Wednesday, May 19, 2010

Housing Recovery? Where?

I hope all of you home sellers got out while you still could. As you can see below, mortgage applications have fallen off a cliff since the tax credit ended:

Quick Take

I warned about this within the last week and the numbers are uglier than I expected. Applications fell 14% the week after the tax credit ended and then fell an additional 27% the following week. These are the worst numbers since 1997 according to Reuters.

Flippers Beware! The mini housing recovery is toast.

Here is a little advice for the sellers out there: If you couldn't sell your house during the tax credit period than I suggest you seriously re-evaluate where you are pricing it at and then drop it. You don't want to be the last person on the block selling in a situation like this because it's going to get bloody out there.

Without the tax credit the housing developers and sellers now face the grim reality of trying to sell to a market that has close to 20% U6 unemployment. They also have to deal with the severe "hangover effect" thats been created by the stimulus that inhaled most of the first time home buyers as well as the rest of the low end of the market.

What we are now left with in housing are millions of empty homes that are priced where no one can afford to buy them in a market where there is no demand. You also have builders with huge inventories that are starting to get pressured by the banks who are really ansty about getting paid back after funding the largest housing bubble in the history of this country.

If this isn't "The Perfect Storm" then I don't know what is.

If you are just putting a house on the market I suggest that you undercut your competition. The run for the exits is going to be fast and furious once the reality sets in that there are no buyers, and I expect prices to start to fall off a cliff again by the end of the summer.

Remember, the banks have been easy on the builders this go around when it comes to getting paid back because they understand how tough the economic conditions are out there. The Fed knows it too and they have made it easy on both parties via lax accounting standards in order to get this mess "cleaned up".

The problem here is this cannot go on forever. At some point the music has to stop and bills need to be paid. With banking reform right around the corner I expect that things are about to change.

There will be an inflection point where the builders are going to be forced to reduce prices over and over until they sell in order to avoid being forced into BK by the banks. I believe the end of the tax credit will be the spark that lights off The Final Housing Time Bomb that finally gets us to the bottom.

Expect to see a lot of pain when it does.

When this capitulation begins it's going to destroy whats left of the housing market. Bubbles always pop and so far the reduction in housing prices has been far too orderly.

If you are a buyer sit on the sidelines because demand is about to fall off a cliff without the tax credit.

This will eventually smoke out the sellers and builders and force them to capitulate all at once because no one will want to be the guy left holding the bag once it starts to unwind.

14 comments:

Anonymous said...

in california, i dont see the prices drops; what...15% its really not that much.

Anonymous said...

point is; there's been no pirces dropped to reflect the real market place of no real buyers.

Jeff said...

Anon

Exactly.

You didn't take a loss if you didn't sell. Everyone is holding out and praying that the market comes back.

When reality slaps them in the face after 3 years of not being able to sell will induce a panic.

I may be early with the late summer call but there is no doubt that there will be a run to the exits when everyone realizes the game is over.

Anonymous said...

Remember, history doesn't exactly repeat itself but it rhymes. If anyone looks at the situation calmly and rationally, an individual, state or country cannot debt themselves to prosperity. What we have is a credit induced bubble that is going to take a lot longer then 18 months to resolve, the market can look to the future but at some point even the market will have to admit the recovery is not progressing as fast as it suggests. To me, there is a lot a of rhyming from the 1930's going on, you have a leveraged society, bubble popping, market reinflation & then reality takes hold and the growing pains are felt. You can only put so much miracle grow into the system before it has grown as much as is physically possible.

flipdippy said...

I think red on wall street is the energy upon which jeff feeds. Almost posting daily?

Are any of you guys buying or shorting the market here?

Still, just seems like the powers that be are just giving us a little teabag of what's to come, their way of creating some volatility to drive the markets up further, but also in their infinite compassion, to give us peons a chance to get our personal affairs in order before the whole order is brought down.

Katie said...

When you say prices are going to "fall off a cliff" could you be more specific?

My husband and I have been waiting for 5 years for prices to come down in the DC area and we are just about ready to go.

I mean, if you thought a cliff was prices were going to fall 5-10% we would be willing to risk it and dive in now. However if prices fell 30-40% we would be much more apprehensive!

Jeff said...

Flip

I try and post(when I am not busy) when I see a lot of danger.

There wasn't much to discuss the past 6 months when the HFT's took over the market.

Reality is setting in now and people need to batten down the hatches.

The interventions and manipulations of the markets have made them very difficult to write about because you can't predict what they will do and fundemntally it makes the markets almost impossible to analyze from a fundemental standpoint.

Jeff said...

Anon

Couldn't agree more.

Katie

DC is different because its supported by government jobs which are aplenty as we all know.

I still think housing will correct shraply there however that market will hold up better than the rest of the country because people have jobs.

Katie said...

Jeff - thanks, I think. I hate to belabor the point, but "sharply" doesnt seem much more comfortable than "fall off a cliff".

Are we talking 5-10% or 30-40% in your guesstimate?

Jeffrey said...

Katie

Wow thats a tough one.

A lot depends on what happens with interest rates.

Unfortunately home prices are a moving target based on interest rates, how the economy does, and the stability of the financial markets.

If rates move higher I wouldn't be suprised to see a 30-40% correction or possibly more.

If they stay around these levels I still think you will see a 30% correction but its going to take a lot longer to get there.

DC got really outta hand and many loans out there are jumbo loans due to the high prices in real estate.

Are you buying or selling?

Katie said...

Thanks Jeff. We are looking to buy as the hubby and I are basically sick of renting. Prices havent really come down much at all in the last 5 years in the area we are looking - certainly not nearly as much as the 150K in rent we have spent in that time (wow 150K...makes me sick to write that :(

I still hold out hope that a correction is on its way though, and I appreciate your thoughts!

getyourselfconnected said...

jeff,
missed this one last night. Good stuff. The big IF is how pressured the FED will eb to continue or re-open housing support measures.
Did you really dump 50% of your metals?

For the DC renter, yeah that area is tough. I expect more and more government jobs on the way as well so thet may be a tough one. 5-10% would be the biggest drop in my mind looking a year out. Just my 2 cents though.

Flip,
25% in physical metals, 75% in cash. I won't short any of this crap due to super high overnight risks.

Jeff said...

Get

Yep.

Sold some SLV.

Jeff said...

Flip

Have some shorts on as hedges but mainly all in cash and some bonds.

Crazy times. I will have soemthing up later