PIMCO, Phil Gross – MOOOOO

From the above articles, there looks to be an additional 33% decline in real prices over the next 5 years for San Francisco.  This is good news for those saving to buy a house in 5 years but bad news for everyone else. If you buy now and the prices sinks down 33% over 5 years, you’ll have negative equity even with a 20% down payment. Negative equity is a usual stop along the way to bank foreclosure. This is bad news for those looking to buy now.

The above graph is from PIMCO. See where we are right now at the beginning of a small cliff and how much farther down we have to go through 2010.

PIMCO’s Phil Gross argues that the best way to stop the coming decline is to restore affordable credit. Unfortunately, while Federal interest rates have declined from 5.25% to 2%, mortgage interest rates have risen from 5.5% to about 6.5%, currently. The way to do this is through some sort of legislation. He seems to be in support of the brand new housing bill that’s going on through, but I’m unsure as to how that will affect interest rates (I don’t know).

The other amusing solution that he throws out from a friend of his is the Government buying 1 million new/unused homes and blowing them up to reduce supply. This would likely work economically, but certainly not politically.

We have seen further deterioration in the residential land portfolio during the second quarter. … M&I has $2.3 billion in residential land loans to individuals and developers. $1.5 billion, or 66%, are located in Arizona . The bulk of the Arizona loans, nearly 70%, are in Maricopa County . … LTVs are approximately 115%. Residential land accounts for $219 million of nonperforming loans of which 55% are based in our Arizona business unit.

LTV is the amount of a loan that is paid off. 0% means it’s paid off completely. 100% means nothing has been paid. 115% means people owe 15% more than when they did when they originated their loans. This is across all of their loans! And apparently, they’re stating that they took on NO subprime loans. When your regular prime loans have such high LTV, that’s a terrible thing for the state of the bank. Imagine what that means for all banks if even those who loan properly are getting hammered?