Market Plunges on Housing/Financial Worries

Happy Monday to all!

What a way to start the week! The markets plunged more than 2% today as housing and the banks continue to drag down the markets.

A key difference to todays market plunge versus the drops we have seen in the last few months was the lack of rotation into commodities. Gold and oil were basically flat.

I warned everyone a few weeks ago that the speculators were running out of places to hide. Demand destruction, deflation worries, and a stronger dollar have ruined the commodities trade. There is no where else to hide folks except to stay in cash or buy treasuries.

Home sales were up 3% versus the 1% that was expected

When you first read this it sounds like good news right? Well once you dig into the numbers, you quickly realize that the numbers are not good:

"Sales averaged a pace of 4.95 million the past three months, the same rate as the previous period, indicating that purchases may have touched a bottom. At the same time, the glut of houses for sale means property values will probably keep dropping, putting pressure on household wealth and consumer spending.

Resales were forecast to rise to a 4.91 million annual rate, according to the median estimate of 75 economists in a Bloomberg News survey. Projections ranged from 4.69 million to 5 million. July's sales rate was the highest since February.

Sales were down 13 percent compared with a year earlier. Resales totaled 5.65 million in 2007.
The increase in sales wasn't enough to keep up with the surge in properties coming into the market as foreclosures mount. There were a record 4.67 million unsold houses and condos on the market in July, representing 11.2 month's supply at the current sales pace, matching the highest ever. The group has said a five to six months' supply is consistent with a stable market.

The median price of an existing home fell to $212,400 from $228,600 in July 2007.

One-third to 40 percent of total sales last month reflected distressed properties, which include foreclosures, he said."

My Take:

Home sales were up slightly but we have two problems here. The first one is inventories are still rising even though home sales are up. This means more homes are coming on to the market via foreclosures, new home sellers, and builders than are being sold. This obviously continues to further pressure home prices.

The second problem is 40% of whats selling are distressed properties. I have always said the demand for housing is there as long as it is AFFORDABLE. When they get to a distressed price they will sell. The problem is that most sellers refuse to admit this. Robert Shiller once said that sellers are always the last ones to capitulate in a housing downturn because no one psychologically likes to admit that they made a mistake or failed.

Sellers that are trying to get $500,000 for a home they bought in 2005 need to realize the housing bubble has burst.

The lending game is over, and tighter standards now apply. Sellers must start pricing into their asking prices. A guy that could qualify for a $500,000 home in 2005 may only be able to qualify for 1/2 that amount today.

Until the sellers realize this, the housing misery will continue. They need to start adjusting their prices to where buyers can qualify. There are way too many delusional sellers that think their home is "different", and that their granite countertops and stainless steel appliances have added $80,000 to the value of their "perfect" house.

Well guess what sellers. The bank doesn't give a crap about your granite. They just lost billions lending to buyers that could not afford their loans, and they now sit on the brink of insolvency as a result. The lending standards are going to be 20% down and no more than 36% of your pay going forward. Granite or no granite.

As a seller, if you can't afford to short sell it at this lower price, give it back to the bank and take the credit hit. I think that based on the increase in foreclosure activity, sellers who bought at the peak are now realizing that this is what they have to do.

This is why I think inventories are going to continue to soar and this crisis still has a ways to play out.

Bank Worries

Here is a nice summary from Bloomberg on what torched the markets today. AIG, Lehman, and the weekend bank failure combined to spook the markets today.

Bottom Line:

Watch out and be careful here. We might be seeing the beginning of another wave of selling in the stock market. There is nowhere to hide. Everything was red today. This is what deflationary collapses look like.

The housing numbers were the key component of what sold off the market today IMO. Lehman and Washington Mutual both appear to be on the brink of failure. The word on the street is that Lehman's boss is on the hot seat.

I know I have said this before but I will say it agian: Until housing prices stabilize, the stock market is going nowhere. Today's data showed us that prices continue to keep dropping and inventories continue to rise.

This is a deadly combination that will continue to put pressure on the banks and the markets.