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19 Feb, 2012

Housing prices post steep decline

Home prices posted a steep, month-over-month drop in November, falling 1.3%, according to the latest S&P/Case-Shiller 20-city report. Prices fell in 19 of the 20 cities the index covers.

Prices are down 3.7% from a year ago, and off 32.8% since they peaked in the summer of 2006. The index is currently only 0.6% above its March, 2011 low.

"Despite continued low interest rates and better real GDP growth in the fourth quarter, home prices continue to fall," said David Blitzer, spokesman for S&P.

Phoenix, one of the hardest hit metro areas in the country, was the only place to record a gain in November. Prices there rose 0.6% month-over-month but are down 3.6% from a year ago.

Home prices in Chicago posted the steepest decline of any city on the index, falling 3.4% month-over-month. Atlanta prices were down 2.5% and Detroit prices fell 2.4%.
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The drop in home prices was more than housing bear Peter Morici, professor at the University of Maryland Smith School of Business, anticipated. He had forecast a 0.8% drop.

"We've had more robust sales activity in the housing market lately," he said.

Morici thinks recent home price weakness stems at least partially from the fact that more sellers have accepted the weak market conditions and are putting their homes up for sale. Retirees and other home owners had postponed sales, trying to wait out the decline.

"Sooner or later, you have to get rid of that house," he said.
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Pat Newport, a housing market analyst for IHS Global Insight, agrees that's part of the story.

"People are a lot more flexible on price than they were three years ago," he said. "They're willing to lower their asking prices to move their houses."

He thinks a bigger contributor to the market malaise is sales of properties in foreclosure. Many homes sold these days are either short sales or homes that were repossessed from mortgage borrowers who could not pay their loans.
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"That probably explains the steep declines in Atlanta," said Newport. "That city has a large number of foreclosed properties."

Atlanta continues to be a standout for price drops. Its 2.5% November fall followed a 5% drop in October, a 5.9% plunge in September and a 2.4% slide in August. It also posted the weakest annual return, down 11.8%.

Other poor performers over the 12 months ended in November were Las Vegas, where prices were hard hit by foreclosure sales and fell 9.1%, and Seattle, which recorded a 6.3% decline. Detroit, up 3.8% and Washington, with a gain of 0.5%, were the only cities in positive territory for the past 12 months.

19 Feb, 2012

Believe it or not Sub-Prime bonds becoming desirable again

The Miami Real Estate Club found that investors' belief that the worst is over for the U.S. housing market is fueling renewed interest in once-toxic mortgage bonds that were at the heart of the financial crisis.

Prices of some distressed bonds backed by subprime home loans—those issued before the crisis to borrowers with sketchy credit histories—have chalked up double-digit percentage gains this year, with one prominent market index rising 14%.

The rally has drawn investors back to a corner of the credit markets that was pummeled from 2007 to 2009 and has been volatile since.

The latest upswing has some money managers setting up investment funds dedicated to buying beaten-down mortgage bonds, hoping to reap fat yields while waiting for the housing market to turn.

The recent resurgence in battered mortgage bonds that were left for dead during the crisis reflects how investors' appetite for risk is returning, even after many banks and hedge funds lost money last year on similar assets.

[SUBPRIME]

But this time around, investors say many subprime bonds are looking attractive because their prices reflect a doomsday scenario that may not materialize, even though the housing sector remains in the doldrums.

Market prices of subprime bonds reflect "extremely harsh assumptions for how borrowers will behave," said Jeffrey Wheeler, a portfolio manager at Smith Breeden Associates in Durham, N.C. Bonds that are yielding 7% to 9%—strong returns amid today's low interest rates—reflect very high default and delinquency expectations, and the actual outcome may not be as bad, he said.

The Federal Reserve Bank of New York recently sold subprime bonds it took on in the 2008 bailout of American International Group Inc., whose bets on mortgage debt brought the insurer to the brink of collapse. The New York Fed sold bonds with a face value of more than $13 billion to two Wall Street dealers via large-scale auctions, fetching more than $6 billion in cash. The banks—Goldman Sachs Group Inc. and Credit Suisse Group AG—in turn have been reselling the bonds to investors including hedge funds, insurance companies and pension funds looking to lock in high yields over the next several years.

The latest bounce in prices of risky mortgage debt comes amid strong rallies in stocks and corporate bonds, underpinned by investors' optimism that European governments and banks will work through their debt woes without destabilizing global financial markets.

To be sure, some observers warn that subprime bonds abruptly plunged last year and could again, particularly if the outlook for the U.S. economy deteriorates or the European debt crisis intensifies. "This market was the hardest hit last year," notes Chandra Bhattacharya, a Credit Suisse strategist who specializes in residential mortgage-backed securities.

Bonds like those sold by the New York Fed are backed by payments from large pools of home loans originated at the height of the U.S. housing boom to individuals with poor credit. Many of these borrowers have fallen behind on their loan payments or defaulted over the past few years. Some loan pools already have seen default rates exceeding 40%, a big reason many subprime bonds trade at a fraction of their face value, and their holders won't recover their full principal balance, despite the recent rally.

Still, at current prices, investing in certain subprime bonds carries "limited downside and possibly substantial upside," said Joe Walsh, president of Amherst Securities Group, a broker-dealer that focuses on mortgage debt. Since the start of the housing downturn, U.S. home prices have slumped nearly 33%, and many economists expect declines of as much as 5% more.

"The probability of a collapse in housing or another significant leg down has diminished," says Joshua Anderson, a portfolio manager at Pacific Investment Management Co. The Newport Beach, Calif., firm, a unit of Allianz SE, has some funds that hold residential mortgage bonds.

Canyon Partners LLC, a money manager founded by bond experts from the former "junk"-bond shop Drexel Burnham Lambert, and CQS, a London hedge-fund firm founded by U.K. millionaire Michael Hintze, recently launched new investment funds to take advantage of bargains in distressed mortgage debt. Canyon, in a recent report, said some mortgage bonds with "20%+ return potential" have very low risk of losses and high yields, and could chalk up gains as more investors recognize value in the bonds. A spokeswoman for the firm declined to comment.

Market prices for individual subprime bonds are difficult to track, because there are thousands of securities with varying characteristics, and most don't trade often. Many traders follow an index of credit default swaps that tracks values of subprime debt. That index, known as the ABX, is up 14% this year, after dropping 30% from March to November 2011, and recently traded at about 50 cents on the dollar, according to data provider Markit.

"The price reflects the risk" that defaults among loan pools backing some bonds could be as high as 60% or 70%, said Steven DeLaney, a managing director and mortgage-debt analyst at JMP Securities in Atlanta.

But the prices of many bonds haven't kept pace with the index in recent months, a reason many investors see value. According to Amherst data, a generic subprime bond issued in 2006 would fetch about 33 cents on the dollar lately—down from 45 cents in the spring of 2011, but up from 30 cents at its trough last year.

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