Subprime Housing Crisis has now become a National Housing Crisis

There was a great piece in the New York Times today describing how the subprime crisis has morphed into a national housing crisis that is affecting home prices in all parts of the country. Foreclosures are up in many markets including traditionally conservative markets where homes didn't appreciate as much as the bubble areas did.

I advise everyone to read the article. It discusses the struggles of home buyers all over the country. The article also explains how this housing bust is now seeping into the high end area of the housing market.

Note the chart from the article below on foreclosures.:

This chart shows you how markets all over the country are seeing foreclosures. Some areas in Florida and California have seen foreclosures jump 1000%! Amazing. Check out your local market if you are looking to buy a house. This chart can tell you a lot about the financial housing health of your local market. Hold out on buying if you see lots of red in your local area.

I wanted to highlight a part of this article with my quote of the year from a flipper.

"Driving down the country roads near his horse farm in Oak Ridge late last year, David Tolbert spotted a sign announcing an auction by a local builder who’d run into trouble. He ended up buying the house — the four-bedroom that Mrs. Tillman is now trying to sell for him. “I bought it to flip, but the flippage part is not going so well,” he says."

Like the Schneiders, Mr. Tolbert had always quickly sold his past homes for more than he’d paid. Now, with the carrying cost running at $2,000 a month, he, too, needs to sell and is considering a price drop — though he has already lowered the price once, to $409,000. “We’d hoped to make a profit, but if it doesn’t sell by late this year, my profit will evaporate,” he acknowledges. “It’s a pretty good deal, but I haven’t gotten any nibbles.”

My Take:

I have been warning on this blog for months that its too early to be buying foreclosures or new houses at auction. As you can see by the foreclosure data above, there is too much inventory, and buying at these auctions won't make sense until inventories start to drop. Mr Tolbert's now stuck paying $2000 a month by trying to flip a house he bought at auction at the end of a cycle.

Buying a foreclosure or a house at auction only makes sense if you are getting an insanely cheap deal. When I say cheap I mean 50% off or greater.

I wouldn't offer anything for foreclosed condos right now because prices are plummeting, and the lending standards for buying them have changed.

The loans for condos in the bubble areas will evaporate as this housing crisis deepens because they are dropping so fast in value. As a result banks will start avoiding these loans due to the risk of losses.

Another risk you run with buying a condo is if the building is half empty, your HOA dues may go through the roof because the building has to be maintained. Its simply too risky to be buying condos in any bubble area.

Down the road, I expect many of these condos to be converted back into apartments and,who knows, some may end up being converted into section 8 housing due to the massive oversupply in areas like Miami.

Stock Market Weekend Update:

I want to switch gears here. Here is another article of note related to the stock market that I picked up this weekend.

Many investors have been confused as to why the market continues to hold or even rally in the face of horrible economic news. According to Bill Fleckenstein, it appears that quants may be taking over during low volume days in the stock market.

A quick highlight:

"Robot rallies

A friend who is very knowledgeable -- specifically, about quantitative-trading types -- recently weighed in on the stock market's amazing ability to ignore all the recent bad news. In periods when there isn't much news and not much volume, quantitative-trading strategies can rule the tape, which is sort of what we have been seeing. When I pressed him as to what kinds of strategies are being used, he said it's almost all about price action.

Thus those you might think of as normal buyers and sellers are sort of on the sidelines for a variety of reasons, allowing the computers -- which gauge value based on price action -- to ride roughshod and help create the rallies that help produce the illusion of prosperity. That, in turn, begets excitement on the part of more folks who don't understand the economic backdrop.

Bottom line: During the no-news period, which is roughly the middle eight weeks of any quarter when corporations are not reporting results en masse, the lack of data allows computers free rein. That may go a long way to explaining the maniacal behavior we've seen recently on the tape.

Of course, denial has a role in all this, too, as Wall Street would just as soon not see the big picture: the major trouble that lies ahead for the consumer and the economy, as the aftermath of the housing bubble continues its prolonged unwinding."

Quick Take:

Interesting theory isn't it? Its the most logical guess that I have read in a long time. Stocks are extremely overvalued right now relative to the state of the economy. I think the take home message here is when earnings start coming in, these quants might start selling as the price action turns negative on bad news and higher trading volumes.