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Reggie Middleton

Reggie Middleton

Posted: March 12, 2010 05:39 AM

It's Official: The US Housing Downturn Has Resumed in Earnest

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The year 2009 was the year of reflation theories and bubble blowing. Theses of "Green Shoots", catching the bottom, and QE reigning supreme were the order of the day. Sure enough, asset prices (nearly all of them) went one direction, straight up. We all saw it coming, but guys like me who actually count the money and rely on the fundamentals didn't believe it was a sustainable gain. It wasn't a bull market, but a bear market rally. After nearly one year, the reflationists have had their hay day, or have they?

One thing that I have been proven correct on thus far is the housing market. Despite what was probably at least a trillion dollars of effort directed at suspending real estate and real estate related assets, prices are resuming their downward slide after falling 28% nation wide, peak to trough, and  over 50% in some areas.

It was the sharp downturn in housing prices that started the entire domino effect and much of this country's financial infrastructure is still heavily levered into residential (and to a lesser extent, commercial) real estate. Any further downturn will, without a doubt, wreak additional havoc on the economy. Is such an additional downturn in the tea leaves? Let's take a look at some charts sourced from the upcoming BoomBustBlog subscriber "A Fundamantal Investor's Peek into the Alt-A and Subprime Market" update, which should be released withing 24 hours or so. This release will include all of the raw data necessary for users to run their own calculation and draw their own conclusions.

Click to enlarge

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The governent did succeed in temporarily raising home prices in some of worse afflicted states temporarily, but as was easily determinable from the beginning, market forces grabbed control again and prices have continued to sink. There goes a few hundred billion dollars of taxpayer monies in the process. I believe that the taxpayer capital would have been better spend on small and medium business credit line guarantees that would have had an IMMEDIATE and lasting effect on employment and incomes. Instead of trying to manipulate the real estate markets and the associated mortgaeg market, we should have been focusing on true job creation and the availability of credit to that sector of industry that employees the most people. As income to debt service rations increase, home prices would be sure to follow. Of course, prices would have fallen significantly in the interim, but that was going to happen anyway, regardless of how much money you spend and what you spent it on. That's why they call it a bubble "burst"! The government could have used that capital to purchase the properties directly and the prices still would have fell once the government attempts to resell them. The market is the market and it is waste of capital to try and manipulate it in lieu of driving the fundamentals behind what dictates it.

I fear we will be learning a very similar lesson in the equity markets, as soon as the end of the second quarter - and after trillions of dollars of QE on top it.

In the chart above, you can see where CA has made some progress interms of appreciation. CA, FL, and NV account for nearly 50% of nationwide price damage. Let's take a closer look...

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As you can see, even the effects of HAMP and QE in California are starting to wear off. Florida never broke positive ground, it just got worse at a slower pace. California's housing market may get hit even harder as that state government is literally insolvent - and the effects of that insolvency will probably be taking root in the upcoming quarters in terms of diminished services and government employment.

These illustrated negative facing trends were easily discernable 3 months ago when I dissected the Case Shiller resutls graphically, see If Anybody Bothered to Take a Close Look at the Latest Housing Numbers...

The chart below illustrates the seasonal ebbs of month to month price changes.  On a month to month basis, we see hills in the spring and summer and valleys in the fall and winter. During the onset of the bursting of the (first) bubble, this cycle was compressed, but was still there. and lasted throughout the bubble. With the onset of the government stimulus (ex. housing credits and MBS market manipulation), the peaks were significantly exacerbated. Now we are entering into the winter months again, and guess what's happening, as has happened nearly every winter cycle before. The only difference is that this dip is extraordinarily steep! I would also like to add that the month to month price changes coincide exactly with the S&P 500 move downward and upward for 2008 and 2009, to the MONTH! What a coincidence, huh? If this relationship holds,,,, well you see what direction the month to month lines are going and how steep they are, don't you?

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As you can see when we drill down into the month to month  numbers, the improvements either weaken significantly or disappear into numbers that show further declines - and this is in the face of government bubble blowing!

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Let's chop the data up using bar graphs that give the reader a greater feel for the seasonality of the moves, and you will still find the latest numbers showing what looks like a downtrend, again...

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  Remember, the CS index measures matched sales pairs. That means that it attempts to follow the same properties being sold, so the seasonality will mean much less than if one were simply measuring transactions, irrespective of the property. The seasonally adjusted numbers look more positive, but still show a downtrend. Since I could not find the specific methodology on the "de-seasoning", and I am easily able to discern the seasonal trends over time, I am much more comfortable with the raw index data.

So, what does it mean if we get another significant downturn? Well, not only are the 2003 to 2007 vintage mortgages in trouble, but those 2008 and 2009 mortgages are at risk as well. What are the chances of this happening? Fairly significant. For all of those guys who swear we are on the brink of a booming economic recovery, recall that it was housing depreciation that set all of this off to begin with. It was not a dip in GDP, not unemployment, not a dip in corporate profits, definitely not a change in analyst's earnings forecasts and not a crash in the stock market. It was a crash in housing. What happens if we get another housing crash (or more accurately put, the continuing of the current one) after a few hundred billion of stimulus and a 62% run in the S&P to guarantee that the stocks are nice and ripe in their overvaluations? Inquiring minds want to know...

All of this information was sourced from government sources and to a much lesser extent, Bloomberg. Keep the findings above in mind when considering the big and small banks that hold billions upon billions of loans based upon these assets on a leveraged basis on their balance sheet while their share prices skyrocketed 100%+ and sell side analysts forcast rosy earnings and continued rocketing share prices. Do you remember in 2007 and 2008 when the  housing market really started to nosedive?

Better yet, what has happened to the equity markets over the last 80 or so years whenever stock prices wandered so far away from the fundamentals? I am not going to be the one to utter the word CRASH, but go back and chart it yoursefl, The last event was only two years or so ago.

 

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