Posted by Ray on August 13, 2009 under Economy, Markets | 
Correct me if I am wrong, but hasn’t real estate hit its bottom? According to CNBC, TV, Cramer said that real estate hit its bottom, ‘early’, in June and all other reports yesterday everything is fine and prices will go up,up,up! However, as usual, CNBC.com has conflicting stories for example, CNBC TV says bull market with hot economic growth and there is no risk in this bull market, but CNBC.com is awash with stories about the global markets are in trouble and real estate is in pretty bad shape. This is what makes me question the integrity of CNBC commentators, who I once respected.
Regardless, real estate is a mess and July was no exception with foreclosures setting yet another record. Remember this is ‘another’ record meaning it was worse than June which means more pressure on the residential market when or if banks put those homes on the market. That is the crux of the matter, banks are holding properties, often referred to as the shadow market, and we have no idea exactly what their inventories are. Therefore, the sales numbers and inventory numbers mean nothing as there is hidden supply out there, unless they continue to destroy foreclosed home, yes banks are doing that.
All of the programs in place are simply not working and I would chalk this up to a waste of time and money considering most modified loans still defaults. As hard as this is to say, we need to let these homes be foreclosed upon, yes I am serious. This is one way of cleaning up malinvestments and people need to understand how to live within their means instead of trying to keep up with the Jones’s. Now, before you call me cold hearted or insensitive I need to let you know that I did have a family member lose their home with horrible consequences, but it was a matter of too much house without enough resources.
The foreclosure rate for July was up 7% month-over-month and up 32% year-over-year. What this means is more moratoriums are on the way and more federal rescue plans which are merely a waste of money. These programs only postpone the inevitable and will make future reports look OK in the short-term, but longer term it will simply create more bad data points. The market is telling us to let housing depreciate and propping it up will only prolongs the pain moving forward.
This data also feeds into my belief that the markets are overbought to such a high degree that I fear the next leg down will be horrific. This is why I moved mostly to short treasuries, non US dollar assets and cash only keeping 35% total in equities, enough to let me participate if I am wrong, but if I am right it will not destroy my portfolio. Either way you feel I would strongly suggest you invest defensively for the short-term. As usual, do your own homework and invest according to your goals and needs.
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Posted by Ray on August 12, 2009 under Main |
Oh the media has been working overtime to convince everyone that things are great and there are green shoots everywhere. From a half backed GDP report, which revised 1Q09 down by .9% which you then add in inflated government spending and you magically have good news, to a fully backed jobs report they have managed to turn one bear into a green shoot advocate, Roubini.
In other news mortgage applications plunged again this month thanks to higher interest rates, not sure what to really think about a 5.38% mortgage rate being “high,” but somehow this was spun as sales contract numbers rose, slightly. Contracts really mean nothing as they have a high, relatively high, cancellation rate and I have never based any decisions about the market over this type of data point, it is really a nothing in the big scheme of things. Now if we were talking sales then that is a different story as sales means something. Regardless, mortgage applications dropped which should make yesterdays CNBC story about optimism in the housing market obsolete and defunct as the story was obviously spun to make things look better.
With Roubini now in the camp of the recession will end by December 31st, 2009 the bulls have declared victory and are dancing in the streets. They even got him to say that asset prices should go higher and the risk of a double dip recession is low, all of which is nonsense. After being misquoted a few times and constantly bashed by most people on CNBC it is clear that he has had enough and decided to side with the path of least resistance.
However, I have to disagree with him on equity prices as I see it the S&P 500 have priced in perfection and has set itself up for a big fall. However, even I admit that the inflation of the money supply is making things unpredictable as much of that money ended up in equities. Even so, I think we are in for a wild ride in the near future.
With mortgage applications down and mortgage rates up I think it is safe to assume that the residential housing market will continue to languish in the near future. That is until the Fed magically lowers rates again through quantitative easing, monetizing our debt, but I am fairly convinced that will not do much to spur sales. People are funny, when they see prices continuing to fall they tend to stop buying to wait for a bottom which creates a paradox for the real estate market as they need buyers to stop prices from falling.
In a nutshell, things are tough and I am willing to bet we are in for much lower equity prices in the near future. While Roubini has been tamed and the media works on spinning the mortgage application data and claim that new contracts are indicative of potential sales, which they are not, to declare the real estate market “stabilized” I will continue with my bearish outlook until things fundamentally change. So far, I have seen the fundamentals weaken, not strengthen and there is simply no compelling reason to buy equities at these prices.
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Posted by Ray on August 2, 2009 under Main |
After reading numerous articles stating that housing has bottomed and about to rebound I find it hard to believe these authors, namely names like Cramer and some other overpaid anchors, are looking at the same data everyone else is looking at or if they are even on the same planet. The same cheerleaders who were their helping boost housing prices to nosebleed altitudes are now saying the worst is over.
This is pure nonsense and while the “worst” may be over I am willing to bet that prices continue to fall in the near future. I know what you are saying, but everyone already said the worst is over and such geniuses like Cramer called the bottom months ago. Well, what can I say, perhaps I like being chastised by the media or I like being a contrarian. Actually I am neither, more like a realist, a student of history and, hell, I like looking at data and not trying to spin it to boost ratings or to sell cheap and false hope.
This is evidenced in an article I read today where a person interviewed on the housing market actually said this:
“By every measure, except foreclosures, the housing market has stabilized and many areas are recovering, according to a spate of data released in the past two weeks. Nationwide, home resales in June are up 9 percent from January, on a seasonally adjusted basis. Sales of new homes have climbed 17 percent during the same period. And construction, while still anemic, has risen almost 20 percent since the beginning of the year.”
Foreclosures are the problem, plus unemployment and the lack of real lending. What we have here is a temporary plateau in housing prices because of pure government intervention, not real market forces. To spin this any other way is an act of stupidity and attempting to encourage people to buy overpriced homes. I might add that this story came out after a story about how unemployment benefits are running out for people, which is why continuing claims went down, and Congress may extend benefits again, as they should.
What we do Know
There is no question that price depreciation is slowing, but it is slowing under artificial circumstances. Without the first time home buyers tax credit, ultra-low mortgage rates and builders slashing prices demand would be much weaker than it is currently. However, what the market is really telling us is that prices need to go much lower than they are currently. Artificially inflating prices is simply repeating the problems that got us here in the first place.
If we look at history we have never had such a large appreciation in housing prices than the 2003-2006 period. A friend of mine bought a house in Pasadena California in 2004 for about $550K and by 2006 his house was appraised at 1.05 million, after only 2 years. Now his house is worth, they say, about $800K give or take. Let’s recap that, the home doubled in value and then is worth 20% less than its all-time high price and we think that is enough or a retracement to justify stabilization, I don’t think so. Keep in mind he could afford the home and is in no financial trouble, just wanted to add the disclaimer.
Others were buying in a frenzied mode up until, really, 2007 and then people realized that things were not what those Realator.com commercials said and home prices can go down. Real estate is nothing like the equities market until the boom hit and people would bid up properties and make offers over the asking price. Frankly, the housing market made the dotcom era look tame and, obviously, had worse consequences when the bubble burst all under the false pretense that housing prices never go down.
When people tell you that prices can never go down that is when you should have the “aha” moment that we are in a bubble. Frankly, all prices eventually go down on some sort of cyclical pattern, but they then take a certain period to illustrate their point, usually a rolling 10 year period. This argument was made about equities in 1999, but what they never told you was that during certain 10 year points, equities did go down and at some points substantially. In my opinion, housing only went up long-term because of inflation rather than actual appreciation. Yes, some areas do appreciate, but inflation is the leading reason why a home built in 1950 originally sold for $10K and today it is worth $100K.
Regardless, housing has a ways to go before the bottom is really here and while that won’t boost ratings or sell more magazines it is the truth. For evidence of this let us take a look at a long-term chart of housing prices:
Combine that chart with the other evidence within the housing market and you will see that there is a long way to go before we hit bottom.
June 2009 NSA New Home Sales Worst Since 1982
Source: M Hanson Advisors
IT’S TAKING A YEAR FOR HOMEBUILDERS TO FIND BUYERS
Source: Haver Analytics, Gluskin Sheff
Builders Are Slashing Prices to Dump Inventory
Source: M Hanson Advisors
Any chartist will also tell you that nothing moves in a straight line and while we have had a huge plunge in prices what we are witnessing is temporary support. There is no other compelling evidence to support this recovery talk that is everywhere. It is also true that we will not know when the bottom will happen until after the fact, but based on the data we have, I do not see it yet. Furthermore, until unemployment starts to turn, meaning we have net job gains and the unemployment rate drops by more than people simply do not qualify for benefits, you can be assured that housing will not turn until at least then.
The Bottom line
We can all believe that things are getting better, but it will only really get better when the actual evidence supports it. The talking heads have their agenda, to get more viewers or sell more subscriptions while I have no agenda whatsoever. Based on this data not only would I not buy a house right now I would not touch any stock that has anything to do with the sector.
From what I see the only way we will ever reach a true bottom, which is what we need for a recovery, is if the government stops intervening in the market. It will be painful and I am sensitive to this train of thought, but it is what we need. I am in the same boat as everyone else because I am a homeowner, but I want to stress the owner part f that statement because I bought my home to live in and not act as a savings or retirement account.
Perhaps if more people took pride in actual ownership of a home then they would not have bid up properties to astronomical, unsustainable levels and this whole thing could have been avoided.
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