Thursday, April 14, 2005

R.I.P. Housing Bubble

It is hard to know what to make of a day like this one. We had a broad sell-off in many financial stocks, with GM down almost 6%, Doral Financial was off over 10%. But just as big a story was the home builders. These are down numbers, Pulte 5.3%, Ryland 4%, Lennar 3.8%, KB Homes 4.2%, Centex 4.5%, and DR Horton 4.4%.

This blog continues to see a change in sentiment that has been in place for years. Meanwhile congress did their bit by passing a huge bankruptcy bill that will put the lid on the coffin, just in time for the bust. Could it be any more obvious?

28 Comments:

At 6:50 PM, Anonymous Anonymous said...

Everything is about real estate:

http://biz.yahoo.com/ms/050414/131587.html

Intrawest is a ski company that doesn't make much money with skiers. But its real estate is thought to be very valuable.

 
At 6:52 PM, Blogger PunKtilious said...

After hours on KBH (KB Homes) doesn't look much better.

 
At 7:03 PM, Anonymous Anonymous said...

OMG, this commentary from PrudentBear.com sums all of the data this blog has been following. Things are looking pretty shaky to me. Are we just being drama queens?

http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=42272

 
At 7:09 PM, Anonymous Anonymous said...

I don't think we are being drama queens. How many days can a stock market see 50 to 100 point drops (DOW) before people start selling off en masse ?

With IBM and SUN missing estimates, I suspect that there is going to be a big sell off tomorrow.

BTW: I find it funny that the press doesn't fit housing into their explanation for how the economy is doing. Refinancing is down and that must drive consumer spending and that is primarily what is causing the downturn in the market. Inflation is another factor and that is being driven by... outstanding demand for housing.

The press used to blame oil, but it fell the last couple of days. The market didn't respond to that, so obviously the problem isnt' oil.

Could the problem be that consumer spent trillions of dollars on their HOUSES and now they don't have any more to spend on anything else ?

 
At 7:11 PM, Anonymous Anonymous said...

I am rather shocked that the home builders got hit while the creditors like FNM got out today rather unscathed. Isn't it better to be stuck with excess inventory than holding the bag on billions in bad loans?
Although I am firmly convinced of a housing bubble, I am a bit confused who will pay when it pops, i.e. who is holding the bag for this mess?
Certainly the over-leveraged homeowner is liable, but what happens when he defaults? According to my admittedly limited knowledge, the mortgage has probably been sold in the secondary market to GM or FNM and hedged with a derivative, then bundled and sold to an Asian central bank. The derivative markets I believe are set up by banks like B of A. My best guess is that FNM is the real loser in this chain if defaults rise. As evidence of this, Bill Fleckenstein often discloses in his weekly Market Rap that he is long FNM puts.
If what we are seeing is the start of bubble popping I am surprised that it starts with the home builders. But then again, maybe that makes sense. They would show a decrease in orders before prices really started to drop. And we will not see defaults on any extensive basis until prices drop.

 
At 7:18 PM, Blogger John Law said...

I read this and just realized, there will probably a ton less credit availalbe that the housing market(meaning buyers of homes) isn't up to speed on yet:

http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=42272

Last, but certainly not least, there appears to be a de clining future ability of the GSE to accumulate or fully offer implied support to mortgage backed securities (MBS). This is of huge and rising importance as these agencies play a central role in securitizing hundreds of billions in mortgages. Over the past 15 years the portion of mortgages securitized has risen dramatically from 40%-60%.

---the bubble may be popped by the mortgage finance system, and not the exhaustion of consumers willingness to buy homes.

 
At 7:18 PM, Blogger John Law said...

I read this and just realized, there will probably a ton less credit availalbe that the housing market(meaning buyers of homes) isn't up to speed on yet:

http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=42272

Last, but certainly not least, there appears to be a de clining future ability of the GSE to accumulate or fully offer implied support to mortgage backed securities (MBS). This is of huge and rising importance as these agencies play a central role in securitizing hundreds of billions in mortgages. Over the past 15 years the portion of mortgages securitized has risen dramatically from 40%-60%.

---the bubble may be popped by the mortgage finance system, and not the exhaustion of consumers willingness to buy homes.

 
At 7:21 PM, Blogger Ben Jones said...

(obviously the problem isnt' oil)

Right, and they will next focus on the consumer, rather than what is making him poor.

(who will pay when it pops, i.e. who is holding the bag for this mess?)

I am on the record for saying we should see waves of capitulation. The GSE's are already way down and some are insolvent today! I uggested in the past that the HB's would be next and lastly, the man on the street. Unfortunately, the US taxpayer will foot much of the bill. But this is one turd that Uncle Sugar may have a hard time swallowing.

 
At 7:34 PM, Anonymous Anonymous said...

I actually think whomever is holding those MBS is the one that is ultimately going to pay the biggest price. That and the homeowner.

I suspect those MBS are held by foreigners. That should make them want to sell US dollars even more !

I just can't believe that all of this isn't part of the general populations consciousness.

Its like we can see the train coming and we can see that there is going to be a wreck and we are yelling at the engineer, but he isn't hearing us.

 
At 7:54 PM, Anonymous Anonymous said...

http://www.kitco.com/ind/Hoy/apr142005.html

 
At 8:21 PM, Blogger John Law said...

can someone repost that nasdaq/homebuilders chart?

 
At 8:57 PM, Blogger Sunny said...

To describe it as a bubble is not really as accurate as saying its a car stuck in the beach and the tide is rising. You know its coming, you can see it coming, and you can't do much about it. At least in the tech bust, you could sell and get out; it is not as if an investor can wake up and say "Lets sell the second home today."

 
At 9:00 PM, Anonymous Anonymous said...

Anonymous said:
Although I am firmly convinced of a housing bubble, I am a bit confused who will pay when it pops, i.e. who is holding the bag for this mess?

I think that home builders are going to get the shaft as well. A coworker of mine told me that one of his close friends 'purchased' 7 homes in Las Vegas for only the earnest money. His plan was to flip them if prices went up and walk away from his earnest money if prices went down. Who gets screwed there? The builder does.

Full disclosure: I'm short TOL & KBH.

 
At 9:08 PM, Blogger John Law said...

I wish I had the money to go short.

 
At 10:18 PM, Anonymous Anonymous said...

While I completely agree with your conclusions, you should know that you are reading the after hours numbers incorrectly. They are calculated from the beginning of the day.

 
At 11:03 PM, Anonymous Anonymous said...

(Unfortunately, the US taxpayer will foot much of the bill. But this is one turd that Uncle Sugar may have a hard time swallowing.)

I don't know about that. Often markets behave in such a way as to disappoint the maximum number of people. What would be most surprising? I think low inflation combined with stable housing prices for a long time, rather than big blowup.

So there you are, with your million dollar San Diego shack worth the same in 2015 as when you bought it back in 2005. Your salary hasn't gone up much, so the monthly mortgage payment, property taxes and insurance are just as much a burden now as ever. You wish you'd sold long ago, but by now you've sunk so much into this house that you hate to just give up, even though you still don't have any equity built up. (You bought with an interest only mortgage.) Meanwhile, the city has gone bankrupt, the school system is shut down half the year with strikes, crime is up, etc. All you can think to do is pull in your belt and eat macaroni and cheese every night until the tide turns. There's got to be daylight at the end of this tunnel, right? Real-estate is ALWAYS a good long-term investment, right?

 
At 6:46 AM, Anonymous Anonymous said...

(I wish I had the money to go short.)

If one had some cash, how would he go about doing this??? Risks involved?

 
At 7:17 AM, Anonymous Anonymous said...

Stock Shorting 101

To short stocks in an IRA use RYDEX funds.
RYAIX - Inverse of NASDAQ
RYURX - Inverse of S&P 500
RYSHX - Inverse of Russell 2000

To short stocks in a brokerage account you need to get authorization to do so. You can short individual stocks, indexes, ETFs, most anything that is widely traded. Shorting stocks is not that risky because you can hold them short for as long as you like. However, you have to pay interest on the money you borrow from the broker to short them. So this can eat away at your profits if you time your move wrong.

You can also leverage your short positions by buying put options or selling calls. Options are a lot more complicated and risky. They have expiration dates and are worthless after they expire so you have to time the market properly. But if you do it right you can make a killing. You need to thoroughly educate yourself on them before using them.

Personally I have 30% of my IRA account in the three Rydex short funds because they are generally a fairly low cost way to short. I don't do options because they are too risky. The market is very difficult to time.

Be careful and good luck!

 
At 7:27 AM, Anonymous Anonymous said...

Housing takes single women/moms as prisoners.

http://www.freep.com/realestate/renews/hackney15e_20050415.htm

 
At 7:32 AM, Anonymous Anonymous said...

Another Way to Short

You can also use bear market mutual funds like Prudent Bear (BEARX) or Comstock partners.

I like the Hussman Strategic Growth Fund (HSGFX) and have about 10% of my portfolio in it. IMHO John Hussman is a market genius. Basically his mutual fund acts like a hedge fund where he hedges risk depending on market technical indicators. He also has weekly market commentarys that are very good.

If you are wondering if this is a sales pitch - it's not. I'm an individual investor who does all of my own research because I don't generally trust what most financial planners are offering as advice these days.

 
At 7:53 AM, Anonymous Anonymous said...

Do you have a website for Hussman ?

 
At 7:59 AM, Anonymous Anonymous said...

Hussman website:

http://www.hussman.net/

 
At 8:17 AM, Anonymous John Vosilla said...

"Often markets behave in such a way as to disappoint the maximum number of people. What would be most surprising? I think low inflation combined with stable housing prices for a long time, rather than big blowup.

So there you are, with your million dollar San Diego shack worth the same in 2015 as when you bought it back in 2005."

That is the best case scenario in a world of a major debasing of the currency along with all the negatives that go with it. I bet before it even got back to that level it first took a major adjustment down in the face of much higher rates. I give that a 2 to 1 shot of happening versus a depression.

Anyone who thinks real estate can never go down is being foolish. I personally had a Florida condo that went down 40% in the late 80's and took 15 years just to get back to break even. It was pretty much the expectation by the public that condos would never appreciate only a little more than a decade ago and the only way to build equity was pay down your mortgage. Boy have times changed.

 
At 9:13 AM, Anonymous Anonymous said...

Thanks folks for the lesson on shorting. Perhaps I should stay away from something I know nothing about....

 
At 9:19 AM, Anonymous Anonymous said...

"only a little more than a decade ago and the only way to build equity was pay down your mortgage. Boy have times changed."

AMEN BROTHER ! What the hell has happened that everyone thinks they need to be mortgaged to the hilt ? I'm just shaking my head these days. And the press seems to condone highly leveraged real estate as an excellent investment. Talk about a mania !

 
At 9:44 AM, Anonymous Anonymous said...

I am a big fan of Hussman. His market commentary is worth reading every week. I have about 20% of my portfolio in his equity fund.

 
At 9:45 AM, Anonymous Loren said...

If you think real estate can't go down "much" just look at Detroit. In the 1990's you could buy a really nice house for $5,000 to $10,000, while 10 miles away in the 'burbs similar houses cost $100,000+. There were home owners who walked away from property they owned outright because to combat "blight" the city made owners bring houses up to some kind of code before selling. There was no way to recoup the costs, so the houses were abandoned, destroyed by squatters and then bulldozed by the City. Maybe it's different now, but that's how it was when I lived in Michigan. Real estate in bad neighborhoods had NEGATIVE value!!!

 
At 10:01 AM, Anonymous Anonymous said...

And the stocks are all down again today!

 

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