below, and consider what lenders and homebuilders have the highest exposures to the weakest areas. I'll start: Toll Brothers has a high concentration in the mid-Atlantic states.
>
Geographic Distribution of House Price Risk
chart courtesy of PMI
>
The color codes rank order the 10 riskiest states in red (11 including
the District of Columbia), followed by the next 10 riskiest states in
tan, white, light blue, and aqua.
The Northeastern states and California top the list, but Florida replaced New York in the top 10, a change from the prior year.
For comparison's sake, the following map shows the gains in home prices by region.
Home Price Appreciation
Data source: Census Division, % change over previous four Qs (as of Q3 '06)
>
There are some who claim this data is irrelevant to the stock market; quite frankly, I simply do not understand that thought process (or the lack thereof).
UPDATE February 8, 2007 9:36am
Its a WSJ two-fer: Mortgage Refinancing Gets Tougher
"With rates on many homeowners' adjustable-rate mortgages rising, some who would like to refinance into a new loan are finding they can't.
In some cases, that is because their loan carries a prepayment penalty, which would force them to come up with thousands of dollars if they refinance in the first few years. Such penalties are common with so-called option adjustable-rate mortgages, which typically carry a low teaser rate that rises sharply after an introductory period.
Other borrowers are getting caught short by a changing housing market -- one in which home prices have flattened and lenders are beginning to tighten their standards after a long period of making mortgages easier and easier to get. The challenges are greatest for homeowners whose credit has declined since they took out their last loan and for those who have little if any equity. Some of these borrowers are still able to refinance but are finding it more costly than they expected.
These new challenges come at a time when many borrowers who took out adjustable-rate mortgages are facing higher payments. There are about $1.1 trillion to $1.5 trillion in ARMs that will face rate increases this year, according to the Mortgage Bankers Association. The MBA expects borrowers to refinance as much as $700 billion of those mortgages..."
We are far from done with the economic and market impact of Housing . . .
>
Sources:
In Home-Lending Push, Banks Misjudged Risk
HSBC Borrowers Fall Behind on Payments;
Hiring More Collectors
CARRICK MOLLENKAMP
WSJ, February 8, 2007; Page A1
http://online.wsj.com/article/SB117088245754201362.html
Early Payment Default
HSBC
http://online.wsj.com/public/resources/documents/info-hsbc_mortgage07.html
PMI releases Winter 2007 Economic and Real Estate Trends report (pdf)
Economic and Real Estate Trends Report
The PMI Group,Winter 2007
http://media.corporate-ir.net/media_files/irol/63/63356/Winter2007ERET.pdf
PMI's Winter 2007 Risk Index Reflects Slowing Housing Market
http://phx.corporate-ir.net/phoenix.zhtml?c=63356&p=irol-newsArticle&ID=953696&highlight=
Mortgage Refinancing Gets Tougher
As Adjustable Loans Reset at Higher Rates, Homeowners Find Themselves Stuck Due to Prepayment Penalties, Tighter Credit
RUTH SIMON
WSJ, February 8, 2007; Page D1
http://online.wsj.com/article/SB117090141629001793.html
Thursday, February 08, 2007 | 07:40 AM | Permalink
| Comments (36)
| TrackBack (0)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00d83517643769e2
Listed below are links to weblogs that reference Geographic Distribution of House Price Risk:
Comments
We are only now seeing the homebuilders write down their assets because they were "surprised" by the business conditions in the builder market. It was a surprise to me to hear folks calling for a bottom PRIOR to having any of these writedowns, and I believe that there will be more to come for the homebuilders.
Bank loan loss ratios are at historic lows. Even 50% increases in the percentage still has that metric at historic lows. Take a visit to FRED to see for yourself this trend.
http://research.stlouisfed.org/fred2/series/USLLRTL?&cid=23
There will be no bottom in the housing/credit markets until we see alot more balance sheet pain for the homebuilders and the "regular" lenders who have subprime stuff lurking in their portfolios. Calculated risk has done a good job of bird-dogging this story.
Posted by: Leisa | Feb 8, 2007 8:07:01 AM
If the chart defines the risk based on the past appreciation rate, it is misleading. A flat housing market while the fundamentals are deteriorating could be overpriced. Take Northeast Ohio as an example. It is losing population, new home sites are everywhere, existing homes for sale remain on the market a long time (1+ years) unless the owner accepts a price well below the appraised value, and foreclosures are up. I would not call it a low risk state.
Posted by: Ohioan | Feb 8, 2007 8:14:45 AM
Subprime lender NEW is also blowing up this morning.
Posted by: seminole83 | Feb 8, 2007 8:16:23 AM
Fraud by borrowers has been higher than expected.
i love it. not, "we didn't scrutinize carefully enough". not "we were too aggressive". not "we pursued a short-term profits without enough regard to long-term risk".
Posted by: j d ess | Feb 8, 2007 8:47:32 AM
The coasts - can't trust 'em.
Posted by: wally | Feb 8, 2007 9:53:25 AM
New blow-up comes right on the tail of HSBC. Suprisingly, the HK market was able to come back almost 400 points overnight.
HSBC Holdings Plc, Europe's biggest bank, said it plans to set aside $10.6 billion companywide for bad debts, 20 percent more than the $8.8 billion it said analysts expected on average, because of struggles in its HSBC Finance Corp. lending business.
Posted by: Michael C. | Feb 8, 2007 9:53:59 AM
barry, you're so Old School. just the thought that declining housing and auto production have any relation to the real economy... or that the market itself has any relation to real events... you're so funny. as i'm sure u know, inflation was made illegal some time ago, and recession is unimaginable.
Posted by: scorpio | Feb 8, 2007 10:08:41 AM
For the Homework Assignment:
Out West, it's probably KB Home. Also, this showed up on "Global Econ Trend Analysis" a while back, and it may be worth repeating here again:
The Mortgage Lender Implode-O-Meter -- http://ml-implode.com/
Posted by: Ken M. | Feb 8, 2007 10:13:24 AM
time to revisit the conference call from new century back in november.
on of their main topics was the stock buyback! amazing!!!!!!
of course debt fueled!
http://immobilienblasen.blogspot.com/2007/02/endgame-for-new-century-new.html
Posted by: jmf | Feb 8, 2007 10:45:20 AM
From first glance there seems to be a correlation between home-price increase and states with population growth.
Low density states with stagnant or falling populations - North Dakota, Indiana, Nebraska, and Kansas for example - have seen less housing price growth.
High growth areas and/or areas with strong economies - Florida, Nevada, California, Maryland for example - are in red.
Posted by: Nova Law | Feb 8, 2007 10:51:54 AM
Well the good news is... once those people walk away from paying twice as much in mortgage payments as they could be paying to rent the same house, they'll have a little extra cash to spend at Wallmart, or on cars or everything else. And the banks will still be happy to help them out with as many 18%-32% credit cards as they can handle.
Posted by: Bob A | Feb 8, 2007 10:58:36 AM
Debt is good.............for you.
Posted by: Teddy | Feb 8, 2007 11:08:11 AM
No no, it's not DEBT -- that's such a puritanical word! It's CREDIT that's good for you. And everyone has a right to credit.
Posted by: HVH | Feb 8, 2007 11:26:08 AM
Bob A -- Excellent point. Time to buy WMT!
Posted by: MAS (San Diego) | Feb 8, 2007 11:30:12 AM
"Fraud by borrowers has been higher than expected."
These are people that you and I know better than to lend twenty bucks to, and yet the mortgage industry lent them millions.
Cry me a river.
Posted by: Idaho_Spud | Feb 8, 2007 11:35:28 AM
The people now saying 'Fraud by borrowers' are the very same people that a couple of years ago were telling borrowers:
"Don't bother reading those (10 pages of discloser) documents, just sign down here"
and to self employed borrowers
"All we have to do is say you make enough to qualify, they'll never even check"
Posted by: Bob A | Feb 8, 2007 12:22:08 PM
I'll toss in a hypothesis just to stir the pot :)
One could make the argument that the low risk areas are mainly the "well grounded" folk. You know, the honest, hard working, well-grounded (in faith in a higher being) people of farm country or the bible belt.
There appears to be less risk that these people will welch on the mortgage while the "less well grounded" people in CA(!) and the "sinners" in NV and FL are more interested in what's best for them.
Just an observation! :)
Posted by: Mike | Feb 8, 2007 12:23:57 PM
Hey Spud, guess who's tax dollars will be spent on the bailout, if needed...???
Posted by: lurker | Feb 8, 2007 12:38:08 PM
Just a side issue. Has anyone noticed that the the Wilshire 5000 is only 70pts (i.e 0.5%) away from its all time high from March 2000. Which begs the question where is the bear market (apart from Nasdaq stocks)? So the real and consistent source of a drag on returns is inflation and dollar depreciation. As a well diversified investor would be about flat in notional terms on any purchase made between March 2000 and NOW!!
Posted by: vegaman | Feb 8, 2007 12:39:18 PM
Aren't these flippin' banksters supposed to be the SMART money? What is this world coming to when a joe average like me can see something as plain as day and million dollar CEO's can't?!
I think they need to start hiring these CEO clowns based on their ability to think objectively and independently and not on their ability to do exactly what their old college buddy down the street is doing.
....but then again, when you know in the back of your mind that the Fed will be there with it's printing press to bail you out if you foul up there is every incentive to take risk and do no due diligence. The guy who will lose his job is the guy who doesn't increase his loan portfolio 20% for the quarter, NOT the guy who did while pushing the balance sheet into a potential disaster "if the market turns"
Time to buy credit counselors. These guys will be making a fortune soon.
Posted by: DavidB | Feb 8, 2007 1:12:51 PM
Goldman is listed as nearly an 8% equity owner of NEW and almost 3% equity owner of NFI. I assume those investments were made in part to ensure they got a steady flow of mortgage loans that they could package and market to institutional investors.
If Goldman did create a bunch of mortgage loan structured product from pools of mortgages fed to it by NEW (and I don't know they did, I'm just hypoethesizing), would Goldman be on the hook for failing to perform proper underwriter due diligence if the borrowers did engage in widespread fraud?
Posted by: S | Feb 8, 2007 1:28:53 PM
When you have lots of liquidity, every other assets in the market got jacked up beyond their fundamentals. The stock market in the late 90's is now followed by the housing market. The bond market too has been operating with near zero term risk. This is part of entrepreneurial's 'dark matter' that some harvard economists have talked about. We leverage cheap money in the form of global saving glut into more productive returns in the form of bubble economy.
Posted by: anon | Feb 8, 2007 1:43:45 PM
DavidB-
Objective, intelligent, "can-do" folks have a hard time getting to the top when their direct, honest, fact-based approach intimidates the Kool-Aid-drinking establishment. Original, innovative employees stand out amongst the herd...and the herd's insecurities fuel the ouster of said positive employee.
It's amazing how executives really don't focus on the "Big Picture" of their respective companies. They are very much pre-occupied with paying for their grandchildren's stay in rehab in 2015.
As a former (stated humbly) innovative, idealistic employee, I've learned that I must conform...at least long enough to save enough capital to do what I want to do.
At least that's how the "super-regional" banking paradigm operates in this "flippin' bankster's" humble opinion...
Posted by: CDizzle | Feb 8, 2007 1:54:47 PM
I agree that the PMI analysis is not only of limited usefulness, lumping by states, but limited quality, since it really only looks at price and appreciation. In some locales, ones with a lot of building, this is relevant, in metropolises, it usually is not. I prefer your heat map.
Posted by: Lord | Feb 8, 2007 2:01:38 PM
DavidB: The guy who will lose his job is the guy who doesn't increase his loan portfolio 20% for the quarter, NOT the guy who did while pushing the balance sheet into a potential disaster "if the market turns"
Right! That's exactly what happened. The traditional bankers were pushed out by the salesmen...
Posted by: HVH | Feb 8, 2007 2:05:00 PM
