Housing Bust

By: Sol Palha | Thu, Mar 22, 2007
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"It is the dull man who is always sure, and the sure man who is always dull." - H. L. Mencken 1880-1956, American Editor, Author, Critic, Humorist

The chart above quite clearly illustrates how household debt has soared to a point where it accounts for huge portion of the GDP; this monstrous debt is now equivalent to 90% of the United States GDP. This also clearly illustrates how this economy has been financed by a mountain of debt; at the end of the day nothing new has been created other then a huge pile of debt. This sort of scenario cannot last indefinitely, eventually the assets that were over inflated must deflate and this is currently what's happening in the housing sector.

This is a rather extremely important eye opening chart; for once we can truly see how monstrous this real estate bubble is. This chart represents prices of homes in the United States going back to the 1880's. When one takes a look at the big picture one can quite clearly see that the current trend is simply unsustainable. Another important fact is that we have over 3 trend lines on this very long term chart (only 3 have been drawn in) and thus a correction is imminent and in this case it has already begun but one must remember it has only just begun.

This chart provides a closer look at the housing market for the last 21 years and even when prices are adjusted for inflation the price move has been rather huge in the last 4 years. Note to that in this case we have over 5 up trend lines in place; the trend line rule dictates that the more trend lines you have in place the more violent the eventual correction is going to be.


The housing correction/bust has only just begun; there are a still a huge number of mortgages that are going to be reset in the upcoming months. Right now only the sub prime sector has been affected but in the months to come individuals with very good credit scores are going to take the beating of their lives; they let stupidity and greed dictate their actions. These individuals made the fatal mistake of taking on debt that they cannot service with their present income. They are only surviving now because their mortgages have not reset, once these mortgages reset watch the next phase of the blood letting process begin.

When the real blood letting process begins fear will be rampant as the market will most likely start to pull back/crash in conjunction with the housing sector. Investors will start looking for a safe haven and precious metals and energy sector will provide this.

Bottom line stays far far away from the real estate market.

Random Musings

To date over 36 Mortgage lenders have gone out of business and today it looks like its lights out or close to lights out for New Century the countries second largest sub prime mortgage lender. For the past two years we have been warning that certain individuals who simply did not have the money to put down for a house should not have been in this market. We also warned that these creative devilish new mortgages that were being invented with 0% to 2% teaser interest rates, interest only and so on were dangerous instruments as it was the equivalent of telling a child to put out a fire with a can of gasoline. At that time we stated that the day of reckoning was 12-24 months away well that day is here today and its only going to get worse.
Over 50% of the current foreclosures are coming from the sub prime market. These individuals bought these houses for little to no money down in the hopes of jumping on the get rich real estate gravy train. They were dreaming about locking in gains of 20% plus a year; fast forward many of these house have lost anywhere from 10-25% of their values and as envisioned the mortgages have reset. In some cases payments have jumped as much as 100% and faced with lower prices and mounting new monthly payment these home owners are simply walking away from their mortgages.

This problem is slowly going to trickle over to many of the larger banks; a clear cut recent example is HSBC. Once again we advise all our subscribers as we have been faithfully doing now for over 2 years to stay far away from the housing sector. The blood letting has only just begun.

The stories below quite clearly illustrate that the worst is yet to come and had only just barely begun.

New Century on bankruptcy's doorstep

NEW YORK (Reuters) - New Century Financial Corp. (NYSE:NEW - news), the largest independent U.S. subprime mortgage lender, said on Monday its lenders plan to halt financing, pushing the company closer to bankruptcy amid dwindling cash and $8.4 billion in obligations that could come due immediately. New Century's struggles are part of a wider meltdown among lenders to less-creditworthy home buyers who are defaulting on mortgages in increasingly large numbers. The contagion could spread, roiling a larger section of the U.S. economy while hitting investors, such as pension funds, which bought securities backed by suspect home loans, analysts say.

If home prices remain flat this year and next, mortgage defaults could total $225 billion, creating a real risk of pulling down the broader housing market and weighing on borrowers with good credit, Lehman Brothers analysts said in a research note. "Our expectations of defaults at about 1.5 million to 2 million units are fairly significant in a soft housing market," the analysts said recently.

The largest U.S. mortgage lender, Countrywide Financial Corp. (NYSE:CFC - news), warned that sub prime turmoil may hurt near-term profit, sending its stock down 2.7 percent. Full Story

While all the experts were busy ranting and raving that the worst was over (liars as they lost the ability to tell the truth) we calmly stated that the worst was yet to come. Believe it or not we are still not even half way through the cleansing process; there is a lot more carnage in the works. Now individuals that should have never even considered buying a house are plagued with the thought of how are we going to come up with our monthly payments? The next stage will be when they start asking the question where are going to live? As far as the lending institutions go we expect several more of them to fold and at least 1-3 banks are going to take a massive beating; one that comes readily to mind is HSBC. The story below further highlights how the sub prime was nothing but very stupid investment to get involved in. The punishment for stupid investments is extreme pain and from a pain perspective we are just on the paper cut stage and we need to all the way to the lost a limb or being severely wounded stage; its safe to say that we still have a long way to go before things calm down. The story below further illustrates how rapidly the situation is deteriorating.

Sub Prime Mortgages

The sub prime mortgage business took another hit as Accredited Home Lenders said it would have to find new financing after its creditors demanded more money to cover rising loan defaults. (Bloomberg) The nation's second largest lender to people with poor credit -- New Century Financial -- is scrambling to stay afloat after its banks cut off its financing. "Connect the dots and it looks like it's a bankruptcy filing," said analyst Chris Brendler of Stifel Nicolaus. (AP in Yahoo! Finance) The meltdown could deepen the housing slump by flooding the market with foreclosed homes and removing risky borrowers from the pool of buyers. "Every party has its hangover," said appraiser George Hatch. Full Story

Mortgage problems

Distress continued to make headlines, putting a personal face on the story.
One tale from a community worker in San Diego suggests the hardships of variable rate home loans are affecting more than just those who have spotty borrowing records.

Andy Sobel had good credit, a decent job and modest savings, but he needed to stretch to buy a home in the white-hot San Diego housing market in 2004.
Three years later, Sobel has lost his home and his savings, and he faces a big tax bill as a consequence of a failed subprime mortgage held by Countrywide Financial Corp. (NYSE:CFC - news), which he said he should never have been made.

"You never think that this could happen to you. You feel like an idiot," said Sobel, 48, who has a doctorate in education. "You fall down and they stab you." A couple in Massachusetts, Thomas Hilchey and Robin Crevier, are taking legal action against their lender, Ameriquest Mortgage Co., accusing it of deceit and saying its salesman failed to provide documents and disclosures on the loan required by state and federal law. Such stories are likely to remain commonplace for some time to come, say analysts. Still, there is disagreement as to just how widely beyond the sub prime sector these problems will extend. Economists see eye to eye on one thing though: the health of the U.S. economy hinges on an orderly resolution of the housing debacle. Full Story

Ignorance is no excuse one should always educate oneself when one is about to make the second most important decision in their lives. We will talk about the first one sometime next week and we are pretty sure that most of you will be drawing the wrong conclusion till then.

It seems that everyone is getting hit now as greed knows no limits. The masses never learn from history regardless of whether they have a high IQ or one that is almost non existent. The key point here is that the mass mindset refuses to study history and learn from it. Remember this and drill it into your head and the heads of your loved ones; never ever buy into something when everyone thinks its going to go up.

"Men hate the individual whom they call avaricious only because nothing can be gained from him." - Voltaire 1694-1778, French Historian, Writer



Sol Palha

Author: Sol Palha

Sol Palha

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

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