Tuesday, December 23, 2008

The Housing Collapse Continues!

Good Evening Folks!

I gotta admit: Sometimes its hard to write this blog everyday as I watch our economy implode. The news just keeps getting worse folks. Stocks fell another 1% today as worries around the economy continue to intensify.

The main culprit for the drop was the absolutely horrific housing numbers that were released today. Median resale prices in November dropped 13% which was most likely the largest drop since The Great Depression.

"Dec. 23 (Bloomberg) -- Sales of single-family houses in the U.S. dropped in November by the most in two decades and resale prices collapsed at a pace reminiscent of the Great Depression, dashing speculation the market was close to a bottom.

Purchases of both new and existing houses dropped 7.6 percent from the prior month, the biggest decline since January 1989, to an annual rate of 4.43 million, government and industry figures showed today. A 13 percent drop in the median resale price from a year earlier was the most since records began in 1968 and was likely the largest since the 1930s, the National Association of Realtors said.

“Housing is still in a freefall,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts.

The figures were worse than economists had forecast and signal that the battered housing market that led the economy into a recession may be taking another lurch down. Sliding property values mean more Americans will be under water on their mortgages, destroying household wealth and undermining consumers’ purchasing power.

The average rate on a 30-year fixed-rate loan fell to 5.18 percent in the week ended Dec. 12, the lowest in more than five years, according to the Mortgage Bankers Association.
Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., New Jersey’s biggest homebuilder, called on the government to provide an economic stimulus for the housing industry.

“If government wants to get to the root of the problem they need to fix housing first,” Hovnanian said in a conference call on Dec. 17. Hovnanian, whose company reported a fiscal fourth quarter loss, didn’t specify what type of government intervention he wants in the housing market."

My Take:

What can I say, I'm speechless. This number was way worse than anticipated. Housing prices in every region of the country fell significantly. I have often said on here that our economy hinges on housing prices. The second section of this article that I highlighted says it all as to why the consumer is in such trouble. We have lost a lot of our ability to consume.

Falling housing prices also exacerbate Wall St's problems because their balance sheets are filled with bloated over priced McMansions.

Rates have dropped dramatically and yet its done nothing to stimulate housing demand. Refi's have increased but the demand for new or exisiting housing has vanished.

What really pisses me off is that the government continues to try and fix the problem by constantly attempting to prop up housing prices by pouring liquidity into the banks in an attempt to re inflate the housing bubble with more cheap money and low interest rates. When are they going to realize that this isn't going to work?

In my eyes, prices must fall dramatically before anyone goes near a house. Confidence has been totally destroyed. Americans see nothing but corruption and a constant changing of the rules in the housing market. They no longer TRUST the system. They don't even understand it. I constantly have friends and family coming to me totally confused by whats going, and asking me if they should refinance since rates have dropped into the 4's. All of this confusion has done nothing but paralyze the consumer. No one wants to make a mistake or get "screwed" by a greedy lender. Trust is gone. Once this happens its over folks.

In my eyes, its gotten to the point where no one wants anything to do with a loan or a bank until TRANSPARENCY comes back into the financial system. They won't come back until they have faith that they aren't getting screwed and they understand what they are getting into. I think the Fed lost the public when the loan modifications and quantitative easing started. Its simply got too complicated to buy a house now. This is the biggest purchase anyone will ever make in their lifetime. Its a 30 year commitment. How can you ask them to buy when Wall St has totally GAMED the system???

I feel like screaming "Stop the Insanity!" like that women from the 1990's who did the exercise infomercials.

So what ends up happening when housing prices continue to free fall as the confused buyer attempts to understand whats going on in the housing market?


This is how deflation spirals are created folks. Deflation scares the living daylights out of the Fed: It creates a death spiral where no one buys and prices continue to drop. As prices continue to drop, the buyers continue to stay on the sidelines waiting for even more drops. Its a viscous circle. The pros call this is called a negative feedback loop, and its a hard loop to stop once it gets started!

This is why you saw the Fed use every trick in the book last week in an attempt to stop this deflation.

In my opinion, there is no way that the Fed can stop housing from completely imploding at this point. They need to drop the playbook, step to the sidelines, and let free market capitalism take its course. If this destroys the banks that did the bad loans than so be it. We can always create new banks that have healthy balance sheets will actually allow them to lend!

Bottom Line:

Enough is enough Mr Bernanke: Its time to walk away and let nature run its course. If you don't start to walk, your homeowners will.

20% of current home loans are already underwater and you are playing a dangerous game of chicken. What are you going to do if they decide to walk as you continue to modify loans and change the rules? Stop providing liquidity to a bunch of banks who won't lend. Stop wasting our taxpayer money. You have thrown $8 trillion at this problem and prices continue to plummet!

Save whats left of your balance sheet for the depression that we are about to head into as a result of your bailouts.


I have been trying to go long on a few names thinking we might see a Santa Clause rally over the holidays. Each day I refuse to pull the trigger as the news continues to worsen. I am still short FAZ, SRS, and BEARX. I saw no reason to take any of them off going into the close.

There is absolutely no enthusiasm on the long side folks. Buyers continue to sit on their hands. How can anyone buy after reading these type of headlines everyday? I refuse to try and front run the long side with some longs because i really believe the bottom could completely fall out of this market at any time.

2009 is going to be a long chaotic year.

Save your pennies. You will need them.


John Maynes said...

You're in a great mood, Jeff. Very bad news for housing today but SRS was basically flat. So it was actually bullish. Hope there will be more aggressive bears showing up next year when holiday season is over.

John Maynes said...

Interesting article on Reuters:
Stores to ramp up closings and job cuts in early '09

A little teaser:
"We are going to see some shakeout in the retail industry and I think it's going to happen pretty quickly after the holidays," said Frank Badillo, senior economist with consultant TNS Retail Forward. "We'll see it in the form of store closings, mergers, acquisitions and bankruptcy."

Could help your game plan for early next year regarding CRE and your little SRSes.

Jeff said...

As long as a potential bailout hangs over SRS, I don't think you will see much price action.

SRS will take a moonshot once the Fed and the TARP answer their formal request for funds.\

Kudlow is reporting that we could see a dividend holiday on all banks.

That could really push FAZ to the upside. Those housing numbers were depression like.


ZMonet said...


Did you see Fortune Magazine's prediction that the DC Metro area will see a nearly 19.9% decline in 2009? DC Metro was #10 on the list, but the other 9 were comprised of California (8) and Miami, FL.

Also, I was looking at the months of supply on the market in Maryland and was shocked by the number of months of inventory for Anne Arundel County (15 months). Although I know there aren't that many transactions in the county, Calvert County had 34 months worth of inventory! (up from 17 months the prior month -- doubling inventory in one month!) Looks like parts of Maryland are about to see what parts of Virginia have already seen in terms of price correction.

Thanks for the advice on SRS, I got knocked out on a trade trigger at a 15% gain (better than a loss). I'm now looking for a new entry point in. So hard to predict the market in the short term, but I guess you put your moves on for the long term and play from there.

John Maynes said...

SRS will take a moonshot once the Fed and the TARP answer their formal request for funds.

What do you mean, Jeff? Are you expecting a bailout or not? Or do you think it doesn't matter what the FED will decide?

jeff said...


I live in MD. Baltimore is in big trouble because they have similiar housing prices compared to DC without the jobs or income.

The neighborhood where I live has seen 30% price declines in the last year. DC/BAlmtimore has a long way to go on the downside.

Thanks for the inventory information. Thats very helpful and horryfying! 34 months. OMG!

jeff said...


No one knows whether or not we will see a bailout. As a result, investors are simply avoiding SRS.

The way the Fed's been bailing everyone else out, I would think it would be silly to think they would not bailout commercial too.

I have a small position in there and I plan to hold it.

I think its 50/50 that commercial gets some help from the Fed. Trade this one on the news. Buy it on the drop if commercial does get some form of a bailout.


GreenMonday said...

just in case you guys didn't realize, there was a capital gains distribution issued to SRS shareholders for $4.57. The price will always drop automatically by this ammount in the morning.

jeff said...



Thanks for the heads up.

We were discussing this on the last post. SDS was down $10 on the pro share cap gains.


Growler said...

As always, great info / analysis Jeff!

Jeff said...



always appreciate the feedback

Avl Guy said...

Hey Jeff, I’m slowly getting back up to speed after dashing 1/3rd of the way across the country during a short window of good weather. Lost to the media & policymakers who can't think outside-the-box is the good news that the seeds of almost every aspect of a 'new' recovery of the economy are now in place. It will be clearer once debt deleveraging and deflation have run their course (if the Feds ever let that happen), and the economy hits and wanders the bottom of the crater. Then the economy can be poised to re-boot into something that is more financially sustainable than the nonsense of the last boom or the 25-yr consumer spending cycle and 25-yr secular bull market that have run their course and reached their effective lifespan.

The new lending model has been around for decades. Newsweek ran a piece last month on how the categories of lenders, CDFIs, have successfully and ethically used higher-than-prime rates to serve less-than-prime (and aint we all becoming ‘Less Than Prime”?) borrowers. I use to manage lending for a CDFI. See synopsis and link.

A Risk Worth Taking
Many ethical subprime lenders still manage to make plenty of money.
Like a bunch of present-day George Baileys, ethical subprime lenders evaluate applications carefully, don't pay brokers big fees to rope customers into high-interest loans and mostly hold onto the loans they make rather than reselling them.
Daniel Gross NEWSWEEK From the magazine issue dated Nov 24, 2008

jeff said...


Great to hear from you my friend. I am glad you had safe travels.

Great great article.

Its amazing how responsible a lender becomes when they have to hold onto a loan. I totally agree with subprime as long as risk is managed!

This type of risk management will be the new world on Wall St and its going to force home prices to tumble.

Once responsible lending resumes(20% down 36% DTI) lending will become profitable again. The problem is housing must tumble in price before people can qualify for loans under such standards.

Thanks for sharing!

ZMonet said...


I meant to link to the November 2008 Maryland Housing Statistics (broken down by area) in my last post.


John Maynes said...


meanwhile I see a CRE bailout pretty bullish for SRS. Any company tapping TARP will have to slash their divi. More divi holidays on the horizon for long-term investors.

Jeff said...


Thanks for the link. Housing in 2009 looks pretty bleak in our area!

Happy Holidays!

Jeff said...



I am very bullish long term on SRS.

Any pop on a bailout will be quickly sold.

I just think if there is a bailout, you will see a quick pullback on SRS on the news which will setup a beautiful entry point.

If it doesn't look like its going to happen I will be buying more.

Growler said...

Check out Volume on SRS from Nov. to present. Looks like many are thinking the same thing.

(Perhaps base building?)

Jeff said...


Could be.

I heard something interesting about the bullish headline today that mortgage applications were up 48%.

Only 15% of the applications are getting funded. Many of these apps are from people that are underwater in their house. there is no way a bank is going to refi any mortgage unless it appraises for the amount on the loan.

Many of these underwater folks also attempted multiple refi's with several banks. This makes that number even more irrelevant.

Take this 48% rise news with a grain of salt.