Glenn Tongue On Housing

[Parsad]

Whitney Tilson's partner Glenn Tongue discusses the housing market, as well as briefly commenting on Berkshire and Fairfax.  I like Glenn's ability to restrain his comments, especially on short positions.  Something I was always more critical of when Whitney was interviewed.  Cheers!

 

http://tiny.cc/z5FXa

 

[omagh]

It's common to smokescreen in public comments.  Palm is an older position.  If T2 is establishing new positions (long or short), they won't talk about them publicly until the full position is established.  T2 has talked publicly about housing weakness and shorting opportunities for housing-related industries.

 

In the spirit of Munger's inversions, why does T2 not talk about the cost of replacing housing assets in any of their public chartware?  Eventually housing will put in a floor below replacement cost of housing assets (some intrinsic value level).  Buffett talked recently about the sources of demand and estimated that there is another year or so to soak up the excess stock.  T2 has a thesis and is seeking confirming evidence (confirmation bias).  I hope that in their private thoughts, rather than their marketing materials, they consider the inverted argument.  T2's public appearances are marketing junkets, so pay attention to the T2's bias (Klarman has lots to say on this).

 

Compare T2's thesis in 2010 to Watsa's thesis in the Fairfax 2007 AR.  Watsa was thematically correct because of the overbuild in US residential housing stock using leverage, T2 has much less room to play with in their thesis.  If you continue marking to market, the counter argument is mark to asset value which ignores the marginal seller and looks at the underlying value of the asset.  I realize that this counter argument is a bit more subjective, but replacement values (marked asset values) can be estimated.  New households being created this year are getting a bargain of a lifetime if they can maintain steady employment.  The size of Watsa's margin of safety was very large (roughly 10x return on investment in CDS swaps).

 

-O

they're not supposed to name names? except when it's "helpful"? palm comes quickly to mind....

[twacowfca]

It's common to smokescreen in public comments.  Palm is an older position.  If T2 is establishing new positions (long or short), they won't talk about them publicly until the full position is established.  T2 has talked publicly about housing weakness and shorting opportunities for housing-related industries.

 

In the spirit of Munger's inversions, why does T2 not talk about the cost of replacing housing assets in any of their public chartware?  Eventually housing will put in a floor below replacement cost of housing assets (some intrinsic value level).  Buffett talked recently about the sources of demand and estimated that there is another year or so to soak up the excess stock.  T2 has a thesis and is seeking confirming evidence (confirmation bias).  I hope that in their private thoughts, rather than their marketing materials, they consider the inverted argument.  T2's public appearances are marketing junkets, so pay attention to the T2's bias (Klarman has lots to say on this).

 

Compare T2's thesis in 2010 to Watsa's thesis in the Fairfax 2007 AR.  Watsa was thematically correct because of the overbuild in US residential housing stock using leverage, T2 has much less room to play with in their thesis.  If you continue marking to market, the counter argument is mark to asset value which ignores the marginal seller and looks at the underlying value of the asset.  I realize that this counter argument is a bit more subjective, but replacement values (marked asset values) can be estimated.  New households being created this year are getting a bargain of a lifetime if they can maintain steady employment.  The size of Watsa's margin of safety was very large (roughly 10x return on investment in CDS swaps).

 

-O

they're not supposed to name names? except when it's "helpful"? palm comes quickly to mind....

 

 

In the spirit of inversion, let's flip the prevailing wisdom and see how the worm has turned.  Four years ago,  the sell side was whistling in the dark and telling the public that housing was a local market and that there had never been a nationwide decline in housing prices ( conveniently ignoring the massive, nationwide US mortgage defaults of the 1930's).  Now, the prevailing wisdom is that housing really is a nationwide market.  The truth is that in normal market conditions, it's OK to think of it as a collection of local markets, granting that bubbles and crashes do occur.  Objectively, the housing market is now in transition to a still depressed local market normality.  We live in an upscale exurb of a major metro area.  The overhang of houses here has been extinguished and prices are beginning to rise.  Soon, the local construction of new homes will be picking up. Two counties away, there was massive overbuilding,  houses there are much cheaper than anywhere in the metro area.  Pricing there is attractive, they are not inconveniently located and they may continue to have an overhang for another year or two.

 

What I'm describing is one of the better growth areas in the US.  Aggregate housing in the US is a long way from another boom, but it is beginning to sort out into the normalized regional and local differences.

[omagh]

twa,

 

Even in the distressed areas, there may be market forces coming into play.  Here's a Fortune article on an $800M fund that is buying distressed homeowner debt and getting homeowners to begin paying by reducing the principal.  Cashflow on distressed debt workouts can provide decent returns if the debt is bought with sufficient discount.  Where one market player is successful, others will follow.

 

http://money.cnn.com/2009/12/08/real_estate/lewie_ranieri_mortgages.fortune/index.htm

 

-O

 

It's common to smokescreen in public comments.  Palm is an older position.  If T2 is establishing new positions (long or short), they won't talk about them publicly until the full position is established.  T2 has talked publicly about housing weakness and shorting opportunities for housing-related industries.

 

In the spirit of Munger's inversions, why does T2 not talk about the cost of replacing housing assets in any of their public chartware?  Eventually housing will put in a floor below replacement cost of housing assets (some intrinsic value level).  Buffett talked recently about the sources of demand and estimated that there is another year or so to soak up the excess stock.  T2 has a thesis and is seeking confirming evidence (confirmation bias).  I hope that in their private thoughts, rather than their marketing materials, they consider the inverted argument.  T2's public appearances are marketing junkets, so pay attention to the T2's bias (Klarman has lots to say on this).

 

Compare T2's thesis in 2010 to Watsa's thesis in the Fairfax 2007 AR.  Watsa was thematically correct because of the overbuild in US residential housing stock using leverage, T2 has much less room to play with in their thesis.  If you continue marking to market, the counter argument is mark to asset value which ignores the marginal seller and looks at the underlying value of the asset.  I realize that this counter argument is a bit more subjective, but replacement values (marked asset values) can be estimated.  New households being created this year are getting a bargain of a lifetime if they can maintain steady employment.  The size of Watsa's margin of safety was very large (roughly 10x return on investment in CDS swaps).

 

-O

they're not supposed to name names? except when it's "helpful"? palm comes quickly to mind....

 

 

In the spirit of inversion, let's flip the prevailing wisdom and see how the worm has turned.  Four years ago,  the sell side was whistling in the dark and telling the public that housing was a local market and that there had never been a nationwide decline in housing prices ( conveniently ignoring the massive, nationwide US mortgage defaults of the 1930's).  Now, the prevailing wisdom is that housing really is a nationwide market.  The truth is that in normal market conditions, it's OK to think of it as a collection of local markets, granting that bubbles and crashes do occur.  Objectively, the housing market is now in transition to a still depressed local market normality.  We live in an upscale exurb of a major metro area.  The overhang of houses here has been extinguished and prices are beginning to rise.  Soon, the local construction of new homes will be picking up. Two counties away, there was massive overbuilding,  houses there are much cheaper than anywhere in the metro area.  Pricing there is attractive, they are not inconveniently located and they may continue to have an overhang for another year or two.

 

What I'm describing is one of the better growth areas in the US.  Aggregate housing in the US is a long way from another boom, but it is beginning to sort out into the normalized regional and local differences.

[omagh]

http://www.calculatedriskblog.com/2010/01/new-research-on-mortgage-modifications.html

 

http://www.calculatedriskblog.com/2010/03/report-bofa-to-announce-mortgage.html

So, the Ranieri/Milken crowd are probably onto something.  On the premise that others will follow...Now Bank of America is getting into the principal reduction game in order to get existing homeowners to keep paying their mortgages.  They take a haircut on the principal, but continue to have cashflow.  More pieces falling into place for housing price stability and a housing price bottom.  Another market that stabilizes and puts some certainty into household budgets and enabling a consumer recovery to be possible.

 

The way that BofA has structured their program, they have a five-year window where principal will be reduced which presumes they are trying to get some upside if housing prices recover a bit.

 

Other banks will follow these leads if the economics make sense...

 

-O

twa,

 

Even in the distressed areas, there may be market forces coming into play.  Here's a Fortune article on an $800M fund that is buying distressed homeowner debt and getting homeowners to begin paying by reducing the principal.  Cashflow on distressed debt workouts can provide decent returns if the debt is bought with sufficient discount.  Where one market player is successful, others will follow.

 

http://money.cnn.com/2009/12/08/real_estate/lewie_ranieri_mortgages.fortune/index.htm

 

-O