February 28, 2007

Fleck: The game is over. Subprime helped cause the housing price bubble, and it's over. The Great Unwinding is here.

When it's over, it's really over. I'm amazed at the swiftness of the subprime implosion, and now come the spillover effects. Less housing demand (and ability to purchase). Lower housing prices. Hundreds of lenders imploding. Hundreds of thousands of REIC out of work. Stockholder and bondholder wipeouts. Hedge fund implosions. Financial market havoc.

Got popcorn? The Great Unwinding is here.

What's remarkable is that Wall Street was surprised by the implosions of lenders NovaStar Financial and New Century Financial. What we don't know is how quickly this mess will impact the economy.

Why does the stock market at large seem not to care about the many problems that exist? My best explanation is this: The stock market, which is normally thought of as a discounting mechanism, doesn't work that way at the moment.

When the market reverts to discounting and ceases to be the price-discovery animal it is today, there will be a tremendous amount of violence on the downside.

Ignorance aside, it pays to state the obvious: The subprime industry was absolutely critical to the inflating of the real-estate bubble. If loans had been made only on a responsible basis -- to people who put money down and looked like they could actually repay the money, irrespective of rising house prices -- that bubble would never have achieved anything close to the heights it did.

That game is obviously over. Let me repeat that -- over. The real-estate market of the past few years will not be seen again in our lifetimes. The only thing we don't know is at what rate this unwinding will play out across the economy and, more importantly (to me), in the minds of the Goldilocks-enthralled community on Wall Street.

"Slowly but surely, people are starting to get it, and slowly but surely, I am starting to think that the tipping point in credit -- via a subprime-generated shambles in CDO (collateralized debt obligation) land -- is closer than anybody imagines."


Anonymous said...

Our buddy Cramer on Today show says
The big drop was a computer glitch.
Buy a house now with low rates.

I can't make this sh!t up. Just how stupid do they think(know?) we are?

Anonymous said...

great article

Anonymous said...

It is not over for the IRS! Realtwhores are getting audited by the boatload, because they made sooooo much money flipping houses. There is income for the FED that may have been over looked! According to WSJ if a Real Estate Clerk works part time and they lose money on a flip, the forgiven debt is taxable, just like every one else. If they are full time, their "going into the red" on flips is forgiven as a business expense, or some such thing. Also, RE Clerks made A LOT of money flipping, so according to the WSJ and the IRS, that makes them investors, not RE Clerks, or possibly makes them Part Time RE Clerks. Look out Part Timers that said they were full timers at tax time. The IRS is going back many years in these RE Clerk audits.

Anonymous said...

Reagor at Az Republic is posting awesome positive news again about Phoenix. Up up and away !! People not stopping the move to the southwest. All is dandy!!

blogger said...

Fleckenstein has NAILED it consistently. It's tough to predict the exact day and time of a market crash or when a mania will end, but it's easy to identify a mania and state that it will indeed end.

Fleck has been a great voice (along with the bubble blogs) pointing out the obvious. Now comes the crash we all know had to happen.

Anonymous said...

The signs for this have been there: New Zealand, Iceland, Thailand, Zimbabwe. The outer edges have been crumbling...

Interestingly, I am flush with gold, no job, starting an Internet business that is recession/depression resistant, and last night I found out I'll likely be in southeast asia in 2 weeks. How's that for planning?

Beware the Ides of March!

Anonymous said...

Home Depot (HD - Cramer's Take - Stockpickr - Rating) warned of soft 2007 results, saying it doesn't expect the housing market to pick up till later this year or early 2008.

The Atlanta-based home improvement chain said it expects earnings for the year to drop 4%-9% from their 2006 level of $2.79 a share. That puts the company's forecast in the range of $2.54 to $2.68 a share -- well below the $2.78 Thomson Financial analyst consensus estimate.

Home Depot said it expects sales to be flat to up 2% from last year's $90.8 billion. Even at the top of that range, sales would come in $2 billion short of Wall Street's $93.8 billion target.

Home Depot said it expects same-store sales to drop in the mid single digits percentagewise. The company plans to boost capital spending by 29% in a bid to shore up its poor appearance at retail.

"We are first and foremost a retail business, and our 2007 plans reflect that commitment," said CEO Frank Blake. "While the current home improvement market remains challenging, the long-term fundamentals of our company are strong, and we believe we can improve our performance and grow at, or faster than, the market beyond 2007. That's why we are making significant investments in our associates and our stores."

Anonymous said...

Hi everyone, I heard there was a housing bubble, should I buy before I get priced out of the market?

Anonymous said...

January new home sales plunged 16.6 percent
Western, Northeast regions show biggest declines

Updated: 8 minutes ago
WASHINGTON - Sales of new U.S. homes fell 16.6 percent in January and prices were little changed as the number of new homes on the market decreased slightly, according to a government report on Wednesday showing some weakness in the unsteady housing sector.

The monthly decline was the sharpest in 13 years, since a 23.8 percent drop-off in January 1994.

New single-family home sales fell to an annualized rate of 937,000 units from an upwardly revised rate of 1.123 million units in December, the Commerce Department said.

Analysts polled by Reuters were expecting January sales to dip to 1.080 million from the previously reported rate of 1.120 million units in December.

In January, the median sales price of a new home rose $400 to $239,800 from $239,400 in December.

At the current sales pace, the supply of new homes available for sale rose to 6.8 months' worth from the 5.7 months' worth in December, which represents a 19.3 percent increase. There were a total of 536,000 new homes available for sale at the end of January, down 0.2 percent from December.

The Commerce Department's data comes a day after a Realtor trade group reported a stronger-than-expected month of existing home sales. The sales pace of previously owned homes rose 3.0 percent in January, the biggest jump in two years, the National Association of Realtors said.

Home resales, which represent 85 percent of the housing market, climbed to a 6.46 million-unit annual rate.

Across the regions, the West saw the sharpest decline in new home sales with a 37.4 percent drop. In the Northeast, new home sales fell 18.7 percent while they decreased 8.1 percent in the Midwest and 9.7 percent in the South.


Anonymous said...

Everything depends on us. Bubbles require a critical mass, just as bursts.

With the Internet, information does travel much faster, but the speed is limited by the emotional processing required.

It takes time for the information to sink in. Time for it to reach an actionable emotion.

That happens at the individual level, but is also expressed as a group.

Have we reached critical mass that gets the snowball rolling?

Or can those in power hold the masses' emotions at bay for a little while longer?


Todd Tarson said...

That game is obviously over. Let me repeat that -- over. The real-estate market of the past few years will not be seen again in our lifetimes.

As a practicing real estate clerk... let me just respond to the above by saying... Good!!

That market was unhealthy and could not be sustained. Good for the folks who made some bucks, but bad for those that are now priced out of the market. Most homebuyers in a given year are first timers. Take them out of the market because of price and there is going to be the results we are seeing today.

In my small market for each closed sale on a home in a month, 3 new listings hit the market. Buyers and sellers are speaking completely different languages right now.

Anonymous said...

I do not see a "feeding frenzy" at Home Depot anymore. I use to call friends and report on fat boomers walking around Home Depot (two drink mininum) like they did Gateway Stores 1999. I guess these are the same people still holding on to their NASDAQ stock.

WhiteTower said...

"The subprime industry was absolutely critical to the inflating of the real-estate bubble."

I tend to disagree, only to the extent that the sub-prime market is a symptom, not a cause of the real estate bubble.

The real culprit is the extension of loose credit by the central bank of the US and many other countries. Housing became "affordable" to millions, who otherwise could not have qualified to purchase (in that the rates they would have had to pay would have priced them out as borrowers.)

The sub-prime market emerged after the housing bubble began. The phenomenon of high percentages of mortgage loans being IO and negative amortization (and in the case of Califonria, evidently a majority of loans) did not take place until 2006 -- well after the bubble had begun, and indeed, when it had begun to burst.

In effect the central bank gave a "false signal" to the market that money would be cheap forever, so even those who didn't have the credit and income to buy at the already low rates were confidently extended credit by lenders.

All economic bubbles are caused by these loose credit policies of central banks -- shoddy lending standards, fraud, bankruptcies, etc. are simply symptomatic of mismanaged monetary policy.