Housing Bubble Bursting?

[Randolph Kinney]

Hard landing is happening - new data

http://www.comstockfunds.com/index.cfm?act=Newsletter.cfm&CFID=17966843&CFTOKEN=73482944&category=Market%20Commentary&newsletterid=1303&menugroup=Home

For some time the bulls have been asserting that the housing problem will not spread to the rest of the economy while the bears have impatiently been waiting for it to happen. Well, the wait is over. Today’s stunningly negative results for retail sales at major stores only follows an increasing crescendo of other indictors telling us that the hard landing or recession is now here. Consider the following.

1)The 1.3% GDP growth reported for the 1st quarter is already exceedingly close to the hard landing standard of 1.0%, and numbers reported since then indicate the probability of a downward revision. In addition the 2nd quarter appears to have gotten off to as slow start, indicating the possibility of even slower growth in the current period.

2)April payroll employment growth slowed to the lowest level in 3 years despite receiving a huge boost from the birth/death adjustment.

3)Pending home sales in March was down almost 5%.

4)Lumber prices recently have broken down.

5)The governor of Massachusetts said that the state is facing a foreclosure crisis.

6)According to Foreclosures.com homes repossessed by banks rose 40% in April while filings climbed more than 100%.

7)Centex orders dropped 21%.

8)Doral reported a 64% drop in lending

9)S&P said that 0ne-third of homebuilders were subject to possible downgrading.

10) NAR expects housing prices to decline more than they expected, and they are probably more optimistic than most.

11)Toll Bros. stated that "We continue to face difficult conditions in most of our markets."

12)Vehicle sales declined in April

13)Business spending is slowing.

14)NFIB’s Small Business Optimism Index fell in April.

15)Retail gasoline prices are up about 40% in the last few months.

16)Cisco predicts lower revenue growth.

17)Hourly earnings are in a deceleration trend.

Today’s exceedingly negative retail reports for April confirm these trends and indicate that we are on the cusp of a consumer-led hard landing or recession. Collectively, same store sales were down 2.3% for 51 leading retailers. According to Michael Niemira, Chief Economist of the International Council of Shopping Centers, this was the worst showing since they began tracking the data in 1970. In fact, there have been only two previous negative readings in three decades.

Niemira stated that falling home prices were weighing on consumers more heavily and that mortgage equity withdrawals (MEW) have dwindled. In addition Wal-Mart said that their shoppers expressed concerns about their personal finances, the cost of living and high gasoline prices. The severe downturn in sales hit even such stalwarts as Abercrombie (off 15%), American Eagle Outfitters (off 10%) and Target (off 6.1%).


In our view the stock market has been held up by the consensus belief that we are in a goldilocks economy and that the economic slowdown is just a temporary soft landing with renewed growth likely in the second half of the year. Well, we are only seven weeks away from the second half, and the economy is deteriorating rather than recovering. The current high level of the market definitely is not discounting a hard landing or recession, and such an outcome will come as a nasty surprise to most participants. Once a consumer-led recession becomes obvious to all, the market will tank, and all of the so-called liquidity fueling private equity deals will rapidly dry up. In addition most of the savvy hedge fund managers already knew that the current situation would end badly, but continued to play the upward momentum until they see the end coming. We believe they will see that soon, and that the mad rush of everyone trying to get out the door at once will be something to behold.

 

[Randolph Kinney]

Hot inflation, cold housing on tap this week

http://www.marketwatch.com/news/story/economic-preview-hot-inflation-cold/story.aspx?guid=%7BF0EC3B31%2D7583%2D4CF8%2D9783%2D6D29496258CB%7D&dist=hplatest

WASHINGTON (MarketWatch) -- The twin horns of the Fed's dilemma will be on display in the coming week's economic data: hot inflation on one hand and a slowing economy on the other.

The CPI will be released on Tuesday at 8:30 a.m. The median forecast of economists surveyed by MarketWatch calls for a 0.5% gain in the CPI and a 0.2% increase in the core rate, which excludes food and energy prices.

The other big release of the week comes on Wednesday, when the Commerce Department releases the April data for housing starts and building permits. Economists predict starts will fall about 3% to a seasonally adjusted annual rate of 1.47 million, which would be the second lowest total in the past seven years.


Building permits will probably fall about 2.5% in April to a seasonally adjusted annual rate of 1.52 million, the survey says.

 

[Randolph Kinney]

Bear Stearns Unloads Subprime Risk

http://www.bloomberg.com/apps/news?pid=20601087&sid=aFB8mVnWLjC8&refer=home

May 11 (Bloomberg) -- Funds run by Bear Stearns Cos. own two- thirds of Everquest Financial Ltd., a firm that invests in debt backed by subprime mortgages and buyout loans that's planning an initial public offering of as much as $100 million.

The IPO, announced May 9, may help the funds transfer risk to other investors. The funds buy some of the riskiest portions of collateralized debt obligations, which package loans, bonds and derivatives into new securities.

Assets in CDOs may have lost as much as $25 billion of value as mortgage delinquencies rose this year, Lehman Brothers Holdings Inc. said last month.


The potential for conflicts of interest that would hurt investors buying such an IPO are ``mind boggling'' because buyers would need to rely on securities firms to assign prices to assets that have no ratings, don't trade often and are difficult to value, said Janet Tavakoli, president of Tavakoli Structured Finance Inc., a Chicago-based consulting firm.


Everquest, based in the Cayman Islands, plans to create more CDOs, which diversify and distribute risk so that some of the bonds produced get better credit ratings than the underlying assets. The firm focuses on so-called equity portions of CDOs, or unrated pieces with the highest risks and potential returns.

Jane Slater, a spokeswoman for New York-based Bear Stearns, the largest mortgage-bond underwriter, declined to comment. Levitt, also chief investment officer of Stone Tower, which oversees $7.7 billion, cited IPO rules barring comments.


Levitt and Ralph R. Cioffi, a senior managing director at Bear Stearns, will be co-chief executive officers of Everquest, which had $727 million in assets on Dec. 31 and a net asset value of $619 million, the filing said. Bear Stearns and Stone Tower will manage the portfolio; Bear Stearns will run the IPO.

Many observers find it ``curious'' that a surge in subprime mortgage defaults hasn't resulted in a wave of disclosures of losses on CDO equity, Tavakoli said. The default rate for subprime loans packaged into bonds is the highest since at least 1997, according to Friedman Billings Ramsey Group.

 

[Randolph Kinney]

AIG expects $128m in subprime-loan costs

http://www.ft.com/cms/s/41f33e52-ff49-11db-aff2-000b5df10621,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F41f33e52-ff49-11db-aff2-000b5df10621.html&_i_referer=http%3A%2F%2Fmail.google.com%2Fmail%2F%3Fik%3D23778ad1ab

American International Group on Thursday said it expected to face costs of $128m linked to subprime mortgages in the first indication of the price US federal banking regulators could extract from the industry for past aggressive lending practices.

AIG has not been one of the biggest subprime lenders and has steered clear of the most aggressive mortgages, which suggests the hit for the industry leaders could be much larger.

 

[Greg Bell]

The yield curve is inverted for more than a year. The inversion is light and sometimes the inversion even platens out for a few days or weeks. According to financial think tanks, it is the sign of stagnating economy accelerating towards recession.

The signs of stagnation is very clear. The recession is not there yet because of plentiful low paying employment opportunities. For minimum wage jobs, there is no lack of job opportunities. The moment one starts looking for professional employment and salaries commensurate with his or her qualification, the stagnation in the economy becomes explicit.

Since 1981, large corporations have systematically mismanaged their bottom lines. They have continued to fire employees with or without severance packages. They have focused on manifestation of higher profits while pricing power is declining ever since 1981.

Now a stage has reached when stagnation in tending towards recession. The process is slow. In financial market terms it is called parabolic fall. Such trends are signs of long term down trend. The recession and possible depression that is on its way can stay for a very long time.

 

[Randolph Kinney]

Lending's next tsunami?

http://www.ocregister.com/ocregister/money/article_1692958.php

Borrowers in the credit niche above subprime are missing more home loan payments. Another crop of lenders is trying to regroup and stem loan losses.

But Indymac and others who deal in Alt-A loans, such as Impac Mortgage Holdings of Irvine and Downey Financial of Newport Beach, may not have time to wait. The same problems shaking up the subprime market are now emerging in the Alt-A industry.


What's more, a Register analysis shows reserves for loan losses by these companies are not keeping pace with delinquent loans. Analysts say the same problem bedeviled New Century Financial of Irvine last year – and that helped send the once-top U.S. subprime lender into bankruptcy court after its financial backers lost faith in its accounting and liquidity.

In IndyMac's case, its 75 percent expansion of bad loans in the first quarter far outpaces its 8 percent increase in loss reserves to $68 million.

During an April 26 conference call with analysts, Perry said the company didn't sell a single dud loan in the first three months of the year because no one wanted to pay what he thinks they're worth. No way is IndyMac selling to a hedge fund for "pennies on the dollar," Perry said.


In that time, IndyMac's sour loans and foreclosed real estate ballooned 75 percent to $324 million.

Bad loans are mounting on the books of Alt-A lenders. Yet their reserves for loan losses aren't keeping pace, according to a Register analysis of filings by Impac, IndyMac and Downey, as well as interviews with analysts and federal regulators.

Losses, bankruptcies and layoffs at companies that buy and sell loans are vulnerable to sudden changes in what investors are willing to pay for their mortgages.


The heady profits lenders enjoyed during the housing boom have evaporated, and some analysts question whether their business model was ever meant to survive a housing downturn.

Mortgage bankers who focus heavily on buying and selling loans, such as Indymac and Impac, generally are gambling that they'll make a profit from the sale of loans, he said. They have little control over what they can charge mortgage brokers, because competition is fierce, and they have to accept whatever Wall Street is willing to pay for the loans.


"The mortgage banker sits right in the middle, and it has no leverage, no control over parties on either side," Eckert said. "You can underwrite to the highest standards, but if bond markets are spooked enough they won't offer you a price that approximates your cost."

 

[Greg Bell]

Friday, May 11, 2007
The Housing Tipping Point. 3 Factors That Will Burst the Bubble: The Negative Wealth Effect, Negative Press, and Suffocating Debt Payments.

As the Fed does an ostrich impression by sticking its head in the ground and pretending everything is okay, we are facing an economic tipping point ushered in via housing. The Fed has left the key interest rate steady once again. At this point, they are backed to a wall because lowering rates will signal that the economy is weak and needs additional help thus stunting consumer confidence. If they raise rates, they accelerate the bursting bubble because debt service on millions of American’s mortgages will go higher thus taking money away from the national past time of mall shopping. We are quickly approaching a global tipping point. Tipping points are interesting phenomenon because they occur rather instantly even though the build up may take numerous years. There is a certain point where multiple intersecting fields connect to push an idea, product, or opinion into another dimension. 3 of the many factors that will tip the housing market over the edge are the negative wealth effect, negative press, and suffocating debt payments.


Negative Wealth Effect


For the last seven years it is no shocker that all things real estate out performed nearly every investment vehicle. Home is where your heart and wallet is as the old adage goes. The wallet portion was an added amendment that the realtor groups added a few years ago. When people feel wealthy they spend and the economy spins on a kaleidoscope of happiness showing colors that only Teletubbies are familiar with. You beam with joy. Your credit card blisters with ecstasy. This is the American consumerist dream. We spend with no regard for the future. We’ve reached milestones in negative savings only rivaled to those during the Great Depression. The last 17 years have been great for this economy; we jumped from one bubble to another without missing a beat.

Yet the tide has turned. There is a moment in any bubble where people stop, think, and listen and hear their gut (yes your gut is fluent in English) and you realize that maybe you aren’t as wealthy as you once thought you were. See, we’ve been indoctrinated to believe that everyone of us is worthy of being a millionaire. From the office assistant to the CEO, we all deserve to be unbelievably rich. Work? Investing? Those things are for losers who have patience and who can afford patience when my Blackberry is vibrating in my Diesel jeans.

The wealth effect works in two ways. It amplifies a good economic environment because people feel and are wealthier. No one spends exactly as much as their wealth is worth. If you feel rich, you won’t fee so guilty taking that trip down to Cabo especially when you know your job is secure. However when the market reverses and heads south, you begin to tighten your belt and batten down the hatches. It is exponential on both sides. As housing is going down the economy will be vastly affected because this is the number one store of American’s wealth. If they feel the number one investment they hold is losing money each year, they will restrain their spending. And this will happen by force because of the next topic, the suffocation of debt.

Suffocating Debt Payments


If your mortgage jumps from $1,500 a month to $2,000 a month that is $500 less you have from spending in the economy. But you argue that the bank now has this money. Well, in theory they do because they are also paying their debts to the government and skimming anything on margin. In addition most CEOs don't shop at Wal-Mart. This works perfectly when everyone is doing what they are suppose to be doing. But what happens if rates reset and people stop paying? Now that the bank attempts to unload a property and has suddenly become a landlord we now have a negative cash flow problem and negative cash flow is a flu in economics. It will spread. It is contagious. And the person that loses their home? Well as this market implodes on the credit orgy we’ve lived through many will have harder times accessing credit and most will not be able to purchase another home for many years. Thus the number of people in the market buying homes is decreased simply by eliminating those that are currently homeowners via ridiculous credit instruments. Plus market psychology will feed to the frenzy. In essence there is a purging of owners who shouldn’t be owners. Yes, this goes against the American dream of everyone owning their own plot of land but face it, debt is not wealth and no amount of posturing can change that economic reality.


There is an interesting stat showing that credit card debt has increased drastically in the last few months. The logic follows that folks facing resetting mortgages are using their credit cards as a “carry over” to finance their current debt. So things look dandy even though they are heading down the merry road of debtors paradise (not to be confused with Coolio’s Gangsta’s Paradise otherwise known as a Real Home of Genius). So we are running out of time on this credit time bomb and by the end of 2007 we will reach another tipping point; a point where money is worth a lot less and credit becomes more elusive. The outcome is a market where prices depreciate and folks feel poorer because they are paying for today’s expenses with tomorrow’s income.


Negative Press


I’ve talked about the $14,000 a year strawberry picker who was able to purchase a $720,000 home. Or what about the 102 year old man getting a 25 year mortgage? And we also have the story of a 29 year old graduate student who was able to buy a $600,000 home with a $20,000 a year income. Even the Los Angeles Times had a cover story about a sheriff deputy who is evicting people in the Inland Empire this weekend. The press is now anti housing if you haven’t noticed. Once relegated to the blogsphere world and tin hat wearing neg-heads, being anti-housing is now in vogue. Not that it is in fashion, but being financially irresponsible for so many years has repercussions. The press is now finally understanding that a $500,000 500 square foot box may be a tad bit over priced in a neighborhood where people earn $45,000 a year. This obvious logic is now tipping the mainstream public into accelerating the bursting of the bubble.

Yet we have summer. This is the last time before housing agents and brokers will be turning tricks for cash. Last summer I was receiving wonderful glossy invitations from ReMAX, Century 21, Prudential, and other well known franchise brokers to join their team; I am still a card holding agent although from my rhetoric you can tell that I am no longer in the industry. Fast forward to 2007 and those glossy expensive invitations have turned into Xeroxed copies that mirror frat parties in college. “Make bank with Joe Schmoe Mortgage” as a model points to you eluding that if you switch over, you’ll get chicks and cash. Stellar marketing. Too bad this was done on pink florescent paper otherwise me and Joe would be selling no-doc suicide loans to the public. Brokers and agents that wouldn’t give me the time of day last year suddenly send me hand written letters of appreciation trying to win my business. Hand written means one thing, more time on your hands.


The thing is, many in the California real estate industry have prospered amazingly from this real estate bubble. Many had high incomes but are not wealthy. See, many in the industry are financially naïve and have invested little of what they earned. They are like Mike Tyson squandering $200,000,000 because when times are good why save? It is a matter of personality I suppose but those folks that grew up in the Depression have habits such as making food last, reusing certain household items, and even SAVING. I heard a lightening bolt strike outside my office because it almost seems like blasphemy this concept of spending within your limits. We are at a tipping point and by 2008 we will be fully engaged in a bursting housing bubble and all the consequences associated with it. 30% of all added jobs in the last seven years have some association to real estate. So what do you suppose this means for our economy?

 

[moh malekpour]

The attention now is turning from sub-prime loans and housing decline to consumer spending and decline in retail sales. The April retail sales was disappointing and showed that the housing decline has affected the economy. Domestic companies had very low sale last month that indicates the working class population who are the bedrock of the economic growth are feeling the pinch and are not spending as much as they were expected to do so mainly because they cannot do cash out refinancing anymore due to lack of equity built up and some are facing with more mortgage and credit cards bills. They also have to deal with higher gas and food prices that are essential for living so they just don’t buy other stuff like TV or computers. The reason that stock prices are going up is because more large corporations are either doing business in foreign countries or are affiliated with foreign corporations.
The Fed may have to cut the rate next month to stop the bleeding of housing decline and its effect on consumer spending but it may not work because the money goes for gas and food costs.
Another thing that may come up very soon is that the congress may impose a tariff tax on Chinese imports and if that happened, those cheap items in retail stores are going to be more expensive. The stagflation is a very possible outcome of the current situation.

 

[Greg Bell]

Looks like it's getting worse..maybe IndyMac may fail by the end of the year,
looks like the summer of 1929..
http://www.ocregister.com/ocregister/money/article_1692958.php

 

[MARK JOLLIFF]

Greg, I'm not going to quote your whole post as it's to large. Just wanted to say it makes sense and was very well written. I've lived within my means and am grateful for doing it. Your outlook is more likely than not and is very scary. I'll never forget a lunch I had in 04 with Lo/Mb's who laughed at my prognosis when I said nothing lasts forever and the market appreciation we were seeing was unsustainable. They laughed at me and teased me for not buying a nicer car and a bigger house like they had done. It amazes me how people that are relatively intelligent can't seem to grasp the obvious. My mantra at the time was "Remember the dot com bust". Oh well. Time to hunker down and stay low. Thanks for a well written post!