Case Shiller/New Home Sales/Consumer Confidence

Good Morning

Well we had a triple witching hour of news that came out early this morning. Lets start with the Case-Shiller Index and new home sales. Surprise, Surprise, home sales continue to decline at a record pace. Here is the scoop on both numbers from Bloomberg:

"May 27 (Bloomberg) -- Home prices in 20 U.S. metropolitan areas fell in March by the most in at least seven years, pointing to weakness in the housing market that will constrain economic growth.
The S&P/Case-Shiller home-price index dropped 14.4 percent from a year earlier, more than forecast and the most since the figures were first published in 2001. The gauge has fallen every month since January 2007.

Prices continue to slide as record foreclosures put more homes on the market and stricter lending standards make it harder to get loans. Falling home values are slowing consumer spending, threatening to halt the six-year expansion.

``Many households are putting their home-buying plans on hold, given the expectations that the house price corrections will persist,'' Celia Chen, an economist at Moody's Economy.com in West Chester, Pennsylvania, said before the report. ``The housing downturn remains in full swing.''


New Home Sales:


Sales are up slightly in April from the horrendous 17 year low that we had in March. I wouldn't get to excited about this increase. This is the spring selling season and the fact we are selling new homes at a 500,000 rate is not promising. From the same article:


New-Home Sales Rise

A government report showed new-home sales unexpectedly rose in April after readings for the prior month were revised down. Sales increased 3.3 percent to an annual pace of 526,000 from a 509,000 rate the prior month that was the lowest in 17 years, the Commerce Department said today in Washington."

My take:

Well housing prices are still accelerating to the downside. There seems to be no end in sight for the housing crash. Bubbleland(CNBC) was having a difficult time trying to find any way to spin the Case-Shiller report positive. Housing continues to look dismal and is affecting consumer sentiment.


Consumer Confidence Report:

The news wasn't any better here folks. Dropping housing values and inflation combined with the virtual disappearance of home equity loans is making the consumer feel pretty bad. Consumer confidence fell to 57.2 which was a 15-1/2 year low and was lower than forecasts.

Take a look at the chart below to see how dependent consumers were on using their home equity to spend like drunken sailors.

Aren't these number shocking? 1 out of 3 cars bought in California were bought using a home equity loan. Amazing.

I wouldn't want to be a car dealer right now. Especially with higher gas prices. Unless you are selling hybrids, auto sales is a bad place to be.

This chart is a great snapshot of how the consumer must be feeling without their home equity loans. Banks are pulling these loans right and left in all of the bubble areas. Meredith Whitney predicts the dollar value of the home equity loans being yanked from homeowners will be in the trillions over the next year.

Think this will leave a mark on the consumer? Ummm let me guess...uhh yea.

Bottom Line:

The news isn't getting any better folks. The Case-Shiller was in line with expectations so stocks bounced a little on this news. Stocks were also a little stronger because the dollar strengthened and oil prices dropped a few bucks.

I expected a little bounce today because we seemed a little oversold from the slaughter last week. This is just a temporary bounce IMO.

The housing data is bleak, oil is at $130/barrel, and consumer confidence is at 15-1/2 year lows. As long as these things stay in place, stocks are going nowhere.

Hold off buying that house! Prices are still dropping. Remember NO KNIFE CATCHING including foreclosures!!! There were no signs in the Case-Shiller report that housing is stabilizing. Stay on the sidelines. Much better deals lie ahead!!

World Markets/UBS Warns of more Trouble/UK housing

I hope everyone enjoys a nice BBQ today!

Although we are closed today, there was a lot of action in the world markets in reaction to our selloff last week. The Nikkei in Japan was down over 300 points and the Hang Seng was down 2.5%. Stocks in Europe were also in the red.

One of the key reasons for the drop was UBS's announcement. They came out today and said that further writedowns are coming, and admitted they still have considerable exposure to bad mortgage securities. Wow what a shocker..Not!!

Here are some of the highlights:

May 26 (Bloomberg) -- UBS AG, the European bank hardest hit by the U.S. subprime contagion, fell the most in more than two months in Swiss trading after saying it may face more losses from mortgage securities.

UBS declined 1.74 Swiss francs, or 5.8 percent, to 28.20 francs in Zurich, the biggest slump among the 59 companies on the Bloomberg Europe Banks and Financial Services Index. UBS has dropped 43 percent this year, cutting its market value to 61.4 billion francs ($59.9 billion).

``UBS will have to fight against negative news flow for at least several more quarters,'' said Rolf Biland, who helps manage about $3.1 billion, including UBS shares, as chief investment officer at VZ Vermoegenszentrum in Zurich. ``The U.K. housing market is almost as overheated as in the U.S., and could lead to losses for banks.''

The bank still has more than $45 billion in U.S. mortgage-related assets, $8.6 billion in leveraged finance commitments and $10.4 billion in U.S. student loans on its books.
The company hasn't said how much it holds in non-U.S. mortgage securities."


My Take:

The final paragraph that I highlighted shows you how much more potential damage is on the way.

How much do you want to bet that the majority of the $45 billion in mortgages in UBS's portfolio is mainly comprised of subprime loans. Is that a capital raising call that I hear? I am sure its coming soon. Dilution is on the way UBS shareholders!

The analyst above said the bad news could be flowing out of UBS for several quarters. I thought the worst was already behind us? As you can see boys and girls, we have a long way to go to get through this credit crunch.

Also, notice the last line of the highlights. They won't admit their exposure to non-U.S. mortgage securities. Looks like a second punch to the gut is coming from the European housing market.

Spain's housing market is crashing, and it looks like the UK market is right behind them(see below).


UK Housing Market starting to buckle?

It looks like we are not alone when it comes to housing bubbles. Housing prices in the UK have now dropped for the eighth straight month.

Some Highlights:

"May 26 (Bloomberg) -- U.K. home values fell for an eighth month in May and will probably drop further, Hometrack Ltd. said.

The average cost of a residential property in England and Wales slipped 0.5 percent to 172,200 pounds ($341,000), the London-based research company said today in a statement. Prices fell 1.9 percent from a year earlier, the biggest decline since November 2005.

``The `buyers' strike' continues,'' said Richard Donnell, director of research at Hometrack, in a statement. ``Pricing looks set to remain under downward pressure over the coming months.''
Bank of England Governor Mervyn King predicted this month that property values are ``likely to fall further'' and said there is a risk that the U.K. economy may contract.

Home buyers are paying more for mortgages after the global credit squeeze prompted lenders to curb lending. U.K. banks increased the cost of home loans with a 5 percent down payment to the highest in more than eight years in April, failing to pass on the Bank of England's three interest-rate cuts since December."


Final Take:

Sounds familiar doesn't it? Its becoming clearly evident that this may become a global slowdown versus just a United States problem. Housing is falling, and the high priced Euro is hurting manufacturing because goods are now too expensive to export. Europe is also facing the same high inflation that we are.

The global growth story is what the bulls have been hanging their hat on. If Europe and the US stop consuming then how are countries like Asia and India going to continue to grow if there is no one to buy their cheap goods? Asia's manufacturing is the key driver of their economy.

It now seems apparent that European banks like UBS are going to get clobbered by housing on both sides of the Atlantic. I wouldn't be surprised if a bank blowup happens overseas first.

The one/two housing punch could result in a KO.

It will be interesting to see how the US markets react to the world wide sell off and UBS/UK housing news.

We seem a little oversold from last week so I wouldn't be surprised to see a little bounce. However, with $130 oil, it will likely be mild. Longer term, a big sell off in equities is probable because the bad news simply isn't priced in to stocks.

The average drop in equities during a recession is 28% and we are nowhere near these levels. I predict this will be a severe recession so the potential for a larger sell off is definitely there.

Until next time!

California Home prices down 32% vs. April 2007

The average home price in California is down 32% in April of 2008 versus April of last year. Here is the whole piece from Bloomberg:

"May 23 (Bloomberg) -- California home prices tumbled 32 percent in April from a year earlier as ``distressed'' properties and a lack of financing cut demand, the state realtors group said.
The median existing home price fell to $403,870, the California Association of Realtors said in a statement today. Sales increased 2.5 percent, ending 30 months of consecutive year-on-year declines. Homes priced under $500,000 accounted for 64 percent of sales compared with 40 percent a year earlier.

California had the second-highest U.S. foreclosure rate in April, one for every 204 households, and the most foreclosure filings for the 16th consecutive month, RealtyTrac Inc., a seller of default data, reported on May 14. Sales increased in northern and southern California last month as buyers purchased discounted properties that had been in some stage of default, DataQuick Information Systems said this week.

``Both tighter underwriting standards and the ongoing effects of the credit/liquidity crunch continue to constrain sales,'' William Brown, president of the association, said in the statement."


My Take:

Isn't this staggering? Imagine buying a home and realizing a year later that the biggest investment you ever made in your life is now worth a third less.

Whats scary is prices are still deteriorating and we still can't see a bottom. The reason California is having such a hard time is most of the houses there are priced over $417,000 which puts them in the jumbo loan category.

No bank wants anything to do with jumbo loans because they consider them to be more risky. This is why the interest rates on a jumbo are now around close to 8%. Many Californians stretched to buy these houses by using loan products like subprime which are no longer available in today's mortgage market.

This spells disaster if you bought a home with a subprime product and it cost you $417,000. I predict many of these homes will not be sold until they get underneath the 417k category.

You need to assume most of these buyers don't have the money to short sell these houses at $417,000 or below, so expect most of them to walk away are get foreclosed on.

The reason I say this is because these buyers wouldn't have used a subprime loan if they had the cash for a solid downpayment. Anyone with the money to really afford such a house would have used a conforming loan.

When you realize many of these houses are now in the red by $100,000 or more, its easy to see how this will end very badly.

The fact that 64% of home sales in '08 were under $500,000 in the article above versus only 40% last year is starting to bear this out. Expect the under 500k number to continue to rise.

Bottom Line:

Housing prices will continue to decline in California because there are still many more subprime loans that still have not reset. As a result, there will be more foreclosures which will result in higher inventories. This combined with tougher lending standards will continue to push prices down further in 2008 and beyond.

I still wouldn't be buying foreclosures in California. As long as prices are accelerating to the downside, you will be catching a falling knife.

This is an easy way to get cut!