Wednesday, June 23, 2010

Housing Collapse Intensifies

This one's going to leave a mark:

From Haver Analytics:

"· New home sales fell by nearly one-third last month versus April with the end to the Federal government's $8,000 home-buyer tax credit. New home sales at 300,000 followed a downwardly revised 446,000 during April. It was a record low for the series which dates back to 1963. The latest level was well short of Consensus expectations for 420,000 sales."

My Take:

Ouch!  A whopping 33% miss versus consensus and yet the stock market hardly blinks....Amazing!

The bulls definitely have their blinders on at this point if they are ignoring numbers like this.  Two years ago this would have triggered a 500 point sell off in the market.

Today, Wall St believes that the housing nightmare is backstopped by the Fed so they just assume that bad housing news is "priced in".  HA!  Good luck with that idea.  What they fail to recognize is that the government cannot afford to continuing to backstop this garbage forever.

We are selling bonds at the rate of $100 billion every other week in order to finance this insanity.  How on earth is this sustainable long term?...Answer:  IT'S NOT.

Perhaps the bond market is waking up to this reality?  Santelli gave today's 5 year bond auction a "D".  The bid to cover was 2.58 which is pretty piss poor on a 5 year bond.

I also caught this today.  Can't pay your mortgage?  Don't worry the state will pay it for you!:

"Michigan’s plan to spend $154.5 million in federal funds to help those hardest hit by the economy has gained federal approval and will be available starting July 12.

The funds – targeted at helping borrowers facing pay cuts or job losses keep their homes – are expected to aid more than 17,000 Michigan households.

Until then, Michigan State Housing Development Authority officials will educate banks and credit unions about the process of evaluating borrowers for the program. Borrowers must apply with their lenders to take advantage of the lifeline, which will be awarded on a first-come, first-serve basis.

State officials say they’ll tell borrowers within 48 hours if they qualify for one of the program’s three options:

• Mortgage payment assistance for homeowners now receiving unemployment compensation. The state would provide half of the monthly mortgage payment up to $750 a month for a maximum of 12 months.

• Rescue funds for homeowners who have fallen behind on their mortgage payments because of a temporary layoff or medical emergency and have overcome this obstacle. The state will provide up to $5,000 to families in this situation.

• Federal matching funds for principal reductions for homeowners who can no longer afford their mortgage payments as a result of reduced income. This will allow up to a $10,000 principal reduction from the state that will be matched by the lender"

Continued Take:

Has the world gone mad?????   How on earth is this going to be productive?  Will these borrowers all of the sudden be able to afford their house 12 months from now?   Talk about a total waste of money.

We have already seen a 50-70% re-default rate on modified mortgages.  Why on earth do they think this is going to solve the problem? 

The government needs to be face the music:  Millions of people bought houses they could not afford using lending products that are no longer available.

Pissing away billions trying to keep them in these homes is nothing but a total waste of money that we don't have!  The USA's checkbook is running out of checks and the balance in our account reads - trillions.

We must start letting the housing market revert to the mean. The Fed's needs to let these borrowers default, and the banks must then recognize these losses on their balance sheet.  If millions of banks and borrowers go bankrupt as a result then so be it. 
This is how free markets work.  If you make a financial bet and lose then you should be held responsible for it. 

The government also needs recognize that the risk of such housing programs from a moral hazard standpoint is extremely dangerous. 

Borrowers are rapidly coming to the conclusion that perhaps the best thing to do is to stop paying on their mortgage because the government looks more and more like they will be there to bail them out.

The Bottom Line

The popping of the housing bubble is happening more violently then I had ever could have predicted.  The fact that we hit an all time low in new home sales during the springtime where everyone is supposed to be buying is flat out frightening.

I understand that the housing tax credit may have skewed this number a tad but let's put this into perspective.  In 2007(after the housing bubble had peaked) we still sold 769,000 new units according to Haver.   Today's number was more than 50% lower.

The medium home price also dropped to $200,900 which is the lowest number since 2003.  Think about this one for a second:  Prices are collapsing at a time where we are seeing the lowest mortgage rates in history!

What this tells you folks is that America has lost interest in owning a home.  The psychological damage has been done.  As prices continue to fall, potential home buyers stay on the sidelines because they are petrified that they might lose money on their home. 

Homes are now looked at as a place to live versus an investment.  Once this mindset sets in its very difficult to change it.  What we are seeing now is a classic example of how deflation sets in on a specific asset.  The more prices drop the more people stay on the sidelines which then triggers more price drops. 

It's called a negative feedback loop(otherwise known as a deflationary death spiral).   This is how bubbles pop and we are seeing it now in housing.

One more question to ponder:  Can you imagine what the home sales numbers will look like when rates start moving higher and/or when the weather starts to get cold?  Yikes!

I am rambling here so I think I will call it a day. 

I will leave you with this one piece of advice:  Stay on the sidelines if you are looking to buy a house because this housing unwind hasn't even gotten into full gear yet.

Until next time. 

Disclosure:  No new positions at the time of publication.


getyourselfconnected said...

Great write up Jeff.

I just keep wondering how it is that all this is going on and out costs of borrowing keeps falling? Look, I get the safe haven thing but really this is nuts.

It is becoming clearer to me all the time that the world is in no position to do anything but keep allowing us to do what we want and to finance it otherwise they will be screwed. Not exactly a great thing.

Jeff said...
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Jeff said...


Thanks bud.

In the end we will not be allowed to continue this. THe world is done with spending.

Everyone but us has accepted the fact that austerity is the only way out of this mess.

If the world tightens their belt and we continue down this path the bond market is going to punish us. They will go buy bonds in Europe. Are credit risk will have to be repriced.

I was talking to a credit trader friend today. He believes the easy money cycle is pretty much done.

He said a move on the 10 year from 3% up to 4-1/2 percent would increase our borrowing costs by 50%.

Its unsustainable and if we think we can contiinue spending when everyone else is tightening the belt we will get pummeled by the bond market.

They will go buy South american and European debt if they see deficits that are being reduced in other countries.

I wouldn't get sucked into this last move up on bonds.

Now is the time to refi if you have a mortgage. I don't think we will be at these levels for too long



Jeff said...
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Jeff said...
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getyourselfconnected said...

I just posted a piece, and one of the next steps in Bens anti deflation game is to target the 10 year or even cap that rate. What could the bond guys do? I know the mechanics of why things cannot happen, but I have been watching things that cannot happen for two years happen every bond auction, ya know?

Not trying to be a pain, but I know I am missing something.

Jeff said...


Go read up on the late '70's. The same thing happened. Banks all piled in and borrowed the short end and then bought the long end and then pocketed the spread. This was all fine and dandy until the punch bowl was taken away buy volker. The banks all got caught on the wrong side of the trade when volker took rates into double digits. Many of them went BK after getting caught trapped in long end bonds at a 6% rates. When volker raised rates they got slaughtered because the value of the bonds they owned collapsed.

Volker was forced to take the punch bowl away as a result of inflation. This go around rates will rise as a result of huge deficits. Bond traders will demand higher yields as a result of higher risks due to large deficits.

The bond market can raise rates by simply not buying bonds. When bond traders stop buying the fed is forced to raise the yield in order to make them more attractive.

The fed is merely a pawn in the game although they want to create the image that they control interest rates.

Herb said...

As interest rates increase, inflation will increase as well.

A house may be the only hedge against inflation the middle class has left.

Jeff said...


If you own a house outright...Great.

If you don't stay away.

Housing is dead and I don't think it will represent inflation as a hedge.

Incomes are flat and the lending products that were developed to create this housing insanity are gone.

Housing is so toast at this point.

The reality is our average incomes can't afford the current housing prices.

Prices will be 1.5 times income at some point. Lending has changed and prices must collapse in order to find buyers.

Anonymous said...

"Housing is dead and I don't think it will represent inflation as a hedge."

Translation, its different this time huh Jeff? How the hell can we have inflation when people dont have any money to pay for things?

The fact of the matter is, wage inflation is a lagging, yet necessary ingredient for inflation. Let that sink in for a minute. Key words are "lagging" and "necessary". Repeat that over and over til it sinks in.

Jeff said...


Wow thats quite a lagging indicator considering its been over 10 years since wages increased.

Hardly seems"necesssary" to me. Bet the japenese would agree with me.

You need to add the word "impossible" to your beliefs on rising wages.

Anonymous said...

Wow you are retarded Jeff. You know that.

Of course the Japanese would agree with you, as I would too, because that phenomenon was called DEflation. (Emphasis on the DE for those of us who have trouble following along).

Take note of what started this, herb said IF we have inflation, housing may be a hedge.

You disagreed and said its different this time.

I called you out on it.

Im not saying herb is right and there WILL BE inflation, (I still see inflation or deflation as a possibility). I just simply pointed out that IIIIIIIIFFFFFFFFF there is inflation, housing will be a hedge as it always is.

I know this pains you to say it. You want to have your cake and eat it too. You want to come up with this fantasyland world where IF we have inflation, housing will still crash. That wont happen. Period.

Jeff said...

No ***t sherlock.

Like I need you to explain this to me.

I agree with everything you said. I don't see inflation happening either.

You also put way to many words in my mouth. There is no fantasy land.

This is all a goddamn nightmare that neither you or I can predict as to how it plays out.

I interpret the data like I see it and I fully understand the issues at hand.

BB said...

Anon and Jeff,
There's a word from the 70's with which you should acquaint yourselves, STAGFLATION. Stagnant employment (lagging wages) and high inflation. Back then real estate was a hedge for those who owned, but ownership was much lower then and had not been nearly as overbuilt as we are now and the country was still a net creditor nation. This time around things will be much worse due to the foolish waste of taxpayers dollars on the too-connected- to-fail (big banking) and the too-stupid-to-succeed (sub-prime and life-by-credit citizens) and all the other waste which padded our national debt over the past ten years. You can pay me now or you can pay me later. When you pay later it's much more expensive, much more painful and much more uncertain.

Anonymous said...

"Jeff said...

I agree with everything you said."

You do? Really? When this started you said...

"Housing is dead and I don't think it will represent inflation as a hedge."

But now that you agree with everything I said, I guess your position is. "IIIIIIIIFFFFFFFFF there is inflation, housing will be a hedge as it always is."

If thats the case, why not say that in the first place? Just show some intellectual honesty and I wont give you a hard time on every single bit of minutae like this...

Jeff said...


Good point on stagflation.

I wouldn't be surprised to seee some sort of form of it for awhile moving forward.

I kinda feel like we are seeing it now when it comes to the market. We seem to be stuck around the 10k area on the DOW.


I gotcha. sometimes I don't have time to explain in detail what I meant.

I meant to say housing won't be a good inflation hedge because I don't believe we will be seeing inflation.

Yes...If we did see inflation housing and other assets would be a hedge against inflation.

Anonymous said...

I meant to say housing won't be a good inflation hedge because I don't believe we will be seeing inflation.

Fair enough. If thats what you meant, thats a defensible position. Sorry I took issue with something that wasnt your intent.