The Five Waves of the housing collapse

I missed this post on BusinessInsider when it came out on Friday but the pessimists who predict that the worst is just beginning to appear are men after my own heart. And  Greenwich will be at the epicenter of that collapse.

The Past: Losses Mostly Behind Us:

• Wave #1: Borrowers committing (or the victim of) fraud & speculators, who
defaulted quickly. 
Timing: beginning in late 2006 (as soon as home prices
started to fall) into 2008.  Mostly behind us.

• Wave #2: Borrowers who defaulted when their mortgages reset due to
payment shock.
  Timing: early 2007 (as two-year teaser subprime loans written in early 2005 started to reset) to the present.  Now tapering off as low interest rates mitigate payment shock.

The Future: Losses Mostly Ahead of Us

• Wave #3: Prime loans (most of which are owned or guaranteed by the
GSEs) defaulting due to job loss and home price declines
(i.e., underwater
homeowners).  Timing: started to surge in early 2008 to the present.

• Wave #4: Jumbo prime, second lien and HELOCs (most of which are on
banks’ books) defaulting due to job loss and home price declines/
underwater homeowners.
  Timing: started to surge in early 2008 to the

• Wave #5: Losses among loans outside of the housing sector, the largest of
which will be in the $3.5 trillion area of commercial real estate.
started to surge in early 2008 to the present.

Importantly, Whitney and Glenn believe that recent signs of stabilization in the housing market are a HEAD FAKE.  Prices still have a 10%-15% to fall and won’t recovery quickly.

Rather than representing a true bottom, recent signs of stabilization
are likely due to two short-term factors:

1. Home sales and prices are seasonally strong in April, May and June
due to tax refunds and the spring selling season

2. A temporary reduction in the inventory of foreclosed homes

– Shortly after Obama was elected, his administration promised a new, more
robust plan to stem the wave of foreclosures so the GSEs and many other
lenders imposed a foreclosure moratorium

– Early this year, the Obama administration unveiled its plan, the Homeowner
Affordability and Stabilization Plan, which is a step in the right direction –
but even if it is hugely successful, we estimate that it might only save 20%
of homeowners who would otherwise lose their homes

– The GSEs and other lenders are now quickly moving to save the
homeowners who can be saved – and foreclose on those who can’t

– This is necessary to work our way through the aftermath of the bubble, but
will lead to a surge of housing inventory later this year, which will further
pressure home prices

Here’s what will likely drive future losses:

1. The Economy
• Especially unemployment

2. Interest rates
• Ultra-low rates have helped mitigate some of the damage
• But if the recent spike in rates continues, it could lead to an even greater surge
in defaults and losses

3. Behavior of homeowners who are underwater [Approx 30% of mortgages right now]
• Roughly one-fourth of homeowners with mortgages are currently underwater,
some deeply so
• For many, it is economically rational for them to walk – so called “jingle mail” –
but how many will do so? 
• There is little historical precedent – we are in uncharted waters
• As home prices continue to fall and homeowners become more and more
underwater, they are obviously more likely to default, thereby creating a vicious
cycle, but what exactly will the relationship be?  Have millions of foreclosures led
to a diminution of the stigma of losing one’s home?
• Our best guess is that there will be rough symmetry: for homeowners 5%
underwater, an additional 5% will default due to being underwater; 10%
underwater will lead to 10% more defaults, and so forth…


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25 responses to “The Five Waves of the housing collapse

  1. Shoeless

    From the Fed’s just-released Beige Book:

    On Real Estate and construction:
    Although the residential real estate market remains weak, agents in the New York, Philadelphia, Cleveland, Richmond, Chicago, Kansas City, Dallas, and San Francisco Districts reported an uptick in home sales. The reasons cited include seasonal factors, low interest rates, declining house prices, and tax credits for first-time buyers. Much of the sales increase was found in the lower-priced end of the market. New home construction appeared to have stabilized at very low levels in Philadelphia, Cleveland, Atlanta, Chicago, Minneapolis, Dallas, and San Francisco, although Kansas City reported an uptick in construction. Home inventories were trending down in Philadelphia, Richmond, Atlanta, Kansas City, and Dallas. However, Chicago reported that inventories remain elevated.

    Commercial real estate markets continued to weaken across all Districts. Vacancy rates for commercial properties were rising in many regions of the Boston, New York, Philadelphia, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, and San Francisco Districts putting downward pressure on rents. Atlanta, Chicago, and St. Louis reported new construction projects being postponed or cancelled, and new construction in the New York, Philadelphia, and Minneapolis Districts dropped substantially. Eight Districts cited difficulty in obtaining financing as one of the primary reasons for delaying or stopping construction of new developments and for limiting sales of existing properties.

    Commercial real estate (CRE) is following residential off the cliff (this is the typical pattern – CRE follows residential). CRE will be crushed this year and into 2010.

  2. Shoeless

    There is a new tool from Political Calculations: Predicting Mortgage Rates and Treasury Yields

    Using their tool, with the Ten Year yield at 3.99%, this suggests that 30 year mortgage rates will rise to 5.8% based on the historical relationship between the Ten Year yield and mortgage rates.

    According to the MBA the “average contract interest rate for 30-year fixed-rate mortgages increased to 5.57 percent” last week. So rates will probably be higher this week.

  3. Anonymous

    In a meeting yesterday in NYC…participant showed me hard copy of data……currently $34 billion of Real Estate loans are in default at our nations financial institutions and expected to rise to $70 billion in the next 12-24 months…….young assett managers at institutions basically waiting to see what the bosses are going to do with all of this inventory ( I am speaking nationally here)////net net….a tsunami is coming in the next 12-36 months and a very large amount of Real estate will have to change hands….will this happen in Greenwich…….? Probably to a certain extent Not sure how anyone can miss this one..but would be interested in what you think based on this Data?

  4. GideonFountain

    Goodness, I’ll bet Mr. Whitney and Mr. Glenn have a LONG history of guessing right on housing prices.

    Therefore, as a conscientious BUYER’S BROKER, I am certain you are now advising your clients to “Keep your powder dry, fellahs, don’t even think of buying this year. Wait at least a year, maybe two!”
    (I certainly hope you’re not encouraging anyone to actually buy, are you??)

  5. anon 1

    A few serious questions: I’m curious if anyone is hearing talk of many local residents (not builders) being significantly underwater on their mortgages or if they took out adjustable or option mortgages that are facing jumps in monthly payments from recasts/resets in the coming year. I’m not hearing anything myself.

    Also, any guess as to what % of listings in a given year are from forced situations such as divorces, deaths, etc. 10%? 20%?

  6. Kidding Really??

    Whitney Tilson did actually have many warnings about the housing markets and Mr. Tilson was on CNBC saying he was short Fannie Mae and Freddie Mac BEFORE the end. If you read the actual report here

    This is a guy who you listen to…

    And Gideon.. he is clearly on record with a history of ‘guessing right’ on housing on You Tube as well. How about your record? Can I look you up on the internet or You Tube with your thoughts on housing?

  7. GideonFountain

    Dear Mr. Really??
    Shorting Fannie & Freddie was a good idea starting back around 2004 (or earlier) when the Wall Street Journal started exposing what they were up to, all at the behest of members of congress. What I question is Tilson & Tongue’s ability to predict specific markets. They cannot, neither can I, which is why you won’t find any of my predictions on YouTube.

  8. Shoeless

    Here’s a T2 presentation for anyone who wants to wade through some slides

  9. fred


    if labor was taxed at 100% it still wouldnt cover the loss.

  10. FlyAngler


    The test of a true market seer is the ability to call both highs and lows in a market (or lows and highs as the case may be).

    Too many seers are predisposed toward a certain view from which they can not be shaken. Being negative on a soaring market over multiple years does not mean that seer was accurate as to timing, etc. The old adage about the stopped clock has some merit to it. How many equity market bears were predicting doom on the Dow from 8,000 to the 2007 highs? That the market cracked then make them geniuses?

    Also, don’t forget the seers are people who have to stay in the limelight. If they become know for their (ultimately correct) negative views, they may have to stay negative or get more negative to remain in the spotlight. Often, they become prisoners of their own paradigms and miss the turn/bottom/top. It is the rare sage who can be correct calling both ends of a market. Robini, who had a great call, is starting to moderate his view though he remains quite negative.

    On the flipside, did Elaine Garzarelli ever make a another correct call after she was “credited” with calling the 87 Crash?

    I don’t doubt that home price have further to fall, but I put as much faith in the numbers that suggest a bottom is near as I do in prognosticators who are calling for another 25% below current levels.

    The one consistency is that we never know a bottom or top has been made until it can be seen in retrospect. How smart are those calling for SP500 of 4-500 back in March when the market bottomed near 660? If you were short or out of the market based on their views, you would be feeling a bit foolish (and a lot poorer) today. And some of those permabears are still calling for a retest of the March lows – I wish them luck with that. The same luck I wish those who are holding out for Greenwich prices to fall another 25-30% from whatever we call current levels.

  11. FlyAngler


    One thing confounds me. Your opinions about specific properties are almost always about the merits or disadvantages of location, etc. You gave said repeatedly that location is key. Clearly, you recognize that and that all RE markets are local. And yet, you are very willing to take national statistics and apply them to your local market. Is there an inconsistency there? I can make a case either way (Greenwich is better or worse off than national trends) but I would like you to address what I may be incorrectly seeing as incongruent.

    • christopherfountain

      I may be guilty of using shorthand, Fly, but I have repeatedly pointed put that Greenwich isn’t California, Florida, or Kansas, for instance. But that cuts both ways – California’s sales are up because they’ve had so many foreclosures – we haven’t, yet. And this recession seems to be, for the first time, hitting financial service industry workers vene harder than people in the middle of the country. Before, Greenwich wasn’t particularly affected when a Dodge worker in Ohio lost his job. When that Greenwich guy’s neighbors both lose their jobs, he is.
      So I plead not guilty, but I will watch my comparisons and use of data more carefully to guard against jumping to a local conclusion based on national happenings.

  12. New Buyer

    Manhattan is not Greenwich, but I suspect home owners in both locations have been sucker-punched by the recent downturn in the market. Many many owners of high-end apartments in Manhattan are treading water — they can no longer afford their apts but cannot sell for near what they paid. Some can hold on for maybe a year more while others are trying to stick their thumb in the financial dam by renting their apartments, but I suspect the levies will break in the next 6 months.

    My husband and I considered signing a 12 month lease in NYC, allowing us to move into a larger apt and to delay buying until Spring 2010. We recently saw a large pre-war apartment in an established coop. The realtor told us the husband had been “transfered overseas.” (What a strange co-incidence that 4 out of 8 apartments we saw were the result of ” job transfers.”) Since the apt was both for sale or for rent and “everything was negotiable,” we had questions about the financial health of the owners.

    The co-op required a full board package for rental approval. We said fine. My husband had one condition — he wanted to see the apt owner’s financials as well. The realtor told us that was unheard of. Husband argued that these are unique times — if this couple stopped paying their mortgage or their coop payments, we as renters could be forced to move mid-lease according to the terms of the lease. Unlikely the coop could enforce it quickly, but we are not looking for legal headaches the same year we are trying to buy. It turned out to be a deal breaker. We later learned from friends who live in building that the family was underwater, desperate to sell due to job loss and had a large mortgage. This is but one example of a family/apartment that is on the brink of a fire-sale. There are many more out there.

  13. kidding really?

    Fly –
    You’re right… need to get both sides of the trade to be seen as one with the goods. Whitney Tilson is pretty sharp and I agree with his research. I’ll go a bit further and mention the large amount of supply on the market, the shadow inventory (people who’d love to sell but know nothing is moving) unprecedented job loss, capital/long term savings loss and financing difficulties. It’s hard to argue housing has stabilized as we have heard for the past 6 months when you have those headwinds which are far from improving.

    House prices will stabilize when houses start trading. The ONLY way they will trade is at lower prices. I estimate house prices in Greenwich are down 15-20% off the peak (perhaps more or some less). House prices will need to come down 40-50% off peak to see real inventory turnover just like other markets have which have seen stability in pricing and increased turnover. NYC will see the same price declines.

    FYI – I called the top by 2 days in June of 2005 in the homebuilding stocks as well my long term S&P 500 price target from February 26th 2007 was 690 (a week before ‘subprime’ became a household word). I currently believe this market bounce which I was a week early in March buying is nearing the end. (I am shocked it didn’t help home sales in Greenwich in a big way). I do believe strongly we’re going to see a double dip occur which might take the major indexes back down to previous lows but for sure low enough to scare people. Timing is my business and I can’t wait to call a bottom to this housing nightmare.

  14. Walt

    Hey (HAY!!!) Gideon:
    So you are as pissy as your brother? Pull up the pampers and buck up, my friend. Deal with the long haul. Given this market, you have a few years of pottie training left. So relax. It must be a gene pool thing. Don’t fret. The five Filly’s (S.I.H) dealt with it.
    Your Pal,

  15. FlyAngler


    I hear you and, again, do not dispute that the lows have not been made in local RE market. One thing that is slightly different here than in AZ, CA, NV and FL is that there may be modestly deeper pockets here than there are in those markets. Thus, folks may be able to wait longer which may or may not be futile in the end.

    I spend my time in the short duration, high grade debt market managing corporate cash. Not glamorous but its a livng. I ignored Merrill’s Rosenberg for quit some time but started paying attention to him and others in 1Q07 when my trading desk guys started getting short subprime in their prop books. In the Spring 07, we started fretting about subprime, ABCP, SIVs and CDOs. That SIVs were rated AAA were a mystery as was how one could price them in near real-time since many of these pools owned other pools wich owned other pools. The nested risks were too tough to map, never mind value. I started to understand what some were saying about the worthlessness of a AAA rating.

    We sopped buying ABCP in May and avoided the blow ups in Aug & Sept. We quit buying FRE/FNM debt in October 07.

    We saw the auction rate mess coming with the building inventories of unsold ARS on thh dealers secondary runs through 4Q07.

    In all, we got through the past 27 months without burning our clients which was respectable performance. On the flip side, I did not extend duration in 1Q09 so I am smarting from riding down really short duration yields to this point.

    I am not a green shoots advocate and believe this market has been buoyed by excess liquidity and the removal of the meltdown discount. Toss in some underinvested professionals, short covering and you have a remarkable rally on air. Between the high yield and CRE market, there is a stunning amount of debt that has to be rolled in the next two years with little demand in the market. The result will be more failures, distressed asset sales and deep discount M&A activity. That will take its toll on employment which will filter into the economy later this year and in 2010. Retail as an industry is in a world of hurt as the consumer becomes increasingly frugal. GGP was just a harbinger of more failures in the Mall space. And that will also have an impact on retail employment and its knockon effects.

    And all of this will have an increasingly negative impact on consumer debt.

    Personally, I see a double dip as well though I don’t think we retest the mid-600s unless there is a significant exogenous geopolitical event to help things along.

    Need help on some of those potential events:

    This is no V-shaped recovery, contrary to what the chattering class on CNBC would have us believe. Got to Bloomberg and run a GDP chart going back to the mid-60s. Look at all patterns and you will see a single V in the bunch. Most are Ws or a string of Ws or Vs, which at a distance, look like Us. I think we will have several years of volatile performance and we all can guess what that means for local real estate. Nothing good.

  16. anonymous

    John Paulson made a few billion bucks for himself properly shorting the RE/debt bubble; let’s see if he can make serious money betting on any recovery in housing cycle; but doesn’t really matter if he can or can’t, as he’s a multi-billionaire anyway; it’s all academic for Paulson at this stage in his career

    Lots of these other clowns in news like Roubini, Taleb, Tilson, etc have relatively puny net worths but lots of airtime, books, etc…hmmm

    Not many guys, incl Buffett, Lampert, etc, have consistently made money over every up or down cycle or situation or bubble/bust…but a few key correct bets leave one a young multi-billionaire flying off into retirement or semi-retirement in own G550 (or whatever favored bird)

  17. kidding really?

    Fly – you’re my kind of guy. Great insight…. albeit as bearish I am which is troubling for many to understand. Bring the family over to my underground bunker for a depression party.

    Gideon – it seems hard for you to understand but it’s not about the houses. It’s not about location, kitchens, gardens, nice bathrooms – IT’S ABOUT FINANCING ALL OF IT. Recent history showed in 2007 when resets on mortgages of subprime and some Alt A struck the lower end consumer prices dropped dramatically, foreclosures rose and people suffered. A large chunk of higher end mortgages are about to reset this year and for the next 18 months. Already there is a large % of inventory, prices are now dropping to multi year lows for those lucky enough to sell – thus many people in this area are technically underwater if they bought in the last 3 years. People are losing jobs, long term savings and might not be bonused for another year. Greenwich and Fairfield County might have wealthier people but people are stretched just like the low end but with larger debts and expenses which will be cut back. Lot’s of smoke and mirrors with Bentley’s and 10k square ft homes.

    I’d LOVE to hear a good argument of why anyone should buy now or within the next 6 months. It’s all about $ – who’s got it and who needs it. Right now people need it more than they got it. Greenwich used to be a ‘got it’ town but that’s changed.

    Lastly I went to Academy Video tonight to pick up some of your DVD’s but they were all checked out.

  18. towny


    The articles posted failed to mention that Russia, Iran, Venezualea, will accept payment for oil exports in any currency. The dollar isnt pegged anymore and its just a matter of time.

  19. towny

    whats important now is predicting when John Q finally realizes what is going on and runs for the door.

  20. FlyAngler

    Towny: Yup, I don’t like the dollar’s prospects long-term either. For the first time in 20 years of managing cash for corporations and families, I am getting requests for non-$ strategies from investors who have no material non-$ liabilities. Strictly long horizon diversification and not a trade. Looking at Loonies, Aussie and NZ. They do not want Euro nor Yen. Note the BRICs are selling USTs and buying IMF bonds so they can hold the IMF by the short & curlies and “suggest” where the IMF should be providing support, right where the BRICs want to do business. The amounts involved are not large relative to the UST market but the trend is not good. Also, these investors went from the talking stage to the action stage in a depressingly short period of time. On the other hand, I wish them luck with IMF debt given how much activity IMF will have ahead of itself in Eastern Europe. Note also today that the ECB had to lend money to the Swedish central bank to keep it solvent. YIKES!

    Kidding: Glad to hear you have a bunker but I have four kids and a wife who I have to protect. How big is it? Sadly, the number of folks in our area that I know that are getting carry permits and/or are buying their first firearm is depressing.

    Anon: Yeah, those that can, get rich. Those that can’t, get airtime on CNBC, hundreds of views on SeekingAlpha, cuddos from ZeroHedge, etc. Note that Paulsen just bought into a RE brokerage where he makes money based on activity but not necessarily rising prices.

    Kidding: Your point on shadow inventory is a good one as I am lurking in the “shadows”.

    Chris: Thanks for hosting such a lively exchange. I just wish all this banter made me feel a bit less gloomy than I feel reading my screens every day. Oh well, there’s always the weekend and a hug from my five year old.

  21. Anonymous

    When all this real estate changes hands over the next 3-5 years ,at incredibly low prices, I will stay in hard assets………always the best place to be for the long haul.

  22. Towny


    yup. go with the minted .999 type in small denominations. cash sale. no trail. no capital gains.

    latvia is having a fire sale today……..

    note: i’m not advocating anything illegal/un-ethical, i’m just saying.

  23. fred

    not when taxes go through the roof

  24. you

    what collapes