Housing Index: Stocks ignoring housing bubble

So far, the stock market has ignored the housing "problem." The bullish thesis runs like this -- first, everybody warned about the coming disaster in housing. The potential housing collapse was covered by every economist, every money manager, every advisory in the nation. So what happened? As far as the broad stock market was concerned -- nothing happened. The home-building stocks got whacked and the rest of the stock market couldn't have cared less.

So what are we to make of the housing situation? Is the stock market (at least up to now) correct? Is the great housing bust simply a bear's fantasy. Has the stock market fully accepted the thesis of the soft landing?

Again, I prefer to look at the charts. Look at the Phila. Housing Index. We see the initial "crash" from just over 270 down to 190, a drop of 30 percent. And since then, we've seen a post-crash rally to the 220 area. But what now? So the big question -- can the Housing Index hold above its 190 low or is that level fated to give way?

I suggest that we keep our eyes glued to this Housing Index. So far, this Index has corrected about 36 percent of its crash losses. The action of this Index in coming months will be crucial.

Housing in California

Centex, one of the nation's largest homebuilders, advertises in the Bay Area that "for a limited time", if you buy a home from them, they will keep your monthly payments low for 5 years. The buyers are promised to pay "below market rates".

Centex is joining the game shady lenders have been playing for a long time: your monthly payment is "low", say 1%, but your yield is still 6%. The way this works is that the principal is increased every month.

This latest campaign will keep new home sales higher than they would be without such incentives - at least for now. It does, by the way, also keep banks happy. Accounting rules require bank to record (in the example above) the full 6% in income as long as the mortgage holder does not default on his or her 1% payment.

The automotive industry could push out their demise with enormous subsidies for some time; let's see how long the home builders can keep things going. For now, home builders are given a lifeline because long term interest rates have not moved up much.

Former Federal Reserve Chairman Alan Greenspan said on Thursday the U.S. economy was pulling away from the shoals of a sharp housing-sector downturn and that the outlook for growth was "reasonably good."

"Most of the negatives in housing are probably behind us," Greenspan said at a conference sponsored by the Commercial Finance Association. "The fourth quarter should be reasonably good, certainly better than the third quarter."

Thought: Greenspan created the greatest housing bubble in history. So what the Maestro now says about the housing picture I take with a large grain of salt.

The biggest home builder

Look at the stock of Hovnanian (HOV), which is the nation's biggest home-builder. The stock might tell us something about the forthcoming housing picture.

After a massive correction of 65%, HOV hit bottom at a price of 25 -- and rallied. But note that the histograms already appear to be rolling over, and RSI has started to move lower. HOV is now above its 10-week moving average but below its 40-week MA. It looks as though they've peaked.

Of course, the big question now is whether HOV breaks to a new low -- or whether it holds in a trading range above its last low of 25. If the housing industry is fated to be a disaster, I would expect HOV to break to new lows. If HOV can hold above 25, I would take that as a plus for the home-building and housing industry.

USA TODAY: life of a Flipper

Real estate: Calif. flipper a case study in how boom went bust

Mistake No. 1

Using 'liar loans'


Mistake No. 2

Overpaying


Mistake No. 3

Lacking cash


Mistake No. 4

Quitting your day job


Mistake No. 5

Hiring an unlicensed contractor


Mistake No. 6

Buying sight-unseen



Mistake No. 7

Buying out of state


Mistake No. 8

Buying too many properties too fast



Mistake No. 9

Underestimating remodeling costs


Mistake No. 10

Having a poor exit strategy


Serin's current situation is bleak. He is currently unemployed as is his wife, who has gone back to college to get an accounting degree. They rent an apartment and have $140,000 in debt, and the remaining five houses he owns are facing foreclosure.


USA TODAY: Front page of Money section

Contra Costa: prices heading lower

The median price (10-day moving average) of current inventory, which includes condos and detached single family homes, is $569,900. This is 4.21% lower than $594,950 on Oct. 21, a year ago. One very important support level to keep an eye on is the January 5 low of $565,000 (red X mark). We'll see if this support would be violated come January 2007.

Bay Area Foreclosure: 7 year high

Foreclosure activity in the Bay Area rose to its highest level in more than seven years as home sales slowed and prices began to slide.

The number of notices of default, jumped 89.2 percent in the nine Bay Area counties in the third quarter compared with the same period a year ago.

Both Rosen and Levy expect foreclosure activity to continue its upward march.

There were 3,795 notices of default sent to Bay Area homeowners in the third quarter, up from 2,006 a year earlier.

Homeowners were about five months behind on their mortgages when lenders issued the notices of default.

Karevoll said foreclosure activity peaked in the Bay Area in the first quarter of 1996 when there were 6,830 notices of default. "What we're seeing now is the market rebalance itself," he said. ".

The Bay Area trailed the statewide average in terms of the rise in default notices. Across California, the number of notices of default rose 111.8 percent in the third quarter to 26,705, from 12,606 during the same period a year ago.

Statewide, more than half of the homeowners who went into default in the third quarter had loans issued in 2005.

"In the Bay Area, foreclosure activity is always lower than rest of the state," Karevoll said. "The Bay Area has a higher housing cost than the rest of the state, so the people who buy in the Bay Area have more money and are less likely to go into default."

The higher prices also mean that the Bay Area has fewer entry-level home buyers than places like Sacramento, he said.

Solano County saw a 171.3 percent increase in notices of default in the quarter, the most of any Bay Area county. San Francisco had the second-biggest jump with a 109.9 percent gain, followed by Contra Costa with a 99.6 percent rise.

Market Valuations

"The key is that the stock market's ability to defy valuations is ultimately temporary. Over the long-term, investors can get perfectly good results by focusing only on valuations and ignoring the quality of market action altogether. Over the short-term, however, this can be very frustrating because the market can defy valuations for months or in some cases years before ultimately wiping out those "speculative" gains by returning to more normal valuations" from Dr. John Hussman's current report from the Hussman Funds.

How does this apply to the Bay Area Housing Market?

Money supply and elections

The election is coming up on November 7. The Fed has been known to boom the money supply in the period before elections -- this for the obvious benefit of the party in power. Could this be happening now?

The lending mess

If lending standards did not get completely abused and you actually needed a 20% down payment and could only borrow up to 28% of your gross income, home prices would have been checked by income. Instead they came untethered. So much so that the NAR said forget the old first time affordability rules. We will just change the rules. Now you only need a 10% down payment and can use 40% of your gross income to buy that charming house in Chula Vista.


Well now the bubble seems to have popped. Remember the Business Week Map of Misery Chart. California is the epicenter for Option ARM loans.

But something curious is happening. Borrowers in mass are starting to make the minimum payment on their Option ARM loans. So much so that the lending institutions are seeing huge increases in capitalized interest because they are essentially lending their borrowers their mortgage payment (look at the SEC filings for DSL, GDW, FED,WM...). Concerned and late to the party, the Interagenices issue new guidance to rein in the exotic loans. Ouch, says Countrywide, "Requiring lenders to qualify borrowers on the true cost of a loan, the company said, 'would tend to defeat the intended function of the loan and would significantly reduce the number of borrowers that could qualify.'" Whoa.


The rise in short-term rates would normally have checked the real estate markets a couple of years earlier if not for the Stated Income Option Arm. Imagine if you had used an interest-only ARM that adjusts annually to purchase a home in late 2003 or early 2004. Assume that there is no minimum payment feature. Your first year rate could have easily been 3.5%, and because that was the "real" rate for the ARM, you may have been qualified at that rate. A year goes by and short-term rates move up dramatically such that your new payment might be at 4.25%. Ouch! That's a 21% increase in my mortgage payment. Another year goes by and rates go up again. Double Ouch! My mortgage rate has gone up to 5.5% and my payment has increased 57% from inception. I barely qualified when I bought this house. How am I going to be able to make my mortgage payment?


Now if you live in Colorado you just have a hard time of it. There are not as many Option Arm loans available in Colorado as compared to California. So what do you do? Hand the bank the keys. That's why Colorado is currently seeing higher levels of foreclosure activity.


But if you live in California, what do you do? Well, when your first reset hit on your original ARM, you called your mortgage guy. No problem he says. We will refinance your IO loan into an Option ARM and your payment (minimum) will actually go down even though interest rates have risen. This is akin to Jesus walking across San Diego Bay. It's a miracle!


Of course, the problem is you just delayed the inevitable and made the problem worse. Your minimum payment rate can only last so long. The "real" rate has been rising with the up tick in mortgages tied to short-term rates. You can run your balance up to maybe 110-125% of the original balance, but that's it. The house has stopped appreciating, and maybe is starting to decline in value so you can't refinance. So you and everyone else make the MINIMUM PAYMENT. This means you don't need to worry about foreclosure just yet. You might be able to do this for a few more months.


So the bank is now in the position of contractually loaning a marginal borrower more money to make his payments. In past times this borrower may have already went into default, but the minimum payment gives him a chance for a short period of time. It's significantly worse for the bank because the LTV is rising into the eventual foreclosure. And it is rising because the bank is actually lending a troubled borrower more money just before the borrower hands the bank the keys.


This is why Downey, FirstFed, Golden West, Wamu and other lenders are seeing huge increases in their capitalized interest to loan interest income ratios. This is why their balance sheets are seeing huge increases in the amount of negative amortization included in loan balances. I don't believe this has ever happened.


Are falling rates going to bail out all these borrowers? How could it given that money was given away for free. You could lie about your income. You could make payments that were not reflective of the true cost and this was in an interest rate environment that gave borrowers the lowest true rates in a generation.


As this becomes more evident it will certainly cause repercussions in the MBS market. It will cause problems for the portfolio lenders. It will cause problems for the hedge funds that bought sub-prime MBSs and leveraged them up to enhance the return. It will cause problems for foreign central banks including China.


Certainly, these were not your Father's mortgage backed securities.


2007 should be really interesting with another $1,000,000,000,000 in resets

Stocks and T-bonds

The Stock market is making a huge top. The bonds are starting to cave in, and today the 10 year T-note dropped under its 50-day moving average. The long T-bond sank right to its moving average. Sinking bonds and rising interest rates are the last thing the stock market wants to see. Let's say the whole situation is fluid, very, very fluid. And caution is the word.

The U.S. housing slump will weaken the economy more than previously forecast, prompting the Federal Reserve to reduce interest rates by June. Bernanke last week said housing is undergoing a "substantial correction'' that will lop a percentage point off growth in the second half of this year.

Asking price: 10 months under the neutral line

In September, sellers of residential properties in Alameda and Contra Costa counties received $7,918, on average, less than what they asked for. This is a further decline of $2,075 from August and 10th consecutive month under the $0 neutral line (blue line) since it crossed below this line in December 2005.

Marin Housing Bubble blog

Above is a graph of the yearly price of a Marin house (mean Marin SFR sale price divided by 30) divided by the mean yearly rent in Marin county for each year from 1995 to 2005. Click on image to make larger









The ratio of yearly price to yearly rent is roughly constant up to about 2002-2003 and then goes through the roof. IMO this graph nicely illustrates the bubble in Marin.

From: Marin Housing Bubble Blog

Mortgage Fraud: Souther Cal

Mortgage fraud surged in Southern California as borrowers overstated income, exaggerated assets and hid debts to qualify for expensive mortgages, authorities and industry observers said.

The FBI said lenders filed nearly 4,300 reports of suspicious activity in the first 11 months of the fiscal year ending Saturday - on track to double last year's total.

Thus far, people who lied about their income to get a loan and later found themselves strapped have been able to make payments by refinancing or selling property for a profit.

That could no longer be an option with home prices flattening or declining. Those without sufficient equity may be forced to sell for a loss or default on payments.

"This is the calm before the storm," said Steve Smith, a Redlands appraiser who lectures frequently about real estate fraud to industry groups.

Gold and Oil

Oil and gold, the two most emotional and political of items. Gold, the only time-honored, outside-the-systems, money. And oil, the life-blood of civilization, at least until some other form of energy is created and placed into wide use.

For obvious reasons, politicians and particularly US politicians in power want both gold and oil -- down. And they will do whatever they have to -- to drive both of these items down. They may be successful for a while -- but only for a while.

During the 1970s as we sat with gold during that great and wild precious metals bull market. At one point in that bull market gold dropped almost 50 percent.

Gold is highly emotional and is subject to brutal corrections, as the gold bull seeks to shake its riders off it back.

Natural gas is down, oil is down, copper just dropped, platinum and silver and palladium are down, soy beans are down, sugar is down, coffee is weak, housing is soft (even in Manhattan I understand housing and condos are starting to "give"). This is a disinflationary background, and it's a intermediate-term negative background for gold.

Those holding gold in nonphysical form have been knocked out of the box. It's as simple and brutal as that. Stop-losses have been hit wholesale. What we're seeing now is the slaughter of the many holders of "paper-gold."

Look, the long-term future of this country and in the central bank system is expressed in one word -- inflation. Ultimately fiat paper must fall. That's why we hold gold. What form we hold gold in is crucial. If you own paper gold you are vulnerable. If you own physical gold -- you OWN it. There is a difference. And in my opinion, it's a big difference psychologically.

Contra Costa Expired listings: Surge

The number of expired listings broke the previous record, set on the 1st day of 2006, by approx. 24%.

Contra Costa: Days on the market

While the inventory of available properties for sale had just begun its seasonal retracement (see Thursday, 9/28/2006 chart below), the number of days worth of inventory had been going in the opposite direction. Two prior peaks shown on our exclusive DOI (Days of Inventory) chart occurred in January of the past 2 consecutive years. We're only at the end of September this year, and the DOI had already surpassed the previous highs. This history tells us that DOI could reach a much higher level come January 2007.