May 2007

I like pictures that are worth 1,000 words. One of them is (from John Mauldin investment letter):

home price decline

As you can see a new home was always a little bit more expensive than an existing home. For all the last 15 years.

Not anymore

What happened this week:

What to watch next week:

  • I think homebuilders are now in the mood of asset liquidation. That should lead to the decline of land prices. Let start watching the land
  • I will watch more closely commercial real estate and REIT’s
  • We’ll have tons of economic data next week, I will watch everything related to consumer and construction

The very significant event just happened. Today the Census released the astonishing 16% (subject to heavy revisions) increase of new home sales and horrible, unprecedented 11% decline in median and 8% in average price.

The housing price is back to July 2005 – 22 months of price appreciation are completely erased.

One can also say that homebuilders declared the war to existing home market. The 11% price decline across the nation probably means 20%-25% price decline in some hot areas, just in 1 month.

It was already reported many times that in some areas new homes are much cheaper than comparable existing homes. The significant part of homeowners have less than 20% equity in their homes, and another 11%, 20% or 25% decline in price will put millions of families upside-down in their mortgages.

This paragraph is revised. The total value of real estate in US is around $20 trillion. As the existing home market is in denial, the real price-to-market is currently set by home builders. If we conservatively assume from the reported 11% decline in prices that the real real estate prices in US declined 5%, then it translates to $1 trillion loss in the citizens books.

The denial phase of housing slump is probably over. Now we are moving to recognition, panic and then acceptance (that would be the bottom)


Note: Pat_in_OH from CR noted that:

If we look at the March report we see that, in the original release, 84 thousand houses sold at an average price of $330.9 K for an implied total revenue of $27,795 K.

Now we have the April report showing 92 thousand houses sold at an average price of $299.1 K for an implied total revenue of $27,517 K.

So the total cash flowing into the home builders is essentially unchanged. Market celebrants should hold the champagne for a bit longer. (Note that I’ve used the original report’s 84 thousand houses, not the revised 81 thousand since we should expect that the average to have changed also — but we don’t know what value to use.)

Yen is at major support around 82.0-82.6. It being there 2 times before – in December ’05 and January ’07.

As you can see all moves up are very steep, like short coverings. Let see what Yen will do now

At Calculated Risk, the question of relationship between mortgage equity withdrawals and consumption is one of the central ones. Indeed, when MEW is at 5% of disposable personal income, it seems that this number is very crucial part of real consumption.

Those who argue that housing collapse does not affects consumption usually say that people are smart enough to not use MEW to directly fund consumption, so decline in MEW should not affect that component of GDP.

I agree that while people usually do not use MEW to purchase plasma TV’s, but that’s where the money flow will end up anyway. Let see. Suppose people use MEW only for legitimate reasons:

  • Remodel the house, purchase second home, make a down payment for bigger home, service debt on the home. In that case money go builders, agents and brokers – and they will count it as income and purchase plasma TV
  • Purchase better health insurance, send kids to college. In that case money go to hospitals and colleges, they count them as income and purchase plasma TV
  • Restructure past financial mistakes. In that case plasma TV was already purchased, but later financed with MEW
  • Tap MEW to cover unexpected problems, like loss of job and so one. In that case the bankruptcy is avoided, so the bank lenders are not experiencing the losses, profits are intact, share prices are rising – and that makes bankers and investors to purchase plasma TV

In 2005 and 2006 the rate of personal defaults and bankruptcies was at historic lows, because whatever happens, eventually the MEW could be used to make the book. As shown above, whatever reason for MEW, it will end up as another plasma TV

Dollar is moving up since late April. Here’s the chart.

But we know that speculative interest to the dollar is usually proportional to the treasury rates. When rates are up dollar is usually up, too, as foreign capital inflows.

Let see the chart of dollar index divided by the 10-year Treasury interest rate:

dollar vs treasuries

I understand that the dependency is not necessary linear, so dividing those values is a little bit like dividing apples by oranges, but it makes some sense.

On this chart dollar is making new 10-month lows.

Shares of Homebuilders Jump After Treasury Secretary Says Housing Slump Mostly Over

Do you know at least one, just one datapoint that will support that view? The most real-time data I know,, tells me that inventories are well above last year level.

  • Los Angeles +25%
  • San Jose +33%
  • New York +7%
  • S. Louis +20%
  • Baltimore +24%
  • Chicago +19%
  • Seattle +46%

In housing slump the 2006 was just a warmup. The real trouble hasn’t started yet…

Thanks a lot to my reader Sweden for asking for another post. In the past week almost nothing happened, and I was in vacations, so I was not sure I have enough news for the post. But let me try.

What happened this week, while I was in vacations:

  • The most influential event was the dollar rebound from the multi-year lows. That’s what all currencies do – they bounce out from support and resistance until major events make them fall through. The treasury interest is up, so dollar is more interesting for carry trade. I think that made all traders, TV hosts and money managers to relax and let market move up
  • It’s very clear that capital is moving from small stocks into big ones. REITs are moving down. Remember this post?
  • All news related to housing were rather bad, but everything outside of real estate is ok (for now)
  • Spain is dumping 80 tons of gold. When spanish real estate bubble pops it won’t be pretty

What to watch next week:

  • Next week is the big housing week. I expect bad sales and high inventories. The is posting exploding inventories
  • Monday is Lowe’s report, I’m very curious. Also reports from Toll Brothers and Target
  • Yen is extremely low, I don’t know if there is enough force to keep it there. Let’s watch Yen
  • There is a huge market bubble in China. I don’t know when it pops – maybe next week, maybe next year – but when it pops it’s all will be over for this economic cycle

Economy is changing gears. The most important news this week:

What to expect next week:

  • Housing index from NAHB 15th and starts 16th – expect no good
  • Core CPI may decline, but while it’s rounded up it’s hard to tell
  • Consumer confidence – probably a modest decline

The remaining New Century Financial mortgage loans were just sold for 34 cents for the dollar. And that was the best bid.

There are close to $800,000,000,000 of US subprime loan papers trading all around the globe. If some of them are worth only 0.34 of the face value then we are talking about hundreds of billions $ of losses. Ugly

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