--
``Some 74 percent of consumer expenditures are correlated to housing. I don't think the consumer will hold up. They will cut back on things like buying cars and vacations.''
Cities that scored lowest with an F minus'' grade, described asvery competitive with a negative bias'' in her firm's September homebuilding survey, included San Diego, Phoenix, Inland Empire (California), and Fort Myers, Florida.
I wonder what does the no recession yet crowd think? Those who focus on lagging indicators, e.g., M-ploy-ment, always lag!
I've never seen the market as bad as this,'' Zelman said.And it could get worse. The home-price decline could range from 16 percent to 22 percent.''
Barring huge government subsidies, I would expect all of the house price appreciation in real terms since the late 90s to be wiped out, and then some due to the excess production and severe damage to housing related finance infrastruction.
Why would this not happen, barring a super-bailout? (A super-bailout is a definite possibility IMO, but one that would depress other aspects of the economy, and may well backfire.)
"[T]ight-as-a- drum mortgage restrictions," quotes the article.
Is that true--are mortgage restrictions anywhere near tight yet? I have no idea, but I can remember thinking I'd buy my first house in 1991, and the only "easy" money was seller-financing. Money was much looser five years later.
She thinks that sales have another two years of a downturn.
You think that housing starts will bottom at 1.1 (or was it 1.0?).
I suspect this means that either:
1. We will continue to have a huge inventory build over the next two years, or
2. We will not have a V-shaped trough in starts, or
3. Your views aren't that close to Zelman's.
Which is it?
PS-- not one word of that comment was snark; it's a serious question.
The home-price decline could range from 16 percent to 22 percent.''
...
After price inclines of that much per year over the past 5 years, we're crying about 20% total decline? That's kinda like winning the lottery and crying the next year because your income went back down.
I can believe 16% to 22% per year for several years...
Realistically, we are going to see one of three things: 1) Huge price declines until housing is in-line with incomes, which have been declining since 2000. 2) Massive wage inflation. Don't count on that since wage increases are the one type of inflation that the Fed fights. 3) A return to toxic loans, funny-money, "real estate only goes up!" etc. Again, unlikely.
So, huge declines are in the making, IMHO. It might be fast, slow, or extra slow, but there's no way around it. And even if wages DO go up, once one factors in run-away inflation and higher taxes, fewer job benefits, fewer real jobs, etc. nobody is going to be able to "buy" your typical $500K McMansion.
Nothing surprising .Homeowner have unrealistic sale price expectations( my self included).We got spoiled by awesome profits from homes for way to long. If we are were to be realistic no home is actually worth that much money. More realistic view would be to 30% -50% in home price reductions.
Will the financial institutions model and disclose the impact of this scenario? I suspect someone has performed this, but they dare not disclose the result.
--
From always trustworthy gang at Goldchain Silverknife:
Californian home prices are over-valued by 35-40% -- House prices are significantly over-valued in California Our house price model indicates that Californian homes are 35-40% above the price range implied by current and forecast economic conditions (compared to 13-14% over-valuation nationally). As of August the median house price in California was $589K, but economic conditions support prices between $350-380K; material price declines are likely, in our view. From 1985 to 2003, 82% of quarterly variation in the OFHEO index for Californian home prices could be explained by two factors (state-level disposable income and interest rates); but this relationship broke down in 2004. We believe that sales of affordability products (e.g., subprime, option ARMs) which spiked in 2004 drove Californian home prices above levels supported by economic conditions; now that the secondary market for these products has evaporated, we expect home prices to return to normalized levels (as prices fall and disposable incomes grow).
For those of you wondering why the builder's stocks are up 4% today, I have an observation that can predict such bounces. The builders have been trading on the 5-day stochastic indicator with lower highs and lower lows. The stochastic goes from 0 to 100, and stocks tend to bounce when they get too close to 0 (=oversold). My guess is that some hedge funds or other large traders are playing this situation and accentuating the volatility. They short the builders until they are oversold (stochastic very low) and then they go long. The sharp changes panic some of the high numbers of shorts in these stocks, driving them even higher. The best plan for shorts and puts is to take at least some profits when the individual builders and XHB become oversold (stochastic is very low) and to buy back puts or short after a bounce.
In any case, it takes some guts to run up these stocks today just before this week's September home sales announcement.
The builders were way oversold when the Fed announced its big cut in Sept. That led to a violent bounce. However, the top of the bounce was a great shorting opportunity. Also, and not surprisingly, the Citi analyst Kim upped his rating to buy when the downturn was extreme. After doing this (buying puts on builders) for a year and a half, I hope that I am finally starting to get both the long term trend and the short term dynamics.
My thoughts on housing and the economy. Not many people will yell fire in a theater even when everyone smells the smoke. Panic is not in anyone's best interest, yet it is impossible to not notice what has started. Zelman is being cautious and I don't blame her but.....
All changes start on the margins. They start small and grow until some people notice them and they keep growing until lots of people notice and eventually everyone sees the change and you have a paradigm shift.
In the game of Monopoly, every time a player passes go or gets a chance card they get more money. In the beginning, Park Place costs $400 and in the end of the game everything keeps inflating in value until one person has all the property and all the money.
This is how our fractional reserve banking works. It creates more and more money by creating more and more debt and transfers wealth, very similar to the other Monopoly game. It could work well with proper regulation to keep it from getting out of control but as we have seen over the years, regulation gets in the way of increased profits so regulatory oversight has been slowly removed or ignored since our last great credit boom/blow up. Now we have Enron accounting style SIVs and the banks selling insurance to each other and buying and selling stocks with borrowed money. So they create the lending for business and then speculate on the movement of their stock prices and insure the loans all from one giant conglomerate banking concern. There has little transparency at the top and few consequences for doing what ever it takes to get ahead, to win the game by creating an ever larger pyramid of debts, by adding more and more money each time they pass go.
The majority of the debt created in the last 15 years has been non productive debt. Borrowing to buy stocks or houses is not productive debt. Borrowing to build roads and factories may be if they produce enough savings to provide a profit over the interest paid. At least they produce but most of our recent pile of debts are of the non productive type. Borrowing to buy stocks and McMansions and fuel and energy to burn in our over sized vehicles produces nothing. We all have seen the kind of debt that has been created in the last decade, debt to fund consumption not productive activities for the most part. So when this debt is repudiated, what do you have left? Not a rail road or a million miles of fiber optic. You have nothing worth much.
When a financial system is built on non productive debt instead of productive endeavors, bubbles are a consequence. Inflated dollars look for momentum and movement and not investment, because investment isnt where the advantage is. The advantage is leverage and momentum. So instead of a productive society you end up with speculation and more and more debt. Everyone playing Monopoly and fewer and fewer people actually working at real productive endeavors. It became cheaper to let the poor neighbors do the productive w
we dont need to because we are a country of speculators and game players Well in the beginning when Park Place costs only $400. And now at least at the top, those with the access and the power and the connections. The rest just become want ta bees. Or just plain economic slaves. No one who is in the game cares about their less fortunate neighbors, its just business and some win and some lose.. You cant stop and worry or youll become one of those losers too. Besides you need your money to play the game to build a bigger pile to stay competitive and stay in the game. Any money you give away makes you less able to play and be a winner. So selfishness rules and is promoted as anti tax and anti government rhetoric, even though the government continues to grow, but now it is creating debt or monopoly money for those at the top.
Bubbles need to grow and or morph into larger and larger entities. They can not shrink once they have begun growing. Shrinking is deflationary and deflation in an overly indebted system is worse than a cancer because as the value of equity shrinks so does the ability and the willingness to repay and thus to even work. The advantage of leverage turns into the nightmare of leverage. Thus deflation can accelerate until it has destroyed the system.
Why didnt this happen in Japan? Because they were savers and the majority of the debt was productive in nature. In the US we have massive debts of non the productive kind and little or no savings. Yet the payments from this debt are needed to continue on, to keep some of the player and consumers paying others, whether it is an insurance company or a pension fund or a school annuity. The income is needed to fuel the system. This is the nightmares that the fed governors should be having. I dont know if they do because they seem to strangely believe that more and more liquidity will always solve the problem and/or just pretend if they supply more it will get into the right hands. Which is insane because lowering the interest rates will not help those who already dont have enough income to pay for what they have previously consumed.
All changes start on the margins. They start small and grow until some people notice them and they keep growing until lots of people notice and eventually everyone sees the change and you have a paradigm shift.
So where are we in this big Monopoly game today. Fractional reserve banking has created massive debt. Over 300% of GDP. In 1929 it was only a little over 200%. They have created so much debt that many people were forced to borrow against all their equity to even make the payments on their already spent existing debts and now owe so much that they can no longer cover the current existing payments even by borrowing. This was all because those who could take more and more from the system did. Park Place which started at $400 is now booked in the trillions, at least that is what is borrowed against it At least on paper.
This situation of over indebtedness has reached a climax. Why do I think that. Look at the margins. Started out with a few defaults and those became a growing number of foreclosures and the savings rate went negative and defaults soared and foreclosures and bankruptcies are soaring higher and now people are removing money from their 401ks to make their payments with. Retail spending is declining, especially when balanced against the real cost increases (food and energy and others off the books) and now the banks and other owners of the debt are showing negative results while house prices are deflating in value restricting future credit even as we speak. This may just be the beginning of the deflationary cycle but it has started. And where are those at the top vying to win the game putting their leverage now? Into oil and gold and iron and stocks and other assets because the money no longer has any advantage chasing real estate which will just push the working class into bankruptcy faster and faster. This is the end of the game. Fewer and fewer people can afford to stay anywhere or buy anything because all the money is held in the hands of the few so game is almost over.
When Joe A cant pay Joe B then Joe B cant pay Joe C and the debt cycle turns into a deflationary cycle. Just look at real estate and tell yourself that this isnt happening. There is nothing that can be done because debt has to be either repaid or repudiated and when enough Joe As can no longer pay, the entire pyramid of debt comes tumbling down. So in real life does Monopoly work? Not really.. Because there are real people involved and real families and there are many more of them than the few winners. What is that old saying about financial turmoil leads to political strife or something like that.
No amount of SIV Enron accounting, hiding of the non payments will do anything. No amount of liquidity injected into a dysfunctional non productive system will allow Joe A to pay for all the stuff he bought on credit beyond his real ability to repay. Nothing will make McMansions into anything more than an ego trip. A house is shelter and beyond that it is ego. When ego becomes the basis for economic growth funded by debt, well, we are just getting ready to see what the results are. They have just started so sit back, get your popcorn and enjoy the movie because there is no turning it off now.
-22% was my EXACT call a month ago - to be precise: as a national average decline from peak. If that is what Ivy is saying, I am just so delighted. That she shares my view, that is - not the fact that my house is about to 'lose a bedroom' value-wise.
More realistic view would be to 30% -50% in home price reductions. - 30-50%? For a second there, I thought I was maybe overly bearish. Sheesh.
Interesting Businessweek article referencing Fed study re: homeownership rate likely to fall and piggyback mortgages reason for recent homeownership rate increase
Bill said: "In any case, it takes some guts to run up these stocks today just before this week's September home sales announcement."
I'm not sure about that. The issues with housing have been around for a long time, long enough for intelligent people with real access (and real money) to take a stab at estimating how bad things are likely to get.
There's also this idea, related to the sources of market information. The NAR is going to release existing home-sales data, but what is their source?
The NAR didn't build the homes, hire the people to build the homes, didn't make the loans to finance either the homebuilders or the homebuyers, etc., etc. Other people and financial entities farther upstream have access to this information long before the NAR does, so there's already a certain amount of information about housing and the future of housing floating around out there. Whatever the existing home-sales number turns out to be, it's not going to be a big surprise to anyone who really knows something, is it?
I ran into this information problem years ago when I used to trade agricultural commodities. There was considerable speculation around the release-times of government crop reports, but the government was only the aggregator of the data, not the source. The sources were, naturally, orange-growers, wheat farmers, cattle-feeders, etc., who already knew what the conditions were before the crop reports came out.
I'm not saying I know what the home-sales number is going to be, I'm just saying that at some point you have to ask yourself how much information is already reflected in stock prices by true "insiders."
Bill, you helped me a lot with your advice on the stochastics, thanks again. I sold my DHI puts last week; didn't time it "perfect" but close enough to realize a 100% gain.
I think this pattern with the homebuilders you observed will continue in the short-term. Of course, at some point these beaten-down stocks will hit a true bottom. What I am looking for there as a signal would be an inverted "head and shoulders" pattern where the previous low is not broken and volume on the downside is lighter. Until I see this develop i will continue shorting them.
Also have to give a nod to Sebastian, he could be on to something. Perhaps those "in the know" already have seen the housing data for last month and it isn't as apocalypic as everyone expects.
Another warning on the housing stocks was on Friday, when they were about even on a big down day for the market. It looked like they "really wanted to bounce."
Although there will always be bottom callers, I really expect some of the HBs to go bankrupt before the bottom is hit. Some people called a bottom in Sept when the builder's sentiment index matched the low of the early 90's and the stocks bounced up with the Fed cut. My bottom line on the whole housing situation is that housing cannot recover until prices and affordability are back to reasonable levels. This is especially true now, since the tightening of credit makes it more difficult for people who can't afford a house to buy one.
"Some 74 percent of consumer expenditures are correlated to housing."
Interesting use of the word correlated. I'd want a list of the items with their correlation factors in column 2.
Diapers, of course, correlate strongly to housing, because a larger volume of diapers flow through three bedroom units than one bedroom units.
Implicitly, diaper usage will go down as the housing market corrects. Rinse and reuse, or learn to hold it.
Also, a number that large can only include rents and mortgages. One year after a 110% ltv exploding subprime detonates, the credit impaired borrower would have 100% of their ungarnished income to use in the fluid rental market.
It could work well with proper regulation to keep it from getting out of control but as we have seen over the years, regulation gets in the way of increased profits so regulatory oversight has been slowly removed or ignored since our last great credit boom/blow up
--kind of like a mechanic in reverse. He takes a nonworking car and replaces things until it runs. The "financial innovators," take a working economy and get regulations repealed until it stops working.
Prices are going to return to their historical ratio to incomes, with some overshoot. Since the bubble was unprecedented, the overshoot may be large.
Average price decline will be at least 40%, and 50% is quite possible.
High-end condos will decline 70-80% from peak prices, as in Japan. In condo buildings with large numbers of foreclosures and vacancies, the shortfalls in HOA revenues will be lethal.
I'm not sure why this bounce in the HB stocks would be any differant than any other bounce we have had the last few months. The deterioration in the fundamentals appears to be getting worse, not better.
kono -- interesting essay. As a quasi-Georgist I think the LVT is the answer to this question:
It could work well with proper regulation to keep it from getting out of control
Everyone spends the bulk of their incomes toward paying off land rent; it makes sense to me that applying these payments toward government services (or hell, a citizen dividend for the idiot minarchists among us) should be investigated, like they were in the Progressive Era in some enlightened places.
Also, the game of Monopoly was originally designed by a Georgist to illustrate the evils of the land speculator and parasitical landlord class.
Seb's comment is a good one, but I think that the economists are still underestimating weakness in housing. Also, over the past two years, I've found that by reading blogs and having some idea of local markets, I seem to be better informed than analysts and economists on the monthly numbers.
I agree with Robert's comments above, as well as those of the builders themselves. There is still no sign of improvement on the horizon. Thus, the bounces are only to aleviate oversold conditions and to sqeeze some shorts. I am trying to play both sides a little. I sold some Nov 20 Ryland puts on Friday. The stock is up 8% since them, so my position is up about 50%. The question is whether I should take the profits now or trust that Ryland (now 25.7) will stay above 20 until Nov expiration. I guess that I will hold, as a 20% decline seems unlikely.
She is a welcome voice of reason, especially for an analyst.
--
``Some 74 percent of consumer expenditures are correlated to housing. I don't think the consumer will hold up. They will cut back on things like buying cars and vacations.''
Cities that scored lowest with an F minus'' grade, described asvery competitive with a negative bias'' in her firm's September homebuilding survey, included San Diego, Phoenix, Inland Empire (California), and Fort Myers, Florida.
I wonder what does the no recession yet crowd think? Those who focus on lagging indicators, e.g., M-ploy-ment, always lag!
Jas
Well, don't tell the folks over at NAR, they are still delusional.
Real Estate Data, Statistics, Demographics, & Trends: NAR Current News
I've never seen the market as bad as this,'' Zelman said.And it could get worse. The home-price decline could range from 16 percent to 22 percent.''
Barring huge government subsidies, I would expect all of the house price appreciation in real terms since the late 90s to be wiped out, and then some due to the excess production and severe damage to housing related finance infrastruction.
Why would this not happen, barring a super-bailout? (A super-bailout is a definite possibility IMO, but one that would depress other aspects of the economy, and may well backfire.)
" F minus "
Now, that a grade I am talking about.
"[T]ight-as-a- drum mortgage restrictions," quotes the article.
Is that true--are mortgage restrictions anywhere near tight yet? I have no idea, but I can remember thinking I'd buy my first house in 1991, and the only "easy" money was seller-financing. Money was much looser five years later.
I suspect this means that either:
1. We will continue to have a huge inventory build over the next two years, or
2. We will not have a V-shaped trough in starts, or
3. Your views aren't that close to Zelman's.
Which is it?
PS-- not one word of that comment was snark; it's a serious question.
22% decline at worst? What's the size of your bid at that level?
Contrast this with Tanta's MSP article above.
The home-price decline could range from 16 percent to 22 percent.''
...
After price inclines of that much per year over the past 5 years, we're crying about 20% total decline? That's kinda like winning the lottery and crying the next year because your income went back down.
I can believe 16% to 22% per year for several years...
Realistically, we are going to see one of three things: 1) Huge price declines until housing is in-line with incomes, which have been declining since 2000. 2) Massive wage inflation. Don't count on that since wage increases are the one type of inflation that the Fed fights. 3) A return to toxic loans, funny-money, "real estate only goes up!" etc. Again, unlikely.
So, huge declines are in the making, IMHO. It might be fast, slow, or extra slow, but there's no way around it. And even if wages DO go up, once one factors in run-away inflation and higher taxes, fewer job benefits, fewer real jobs, etc. nobody is going to be able to "buy" your typical $500K McMansion.
16-22% nationwide? From the height of the market, or from here?
If it's the former and the latter that'd be pretty dramatic even in the face of the runup of the last five years.
Especially with inflation running at 10%+ (coming soon to a dollar near you!).
Nothing surprising .Homeowner have unrealistic sale price expectations( my self included).We got spoiled by awesome profits from homes for way to long. If we are were to be realistic no home is actually worth that much money. More realistic view would be to 30% -50% in home price reductions.
Will the financial institutions model and disclose the impact of this scenario? I suspect someone has performed this, but they dare not disclose the result.
--
From always trustworthy gang at Goldchain Silverknife:
Californian home prices are over-valued by 35-40% -- House prices are significantly over-valued in California Our house price model indicates that Californian homes are 35-40% above the price range implied by current and forecast economic conditions (compared to 13-14% over-valuation nationally). As of August the median house price in California was $589K, but economic conditions support prices between $350-380K; material price declines are likely, in our view. From 1985 to 2003, 82% of quarterly variation in the OFHEO index for Californian home prices could be explained by two factors (state-level disposable income and interest rates); but this relationship broke down in 2004. We believe that sales of affordability products (e.g., subprime, option ARMs) which spiked in 2004 drove Californian home prices above levels supported by economic conditions; now that the secondary market for these products has evaporated, we expect home prices to return to normalized levels (as prices fall and disposable incomes grow).
Jas
She says to Bob Toll on a recorded conference call: "Bob, what flavor Kool-aide are you drinking?" Har! My kinda gal.
For those of you wondering why the builder's stocks are up 4% today, I have an observation that can predict such bounces. The builders have been trading on the 5-day stochastic indicator with lower highs and lower lows. The stochastic goes from 0 to 100, and stocks tend to bounce when they get too close to 0 (=oversold). My guess is that some hedge funds or other large traders are playing this situation and accentuating the volatility. They short the builders until they are oversold (stochastic very low) and then they go long. The sharp changes panic some of the high numbers of shorts in these stocks, driving them even higher. The best plan for shorts and puts is to take at least some profits when the individual builders and XHB become oversold (stochastic is very low) and to buy back puts or short after a bounce.
In any case, it takes some guts to run up these stocks today just before this week's September home sales announcement.
The builders were way oversold when the Fed announced its big cut in Sept. That led to a violent bounce. However, the top of the bounce was a great shorting opportunity. Also, and not surprisingly, the Citi analyst Kim upped his rating to buy when the downturn was extreme. After doing this (buying puts on builders) for a year and a half, I hope that I am finally starting to get both the long term trend and the short term dynamics.
My thoughts on housing and the economy. Not many people will yell fire in a theater even when everyone smells the smoke. Panic is not in anyone's best interest, yet it is impossible to not notice what has started. Zelman is being cautious and I don't blame her but.....
All changes start on the margins. They start small and grow until some people notice them and they keep growing until lots of people notice and eventually everyone sees the change and you have a paradigm shift.
In the game of Monopoly, every time a player passes go or gets a chance card they get more money. In the beginning, Park Place costs $400 and in the end of the game everything keeps inflating in value until one person has all the property and all the money.
This is how our fractional reserve banking works. It creates more and more money by creating more and more debt and transfers wealth, very similar to the other Monopoly game. It could work well with proper regulation to keep it from getting out of control but as we have seen over the years, regulation gets in the way of increased profits so regulatory oversight has been slowly removed or ignored since our last great credit boom/blow up. Now we have Enron accounting style SIVs and the banks selling insurance to each other and buying and selling stocks with borrowed money. So they create the lending for business and then speculate on the movement of their stock prices and insure the loans all from one giant conglomerate banking concern. There has little transparency at the top and few consequences for doing what ever it takes to get ahead, to win the game by creating an ever larger pyramid of debts, by adding more and more money each time they pass go.
The majority of the debt created in the last 15 years has been non productive debt. Borrowing to buy stocks or houses is not productive debt. Borrowing to build roads and factories may be if they produce enough savings to provide a profit over the interest paid. At least they produce but most of our recent pile of debts are of the non productive type. Borrowing to buy stocks and McMansions and fuel and energy to burn in our over sized vehicles produces nothing. We all have seen the kind of debt that has been created in the last decade, debt to fund consumption not productive activities for the most part. So when this debt is repudiated, what do you have left? Not a rail road or a million miles of fiber optic. You have nothing worth much.
When a financial system is built on non productive debt instead of productive endeavors, bubbles are a consequence. Inflated dollars look for momentum and movement and not investment, because investment isnt where the advantage is. The advantage is leverage and momentum. So instead of a productive society you end up with speculation and more and more debt. Everyone playing Monopoly and fewer and fewer people actually working at real productive endeavors. It became cheaper to let the poor neighbors do the productive w
continued:
we dont need to because we are a country of speculators and game players Well in the beginning when Park Place costs only $400. And now at least at the top, those with the access and the power and the connections. The rest just become want ta bees. Or just plain economic slaves. No one who is in the game cares about their less fortunate neighbors, its just business and some win and some lose.. You cant stop and worry or youll become one of those losers too. Besides you need your money to play the game to build a bigger pile to stay competitive and stay in the game. Any money you give away makes you less able to play and be a winner. So selfishness rules and is promoted as anti tax and anti government rhetoric, even though the government continues to grow, but now it is creating debt or monopoly money for those at the top.
Bubbles need to grow and or morph into larger and larger entities. They can not shrink once they have begun growing. Shrinking is deflationary and deflation in an overly indebted system is worse than a cancer because as the value of equity shrinks so does the ability and the willingness to repay and thus to even work. The advantage of leverage turns into the nightmare of leverage. Thus deflation can accelerate until it has destroyed the system.
Why didnt this happen in Japan? Because they were savers and the majority of the debt was productive in nature. In the US we have massive debts of non the productive kind and little or no savings. Yet the payments from this debt are needed to continue on, to keep some of the player and consumers paying others, whether it is an insurance company or a pension fund or a school annuity. The income is needed to fuel the system. This is the nightmares that the fed governors should be having. I dont know if they do because they seem to strangely believe that more and more liquidity will always solve the problem and/or just pretend if they supply more it will get into the right hands. Which is insane because lowering the interest rates will not help those who already dont have enough income to pay for what they have previously consumed.
All changes start on the margins. They start small and grow until some people notice them and they keep growing until lots of people notice and eventually everyone sees the change and you have a paradigm shift.
So where are we in this big Monopoly game today. Fractional reserve banking has created massive debt. Over 300% of GDP. In 1929 it was only a little over 200%. They have created so much debt that many people were forced to borrow against all their equity to even make the payments on their already spent existing debts and now owe so much that they can no longer cover the current existing payments even by borrowing. This was all because those who could take more and more from the system did. Park Place which started at $400 is now booked in the trillions, at least that is what is borrowed against it At least on paper.
last part:
This situation of over indebtedness has reached a climax. Why do I think that. Look at the margins. Started out with a few defaults and those became a growing number of foreclosures and the savings rate went negative and defaults soared and foreclosures and bankruptcies are soaring higher and now people are removing money from their 401ks to make their payments with. Retail spending is declining, especially when balanced against the real cost increases (food and energy and others off the books) and now the banks and other owners of the debt are showing negative results while house prices are deflating in value restricting future credit even as we speak. This may just be the beginning of the deflationary cycle but it has started. And where are those at the top vying to win the game putting their leverage now? Into oil and gold and iron and stocks and other assets because the money no longer has any advantage chasing real estate which will just push the working class into bankruptcy faster and faster. This is the end of the game. Fewer and fewer people can afford to stay anywhere or buy anything because all the money is held in the hands of the few so game is almost over.
When Joe A cant pay Joe B then Joe B cant pay Joe C and the debt cycle turns into a deflationary cycle. Just look at real estate and tell yourself that this isnt happening. There is nothing that can be done because debt has to be either repaid or repudiated and when enough Joe As can no longer pay, the entire pyramid of debt comes tumbling down. So in real life does Monopoly work? Not really.. Because there are real people involved and real families and there are many more of them than the few winners. What is that old saying about financial turmoil leads to political strife or something like that.
No amount of SIV Enron accounting, hiding of the non payments will do anything. No amount of liquidity injected into a dysfunctional non productive system will allow Joe A to pay for all the stuff he bought on credit beyond his real ability to repay. Nothing will make McMansions into anything more than an ego trip. A house is shelter and beyond that it is ego. When ego becomes the basis for economic growth funded by debt, well, we are just getting ready to see what the results are. They have just started so sit back, get your popcorn and enjoy the movie because there is no turning it off now.
Drink THAT, Bobby boy!
-22% was my EXACT call a month ago - to be precise: as a national average decline from peak. If that is what Ivy is saying, I am just so delighted. That she shares my view, that is - not the fact that my house is about to 'lose a bedroom' value-wise.
More realistic view would be to 30% -50% in home price reductions.
- 30-50%? For a second there, I thought I was maybe overly bearish. Sheesh.
CR:
Interesting Businessweek article referencing Fed study re: homeownership rate likely to fall and piggyback mortgages reason for recent homeownership rate increase
A Troubled 'Ownership Society'
Bill said: "In any case, it takes some guts to run up these stocks today just before this week's September home sales announcement."
I'm not sure about that. The issues with housing have been around for a long time, long enough for intelligent people with real access (and real money) to take a stab at estimating how bad things are likely to get.
There's also this idea, related to the sources of market information. The NAR is going to release existing home-sales data, but what is their source?
The NAR didn't build the homes, hire the people to build the homes, didn't make the loans to finance either the homebuilders or the homebuyers, etc., etc. Other people and financial entities farther upstream have access to this information long before the NAR does, so there's already a certain amount of information about housing and the future of housing floating around out there. Whatever the existing home-sales number turns out to be, it's not going to be a big surprise to anyone who really knows something, is it?
I ran into this information problem years ago when I used to trade agricultural commodities. There was considerable speculation around the release-times of government crop reports, but the government was only the aggregator of the data, not the source. The sources were, naturally, orange-growers, wheat farmers, cattle-feeders, etc., who already knew what the conditions were before the crop reports came out.
I'm not saying I know what the home-sales number is going to be, I'm just saying that at some point you have to ask yourself how much information is already reflected in stock prices by true "insiders."
Sebastia
Gald to know Ivy is back on the saddle.
Bill, you helped me a lot with your advice on the stochastics, thanks again. I sold my DHI puts last week; didn't time it "perfect" but close enough to realize a 100% gain.
I think this pattern with the homebuilders you observed will continue in the short-term. Of course, at some point these beaten-down stocks will hit a true bottom. What I am looking for there as a signal would be an inverted "head and shoulders" pattern where the previous low is not broken and volume on the downside is lighter. Until I see this develop i will continue shorting them.
Also have to give a nod to Sebastian, he could be on to something. Perhaps those "in the know" already have seen the housing data for last month and it isn't as apocalypic as everyone expects.
Another warning on the housing stocks was on Friday, when they were about even on a big down day for the market. It looked like they "really wanted to bounce."
Although there will always be bottom callers, I really expect some of the HBs to go bankrupt before the bottom is hit. Some people called a bottom in Sept when the builder's sentiment index matched the low of the early 90's and the stocks bounced up with the Fed cut. My bottom line on the whole housing situation is that housing cannot recover until prices and affordability are back to reasonable levels. This is especially true now, since the tightening of credit makes it more difficult for people who can't afford a house to buy one.
"Some 74 percent of consumer expenditures are correlated to housing."
Interesting use of the word correlated. I'd want a list of the items with their correlation factors in column 2.
Diapers, of course, correlate strongly to housing, because a larger volume of diapers flow through three bedroom units than one bedroom units.
Implicitly, diaper usage will go down as the housing market corrects. Rinse and reuse, or learn to hold it.
Also, a number that large can only include rents and mortgages. One year after a 110% ltv exploding subprime detonates, the credit impaired borrower would have 100% of their ungarnished income to use in the fluid rental market.
It could work well with proper regulation to keep it from getting out of control but as we have seen over the years, regulation gets in the way of increased profits so regulatory oversight has been slowly removed or ignored since our last great credit boom/blow up
--kind of like a mechanic in reverse. He takes a nonworking car and replaces things until it runs. The "financial innovators," take a working economy and get regulations repealed until it stops working.
Prices are going to return to their historical ratio to incomes, with some overshoot. Since the bubble was unprecedented, the overshoot may be large.
Average price decline will be at least 40%, and 50% is quite possible.
High-end condos will decline 70-80% from peak prices, as in Japan. In condo buildings with large numbers of foreclosures and vacancies, the shortfalls in HOA revenues will be lethal.
"Prices are going to return to their historical ratio to incomes."
Only if interest rates return to their historical ratio to incomes.
I'm not sure why this bounce in the HB stocks would be any differant than any other bounce we have had the last few months. The deterioration in the fundamentals appears to be getting worse, not better.
CTX earnings will be very interesting.
kono -- interesting essay. As a quasi-Georgist I think the LVT is the answer to this question:
It could work well with proper regulation to keep it from getting out of control
Everyone spends the bulk of their incomes toward paying off land rent; it makes sense to me that applying these payments toward government services (or hell, a citizen dividend for the idiot minarchists among us) should be investigated, like they were in the Progressive Era in some enlightened places.
Also, the game of Monopoly was originally designed by a Georgist to illustrate the evils of the land speculator and parasitical landlord class.
Seb's comment is a good one, but I think that the economists are still underestimating weakness in housing. Also, over the past two years, I've found that by reading blogs and having some idea of local markets, I seem to be better informed than analysts and economists on the monthly numbers.
I agree with Robert's comments above, as well as those of the builders themselves. There is still no sign of improvement on the horizon. Thus, the bounces are only to aleviate oversold conditions and to sqeeze some shorts. I am trying to play both sides a little. I sold some Nov 20 Ryland puts on Friday. The stock is up 8% since them, so my position is up about 50%. The question is whether I should take the profits now or trust that Ryland (now 25.7) will stay above 20 until Nov expiration. I guess that I will hold, as a 20% decline seems unlikely.