Housing Heading for a "Near Perfect Storm"
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.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
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.
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!
Sing Out Sister!
...and I wish you the very best of luck and a bountiful harvest :-)
Cheers!
We might stop buying groceries and living indoors.
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.
Bush will figure someway to bail out his buddies even if it adds trillions to the national debt.
This is what happens when houses are viewed as investments instead of homes.
I guess I'm the lefty commenter who hates America. Not really, but if that's the pundits' talking point, so be it.
The venture capital bubble of the fondly forgotten dot.bomb era was fairly straight forward. 2% of the economy and a lot of broken hearts.
That Reset Chart is quite sobering. If I am reading that correctly, the next year has about a $trillion of assets which are going to heavily discount. And it ain't a paper loss, it's a margin call.
A positive part is that conventional offerers will be competing intensely for business. And maybe the Fed will lend some pity to the situation.
However, if I go back to one of Bonddad's previous posts... in the dark days of 2001 or so, we weren't up to our buttercups in personal debt. Please don't tell me there are a lot of people who drank from the wacky mortgage AND the debt cup.
The issue that frets me is that somebody is going to have to start selling something besides their house to cover higher mortgages and debt. I hope it is their matching Lexuses (Lexi?) and not their portfolios.
This is going to be a lot more complicated than EBAY dropping to $8.00 per share.
This lefty Chicken Little is out of here before I start talking about the valuations of all of those companies that private equity groups bought.
"Please don't tell me there are a lot of people who drank from the wacky mortgage AND the debt cup."
It has been estimated that in recent years about 0.5% of overall GDP was financed by cash out home equity loans. This is the use your house as an ATM method of financial planning. They wouldn't have all those ads to tap your home equity for that vacation or consolidate those credit card debts if millions of people weren't buying into that scam. Sorry, but that negative savings rate you've heard about had to have a basis in fact.
I hear ya. It was a plea for hope because I hadn't heard numbers for the double down scenario. And I have seen a lot of pale people since the ATM machine broke.
There is just a nagging convergence of two lines.
We love cheap goods. But the real cost is unemployment, underemployment, stagnant pay, higher oop benefits, and disappearing community businesses. Then we bought piles of those cheap goods with debt.
We did this same Supply Side debt thing back in '87. And here we are again. With a private equity bubble to replace the venture capital dotbomber.
It just seems that this cheap money "growth" economy has been a bad recipe with ingredients that don't go together.
And unlike a good meal, we are praying AFTER we have eaten.
Actually that .5% of GDP number is incorrect.
70% of GDP is consumer spending.
33 - 50% of the consumer spending was based upon equity loans or home purchases.
Do the math. That is 23 -35% of the GDP. (and since the US doesn't 'make' anything anymore to speak of with manufacturing, that makes sense.)
Enough has not been said about the Realtor's hand in this mess- I was looking for houses at the time interest rates began to drop & rather than finding better deals I found very abrupt price increases which virtually took any benefit the consumer might have gained & put it in the Realtor's pockets as increased commissions.
It is not like people didn't forcast exactly what is now happening - unfortunately when so many people are realizing significant financial gains they are too willing to ignore facts. & many companies were riding high! A sub-prime mortgage company that employed 35 people closed it's doors a few weeks ago- and yet I remember a few years running they were all sent on weekend long cruises paid for by the company.
Reminiscent of the DOT COM debacle.
Bonddad...been reading your comments for to long, not to believe that this economic crisis will most likely surge to a crest in another "Friedman Unit"...sometime around March of 08.
Jeez...~ in the neighborhood of $ 110-115 Billion...even the cost of the war pales in comparison.
So is this why the Replicant's are finally making some half hearted noises about helping out homeowners?
Because it's starting to dawn on them that the Dems will be able to finally pin them up by their economic trickle down BS?
With this administration, never "mis-underestimate" the power of denial...and stupidity.
God help us their too little, too late action manages to move this situation out of the more likely 60% probability to a less likely 30%, all the way to the really bad "perfect storm" of 10%...all of which are described below.
http://www.dailykos.com/story/2007/9/2/181833/4518
We could ALL see the handwriting on the wall on this implosion....houses sold for 50% more each yr, mortgage brokers and real estate agents (neither needing even a high school diploma) driving BMWs and living in McMansions, and hedge fund managers making 25 million and paying 15% capital gain taxes. It was a HOUSE OF CARDS, based on who could fleece the most amount of commissions! They should all go to prison!
it's all supply and demand. too much money chasing too few homes drove the prices throught the roof. more homes were built to accomodate demand. tightening the money supply means fewer dollars chasing a surplus of houses so prices fall. if any of the mortgage company dunderheads had taken an economics class in college they could have seen that giving loans to people who would not be able to afford them once the rate went up to where it should have been in the first place was a mess waiting to happen. but then they would actually have to care about the consequences. the best thing that can happen from this is for the government to stay out of it and let the chips fall where they may, no matter the outcome. that's the only way people will learn to take responsibility and not run to uncle sam for a bail out when the pyramid scheme collapses.
in your case, hindsight is NOT 20/20. You've conveniently ignored the fact that the government gave these dunderheads the right todo as they please.
You're right: they didn't care about the consequences whatsoever. I bet half of them were counting on Rapture to deliver them from the mess they helped create.
Actually they are a surplus of homes in the US- a considerable number are not occupied.
From 2002-2006, 40% of homes were sold to (1) speculators and/or (2) 2nd (or more) home buyers.
What exists is an oversupply of McMansions with more bathrooms than residents, grantie counters and 3 different areas for eating a meal.
Builders werea ll chasing the buyers from the upper 10% income bracket. Built way more of those houses than there were buyers.
Even the "starter" homes are huge.
Love your posts here.
Why the "really long time?"
As somebody currently out of the market and renting,....
Gee, I'm glad that I am out of the market and renting for the moment.
I am in perfect position to benefit from the housing glut,... assuming that I can find somebody with the money to lend me for a home loan.
That remains the variable at the moment.
Try the credit union. Assuming you have an income that's not tied to the consumer economy.
If the latter, then you should wait until after the crash next year to line up financing, assuming you have any customers able to afford your services.
Diehard conservatives will insist that the solution to all our problems is an unrestrained free market economy. The slow-motion train wreck that is our current housing market is a perfect example of how wrong this can be. Government can, and should, set limits on the movement of funds in a market so fundamental as housing. Interest-only loans (that's rent, isn't it?) and crazy subprime lending to people who really can't afford to buy a home are ingredients for a disaster that only needs time to bake - and the timer has begun to ding.
Maybe the supply record(of homes) has something to do with "Supply Side" economics!
Not too far off the mark.
Long-term interest rates have been kept artifically low for the past 5 or 6 years to keep the one and only strong sector of the economy moving and help disguise just how bad things are in the other sectors.
Think about Bush's profligate borrowing habits - classic economics tells us that this should have driven up interest rates, as government borrowing crowded out private borrowing. That didn't happen. Instead, rates were held low to stave off a full-blown recession - which will now ensue.
Remember all those empty commercial buildings at the end of the 1980s, built with free and easy S&L loans...and how that brought down the S&Ls when all was said and done? Ironically, the same apparatus was at work then...a Republican administration, desperate to paper over a crappy economy, loosened the lending/investment rules to interfere with supply and demand in order to keep at least something moving in the economy. That was a bad move and put us into the recession that got Bush's dad tossed out on his ass.
Well, this is going to be worse. A lot worse.
I hate to say it, I think you're right.
Bush is quite the typical leader of the rich.
The rich elite that actually prosper when the economy is failing. It's one of the reasons the rich elite hated Clinton so fiercely; He allowed there to be more money in the hands of average hard working Americans.. The nerve of the bastard!!
The business cycle was not seeing an end in sight; people were getting more money, the economy was doing better and better. The rich can't STAND that. They like to be waited on hand and foot, like in a restaraunt when the economy's bad and there's little if any business. When the economy's good, they have to wait like everyone else. Curses!!
Remember when Bush was given his ticket to ride by the Supreme Court in December of 2000? it seems the first thing out of his mouth was: "We need to make provisions for the coming recession."
The stock market immediately TANKED, and it seemed like the rich all threw their hats in the air! Actually, the economy was quite strong then, it may have needed a little adjusting but millions of average American investors would GLADLY take that economy over what we have now.
Thanks a lot, Bush. You're a real hero.. NOT.
Can't WAIT to send you home, dude.
You must be logged in to comment. Log in or connect with
