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It's been a while since I did a housing market round-up, but I've been saving articles from the past few months. Needless to say, things haven't gotten any better.

I have a very, very hard time believing that we are through the worst of the housing dislocation. I thought it was tremendously premature for the market to bid up financial stocks that announced charges last week. Things are going to get worse.

The NAHB index fell to record lows.

U.S. home builder sentiment sank to a record low in October as borrowers faced difficulty getting mortgages from more stringent lenders, bloating the supply of unsold houses, the National Association of Home Builders said Tuesday.

The NAHB/Wells Fargo Housing Market index fell 2 points to 18, the lowest reading since the gauge started in January 1985.

Estimates of homes sitting empty run as high as 17.4 million.

Foreclosure rates are soaring, and as those owners are kicked out of their homes for not paying, the structures are sitting empty, with no one waiting in line to buy at any price. Meanwhile, more than $1 trillion in adjustable-rate loans will kick mortgage payments much higher by June 2008 for tens of thousands of homeowners, which will push foreclosure rates even higher as people simply walk away from houses they can't afford. I saw this happen in the last down-cycle in Los Angeles in the late 1980s; it gets ugly and stays that way for years, not months.

According to a report by investment bank Punk Ziegel, there are 17.4 million vacant houses in the country, and only 4.3 million of those are second homes. That means there are more ownerless houses in the United States today as a percentage of total inventory than at any time since records have been kept.

Yet home builders have continued to add to supply.

California's Central Valley is once the hottest housing pocket of the country, counting for one in every 25 homes built nationwide. Now it’s going through a painful contraction after the tremendous growth busted. Yet Standard Pacific Homes is piling up Spec homes in the town of Manteca.

Spec homes are single-family houses built by home builders in anticipation of finding buyers. In other words, they are built on the belief there will be enough market demand, not quite the situation we have right now. In fact, in the Standard Pacific development here in Manteca, we only found one “sold” sign.

You might wonder why home builders would dig larger holes for themselves.

Standard Pacific won't comment for the story, saying the company is in the quiet period before posting earnings.

But Ara Hovnanian, CEO of home builder Hovnanian Enterprise said recently that building Spec homes is about the only way to liquidate land these days.

"It's easier to sell land by popping a house on it than it is to just sell land because there are just not many buyers out there," he said.

The stock price of Standard Pacific (NYSE:SPF):

click to enlarge

Delinquencies are at record highs:

The number of Americans who may lose their homes to foreclosure reached a record in the second quarter as late payments by subprime borrowers surged to one out of every seven loans.

Lenders began the process of seizing properties on 0.65 percent of U.S. mortgages in the second quarter, an all-time high, the Mortgage Bankers Association said in a report today. In the first quarter, that figure was 0.58 percent. The percentage of subprime borrowers making late payments increased to 14.82 from 13.77.

Investors account for a sizable amount of defaults.

A survey by the Mortgage Bankers Association found that mortgages on properties that aren't occupied by the owner -- mostly investment homes -- account for between 21% and 32% of the defaults on prime-quality home loans in Arizona, California, Florida and Nevada, states where overdue payments are mounting fast.

Defaults were high on both prime and subprime loans, those made to borrowers with shaky credit histories. ...

The darkening outlook for the housing sector has prompted economists at Goldman Sachs Group to predict that home prices nationwide will fall an average of about 7% both this year and next. ...

In Nevada, Arizona and Florida, loans for properties that weren't owner-occupied accounted for nearly a third of all home mortgages issued in 2005. The figure was 14% for California and 17% for the nation as a whole. The nationwide share for these primarily investor loans was in a range of about 5% to 7% in the 1990s, then jumped to 11% in 2002, 12% in 2003 and 15% in 2004.

In Nevada, homes that weren't occupied by the owner accounted for 32% of the prime-mortgage defaults recorded as of June 30, the MBA said. Such homes accounted for about a quarter of prime-loan defaults in Florida and Arizona and a fifth in California. For the nation as a whole, the figure was 16%.

Barry Rithholtz notes that:

Here's the SALES and SUPPLY details:

  • Sales are down 21.2% in the past year.
  • August's sales pace was weaker than expected.
  • The sales figures do not account for canceled sales contracts (presently running above 30%).
  • The inventory of unsold homes fell by 1.5% to 529,000 - an 8.2 month supply.
  • Completed homes not yet sold rose 1.1% to 180,000 - the first increase since May.
  • Here are the PRICING details:

  • The median sales price of new houses sold in August 2007 was $225,700; the average sales price was $292,000. This is a drop of 7.5%;
  • This is the largest year-over-year price decline in 37 years.
  • Reported sales prices do not include non-monetary incentives, such as paid real estate taxes, kitchen upgrades, installed pools, free vacations or new cars.
  • Below is a great graph on the anatomy of the housing bubble from the New York Times, via Mr. Rithholtz.

    The Case Schiller index below is also taken from Rithholtz's The Big Picture.

    It wasn't a bubble, you say? Well, if not, valuations sure were stretched. A good article from The Fox Street Journal, and the effects of excess monetary creation on asset prices, as shown in the following graph.

    Yet, Helicopter Ben said this graph was due to fundamentals:

    In 2005, Ben S. Bernanke, then an adviser to President Bush and now the Fed chairman, said “strong fundamentals” were the main force behind the rise in prices. “We’ve never had a decline in housing prices on a nationwide basis,” he added.

    Such statements utterly astonish me when they come from professionals, let alone the eventual head of a central bank. Simply because asset prices have not fallen in the past, it is not axiomatic asset prices will not fall in the future.

    Well, Helicopter Ben's rate cuts won't save either the housing market or the CDO market, just as Easy Al's rate cuts didn't save the Tech Bubble.

    [Richard] Bove notes that the financial system has essentially regressed from one in which borrowers were expected to pay back their debt, to one in which principal was forgotten so long as the interest payments were made, to one in which even interest payments are being refinanced. Now Bernanke has institutionalized this practice by bailing out errant commercial paper holders.

    With the growth in total U.S. financial debt outpacing GDP growth, 8.7% to 1.5%, Bove concludes, our economy is not capable of generating the income necessary to meet the debt-repayment requirements. The potential for disaster is mind-blowing, and any steps taken to paper this over are only prolonging the unavoidable wipeout

    Thus, surely the Fed will continue to cut rates into next year. Residential construction spending is falling.

    Easy Al, now speaking clearly, knows the stakes:

    The fate of the world economy hinges on what happens to house prices in America and that may not be a good thing, former Federal Reserve chairman Alan Greenspan said on Monday.

    Speaking at the Reuters headquarters in London, the former Fed chair delivered a gloomy prognosis on the state of the global economy – U.S. house prices are likely to fall further and they could drag the rest of the world with them.

    Thus, surely the Fed will continue to cut rates into next year. Residential construction spending is falling. That's usually bad news for the economy.

    Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession. Since World War II we have had eight recessions preceded by substantial problems in housing and consumer durables. Housing did not give an early warning of the Department of Defense Downturn after the Korean Armistice in 1953 or the Internet Comeuppance in 2001, nor should it have. By virtue of its prominence in our recessions, it makes sense for housing to play a prominent role in the conduct of monetary policy. A modified Taylor Rule would depend on a long-term measure of inflation having little to do with the phase in the cycle, and, in place of Taylor's output gap, housing starts and the change in housing starts, which together form the best forward-looking indicator of the cycle of which I am aware. This would create pre-emptive anti-inflation policy in the middle of the expansions when housing is not so sensitive to interest rates, making it less likely that anti-inflation policies would be needed near the ends of expansions when housing is very interest rate sensitive, thus making our recessions less frequent and/or less severe.

    As Robert Shiller notes, residential construction as a percentage of the economy was at its highest level since 1950.

    The fallout from the bust will probably impair the economy at large. Shiller found that ``residential investment as a percentage of gross domestic product has had a prominent peak before almost every recession since 1950.''

    In the last quarter of 2005, he notes, home investment rose to 6.3 percent of GDP, "the highest level since 1950."

    Yet, it seems that economist after portfolio manager on Bubblevision are blithely assuming no recession will occur. They may be right, I have no idea.

    But then again, neither do they because the turmoil in the mortgage market is not close to being finished.

    Credit Suisse Group Chief Executive Officer Brady Dougan, the former derivatives trader who took over in May, predicts the market for mortgage credit will be "problematic" for as long as 18 months.

    "U.S. mortgage credit will remain problematic through this year and perhaps through 2008," Dougan told investors at a conference organized by Merrill Lynch & Co. in London. The Zurich-based bank doesn't see a return to stability ""any time soon"" after a surge in subprime mortgage defaults sparked a seize-up in credit markets in the third quarter, Dougan said.

    The whole mortgage mess is confusing. Barry Ritholtz provides a neat graph to help you figure it out!

    click to enlarge

    From The Fox Street Journal, we are The United States of Subprime:

    As America's mortgage markets began unraveling this year, economists seeking explanations pointed to "subprime" mortgages issued to low-income, minority and urban borrowers. But an analysis of more than 130 million home loans made over the past decade reveals that risky mortgages were made in nearly every corner of the nation, from small towns in the middle of nowhere to inner cities to affluent suburbs.

    The analysis of loan data by The Wall Street Journal indicates that from 2004 to 2006, when home prices peaked in many parts of the country, more than 2,500 banks, thrifts, credit unions and mortgage companies made a combined $1.5 trillion in high-interest-rate loans. Most subprime loans, which are extended to borrowers with sketchy credit or stretched finances, fall into this basket.

    High-rate mortgages accounted for 29% of the total number of home loans originated last year, up from 16% in 2004. About 10.3 million high-rate loans were made in the past three years, out of a total of 43.6 million mortgages. High-rate lending jumped by an even larger percentage in 68 metropolitan areas, from Lewiston, Maine, to Ocala, Fla., to Tacoma, Wash. ...

    The data also show that some of the worst excesses of the subprime binge continued well into 2006, suggesting that the pain could last through next year and beyond, especially if housing prices remain sluggish. Some borrowers may not run into trouble for years.

    Yet, at ground zero of the housing mess, homeowners remain optimistic:

    A survey by Attorneys' Title Insurance Fund suggests that the current Florida real estate market is rather Dickensian.

    The best of times: 63 percent of the 1,415 Florida homeowners surveyed by the big title insurance underwriter expect that the value of homes in their community will remain the same or rise in the next 12 months. Thirty-six percent think prices will rise, 37 percent that they will fall and 27 that they will stay the same.

    The worst of times: 80 percent agreed that now is a bad time to be selling a home and worry about their ability to sell their property if they needed to. <

    /p>

    I wonder if they surveyed homeowners in Ft. Myers?

    The median price of an existing condo in Lee County has fallen 38 percent from February 2006, at $353,900, the highest on record, to $218,800 in August 2007, the last month available, according to the Florida Association of Realtors. For single-family homes, the price has fallen 22 percent from the all-time high of $322,300 in December 2005 to $250,800 in August 2007.

    Perhaps, instead, they should have bought a pile of dirt on the other side of the state, which, apparently, is worth $10 million.

    Finally, an answer for why a developer won't return about $10 million in deposits to buyers of the unbuilt Palladio Terrace condo: Merco Group says it doesn't have to return the money! ...

    Merco Group has been a virtual stone wall when it comes to explaining why it is keeping money from its prospective buyers, even though the company canceled plans for the luxury West Palm Beach condo in January. Buyers have begged, cried and sued to get their money back, mostly to no avail.

    But in a recent court filing, Merco says that state law allows it to keep deposits for "construction and development," Merco emphasized. ...

    "The law says the money can be used when the construction of improvements has begun. A lot full of dirt is not an improvement. And they can't have done any improvements because they never obtained building permits."

    Down the coast, housing is a disaster.

    Since 2005, home buyers in Miami-Dade and Broward counties have signed so-called ''exotic'' mortgages at twice the rate of borrowers in the rest of the country. These mortgages include loans like the one Cindy Williams signed, as well as those with low ''teaser'' rates that skyrocket within three years, as high as 16 percent.

    Roughly one in five mortgages written in Miami-Dade and Broward counties between 2005 and July 2007 fell into one of those categories, according to data from McDash Analytics, a private firm that gathers information from nine of the 10 largest loan servicers in the United States. ...

    Unlike the well-publicized trouble with subprime mortgages, which were sold mostly to low-income buyers with bad credit, exotic loans fed the aspirations of middle-class South Florida residents and investors stretching their budgets, often in pursuit of a prestigious address.

    They are concentrated -- at rates three and four times the national average -- in ZIP Codes that include the celebrity haunts of South Beach, the stately manors of Weston, the gleaming condo towers of Sunny Isles Beach and the financial district of Brickell, the McDash data show.

    Many of these borrowers are now in trouble and their two obvious escape routes are blocked: Selling is difficult because of the glut of properties on the market, and refinancing is much harder because lenders have tightened standards since the onset of the subprime crisis this summer.

    Exotic mortgages are also a problem on the Left Coast.

    In the first six months of this year, 36 percent of all mortgages were orginated in San Diego County required borrowers to pay only the interest or actually allowed the debt balance to increase each month, according to First American, a mortgage services firm.

    Out of those, the share of such "alternative" mortgages in the San Diego region that were at risk ---- two months delinquent or heading into foreclosure ---- was 19.5 percent, just under the Riverside/San Bernardino area and less than Stockton and Sacramento, Thornburg found.

    Want to see what happens when a speculative bubble collapses? Take a look at this blog in Sacramento.

    But what makes this real estate bubble unique its global nature.

    In a separate report, "Rising Risks to the Global Housing Market," [Goldman Sachs] said that much of global system had succumbed to a property boom that is in some ways more stretched than in the US, with real (inflation-adjusted) house price rises of over 100pc in France, 60pc in Italy, 55pc in Canada, and 72pc in Australia since the late 1990s. The bubbles in Spain and and Ireland have been more extreme.

    "Such a widespread housing boom has little precedent in modern history. In those markets where prices have run up the most, and rental yields have fallen dramatically, the risks of a housing correction are likely to have increased materially," said the note, by Peter Berezin.

    "The wealth effect for housing is about twice as large as for equities, with consumption falling by about two cents in the short run for every $1 decline in home prices," he said.

    He expects US house prices to drop 7pc in 2007 and another 7pc in 2008, as mortgage lenders shut off credit to chunks of the market. "The U.S. is often a leading indicator for what happens in the rest of the world".

    Mr Berezin said construction booms usually lead to housing busts lasting several years. Residential construction in the US reached 6.3pc of GDP at the peak of the bubble, the highest since the baby boom in the early 1950s.

    In Spain, it has been even higher, averaging 8.7pc of GDP since 2003, and in Ireland it has exploded to 14.2pc, leaving a overhang of unsold property. House prices are already falling in Spain, where 98pc of mortgages are on floating rates that have roughly doubled since late 2005.

    An advisor to the Prime Minister of Spain stated that a housing slump in the country is "unthinkable."

    A residential real estate slump in Spain, where prices have almost tripled since 1997, is "unthinkable," the top economic adviser of Prime Minister Jose Luis Rodriguez Zapatero said.

    The solvency of the banking system and of real estate developers, as well as the unmet demand for new homes, will prevent any meaningful price erosion, David Taguas, head of the prime minister's economic research unit, said in an interview yesterday at his office at the presidential palace in Madrid.

    Pretty sad, isn't it? I wonder if the Spanish government intends on buying homes to keep all the balls in the air?

    "Spain is like the U.S. on speed when it comes to the housing market,'' Diana Choyleva, an economist at Lombard Street Research in London, said. "It's highly likely that there will be falls in nominal prices."

    No kidding.

    And as sure as night follows day, delinquencies will rise in Spain, and we'll see, contrary to Sr. Taguas's assertions, if a decline in Spanish housing is, in fact, quite thinkable.

    Spanish property loan delinquencies may increase as much as 15-fold by the end of 2008 as interest rates rise, Moody's Investors Service said in a report.

    Loan-payment arrears by developers and builders may reach 5.5 percent of total property loans from the current 0.37 percent, according to the New York-based ratings company. The increase would mark a "soft landing" for Spain's 12-year property boom, Moody's said in a report called ""Spanish Banks and Real Estate."

    After rising 178 percent between 2000 and 2006, more than any other country in Europe, Spanish home prices are being threatened as the highest European Central Bank interest rates in six years curb consumer spending, Moody's said.

    "In the Spanish context, I wouldn't call this a soft landing," said Charles Dumas, international director at Lombard Street Research Ltd., a consulting firm in London. "When housing slows down, labor and income will slow down and spending growth will also slow down."

    Spanish builders constructed 750,000 houses and apartments last year, more than France and Germany combined, while annual demand runs about 60 percent of that, according to the Finance Ministry.

    By the way, the population of Germany and France combined is 3.5 times that of Spain.

    Short Spanish banks. Maybe I'll buy a condo from a distressed bank on the Costa del Sol in five years.

    The Bank of Canada is making noises that things are getting out of hand north of the border.

    Bank of Canada Governor David Dodge is raising a red flag about housing prices in Canada, saying that increasingly loose lending rules may be helping overheat the country's real estate market.

    While Mr. Dodge did not draw any direct parallels with the subprime mortgage crisis that has gripped the economy of the United States and sparked a credit crunch around the world, he signalled that his long-standing concerns about mortgages with increasingly easy terms have not been addressed.

    "One worries about the structure of the mortgage market, that we may be actually aiding, facilitating a rise in the price of houses that is really not warranted," he told reporters after a speech in Vancouver.

    So the future chairman of the Fed said soaring home prices were due to fundamentals while the governor of the Bank of Canada raises a red flag. Perhaps American monetary policy should be set in Ottawa.

    Source: The Housing Crisis Goes Global