Posted on Wednesday, December 8, 2010
As Nouriel Roubini heads to Athens to meet with investors and policymakers potentially about the debt crisis in Europe, the economist says he’s increasingly worried about a problem closer to home: America’s real estate mess.
The country’s real estate problems are “underappreciated,” and banks could face another $1 trillion in housing-related losses, Mr. Roubini said in a phone interview with DealBook on Monday. At the same time, he played down the issues in Ireland, Greece, Portugal and Spain, calling the matter “contained” for now.
The United States “real estate market, for sure, is double dipping,” Mr. Roubini said. “The apparent increase in prices has been fully reversed, demand is falling, and supply is going to increase.”
The drumbeat of bad news grows louder. Sales of existing homes fell more than expected in October, down 2.2 percent to an annual rate of 4.43 million, the lowest level in more than a decade, according to the National Association of Realtors. After rising in the second quarter, Standard & Poor’s Case-Schiller home price index fell 2 percent in the third quarter.
Meanwhile the trouble is spreading across all types of borrowers, as even the most creditworthy show increasing weakness. The Mortgage Bankers Association recently announced that foreclosure starts for prime fixed-rate mortgages rose to a record high of 0.93 percent in the third quarter.
Mr. Roubini said he was particularly focused on a recent study by Laurie Goodman, a senior managing director of Amherst Securities and a former co-head of fixed income research for UBS. In her October report, “The Housing Crisis — Sizing the Problem, Proposing Solutions,” Ms. Goodman comes to the dark conclusion that more than 11 million borrowers are in danger of losing their homes, or roughly one out of five borrowers.
“That’s a scary number because the previous estimates I saw were in the three to four million range for the next four years” Mr. Roubini said. “Some say these numbers are too pessimistic, but I’ve spoken to experts in the mortgage industry who say these numbers are quite realistic.”
According to Ms. Goodman, loan modification programs have somewhat masked the problems. After a bank modifies a troubled mortgage, the loan is then reclassified as “current” on the books — even if the homeowner still hasn’t made a payment.
Scores of mortgages, she wrote, will go bad, adding to the wave of foreclosures and short sales. For example, Goodman estimates some 70% of borrowers—those who previously defaulted on their loans but are now current—will run into trouble, again.
“The moral of the story is that there is a lot of work to be done,” Ms. Goodman told DealBook.
Given the severity of the mortgage problems, Mr. Roubini said investors should brace for another wave of housing-related losses. Building off estimates that 11 million borrowers will lose their homes, Mr. Roubini thinks the financial industry faces $1 trillion in additional losses, assuming firms can recover 50 cents on the dollar and the average cost of a home loan is $200,000.
He added, however, that the losses will likely be spread out across the industry, and some will be absorbed without the need for additional capital.
“Losses [will be] divided between banks, investors [in residential mortgage-back securities and collateralized debt obligations] and Fannie and Freddie,” Mr. Roubini said. “Some [are] already realized in the market price of RMBS.”
There is another silver lining, albeit a thin one. Mr. Roubini said the mortgage mess may not necessarily derail the anemic recovery in the economy, which he thinks is still on track to grow 2.3 percent next year.
For a country where unemployment just ticked higher, that’s not-so-gloomy news from Dr. Doom.
By EVELYN M. RUSLI Giuseppe Aresu/Bloomberg News