Barron's is all over it now. Here's some highlights from their recent expose on the disaster unfolding with housing - a disaster which will impact the entire world economy and flip it on its side. Seriously, folks, we're in a heap of trouble now. Thanks Aaron for the lead... Extra credit for why the photo...
A HOUSING CRISIS APPROACHES: According to the Commerce Department's estimates, the national median price of new homes has dropped almost 3% since January. New-home inventories hit a record in April and are only slightly off those all-time highs. Existing-home inventories are 39% higher than they were just one year ago. Meanwhile, sales are down more than 10%.
Although the stocks of new-home builders are down substantially, the stock market and many analysts are ignoring other implications of the housing news.
The following figures are from Washington Mutual's annual report: At the end of 2003, 1% of WaMu's option ARMS were in negative amortization ... At the end of 2004, the percentage jumped to 21%. At the end of 2005, the percentage jumped again to 47%. By value of the loans, the percentage was 55%. Every month, these borrower's debt increases; most of them probably don't know it. There is no strict disclosure requirement for negative amortization.
This financial system cannot work; houses are not credit cards. But WaMu's situation is the norm, not the exception. The financial rules encourage lenders to play this aggressive game by allowing them to book negative amortization as earnings. In January-March 2005, WaMu booked $25 million of negative amortization as earnings; in the same period for 2006 the number $203 million."
August 23, 2006
All of this will seem so obvious two years from now... Barron's latest housing expose: The No-Money Down Disaster
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14 comments:
I admit I feel like "the tutored" when reading Barron's. So help the slow, asset-preservation minded child, WTF am I supposed to do?
WaMu is in a pickle. Although they can book the neg am loan balance increases as income the increased loan balances need higher reserve requirements and their insurance models must surely go exponential for loan loss reserves as well. BTW they also book teaser rate revenues as income at the full interest rate.
There's got to be a mroning after - if we can hold on to the light
Glub, glub, glub - The Poseidon Adventure
pic looks like drunken party revelers... boy is this hangover gonna be an mf'er.
you got it - poseidon (sp) adventure, with the immortal shelly winters about to meet her maker
Why the picture? Because like the ship, the US economy is about to be turned upside down, and everyone for himself
there's something in human behaviour that predispositions us to chasing bubbles - housing just being the latest in a long line of them
As we used to say in the old finance company days, "They ALL pay - until they quit". Some smart old guys are going to be spreading this kind of paper and buying it on the total cheap - pennies on the dollar - because that is the only way the you can make any money off this kind of crap. These places will be begging for K-Y in the years to come.
There is but one way home for the millions in financial bondage, trapped by ballooning debt and depreciating assets:
MONETARY INFLATION
The imbalances must ultimately correct, like water behind the dam seeking it's level. The US dollar must devalue, massively, and the US standard of living must decline. The forward-thinking long-view citizen (translation: the rich) will survive because he will be holding real tangible assets with intrinsic value: gold, silver, natural resources and land. All other assets have inflated prices based on speculation: most homes are priced many multiples of their cost of construction - this pricing is unsustainable.
MONETARY INFLATION
The imbalances must ultimately correct, like water behind the dam seeking it's level. The US dollar must devalue, massively, and the US standard of living must decline. The forward-thinking long-view citizen (translation: the rich) will survive because he will be holding real tangible assets with intrinsic value: gold, silver, natural resources and land. All other assets have inflated prices based on speculation: most homes are priced many multiples of their cost of construction - this pricing is unsustainable.
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I don't know about the land part. That was bought with leverage too. Pretty obvious just from looking at the land prices in S. Jersey as well as around the bubble areas of FL.
Yesterday I visited a new home development in Broomfield, about 20 minutes from Boulder. I don't usually pay much attention to the mega projects South and East of Boulder because frankly, they don't interest me. New urbanism projects are intriguing, but I have less interest in the goliath developers spitting out mcmansions.
Of course, my tastes are not always my clients.
So this company is building 3,100 homes over the next few years. Nearby in Erie, a handful of other builders have other massive projects underway.
Sounds awful doesn't it?
But then I realized something that perhaps you don't Keith. The builders aren't constructing thousands of units and waiting around for them to sell. They tie the pace of construction to the pace of sales, reducing the risk tremendously. Plus, with all the profit structured in by economies of scale and highly profitable "features", a 3% reduction in median prices is a thin slice off their margin. This particular builder had 1.42Bn in net profit last year.
Nize Notes:
The Fed has Voted for Stagflation
Jim Jubak gets it:
The Federal Reserve seems determined to bring back the 1970s -- and that won't be any Golden Oldies party for investors.
The Fed has just voted for stagflation, a dreadful mix of slow-to-no growth and high inflation that made a good part of the 1970s such a bad time for investors. According to Ibbotson Associates, the S&P 500 ($INX) showed a compounded annual return of just 3.2% from 1973 to 1979. Long-term government bonds didn't do a whole lot better with a 3.5% compounded annual return for the same period.
Mind you, those were the nominal rates of return for the period -- that's before inflation. Figure in inflation and investors lost money during these years...
At the Aug. 8 meeting of its Federal Open Market Committee, the Fed decided not to raise key interest rates. That put an end to a string of 17 consecutive increases in short-term interest rates that had taken the central bank's benchmark from 1% in June 2004 to 5.25% now.
A wing and a prayer Oddly enough, Fed officials chose to end their attempt to lower inflation by raising interest rates even as they publicly acknowledged that inflation had picked up speed. "Readings on core inflation (Translation: Overall inflation minus changes in the volatile prices of food and energy) have been elevated in recent months," the Fed said in its press release. "However, inflation pressures seem likely to moderate over time."
"Seem likely to moderate." I'd call that flying the economy on a wing and a prayer. If the Federal Reserve is wrong, the pause in raising rates will give inflation more time to pick up momentum in the economy and to build the kind of entrenched inflationary expectations among consumers and businesses that the Fed has been trying so hard to head off.
Why did the Fed punt on inflation on Aug. 8? Because the central bank under its new chairman, Ben Bernanke, continues to believe, as it did under its previous chairman, Alan Greenspan, that it can fine tune its way to a soft landing...
Changes to the discount rate take 6 months or longer to impact the economy. I think the Fed is betting the now obvious economic slowdown will reduce inflation down the road. There might be one more rate hike this year, but that's probably about it for the year because the economy seems to be slowing rapidly.
"I think the Fed is betting the now obvious economic slowdown will reduce inflation down the road. There might be one more rate hike this year, but that's probably about it for the year because the economy seems to be slowing rapidly."
Since you know so many builders, then you also must realize that price inflation in that business is running 1% per month, not the 4% annual nonsense posted by BLS. Builders are feeling tremendous pressure to move inventory and clear construction loans because an average $350K box is costing them $5k-$10K per month in carrying costs depending on the stage of completion. Now that sales prices are falling, it doesn't matter if they try to match inventory with demand, at some point they will get killed because it will not be profitable to build those houses.
Boulder might be "different", but where I live there aren't many builders who operate as non-profit charities.
Holy shit, Batman!
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