"The most valuable truths are the ones most people don't believe. They're like undervalued stocks. If you start with them, you'll have the whole field to yourself. So when you find an idea you know is good but most people disagree with, you should not merely ignore their objections, but push aggressively in that direction." Paul Graham
Fannie Mae has reported a loss of more than $2 billion in the first quarter and expects severe weakness in the housing market throughout the rest of the year….
The government has increasingly looked to Fannie Mae to restore stability in the market by buying up mortgages and selling them as securities. Three-quarters of mortgage-backed securities are issued by Fannie Mae and its smaller sibling, Freddie Mac.
To raise capital, the company said it would cut its dividend and offer $4 billion in an immediate share offering. It intends to raise another $2 billion later in the year.
The government is relying on Fannie Mae to reduce the problems we’re facing on the mortgage market. In order to help Fannie Mae do this, investors will have to buy Fannie Mae’s stock.
The company (1) reported a loss of more than $2 billion last quarter, (2) cut dividends, and (3) is planning to package up and sell more loans in a troubled secondary market. In addition, the company is (4) lowering its down payment standard to 3 percent in areas with falling home prices.
(5) Fannie Mae’s stock is down 25 percent this year, and (6) its own chief executive doesn’t think the U.S. housing market will recover until 2010.
If you were considering purchasing its stock, what would you do?
By now, many people are starting to recognize that the housing crisis is causing job losses. This goes both ways: job losses reduce the supply of ready renters for apartment units, driving down the prices of apartments, which are valued based on the buildings’ income. Lost jobs also drive down the prices of homes and condos, since fewer people have the income to qualify to buy them.
Real estate is starting to have problems in Manhattan now. Up until this point, jobs at Wall Street have helped the prices of apartments continue to rise. Now sales are starting to slow down. Take a look at this article:
Manhattan apartment sales plunged the most in 18 years in the first quarter as buyers faced the prospect of a recession and job cuts at Wall Street securities firms.
Sales fell 34 percent from a year earlier and inventory rose 4.6 percent to 6,194 units, New York-based real estate appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said in a report today. The median price of a Manhattan co-operative apartment or condominium increased 13.2 percent to a record $945,000.
Note that this is the largest drop in Manhattan apartment sales since 1990. (2008 - 18 = 1990) Sales are down, but condos are still appreciating. Will prices continue to rise?
“If it continues along this pattern, we’re in a period of transition to a weaker market,” Miller Samuel President Jonathan Miller said in an interview. “You typically see a slowdown in sales activity precede a slowdown in pricing.”
Financial companies have cut at least 34,000 jobs in the past nine months as losses and writedowns related to mortgage- backed securities climbed to at least $230 billion. Wall Street drives Manhattan real estate, with the median apartment price roughly tracking bonuses paid by investment banks since 1997, Miller said….
Brokers are waiting for any fallout from job losses on Wall Street or from JPMorgan Chase & Co.’s takeover of Bear Stearns Cos.
When the housing bubble started to pop, we felt the reverberations in Wall Street. This took Countrywide and Bear Stearns down. Now brokers in Manhattan are expecting to see job losses in Wall Street cause price declines in real estate.
It’s a downward spiral.
About 30 percent of all first-quarter closings were for apartments in new developments that went into contract before turmoil hit the credit market, said Gregory Heym, chief economist for Terra Holdings.
“They are pre-credit crisis, pre-Wall Street worries, pre- new mortgage standards,” he said in an interview. “You see a delay in impact in these numbers.”
Read that last sentence again. There’s going to be a delayed reaction to what happened to Bear Stearns. We haven’t felt its full impact yet.