Posted by: jhamon | June 10, 2009

Housing’s Fallen Down And It Can’t Get Up: Facts You Need To Know

 T2 Partners got it spot on a year ago with regard to the housing/credit crisis and they updated their thinking in a presentation last month.  I have posted the complete set of slides and the audio for the presentation below.  It’s best to download both and to follow the audio with the slides.  (Note: last half of the presentation turns to a discussion of Wells Fargo and seems curiously out of place).

T2 Value Investors Conference Audio

T2 Value Investors Conference Slides

For those not inclined to do all that, the big picture is outlined below.

Summary of Conclusions by T2 Partners LLC (VIC – 5/6/09)

• We think housing prices will reach fair value/trend line, down 40% from the peak based on the S&P/Case-Shiller national (not 20-city) index, which implies a 10-15% further decline from where prices where as of the end of 2008. It’s almost certain that prices will reach these levels.

The key question is whether housing prices will go crashing through the trend line and fall well below fair value. Unfortunately, this is very likely. In the long-term, housing prices will likely settle around fair value, but in the short-term prices will be driven both by psychology as well as supply and demand. The trends in both are very unfavorable:

– Regarding the former, national home prices have declined for 31 consecutive months since their peak in July 2006 through February 2009 and there’s no end in sight, so this makes buyers reluctant – even when the price appears cheap – and sellers desperate.

– Regarding the latter, there is a huge mismatch between supply and demand, due largely to the tsunami of foreclosures. In March 2009, distressed sales accounted for just over 50% of all existing home sales nationwide – and more than 57% in California. In addition, the “shadow” inventory of foreclosed homes already likely exceeds one year and there will be millions more foreclosures over the next few years, creating a large overhang of excess supply that will likely cause prices to overshoot on the downside, as they are already doing in California.

• Therefore, we expect housing prices to decline 45-50% from the peak, bottoming in mid-2010.

• We are also quite certain that wherever prices bottom, there will be no quick rebound.

There’s too much inventory to work off quickly, especially in light of the millions of foreclosures over the next few years.

• While foreclosure sales are booming in many areas, regular sales by homeowners have plunged, in part because people usually can’t sell when they’re under water on their mortgage and in part due to human psychology: people naturally anchor on the price they paid or what something was worth in the past and are reluctant to sell below this level. We suspect that there are millions of homeowners like this who will emerge as sellers at the first sign of a rebound in home prices.

Finally, we don’t think the economy is likely to provide a tailwind, as we expect it to contract the rest of 2009, stagnate in 2010, and only then grow tepidly for some time thereafter.


  1. […] As in other sources I’ve recently pointed to, Ross contemplates the possibility that, as is typical with post financial bubble contractions, housing valuations could not only return to trendline of the last decades, but actually undershoot to the downside.  This agrees with T2’s presentation I posted earlier this week (Housing’s Fallen Down And It Can’t Get Up). […]

  2. […] posts: (automatically generated)Golly-fornia: The Great Unwind ContinuesThinking The UnthinkableHousing Can’t Bounce Back: Facts You Don’t KnowMANHATTAN LUXURY HOUSING SALES FALL BY […]

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