Opinion & Analysis


Property Values to Fall a *Ceiling of* 43% from Current Values

In 1 on November 4, 2009 at 4:17 pm

That’s according to Michael White who notes that if you use a 20 year time horizon, with the 10 city and 20 city composite, and assume that the prices will return to the trend line, then our residential property bubble will bottom after the values fall another 40% from current levels.

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He notes that the US (namely Fannie Mae, Freddie Mac, and Ginnie Mae) is funding about 90% of all new mortgages and that at some point, if the government stops their support, then home prices should crash. Prices for real estate are ultimately determined by our income, and if the trend represents a match of income and price, then the picture of the trend line is the picture of our future.

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That said, others will note that applying technical analysis to the Case Shiller index only tells part of the story. If anything, readers noted that there was a limited sample size used to extrapolate future prices. The trend line is only over four years and therefore not useful in projecting a decade into the future. Consumers, investors and others who do not want to see a loss in their homes would rather sit on it for 10 years rather than see a 40% slide in the residential market.

Useful factors would have been based on rising unemployment, rising interest rates, tighter credit, expiration of government stimulus, deflationary pressures on wages and materials.

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A History Lesson On Fannie Mae *Federal National Mortgage Association

In 1 on November 4, 2009 at 3:29 pm

A long time ago in a far away land, there was a depression so bad that they capitalized the “D.” To help, the government created agencies such as the Public Works Project and the Fair Housing Act. Later, it also created the “Federal National Mortgage Association.” (Because having a place to call home makes stronger families, communities, and nations!)

FNMA (Fannie Mae) was created in 1938 to help low to middle income families realize the American Dream–owning their own homes. In 1968, it went public where the government owned the preferred stock and the public owned the common stock.  It hit a high of around $82 in June ‘01 (and is currently trading at $1.18). The company buys mortgages from lenders and provides money to continue allowing lenders to make home ownership possible for many people who wouldn’t necessarily be able to qualify for a loan.

In 1968, when Fannie Mae became a  public owned company, traded on NYSE, a government owned association was spun off and called Ginnie Mae. Ginnie Mae (Government National Mortgage Association), provided a link between capital markets (the lenders) and the Federal Housing markets. They did/do the same exact thing except how money is raised–either publicly or privately.

This makes Mortgage backed securities more attractive to investors such investors. The difference between Fannie Mae and Ginnie Mae is the government backing. While the backing is only perceived in Fannie, is it real in a Ginnie Mae backed security or mortgage.  Note, GNMA is a private company and has always been as such–it is owned entirely by HUD and is not a government-sponsored enterprises (GSE).

Unlike the FNMA and FRE, the debts and guaranties of GNMA are direct obligations of the Treasury and therefore has no ambiguities on their status. They can issue MBS with a guarantee at a lower cost than the old agenies. They did not fall into a trap of bad credit in 04-07 that killed FNMA and FRE. Net net, GNMA did what a government mortgage agency should have done–supported the mortgage market and protect the taxpayers. Many expect their responsibilities to increase in the coming years. 95% of all home loans through the FHA and VA are backed by GNMA. This means that the lender will get paid even if the borrower defaults on payments.

Then there’s Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac (NYSE: FRE) whic is another GSE with 5 out of 18 board members appointed by the President. A buyer of mortgages on the the secondary market, it provides money to lenders to continue selling mortgages. This keeps the market liquid and allows banks to do what they do. They were $73 in December 04 and are currently trading at $1.26.

 

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Commodities, commodities, commodities

In 1 on October 16, 2009 at 4:08 am

OK, as mentioned before, there are 3 billion people in Asia, most of whom are aspiring to play the home version of the American Dream game show. And let’s face it: American society is largely about consumption. We like stuff―we buy it, we wear it, we eat it, we flaunt it, we sometimes even bedazzle it (yeah, Google that). So that’s a lot more consumption on the global level. Rogers notes that while consumption is expected to increase exponentially, not a lot of capacity has been added in the last few decades for a lot of commodities. Meaning, not a lot of new refineries have been built, and not a lot of new resources have been discovered or excavated for a variety of commodities.

In terms of oil, Rogers cites the fact that Saudi Arabia has not seen any new oil discoveries but has consistently said for the past two decades that its reserves are at 260 billion barrels (in which time it has sold 60 billion barrels). He also points out that farmers are a rapidly disappearing species. So to sum up―that’s a lot more people competing for diminishing resources (including the all-important energy and food). Basic supply and demand theory pretty much takes it from there.

“Commodities are the second-largest asset class in the world,” Rogers noted. And they are “the best anchor” for your portfolio, he adds.

Rogers says the typical life span of a commodities bull market is 18-20 years. We’re currently in year 11 right now. Yeah, it could end tomorrow, but that whole supply and demand imperative could also extend this bull beyond its typical time frame.

During the Q&A session, though, the conversation took a darker turn. One questioner asked if the increased competition for resources might lead to war, and Rogers allowed it was a possibility, though he hoped it would not come to that. He pointed out that when a rising power clashes with an established power, the result is usually war, and said that research consistently shows that resource shortages lead to war.

So, sure, commodities shortages might start World War III, but if you invest in the commodities themselves, you might at least be in decent financial shape when the shelling stops—and I’m not being flippant at all. War drives up the costs of commodities.

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