Thread: Home Prices May Fall 20% Amid Bad Loans

Heebner Says Home Prices May Fall 20% Amid Bad Loans (Update1)

By Sree Vidya Bhaktavatsalam and Brian Sullivan

April 12 (Bloomberg) -- Kenneth Heebner, manager of the top-performing real-estate fund over the past decade, said U.S. home prices may plunge as much as 20 percent because of rising defaults on riskier mortgages.

Subprime loans, made to borrowers with a history of missed payments or untested credit, and ``Alt-A'' loans, which require little or no documentation, account for about $2.5 trillion of the $10 trillion in outstanding mortgages, according to Moody's Economy.com. As much as 40 percent of these loans may default, flooding the real estate market, Heebner said.

``It will be the biggest housing-price decline since the Great Depression,'' Heebner, 66, said today in an interview in Boston. Prices may fall by a fifth in some markets, he said.

That would leave home prices at levels last seen in 2003 and 2004, the middle of boom that lifted prices to a record in 2005. The damage from high-risk mortgages will slow the U.S. economy, though not enough to send it into a recession, Heebner said. Fourth-quarter growth was revised to 2.5 percent from 3.5 percent because of housing, the government said March 29.

Heebner, who co-founded Capital Growth Management in 1990, manages the $1.6 billion CGM Realty Fund. The fund has gained an average of 20 percent a year in the past 10 years, the most of any real estate fund over that period, Bloomberg data show.

Falling Home Sales

Sales of new homes will tumble 16 percent in 2007, according to the National Association of Realtors. Existing-home sales will fall 2 percent, the first drop on record, the Chicago-based trade group has forecasted. Subprime mortgage delinquencies climbed to a four-year high of 13.3 percent in the fourth quarter, according to the Mortgage Bankers Association.

Fallout from subprime-loan defaults will also hit hedge funds, and to a lesser extent, mutual funds, that bought collateralized debt obligations and other securities backed by such mortgages, Heebner said. The investment banks and brokerage firms that package and sell these products won't get hurt because they have passed on the biggest risks to the investors, Heebner said.

``They know the product is toxic; they're not going to get caught,'' Heebner said.

The CGM Realty fund does not invest in such securities, he said. Heebner said he has sold his shares of real estate investment trusts that invest in apartments because they will face competition from single-family homes that have been converted into rentals. His fund had 35 percent of assets in apartment REITs such as AvalonBay Communities Inc. at the end of last year.

Mining Companies

He's buying shares of mining companies that benefit from growing infrastructure needs in India, China and Russia. CGM Realty Funds also holds shares of Las Vegas Sands Corp., the casino operator that is developing real estate in Macau, China, and Mexican homebuilder Desarrolladora Homex SAB.

Heebner is known for making concentrated investments in a few industries. He sold homebuilders after owning them from 2001 to 2005, record years for home sales. He bet against technology and telephone stocks in 2000, correctly timing their collapse.

Heebner, whose Capital Growth Management has more than $6 billion in assets, also manages the $2.3 billion CGM Focus Fund. The fund has advanced 13.5 percent this year, making it the top- ranked diversified U.S. stock fund, according to Chicago research firm Morningstar Inc.

To contact the reporters on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net ; Brian Sullivan in New York at bsullivan@bloomberg.net .

Last Updated: April 12, 2007 14:47 EDT


http://www.bloomberg.com/apps/news?pid= ... efer=home#

Cool! Cheaper houses for Americans!

W

Could these sub-prime mortgages be linked to banks giving credit to non-citizens? I've seen lots of stories about banks using the Tax ID # to issue credit.

After realizing in the past few years that ID theft was in large part due to illegals using documents of legal citizens, I wonder if this is another "immigrant" problem. The banks are greedy and want millions of illegal aliens carrying credit cards. Surely they would have no problem giving a mortgage to a hard working undocumented worker.

This reminds me of the Savings and Loan scandal in the 1980's. Taxpayers had to bail out the banks because they gave out too many risky loans.

History really does repeat itself.

There are a lot of illegal aliens who given the turn of events would have been much better off now investing to revive their family's corn field back home than buying real estate here.

Texan.....I think that's what's happened alot here. Not to mention that too good to be true loan that has alot very over-extended now and loosing them.

I just wish our outrageous realestate taxes would drop with the cheaper prices.