Headlines – Week of February 6, 2011

February 12, 2011

More U.S. Homeowners Underwater

According to a recent report issued by Zillow, the U.S. housing problems may be getting worse as 27 percent of U.S. mortgage-holders were underwater in the fourth quarter of 2010. That total compares with 23.2 percent during the third quarter.

Less than one in every 1,000 (0.09 percent) U.S. homes were liquidated in foreclosure in December, according to Zillow, down from 0.12 percent in October, when foreclosures peaked.  Foreclosures are expected to increase again in early 2011, which may cause negative equity to fall, as some underwater homeowners lose their homes and thus are no longer underwater.

Executives at Zillow believe the homeowner tax credit last year interrupted the housing correction that was taking place.  The good news is that we’re getting closer to the bottom.

In December 2010, monthly depreciation in home values notched up again to -0.9% from November and home values fell 5.9% from levels in December 2009. The median home value nationally in December was $175,215, down 27% from its peak in June 2006. Monthly home value depreciation was at its highest level since January 2009. (see charts)






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Real estate is ‘as affordable as it gets’

According to an article published in the Wall Street Journal, data from Moody’s Analytics proves that now is a great time to buy real estate. Home affordability has returned to pre-housing bubble levels or even fallen below the average in many U.S. markets.

Housing affordability by the end of September 2010 had returned to or fallen below the average reached between 1989-2003 in 47 of the 74 housing markets that Moody Analytics tracked.

In September 2010, the ratio of home prices to annual household income had fallen to 1.6 – below the historical average of 1.9 between 1989 and 2003. The ratio peaked in 2005 at 2.3.

Some of the most undervalued markets include Cleveland, Detroit, Las Vegas, Atlanta, and Phoenix. But those cities also are facing high rates of foreclosures and more borrowers defaulting on their mortgages that could decrease values further in those cities before they start to improve.

In Phoenix, for example, it’s become cheaper to buy than to rent, but the question is … can you qualify for a loan?

The other measure of housing affordability is the relationship between house prices and rents. Measured by the price-to-rent ratio (the price of a typical home divided by the annual cost of renting that home) prices are fairly valued, or undervalued, in around 20 markets. Nationally, the price-to-rent ratio stood at 14.85 at the end of September, above the 1989-2003 average of 12. The data suggest pockets of the country have further to fall

Home prices still remain overvalued by both measures in several markets, including Seattle, Charlotte, New York and Portland, Ore.

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Toxic Assets Still Lurking at Banks

A recent Wall Street Journal article, reports that despite increasing bank profits and the rising prices of bank stocks, some banks have yet to reckon with all their “toxic” real estate assets.

Banks still hold plenty of the bad assets including mortgage-backed securities, collateralized debt obligations and other risky instruments. Their potential impact concerns some accounting and banking observers.

According the report, the top 10 U.S.-owned banks had $13.8 billion in “unrealized losses” that have lasted at least a year in their investment portfolios as of Sept. 30. 

Such losses don’t get counted against earnings as long as the banks believe the investments will later rebound.  The WSJ analysis shows that if these losses were assessed against earnings, it would have reduced the banks’ pretax income for the first nine months of 2010 by 21%. 

Many believe that with the banking recovery well under way, the banks should no longer delay a reckoning and should count those losses against earnings.

Another issue that clouds bank’s profits lies in the fact that the value of many risky assets are based solely on the banks’ own estimates—leaving valuations uncertain and, some critics say, overstated.

Many believe the strategy of “extend and pretend” has been the result for the past two years as they believe they will ultimately realize the assets’ full value by holding onto the securities and collecting the principal and interest payments associated with them.

A large part of the problem lies with “Level 3” securities, illiquid investments that can’t be easily valued using market prices. According to the WSJ analysis, as of Sept. 30, the top 10 banks had $360.7 billion in “Level 3” securities. That amounts to 42.6% of the banks’ shareholder equity, a large amount of assets whose value is hard to verify.

Many analysts believe banks are deluding themselves about the future value of those securities, and whether they will ultimately recover as much from those securities as they contend they will.

One example is Citigroup Inc. which didn’t mention its high level of Level 3 securities when it announced its 2010 fourth-quarter earnings. As of Sept. 30, the bank held $79.1 billion of Level 3 assets—equal to 48% of its book value, including billions in credit derivatives, asset-backed securities and some subprime-mortgage-backed securities.

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Posted by Scott R. Lodde


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