Geographic Distribution of House Price 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.
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 . . .
In Home-Lending Push, Banks Misjudged Risk
HSBC Borrowers Fall Behind on Payments;
Hiring More Collectors
WSJ, February 8, 2007; Page A1
Early Payment Default
PMI releases Winter 2007 Economic and Real Estate Trends report (pdf)
Economic and Real Estate Trends Report
The PMI Group,Winter 2007
PMI's Winter 2007 Risk Index Reflects Slowing Housing Market
Mortgage Refinancing Gets Tougher
As Adjustable Loans Reset at Higher Rates, Homeowners Find Themselves Stuck Due to Prepayment Penalties, Tighter Credit
WSJ, February 8, 2007; Page D1
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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.
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
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