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.

Comments

[theeconomicfractalist]

911, Eclipses, and Valuation Fractal Patterns

This week for both the conspiracy theorist and the highly elusive, new nostradamus, OBL: 911; for the astrologist: a partial solar eclipse; and for the nonstochastic macroeconomic saturation fractal scientist: a recent 5 day hourly fractal pattern indicating a high probability of imminent equity and commodity nonlinear valuation decay.

[olephart]

Greed and fear the two basic sides of the investment coin. Just as the bubble was inflated by greed so shall it be deflated by fear. Touting one's personal residence as an investment is like buying life insurance in hopes of collecting on it. What we have seen is simply a tulip craze involving homes. They aren't stocks, bonds or commercial real estate. Most were not purchased as rental units with a keen eye toward the Cap Rate or cash flow. They weren't even purchased with an eye for living in them. They were purchased as investment vehicles. They were purchased so the buyers (speculators) wouldn't be left out. They were purchased to make money (greed). The ever increasing home valuations were based on borrowed money not the intended function of the house. Its function, after all, was only to provide shelter for one each family that is the only value that was real. Once its price was based on something other than that, it became a tulip.

The existence of numerous unsold units (supply) and financial conditions depressing demand will of course bring economics 101 into play. Those on already shaky ground are looking at rising payments through resets on houses declining in value. This is a recipe for additional disaster. As this onion sheds its layers more fantasy home values will be exposed. Even many homeowners with good credit will be affected. All of those who have used their homes as an ATMs and took out home equity loans for frivolous reasons will find that diminishing equity may put them upside down. All those who paid top dollar for their “investments” will be upside down. There is a distinct possibility that millions of home owners will find themselves owing more than their homes are worth. It will be tempting to many to walk away from this debt. This will be like the tethered climbers being pulled off the side of the mountain one by one as the ones above them fall.

[nickyboy1]

You should see the ATM homes - around here - oversized bungalows. Pathetic.

[NavyMom]

And many of the families owing more on the house than the house is worth will not be poor-they will be fairly affluent people in the suburbs who took 2nd mortgage to pay for additions and granite countertops. I expect there will people in my neighborhood in this situation.

[davedave]

crisis and opportunity are linked.

how will the sharpies profit?

d

[dadw5boys]

Wow they used the poor people to drive down home prices so the rich can buy more property cheaper.
WOW what a financial manuaver.
Now all thats needed is a bailout by the Federal Reserve and hand the poor people the bill for the bail out and the interest too.
Then a few tax cuts for the top 5% and it is done.
GAME OVER!

[nickyboy1]

Unfortunately dadw5, I think you are right. . . with all the "help" for the homeowners out there, you'd think that some would not have to put their homes up for sale.
Eminent domain sneaked in neatly and was reported after the fact (as usual nowadays) so what they can't take will be bought cheaply. They are worse than repulsive.