Wednesday, June 30, 2010

The Housing Market Continues Its Plunge

"The power of accurate observation is frequently called cynicism by those who don't have it."
- George Bernard Shaw (1856-1950)

Let me start first by addressing yesterday's release of the monthly Case-Shiller index of home prices, which showed a gain for April.  But if you take a look underneath the hood at how CS is calculated you'll understand why that "gain" is illusory.  CS is based on a home sale price survey of the 20 larges metro areas, and it emphasizes "organic" sales vs. forclosure sales.  Because of the homebuyer tax credit and seasonal factors, the data pool used by CS de-emphasizes transactions which occur at "distressed" sale prices in favor of the fully-loaded, tax-benefit propped up "organic" sales transactions.  In other words, the CS index is statistically skewed to upside, unless you believe that foreclosures are going away and the tax credit had no effect on prices.  Mark Hanson did an analysis on the CS flaws last year if you are interested:  LINK.

So let's toss out the Case-Shiller price report and look at two other very significant developments.  Yesterday the nation's third largest homebuilder, Lennar, announced that it was cutting prices on its new homes by up to 15%.  Last week Lennar reported its earnings and it also reported that new orders for May fell by an unexpectedly large 10%.  KB Homes, the 8th largest homebuilder, reported last week that new orders for its homes plunged 23% in its most recent quarter.  And the Commerce Dept reported last week that new home sales took a 32% cliff dive in May.  Starting to get the picture?

Today the Mortgage Bankers Association reported its weekly mortgage applications index, which is comprised of purchase and refinance mortgage applications.  Once again the purchase applications index dropped another 3.8% from the previous week and was 36% lower than the same week last year.  Here's the link to the report if you are interested: MBAA Mortgage Index.

The point here is that the housing market is in a serious freefall.  Yesterday's widespread sell-off in the stock market, for sure, reflects the growing understanding by those who are paying attention that the economy is in serious trouble, with housing being one of the major components of U.S. GDP ever since World War Two.  Given that the mortgage market is over $12 trillion, as housing economics go into a tailspin, big bank balance sheets are sure to follow.  In other words, we are barrelling head-first toward a credit collapse that will make the one in 2008 seem insignificant.

The even bigger underlying implication here is that it is increasingly becoming apparent - and is even being reflected in mass financial media commentary - that the Fed has only one policy choice left to try and address this problem and that's to engage in "crank" economics - i.e. "crank" up that printing press.  Unless the Government/Fed is wiling to allow the whole system to crater, we can expect a big stimulus/quantitative easing/printing press program to be implemented, likely before year-end and possibly in time to jump-start the system ahead of November's elections.  I hope everyone understands that the only way to protect yourself from the collateral damages this will cause is to load up on gold/silver/mining stocks.  Anyone want to operate a hot dog stand?


  1. The prices of food, energy, medical care, drugs, precious metals, insurance, etc. just keep rising. Yet, housing prices drop. Perhaps this is a sort of 'tribute' to the huge excesses of the past decade of fog-a-mirror loans, or perhaps it's just that property taxes are rising too?

    Still, housing prices will rise in dollar terms sooner or later, barring incredible gubbermint stupidity or bankster cupidity. On second thought, the stupidity/cupidity crowd seem to be the ones running things.


  2. Red, the price level from which housing eventually may bounce will be 30-50% below the general price level today.

    And it may not happen until the Chinese start populating this country en-masse.

  3. This is the fly in the "housing as wealth protection" argument. State finances are in shambles. What can they do?

    Increase payroll and income taxes? People will move.

    Increase sales taxes? People can buy big ticket items out of the state in some cases, or on the internet...but it will work to some extent.

    Increase property taxes? Ding, ding, ding. You can't move your house, and remember, lots of folks have wealth in their home. If 20% of homes are underwater, than 80% store wealth for someone. That's a big, private nest egg that states just can't wait to tap into...those "greedy, evil rich" who own their houses outright should pay.

    Off topic rant...

    The Obamazation of America [from "with hard work anyone can become rich" to "the rich are evil and greedy"] was the first step in stealing private wealth. When they confiscate your IRAs (Biden is a huge supporter of nationalizing all IRAs), it will come with the message that IRAs are owned by only the "evil rich".

  4. Agree w/everything you said. Actually Robert Chapman was ranting back in 2001 that eventually the Govt would be forced to impose massive taxation on real estate.

  5. the usefulness of an index is tied to consistency of method of preparation. I mean you need to compare apples to apples.
    You may argue with the CPI or the GDP or any other index, even the census. But it is giving you real information as long as the method of preparation remains the same. Thus a change in trend can be meaningful here.

  6. Sofa King thinks the only problem with running a hot dog stand is having to go to the bathroom.

    Not a fan of the Pickle Jar.

  7. Dave-

    I'm in Monument, CO. What's you feel for the CO real estate market? I think certain areas are totally screwed (CA,NV,AZ,FL,etc) but we may not see the massive downside in places like CO. My house was appraised (bought it late 2006) recently for about 5% under what I paid. I'm debating on whether or not to sell now.

  8. LOL Sofa King

    Jayhawk, owing a home is a personal thing. If you can afford the payment and you don't care whether it goes down in value or not but you may live there til you die, then don't worry about it. In my view, the Monument/Castle Rock area is going to experience serious future pain. Castle Rock will become the foreclosure capital of the Denver area and the price collapse will affect all the surrounding areas.

    The problem with waiting to see what happens if you do care about the value and you plan on moving evntually, is that by the time you may want to sell your home, you probably won't like the prevailing market bid and it will be thin.

  9. Bix, the trend in housing as per the extensive reading I do is that the mix between real sales and foreclosure/short/distressed changed from Nov - Apr due to the extension and expansion of the tax credit and the self-imposed moratorium in foreclosures by the big banks over the holidays. Right now, "organic" sales are tanking, the foreclosure pipeline and bank REO is buldging, which implies a very big drop in the future median price level of home sales.

  10. Dave,
    You have not commented on BP in a bit. Was just wondering your assesment as the stock is rallying today.


  11. The BP thing speaks for itself. It is going to prove out to be a completely unmanageable disaster. It's a game-changer at this point.

    Today JPM issued some equity report touting the M&A values of BP's assets. I've said all along that the world needs BP's assets, but not BP.

    The asset value of BP won't come close to paying for this disaster unless the price of oil goes to the moon.

    This stock jump is mostly technical and some short-covering in response to the bullshit equity report.

    I have been trading BP from the short side successfully all week, buying near money puts when the stock pops up and selling them when the stock fades.

    Obama's handling of this is beyond disasterous. Check this out:

  12. Dave-

    Thanks. We are close to Castle Rock, but I think get lumped into CO Springs, which tends to get the military impact on housing. I like the house, but deep down don't want to be tied to a depreciating asset with a mortgage. I'd rather be free to move if things really get ugly (which you and I know they will).