In light of a weakening Case Shiller housing index, fears rise that Home Prices May Be Nearing a New Dip.



Two price indexes released Tuesday indicated that the momentum the housing market showed over the late spring and summer is faltering, even as the government said the economy grew at a slower pace in the third quarter than previously reported.



The Standard & Poor’s/Case-Shiller home price index, a closely watched measure of the housing markets in 20 metropolitan areas, barely rose in September, rising 0.3 percent from August on a seasonally adjusted basis. Prices fell for the month in nine cities in the index, including Boston, New York, Seattle and Charlotte, N.C.



A report from the Federal Housing Financing Agency showed that prices were flat in September from August.



The housing market is confronting an abundance of inventory, high unemployment, fearful consumers and devastated family balance sheets.



“There is no clear, easy way out for housing,” said John Silvia, chief economist at Wells Fargo. “Contrary to my hopes, housing prices and the housing market in general will weaken again.”



He forecast a new decline in prices of as much as 10 percent, which he expected to shave a half-point off the nation’s economic output just as it emerges from the recession.



The Case-Shiller index, which covers about 45 percent of the United States housing market, is a three-month moving average. Since July and August were relatively strong, the weak September report could indicate a plunge in prices.



The 20-city composite index is off nearly 10 percent in the last year and 29.1 percent since its 2006 peak.

Pay Option Arm Time Bomb

I’ve been trying to make the point for some time that the Wells’ Option ARMs that it inherited in the purchase of Wachovia (Wachovia came by them via its purchase of World Savings) are not an immediate threat to the bank. The terms of the mortgages were more lenient in the amount of negative equity that would cause an automatic recast of payments and the recast feature does not automatically trigger until the ten-year anniversary as opposed to the five-year featured in most other Option ARMs.



Wells Fargo, who holds more Option-ARMs on its books than any other institution, states in their last 10-Q filing:



Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $4 million in the remaining three quarters of 2009, $9 million in 2010, $11 million in 2011 and $32 million in 2012…



In addition, we would expect the following balance of ARM loans having a payment change based on the contractual terms of the loan to recast: $20 million in the remaining three quarters of 2009, $51 million in 2010, $70 million in 2011 and $128 million in 2012.



Given that we’re talking about a portfolio of over $100 BILLION of these loans, this means ESSENTIALLY NO LOANS WILL RECAST due to the negative amortization limits or contractual terms before 2012.



Both assumptions seemed suspect, yet, they are in fact true. Looking at page 55 of the Golden West 10-K from 2005 we read:



…most of our loans are scheduled to have a payment change without respect to any annual limit in order to reamortize the loan over its remaining life at the end of the tenth year or when the loan balance reaches 125% of the original amount. We term this reamortization a “recast.” Historically, most loans in our portfolio have paid off before the loan’s payment is recast.

11% Decrease Forecast For 2010

The Fiserv Case-Shiller Home Price Index forecasts that average single-family home prices will fall another 11 percent over the next twelve months, with declines expected in about 90 percent of the more than 350 metro areas tracked by Fiserv. Steep home price declines are expected to continue in markets that have been hurt most by the housing crisis, including metro areas in California, Nevada, Arizona and Florida.



“Large supplies of foreclosed properties and extremely weak job markets will continue to put downward pressure on home prices,” said David Stiff, chief economist, Fiserv. “Many temporary factors that were partly responsible for strong spring and summer real estate markets, including the first-time homebuyer tax credit and Federal Reserve actions to drive down mortgage interest rates, will no longer be bolstering demand. Consequently, home prices will resume falling again before they stabilize in 2010.”



One-time bubble markets in Florida, California and Arizona, which have already seen home values fall 40 percent to 60 percent since prices peaked in 2006, are showing no sign of moderation in declining prices.

Cumulative Declines

Extend And Pretend