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Sunday, October 11, 2009

Ivy Zelman on Housing

by Calculated Risk on 10/11/2009 12:41:00 PM

Edward Robinson wrote a recent article for Bloomberg on the rise of independent research: ‘Sell’ for Research Renegades Becomes Business Off Wall Street (ht Eyal)

One of the analysts featured in the article is Ivy Zelman, formerly at Credit Suisse, and now at Zelman & Associates. Ms. Zelman became an internet favorite when she asked Toll Brothers CEO Bob Toll "Which Kool-aid are you drinking?" on the Q4 2006 Toll Brothers conference call.

On Zelman's current view:

Many of her clients are clamoring to know whether the market has hit bottom. In terms of prices, she says probably not: One out of three owners has a mortgage worth more than the value of the home, and mounting foreclosures and distressed properties are slated to account for 53 percent of home sales in 2010 compared with 40 percent in 2008, according to Moody’s.

“When that inventory hits the market, it’s going to undermine prices,” she says.
Although I think prices might have bottomed in some low end bubble areas at the end of 2008, or early 2009 - because of the flood of foreclosures at that time - some of these areas have seen prices increase 10% to 15% since then (according to local reports). This is because of a combination of a buying frenzy associated with the first time home buyer tax credit, and the lack of inventory because of foreclosure delays associated with the trial modifications. It is not unusual for homes in these areas to receive 20, 30 or 50 bids.

Even if the first time home buyer tax credit is extended, I think the interest will wane. Meanwhile the banks are preparing to start foreclosing again. The WSJ recently quoted a Bank of America Corp. spokeswoman: "We are going to see a spike from now to the end of the year in foreclosures as we take people out of the running" [for a loan modification].

So I expect prices in the low end areas to decline again (even if the bottom is in). I also expect further price declines in the mid-to-high end bubble areas. Note: this isn't like in 2005 when I thought large price declines were inevitable. House prices are much closer to the bottom now, and the U.S. government is trying to support house prices, or at least slow the rate of price declines.