This was posted by someone, but written by me on August 10, 2006 on the Prudent Bear Chat page
There is mention of the housing market and the building inventories around the country. This is the tip of the iceberg. I am assisting my mother in her rental portfolio, of which I believe the peak income from which was about 2002. The recent vacancies have been tragic and the applicants we are getting are so beaten up credit wise that I am not seeing even honest applications. 3 of the last 5 applications I have taken have been people in certain stages of eviction. These are older homes, but they are in good shape in the North Dallas suburban region. They are not slum properties.
Everyone is all in. 10 years ago everyone was all in and they created a bunch more everyones by lowering the lending standards, eliminating down payments, coming out with high LTV B & C paper which served to fill the pockets of mortgage brokers, dilute the market and put more high risk people into homes.
What is left? What is left are people that can barely rent. Some of them make pretty good money, but it goes out the window to the point they cannot keep up their rental payments. There is a big storm brewing and the housing slowdown is only the tip of the iceberg.
But it is the iceberg as well. While the country could get through a typical housing slowdown, not this one. The industry is out of tricks. This industry funded the recovery we saw out of the bursting of the stock bubble and kept credit flowing. It stopped the deflation many of us feared was starting by creating collateral for more credit. But, the resale market is gone.
Who are they going to resale to? If they are expecting the people I am seeing apply to rent homes to step up and buy, they have another thing coming. If they are expecting the people renting to buy, they just might, but it will force the landlords to sell their property as well. This isn’t taking houses off the market, it is putting them on the market.
I checked the evictions posted on the JP courts dockets. Strangely enough, FNMA was posted as the plaintiff on several of them monthly. I find this interesting as FNMA isn’t shown to own that many homes in Collin County. But, what are they doing as landlord? Are the evicting foreclosures where people are refusing to move out? Or, are they evicting people on rental homes that socalled investors are letting go back?
As I started out, this is a deep subject. The next step is do people give up their homes or do they give up their nights out on the town? Do they pay their credit cards or their mortgage? The time of paying their credit card with their mortgage is behind us now and when these limits are maxed out, the card payment or the mortgage goes. We are about to see selling to get out from under a thing of the past, as few homebuyers put any money down as they didn’t have any money or at least the conventional down payment and thus are under water without roughly a 10% appreciation over what they paid. Here the new homes have stolen the market and I sense the new home builders can even cut their prices if things get dire. In fact, I sense we are going to see some wholesale discounting as builders are going to be forced to lessen their exposure and their debt levels.
There is a very small pool of available new buyers left. This is in housing and I think it is in other forms of real estate as well that are about to really be impacted as well. Remember, as someone already posted, we haven’t seen the 10 year bond rate move much from where it has been the past few years, maybe 75 BP from its mean of 2004/2005. I recall in the late 1970’s rates moving 75 BP in 2 or 3 days. This isn’t a rate induced slowdown, but a supply on the long run against demand on the long run slowdown. This is a market that is collapsing under its own weight.
You guys are about to see what real deflation is. Housing is by a massive amount the largest industry in the United States and probably the world. What is supplies is a huge portion of the ground up demand for the other goods and services bought and sold worldwide. You shut down housing, you shut down lumber, concrete, steel, copper, roofing and appliances to a great extent. Here then you shut down the industries that these industries are customers of. Realtors drive used Cadillacs instead of new ones. I recall seeing back in the 1980’s slowdown a long term realtor that was probably a millionaire at his peak sacking groceries at one of the local supermarkets, a guy that was a brand name in town when I was a kid. Others went just flat bust. The fringe business went down the drain. Mortgage banking, a huge business now that has hundreds of thousands of high paying jobs is threatened to where it has to shrink and those that are left are making a fraction of what they did.
The other end is the flow of funds from housing to enable people to buy other goods. Remember, housing was the credit card that allowed many to float through the last downturn and made the last downturn hardly a downturn at all. What happens when people have to shop at Walmart or pay their house payment? If they don’t go to Walmart, the associated overstocked manufacturers worldwide have their goods stack up. If they don’t pay their housepayment, the banking sectors and GSE’s have to tighten their credit standards to absorb the losses and most likely start by tightening up credit they can pull in, mainly credit cards. This shuts Walmart and its associated overstocked suppliers as well.
People are all in this game. Look at the tape of the stock market. I wrote about the Dow a few months ago. I believe at that time 21 out of 30 stocks were under their price at the peak. Of the 9 that were over, I think 4 or 5 of them are starting to break down in the form of MMM, BA, CAT and most likely C. Despite high oil prices, XOM hasn’t done that well. Watch companies like LU, SUNW, CSCO, ORCL, MSFT, INTC, GE and a few others that made up the top 10 to 20 highest cap value stocks and see where they stand. That was what the holders of mutual funds were holding when this thing started down in 2000. You know I can name more and I know you can too, but this small group of stocks made up probably 30% of the portfolios of all mutual funds combined and the stocks that have done well weren’t even in the portfolio. These people are stuck and they have been joined by even more fools trying to push a peanut up a mountain with their nose.
How broken is the stock market. John Templeton said a few years ago it was broken and I agree. Until valuations change, it is permanently broken, as the real rate of return on the broad market is at best 1% above inflation. These earnings growth projections are foolhardy and false if one wants to take them as a trend. The excess of the past few years, some of which was due to every company in the world taking their write offs when things were bad, thus having the natural snap back, but the rest is going to be snapped back as well. How can someone sell out with a 90% loss in so many stocks?
There are a lot of dominos lined up. Maybe the rest of the world does well swapping their dollars back and forth between themselves while the US languishes. At some price, money comes to buy property in the United States and that property will be purchased in dollars. But I sense the banks will draw in the money and those countries will be left without exchange as well. I doubt many people can get signature loans on their credit outside of the typical credit card. I doubt if housing goes the way I think it appears to be going, the mortgage insurance business is going to stand and it will take with it all the derivative postions that are used to support it. So will FNMA, JPM, WFC and FHLMC. And what about the Mexican labor that has been employed to build so much of this stuff? Do they starve in a country they went to find work or do they go home? If they stay here, maybe the government feeds them, maybe not. If they go home, that leaves even more vacancies in the housing market. That might solve the illegal alien problem that congress cannot agree to solve.
Long run supply in any product is the marginal cost of building one more unit. Once the bidding war stops, prices fall to the level of marginal cost. This leaves a lot of open shops that go unvisited, kind of like the small town merchant when Wal-Mart came to town. We are going to see a situation where land prices fall, dropping marginal costs even lower, leaving those that held lots that were so dear at the top with overpriced building sites they need to unload. This is a $10 trillion wreck in a group of assets that are very illiquid, unmovable and only marginally useful in the sense that you can only live in one at a time.