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Denbury Resources Inc. Message Board

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  • Couple of things in the news today. Goldman Sachs is trotting out its super-spike forecast to $200 soon. Hard to argue against. An article in the WSJ that Bernstein, I believe it was, is using satellite imagery to determine production from Saudis largest field. Thought it was interesting that Matt Simmons was questioning the science. But, the piece that got my attention was "The Housing Crisis Is Over", by a guy from Traxis Partners, the hedge fund that Barton Biggs runs. Biggs has always been an original thinker. His claim is that with low mortgage rates, calling for another 30% drop in house value is fallacious, versus what they were in early 80s, high teens. The bust has been substracting 2% pts from GDP from a sector that is 5% of economic activity. And he thinks the banks are extrapolating losses that will prove to be to large in their write offs. Result is, the securities that have been written off will need to be marked up. If we can put this mess behind us, with the growth from the rest of the world, the future doesn't appear to be that bad. And, I don't see how oil prices are going to retreat any time soon.

    Having said that, Big River, I was seriously considering doing what you did, trimming back on energy. Probably on hold for a while. Cheers. Hare

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    • Harehau,

      Goldman Sachs did exactly the same thing about 4 years ago, but the number they were calling for then was $100. OIl was at $47 or so at the time and I proposed here that GS's behavior was outrageous and wrong-minded and I assert the same now. It is never an appropriate idea for a big name to shout fire in a crowded theater.

      On the housing crisis, I think that things will take much longer to play out than anyone expects. In theory housing is beginning to get more affordable, but, I think, not yet really affordable. If we use $50,000 as median household income and assume $3000 per year of real estate taxes and utilities (probably a little low) and assume interest of 5.35% on a 20 year loan with 20% equity then the average family can afford to own a $140,000 home using the 25% of income rule. That is still below where we are now although I admit to having skewed the sample because many of the lower income folks would be renters so median income for households able to afford a home would probably be somewhat higher. Still, I think you can get my point that houses still are not cheap in relation to incomes at $190,000 median sales prices.

      (Incidentally, that's how we got in this mess to begin with. The industry, with a little help from Congress, tried to persuade many millions of Americans to buy homes which they really couldn't afford to own using the normal guides and interest rate principles which typically are applied.)

      I would also argue that the expense levels for families are also rising making it more difficult for them to accumulate sufficient equity to own homes and more difficult for them to meet financing standards.

      All of that having been said, the old axiom that all real estate is local is still true. The issues for the housing crisis will be centered in exactly those parts of the country that are less important to the world economy and more dominated by US economic issues--an exact parallel to what we talk about in the investment markets. I wouldn't worry too much about prudently owning a house in Texas (oil), the Dakotas (wheat) or in Seattle (Pac Rim trade) but I would worry a lot about owning one in the rust belt.

      The issue of psychology also needs to be taken into account, I believe. My grandfather, who died in the late 60's never owned a house after 1929. He had a good job during the depression, was convinced that home prices were never going to recover and saved 60% of what he earned all of his life, being content to live in a triple decker owned by someone else. Given the number of folks who will be permanently traumatized by the sub-prime and under-water equity picture (including all of those who are collateral damage because of the hits taken by their neighborhoods) I would not be confident about picking a bottom to housing prices any time soon and I doubt that housing prices (absent some incredible inflationary spurt) will get back to where they got to (about $250,000 median sales price) within the next 10 years.

      Regards,

      Peter

      • 1 Reply to pddane_01929
      • Peter, thought about you comments on housing. I wasn't suggesting necessarily that housing is coming back as a good investment. Theoretically, housing should increase with wage increases, a few percent a year. I have never thought housing was a good investment. I have finally convinced my wife of that. What I was suggesting is that if housing does stabilize, then we wouldn't continue to have that drag on the domestic economy. Although energy may be the new culprit.

        I did look at the NAR data on affordability and was surprised at what I found. Affordabilty, defined as actual income over income required relative to median price, was 112 in 05, 106 in 06, 112 in 07. It bottomed out in July 07 at 104 and has rise since to 130 in March 08. Was actually 135 in February. Prices are falling, rates are down and income is up. According to the income, a purchaser could afford a $240k home and the median price in Mar 08 was $198K. Could this suggest that it is not necessarily an affordability issue but the fact that we have just too many houses, 11 months of supply. Think they said value would stablized when we got to the five month level. The factor in affordability that bothers me is interest rates. It seems to me that we are just delaying the inevitable, an increase in rates. Another reason home values could be flat for some time to come.
        Hare

 
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