Are those the words of an alarmist, lefty blogger, calling for the sky to fall? No. They are the words of Washington Mutual's CEO in a conference call. I guess he now either hates America or is in fact a lefty blogger calling for the sky to fall.
WaMu (WM - Cramer's Take - Stockpickr - Rating) dropped 3% after CEO Kerry Killinger said at a Lehman Brothers conference in New York that the housing industry is headed for a "near perfect storm."He said the lender, which has already boosted its provision for loan losses this year, may have to sock away an added $500 million as housing markets continue to weaken.
First, it's important to remember that Wamu is by far the biggest publicly traded S&L. It has a market capitalization of 30 billion. The next largest company by market cap is Sovereign Bancorp with a market cap of $8.4 billion. In other words, Washington Mutual is the big kid on the block by a fairly wide margin.
Secondly, CEOs are well aware of their status. They know their words can move markets. As such, they are very good at being perma-bulls. No matter what the news, they usually try and spin it in a positive way. That's one of the reasons this statement is news. The CEO of the largest S&L in the US is saying housing is in really bad shape.
To sum up where housing is, let's look at some basic numbers.
According to the National Association of Realtors the total inventory available for sale of existing homes was 4,592,000 in July. That is the largest absolute amount of homes ever on the market by a wide margin. At the same time, we are seeing home prices drop in a big way:
The annual returns of the U.S. National Home Price Index, the 10-City Composite, and the 20-City Composite shows all three still yielding negative returns as of June 2007. The quarterly S&P/Case-Shiller(R) U.S. National Home Price Index -- which covers all nine U.S. census divisions -- was down 0.9% from Q1 2007 and down 3.2% from Q2 2006."The pullback in the U.S. residential real estate market is showing no signs of slowing down," says Robert J. Shiller, Chief Economist at MacroMarkets LLC. "The year-over-year decline reported in the 2nd quarter of 2007 for the National Home Price Index is the lowest point in its reported history, which dates back to January 1987. On a regional level 17 of the 20 metro areas are showing declines in their annual growth rate from what was reported in May."
This is at a time when the credit markets are seizing up and lending standards are tightening. And to make matters that much worse, here is a chart of when mortgages reset.
Notice there are a ton of resets in the first half of next year.
So we have:
1.) The largest total amount of existing homes available for sale ever
2.) Declining home prices
3.) Tightening credit standards, and
3.) A huge wave of mortgage resets coming down the pike.
This translates into the following simple economic formula.
Massive supply (record existing home inventory) = declining prices
Shrinking demand (tighter credit) = declining prices
Maybe that's why the homebuilder stock index has been dropping for the last two years.
In short, the housing market is going to be ugly for a really long time.
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No Bail Out by the Federal Reserve. In fact, do away with it.
I love your columns and wish there was a way to communicate with you better then comments. I'll try your blog. How do you think this will play out for people with few assets, not much cash and medium to good credit who want to buy a home next year?
It was obvious that this was coming even several years ago. I sold near the top of the bubble and moved to a lower-cost area. The thing that really has amazed me is that the bubble lasted as long as it did.
The blowback from this is going to be ugly, but it could also be a catalyst for progressive political change: think of the Depression and FDR. I don't see any of the (R) candidates having any traction on this issue...hard to blame it on Osama. Of the (D) candidates with a chance of getting the nomination, I think this could be a strong issue for John Edwards.
Whatever you may think about Bill Clinton, it's hard to argue that "It's the Economy, Stupid!" didn't win him the election in '92. (With a little help from Ross Perot)
Indeed it was obvious.
And it lasted so long because the government was promoting it. Hell Greenspan was pimping the A.R.M.s himself.
People won't even recogonize this country in 10 years. There will be no recovery this time.
Oh, please.
As long as the rich people give up their disgusting wealth and do what they can to raise this country up to what it was meant to be - us poor people aren't going to tear the country apart.
And if they don't... then we'll tear the country apart and people won't even recognize this country in 10 years. :)
you reap what you sow...
if the fed bails, or attempts to bail, us out we will never learn. guess what? the great depression - people learned, they just didn't learn to pass it to their children.
hopefully we will learn our lesson this time.
unfortunately, history says people never learn.
Add to the list: In Florida, one of the largest markets for new homes, the property taxes on new houses ballooned in proportion with ballooning house prices while those who stay in their homes are protected by "save our homes" legislation that caps increases in taxes at 3%. So, many do not move because they could get hit with a huge tax increase of thousands of dollars every year. If you bought a house for $150,000 5 years ago it may be worth $450,000 today so you could sell it and buy another but you would be paying tax on $300,000 at .025% or $7500 every year MORE than you previously paid.
$7500 more in taxes every year to the State of Florida, just because you move from one house to another of equal value, because you lose your cap on tax increases when you move.
There is an amendment coming up for a vote on this issue in February but, as you might have guessed, it isn't structured very well and probably won't pass. The State just has a hard time giving up the bonanza of new tax revenues that fell into their lap with the rise in housing prices.
They should probably wake up fast and realize that their safest bet is a sound economy, not tax formulas.
>>In short, the housing market is going to be ugly for a really long time.
Ugly if you are trying to sell, fantastic if you are a buyer with cash.
James Howard Kunstler predicted a "perfect storm" in his book "The Long Emergency" in early 2005. He said the housing bubble was unsustainable, and combined with peak oil and climate change, we were in big trouble. He was mostly dismissed as an alarmist but it's looking like he was on to something.
Sorry to bring it up..but did anyone who bought these mortgages think they had won the lottery? Did Drew Carey pat them on the back and make them instant winners. No they knew what they were getting into just as well as the realtor/mortgage industry scum that peddlled this worthless paper.
I worked in the debt consolidation industry for some years (another perfect storm..retail consumer debt) and it never ceased to amaze me how burned and abused the poor darlings thought they were by the big bad cc industry. These companies actually wanted their dough. Yes, this is another predatory industry ( and most certainly the other component of this mess.. the ATM.. is a thin piece of plastic.
)but the terms are in writing, consumers know there is no such thing as zero interest or no money down (hey, just pay the interest only for a couple of years and don't worry you'll probably win the lottery or Drew will call before the piper wants his pay). Yes, certainly the consumers in this mess are victims of political and industry avarice but people need to take responsibility for their own greed, life is not a free-ride never-neverland, you only get what you pay for and you do eventually have to pay for what you get. If you can't pay for it , you can't have it. Maybe this simple plan will put the skids on our drop in standard of living and bring some across the board price drops in the entire economy that will once again mean average Americans will once again be able to afford to live here (12 million Mexicans can and their sending $$ home at the sametime).
I wondered if the investment firms are packaging these credit card loans and car loans and sell them to investors worldwide as CDO's ? If indeed they do, then we will have more ticking time bombs. And there is no doubt that they will explode one day.
Watch New England. Every economic trend for the past 20 years has hit New England first.
Right now, foreclosures in New England are growing by leaps and bounds. And unlike in past mortgage crises, people are actually losing their homes because their mortgages are owned by huge investment groups instead of local banks and credit unions. And that means there's nobody to hold personally responsible -- everybody directly involved in home reposession is just doing their job and following the rules.
New England is the most liberal place in the country with the best social services. That safety net ameliorates the impact somewhat. The rest of the country will be hit harder.
This is the going to be getting into the best maket for Good credit, saavy buyers, large equity in their home sellers, and cash laden stock market investors that are fed up with Wall Street Shenanigans. The chance for people who have huge equity in their existing houses who "lok for a Bargain bigger house or property, can demand get great loan terms, because they can take it or leave it, and they can also finance good buyers on their old homes for people who are legitimate qualified buyers at higher interest rates than they will get on their CDs, and cut the banks out of the predatory activities towards these buyers.. Honest smart real estate Brokers who went through the 80's (as I did) should be out there to help those who can steal a great house from bad bank decisions, and sell their old house to the new qualified buyers that the banks are turning away, or trying to screw and make up for their losses. There are already large interests looking at REITs, and hiring smart people to start looking at this, to get ready when the times get a little more ripe. The feds are stuck. They raised interest rates 16 times a few years ago when instead they should only have shut out the the market of piggy bank loans, and 120% LTV paperwork, and No Income Qualifiers lending practices, and been more scrutinizing on the Hedge Fund spinoofs of quick market profits on inflated property values. The industry deserves the restructure. And we need community banks that don't invest in open markets, but return investments back to local economies where they can stay and grow.
Someone said cash is king------cash was king. Anyone that has any kind of assets had better get into Euros now, because part 2 to this little play is dollar devaluation, and it's going to be ugly!!!!!
Precious metals are sweet as well.
After all is said and done; while our leaders blame one another; while our wealth turns to poverty; while our self-centeredness turns to regret: Remember we are all Americans who do not intend to simply endure. We shall pull together under new courageous leadership and we shall sacrifice as much as we have squandered---and we shall prevail.
I'm afraid not my friend.
This country is more divided now than ever before. Add 20 million illegals who don't speak english and several million muslims who will be shunned for their religious beliefs, not to mention black/white tensions reaching new highs.
America is doomed. We let them divide and conquer us.
We could not get along when things were great and you HONESTLY believe that we will pull together when the new depression hits?
Sadly I don't see it.
Whites went along with race and class discrimination for the sake of upholding real estate values. The latest outrage is the Supreme Court school re-discrimination decision, the work of white bread Seattle property owners and sellers.
And as you say, instead of confronting our problems and solving them, we are going to let things fall apart while hoping that we personally, at least, will come out OK.
Indeed. I guess people believe that living behind gated communities with rent a cops will keep them safe; it won't.
We are at risk of a full blown civil/race war within the next decade if tensions continue to grow.
I will of course be abroad.
During the housing bubble the price of houses increased sharply relative to prices in general. This makes housing unaffordable to many people unless they finance it with financially unsound mortgages, such as interest only.
The drop in the price of houses is good news because it will bring the price of houses back to its historical relationship with other prices and make houses affordable to more people using a conventional fixed-rate with mandatory down payment type of mortgate.
Of course the drop in housing prices is bad news for the people who wrote these irresponsible mortgages. They deserve to lose their shirts. But the Fed does have to take actions to keep the seizing up of financial markets from brining down the economy.
If WaMu suffers a serious loss and its stock price falls sharply, GOOD. If WaMu goes belly up, BAD.
The problem is, it CAN't be confined.
When nobody's minding the store, the greedy thieves will raid the place. The mortgage company executives, CEOs raided the consumers.
Bush-World Gov't is a free-for-all for the rich and the greedy, no holds barred.
Everything and everyone's deregulated.
Nobody can be trusted to behave "like adults".
With Bush-Cheney FRAT BRATS in charge,
why's anybody "so surprised" this mess has happened? THAT'S where you should point fingers. Because THAT'S WHO who smirkily let it happen.
In fairness, they were elected. Sort of. But so was that infamous fellow from Germany.
In my opinion, Bernanke should state that interests rates will rise to level off at 9% by next spring... Buyers will come out like crazy.
Higher rates will bring in more international investment anyway: something that really needs to happen, and could help our industries greatly.
Strangely enough, if you look at the insider transactions on Yahoo Finance, officers at Meritage Homes and Brookfield Homes are buying substantial amounts of their own stocks ! Maybe they really know something that we don't ?
Perhaps they are doing it to bouy the value of their existing stocks so that they don't tank before they can sell off?
Well, the house market is going to be rought, and that will hurt.
But the Countrywides and WAMUs of this world played games -- big profits, now big hurt. So they are screaming for the Fed to cut.
Cut, cut, cut, cut. Save us from ourselves. There are ways to make this better for people who are losing homes, but nobody is making an effort in that direction. This call for a cut is to save corporate asses, not the homeowner in trouble.
After the dot com bubble burst, I thought "What's going to be the next big scam?" Well, it turned out to be this housing/mortgage crisis. Now, "What's going to be the next big scam?" Did you thing greed was going to go away?
From the S&Ls and junk bonds of the 80's through the DotCom bubble and Enron's Energy Derivitives of the 90's, right up to today's Housing Market collapse; the middle and working class take it in the teeth every time a bunch of greedy con artists with connections come up with a new & improved way to line their pockets.
I miss Regulation!
It"s called class war.
And the middle class is losing.
And as Warren Buffet said his class is winning.
The old adage "cash is king" has never been more appropriate and more so in 2008. So is your grandfather's advice: "Do not live beyond your means." What we are witnessing is only the beginning of severe economic turmoil. The debt monster is about to devour America and ravage the western world. All so predictable.
Dear Mr. Stewart - Thank you for your post. I must admit, however, I don't have the patience to plod through your beautiful charts - probably some sort of TV-induced ADD. Sorry.
All I know is this: In my little Arizona town, all the houses that didn't/couldn't sell are now rentals; the house behind me has at least ten cars parked in the driveway and all over the street every night (our homeowner's association is going to freak.); my daughter's husband (a real estate professional) is scratching the dirt for any living, breathing buyer; and my husband and I will be in our current home for a long, long time. We're at the end of our upward mobility, which fortunately for us, is okay. For the rest of America, I'm truly sad.
I'm sad for those who either innocently or greedily took sub-primes. I'm more sad for those of us who now must look at Bush-World, blinking and incredulous for the current state he has created.
I'm not sad, however, for the sub-prime lenders who've left our country ravaged and gasping. If there's an afterlife, they'll all spend eternity in project housing, hiding behind their shuttered windows.
The "R" word (recession) is currently being voiced by the MSM. I'm sure this administration will try to figure a way to pin it on Clinton.
I guess my point is that we'll all learn to live differently. We don't need to move up to that next, bigger McMansion. We don't need to max out our credit cards just because we like the shiny, pretty. We don't need sell our souls just to take out that attractive equity loan.
We might, however, find a corner in our little yards to plant tomatoes, or zucchini, or lettuce. We might fall in love again with the old Ford Taurus and forego that new bad-boy Hummer. We might throw a coat of paint on the old house, and then stand back to admire our labor. We might stop buying expensive iPods, sneakers, clothes, you-name-its.
Good luck everyone!
Thank you so much for saying it right. The greed is so revolting and so unnecessary. A coat of paint, bargains, good books from libraries and used book stores, gardens, slipcovers, used cars -the stuff everyday people always lived with and had so much more appreciation for.
I don't blame the general public entirely though. We were set up for this by our business/repub media & advertising= for profit to them of course when I grew up there were not shows like Lives of the Rich & Famous, multiple books on how to become a millionaire, rarely were there designer names, we did not NEED a new car every year or two years and if people chose to live a simple life with house (or home of any kind), a car or (near to public transport), a 40 hr work week, they were NORMAL - not reviled as they are today by some. People were identified as human beings or "citizens" not CONSUMERISTS.
Incidentally, the "revilers" I speak of are a poisonous streak running through our society. They are also the authoritarians. I trust what I observe. These skunks look down and destest poor people (anyone poorer than they). Classist/Facist sickos. They are frightening and they are here.
After all, six years ago today... Georgie's response was to "go shopping..."
Ani, you are speaking for me.
We might stop buying groceries and living indoors.
...and I wish you the very best of luck and a bountiful harvest :-)
Cheers!
Sing Out Sister!
Posted September 10, 2007 | 06:40 PM (EST)