The Housing Crisis Deepens

Good evening everyone!

Well guys the markets bounced today. I have no idea why given the horrifying housing news that was released today. Take a look at the data on Bloomberg:

"Aug. 14 (Bloomberg) -- Existing U.S. home sales fell to a 10- year low in the second quarter and the median price for a single- family house dropped 7.6 percent as the real estate recession deepened.

The median price tumbled to $206,500 from $223,500 a year earlier, the Chicago-based National Association of Realtors said today. Sales of single-family houses and condominiums fell 16 percent to 4.913 million at an annualized pace.

``It's getting worse,'' Rick Sharga, RealtyTrac's executive vice president for marketing, said in an interview. ``The number of properties that have been foreclosed on by the banks and still haven't sold is the highest we've ever seen.''

Bank seizures of properties in default rose 184 percent to 77,295 in July, according to RealtyTrac. That was the steepest increase since the Irvine, California-based company began reporting data in January 2005.

There were 4.49 million U.S. homes for sale at the end of June, the highest in a year, according the Realtors' association. At the current sales pace, that represented 11.1 months' worth, up from 10.8 months' worth at the end of May, the trade group said in a July 24 report.

Default notices in July increased 53 percent from a year earlier and auction notices rose 11 percent, RealtyTrac said.

Foreclosures could put 8.4 percent of total U.S. homeowners, or 12.7 percent of homeowners with mortgages, out of their homes, according to New York-based analysts at Credit Suisse. About 53 percent of subprime borrowers, those with poor or incomplete credit histories, will have negative equity in their homes this year, and that percentage will rise to 63 percent next year, the analysts said in an April 23 report."

My take:

I don't even know where to begin. Stephen King never wrote anything as scary as this housing article.

Lets start with the bank seizures: 184% increase! Banks are going to start aggresively dumping these homes as these REO's #'s continue to soar. Reuters reported today that Fannie/Freddie are setting up offices in California and are going to start selling their bank seizures in bulk to investors. Can you imagine the price cuts that will be seen if they start doing deals like this?

The REO's obviously will continue to push prices down.

Bloomberg also reported that inventories rose to over 11 months! The bulls keep trying to spin the fact that home sales are up significantly in distressed areas because many buyers are gobbling up foreclosed homes.

The problem is there are more homes being dumped on the market than are being bought. This bullish arguement is pure silliness! The higher inventory rises, the lower the prices in the long run. I still say its too early to be buying foreclosures. If Fannie plans on bulk selling properties, you need to at least wait and see what price they puke them out at.

When these sales occur, you may start to see what the bottom in housing might look like. The only way I would buy a home right now is if I could pick it up at at a distressed price.

In my opinion, this housing crisis is the perfect storm. You have inventories rising, bank seizures soaring to all time highs, free falling prices, and rising interest rates with tougher lending standards.

This is all occurring as unemployment continues to rise and inflation soars. Note the inflation numbers today:

"Aug. 14 (Bloomberg) -- U.S. consumer prices rose at the fastest pace in 17 years in July, limiting the ability of the Federal Reserve to lower interest rates as economic growth slows.
The cost of living climbed 5.6 percent in the year ended in July, the Labor Department said today in Washington. It was up 0.8 percent from the previous month, twice as much as anticipated. So-called core prices, which exclude food and energy, also advanced more than projected.

The surge last month reflected energy prices that have since declined, signaling July may represent the peak in inflation. Still, increases went beyond food and fuel, including gains in clothing, airline fares and education, likely intensifying discussions among Fed policy makers about how quickly to shift toward raising rates."

Bottom Line:

I continue to be amazed at how the market reacts to such bad news. I guess denial is a powerful emotion!

The housing data released today tells us that there are no signs of bottoming, and things are getting much worse. What concerns me even more is as prices drop, people who can afford their homes may decide to walk away because they are overpaying on an asset that might never be worth what they paid for it.

The fact that Credit Swiss expects 13% of homeowners with mortgages to be thrown out of their houses via foreclosure is astonishing. Just stop and think about that for a second. If you live in a suburb, chances are a handful of your neighbors will be tossed out of their homes. At the same time, you get to sit there and watch your home drop in value month after month as the inventory gets cleaned out.

The psychological effect of this crisis will be dramatic as potential homebuyers see families torn apart via the foreclosure process. They will also hear the disaster stories of families that paid twice what their home is worth. When this all starts to hit they may ask themselves: Do I really want to risk buying a home?

The stigma of being a renter will be gone by the time this crisis passes.

Owning a house is no longer the American Dream. It has become the American Nightmare.