Housing Bubble Bursting?

[Randolph Kinney]

WSJ: What's your take on home-builder stocks?

Mr. Heebner: At the end of 2001 we bought home builders. These stocks were trading at six times earnings, and people were worried that the stocks would be hurt by an economic downturn. I became positive when I saw the growth potential created by rising demand and market share gain by the public builders. But if 20% of purchases are for investment purposes and so many borrowers are subprime, that says to me trouble is coming. We started cutting back on home-builder shares at the end of the fourth quarter of 2004 and eliminated them during the first six months of 2005.

Moh, I believe that sums it up beautifully.

 

[DTB]

If and when a recession develops, this area will go POP!

Here in north county San Diego, there are signs of strain in the housing market. Moh has posted an article from the WSJ that captures the essence of what is happening.

Interesting to see how others see their markets.

I thought the bubble was going to CAUSE the recession??

 

[moh malekpour]

I thought the bubble was going to CAUSE the recession??

Mike,
I have said it before and I am going to say it again. You cannot even imagine what is going on in some markets like Southern California. You haven’t been there and you haven’t seen it. I don’t blame you for being complacent about your own market because you are in completely different environment.
Now, does the pop in some states like CA, NY, FL is going to cause economic recession nationwide? I doubt it because the economy as a whole is huge and strong and few states housing bust cannot damage it that quick but it has some effects.

 

[Austin]

Big Al And The Chicago Mob

As I recall from my history books, during the "Great Depression" the wiseguys up in Chicago Land made out pretty well. So did the funeral business in the area. Maybe old Mike lives in a parallel universe and can't relate to the rest of us out here in flyover country. Caprice yuse guys? So says the boss of bosses.

PS: To be read in a raspy voice with a racist accent.

 

[Randolph Kinney]

I thought the bubble was going to CAUSE the recession??

Mike, from the reading I have done plus my own experiences in the real estate market, one of the biggest cause of the slowing of the national economy is the fact that house price appreciation is slowing, stopped, or is declining. House price appreciation has fueled the national economic growth (GDP) because of refinancing and extracting equity at relatively low interest rates that enables consumer spending. It has been well publicized that consumers are spending more than their incomes over the past couple of years and the savings rate has turned negative. You cannot continue spending by debt creation unless you have free money like increases in home equity. Or unless you are the government that owns the printing press for printing money.

Rising interest rates are putting more pressure on housing affordability coupled with an already high average price of a home. Demand for homes is falling creating excess inventory of unsold homes.

20% of home sales have been investors or speculators. That demand is going or has gone away.

There has been a very high percentage of homes sold with sub-prime financing and at 100% LTV. Homes are being sold with huge seller concessions and it is typical that seller will pay all of buyer's closing cost. Builders are offering 10's of thousands of dollars in free upgrades, cars, etc.

The delinquent payment and default rate on home mortgages is rising. There are more short sales and foreclosures hitting the market at prices less than the original purchase price.

Increasingly, appraisers, Realtors, mortgage brokers and sellers are being sued by buyers for misrepresentation and fraud concerning their home purchase.

Inflation is picking up speed. The FED has just raised interest rates, again. The futures market is showing 85% probability of another rate increase for the August FOMAC meeting.

The U.S. treasury yield curve has been rising across the spectrum of maturity and the shape is flat to inverted. That is signaling slow or negative economic growth expectation for the future.

http://quote.bloomberg.com/apps/chart?type=c13&cfg=yldCurve_US.xml&x=3m|6m|2y|3y|5y|10y|30y&y1=5.01|5.28|5.18|5.14|5.10|5.13|5.17&y2=4.99|5.30|5.21|5.17|5.14|5.18|5.22&y3=.02|-.02|-.03|-.03|-.04|-.05|-.05

So Mike, what is your understanding of why economic growth is slowing and may turn negative (that means a recession)?

 

[Big ole Boy]

The Scorpion Bubble

Overall economic sentiment in the late 1970’s was driven by consumer confidence numbers and those numbers became directly correlated with the domestic auto mobile industry. Today Wall Street and Washington have attempted to give investors a frontal lobotomy with core rate indexes, luxury home sales, luxury boat sales and a myriad “radical smart core” indicators used by number pushers to pyramid a societal new belief about the positive energy of innovation at the expense of its local base. Global innovation has bifurcated the US economy into a highly consolidated service economy. Intense consolidation has created an asset bubble which bounces from one sector to another. Real Estate now plays a much larger role in the overall US economy than it did 30 years ago simply by attrition. The commission economy has thus evolved whereby participants (banking and investment community) create highly leveraged “not so new” investment paradigms to confound the masses into believing that wealth can be created at the hands and toil of some other country where one sweats for a wage while here in the West we reap the benefits of intellectual capital through the economics of an entrepreneurial mad house of accountants and bookkeepers who have the moral backbone of a scorpion.

 

[Bobby Bucks]

With this past week having a holiday in the middle and some scary fireworks supplied by the Hermit kingdom, I've come close to overindulging with liquid refreshments and have missed some news. Did the big bad bubble get us yet? Did it get anyone yet, save a few reporters and their disciples in here? All those copy and paste articles look like reruns to me.

 

[Big ole Boy]

GM turnaround strategy to bell weather the DOW

watch GM and the rest of the market ...... I do not see how the two could go in opposite directions unless manipulated by hedge funds,,,,

 

[Randolph Kinney]

Overall economic sentiment in the late 1970’s was driven by consumer confidence numbers and those numbers became directly correlated with the domestic auto mobile industry. Today Wall Street and Washington have attempted to give investors a frontal lobotomy with core rate indexes, luxury home sales, luxury boat sales and a myriad “radical smart core” indicators used by number pushers to pyramid a societal new belief about the positive energy of innovation at the expense of its local base. Global innovation has bifurcated the US economy into a highly consolidated service economy. Intense consolidation has created an asset bubble which bounces from one sector to another. Real Estate now plays a much larger role in the overall US economy than it did 30 years ago simply by attrition. The commission economy has thus evolved whereby participants (banking and investment community) create highly leveraged “not so new” investment paradigms to confound the masses into believing that wealth can be created at the hands and toil of some other country where one sweats for a wage while here in the West we reap the benefits of intellectual capital through the economics of an entrepreneurial mad house of accountants and bookkeepers who have the moral backbone of a scorpion.

I have to agree with you David. Oil as a percentage of our economy has become less while real estate values and the business behind that has become a larger share of the economy. Manufacturing as a percentage of our economy had declined and the service industry as a percentage has increased.

Someone once said that we will become a nation of people selling hambergers to one another while thinking great thoughts and selling new ideas to the rest of the world.

 

[George Hatch]

Bobby,

There are people in RE and related occupations (including appraisers) who are getting starved out in some of these markets right now. There are people who are losing their homes because of pricing declines and mortgage resets. You might ask some of them how they feel about the health of the market. I'm pretty sure they're not in disagreement with the reports of declines.