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The Perfect Storm

|Includes:BZH, KB Home (KBH), TOL

Many of you have been asking me about housing lately via e-mail and in the comments section. I thought today was a perfect day to discuss it because I believe we are now seeing the makings of a Perfect Storm for whats left of the housing market at the end of the year.

It all starts in the bond market.

Lets take a look at some stats. First of all, lets take a look at the treasury auction today:



Quick Take:

The bid to cover wasn't bad but look at the lack of participation by the inderects(China and the other FCB's)! Only $5 billion of the $35 billion auction was bought be the world. This is pathetic and very frightening. It tells you that they are running for the hills when it comes to buying our treasury debt!

China has been warning for weeks that they planned on diversifying out of treasuries. Folks, if we lose the indirect bidders we are going to start seeing failed bond auctions. At that point the economy will be toast.

You gotta wonder if the pullback we saw today and after hours is a result of the banks backing off on buying equities because they needed the liquidity to sell the auction. Things are getting dicey!

Fed Announces Record Treasury Sales Next Week

We also got this pleasant piece of news from the Treasury today:

"Aug. 5 (Bloomberg) -- The U.S. Treasury plans to sell a record $75 billion in its quarterly auctions of debt next week and also indicated plans to expand inflation-indexed securities next year as it finances unprecedented budget deficits.

The Treasury plans to auction $37 billion in three-year notes on Aug. 11, $23 billion in 10-year notes Aug. 12 and $15 billion in 30-year bonds Aug. 13. The amounts matched the median forecast of analysts surveyed by Bloomberg News."

So how did bonds like all of this news? As you can see not very much. Treasuries sold off hard late in the day:

My Take:

The credit markets look absolutely horrifying folks. It appears the world is quietly backing away from our treasuries as we continue to issue ridiculous amounts of debt. there is not enough money in the world to soak up $75 billion a week unless we start printing. BTW, the dollar was down once again today.

This is going to force lending rates to soar which will result in further pressure on housing prices.

Even the banks are finally starting to catch up on how bad this crisis is. Take a look at Deutsche Bank's gloomy housing report:

"Aug. 5 (Bloomberg) -- Almost half of U.S. homeowners with a mortgage are likely to owe more than their properties are worth before the housing recession ends, Deutsche Bank AG said.

The percentage of “underwater” loans may rise to 48 percent, or 25 million homes, as prices drop through the first quarter of 2011, Karen Weaver and Ying Shen, analysts in New York at Deutsche Bank, wrote in a report today.

“Borrowers may also ‘ruthlessly’ or strategically default even without such life events,” they wrote.

Seven markets in states with the fastest appreciation during the five-year housing boom -- including Fort Lauderdale and Miami, Florida; Merced and Modesto, California; and Las Vegas -- may find 90 percent of borrowers underwater, according to the report.


Home prices will decline another 14 percent on average, the analysts wrote."

Final Take:

What can I say folks I am speechless. If you bought at the top you might as well just walk away now. Save yourself the grief and pressure of trying to come up with that $4000 every month to pay the mortgage on your McMansion.

It will most likely be worth 50% of what it was when you bought at the peak when this is all said and done. It will be even worse in the bubble areas mentioned above.

The Bottom Line:

Trying to chase down a foreclosure at this point is still a fools game. The speculators are once again flying into the stock market thinking the recession is over(yeah riiiight). This is probably carrying over into the housing market to a point.

Whats further threatening the housing market is the fact that the first time buyer home credit expires at the end of the year.

I spoke to a mortgage analyst at a large financial firm and he explained to me that in some areas, 90% of the deals they are doing are first time home buyers who are taking advantage of the $8000 tax credit.

He also explained to me that jumbo loans now require 20-30% down payments because no one wants to touch the paper. Minimum credit scores for all mortgages are also rising. Fannie/Freddie now want a 700 credit score. FHA now wants 620 up from 580. This sharply shrinks the potential pool of buyers.

The real estate market according to this analyst is absolutely petrified as to what happens to the housing market when this tax credit disappears.

That's the problem with stimulus folks. Its a one time high similar to what a crack head experiences after he shoots up. The problem is the high wears off and the fundamentals once again appear.

Whats frightening here as this "high" wears off at the end of the year, the fundementals will be significantly worse. IMO, we will be heading straight into The Perfect Storm which is:

Higher lending rates as a result of our Ponzi style deficits

Elimination of the Tax Credit at the end of 2009

Millions of current homeowners begin walking away

Rapidly Rising Defaults leading to further foreclosures on current loans

Even tighter lending standards requiring higher down payments and better credit scores.

Rising foreclosure inventories as banks continue to flood the market with their "Shadow Inventory"

Still want to buy after reading all this? I hope not but good luck if you do! If you MUST buy, stay on the lower end (under300k) because the inventories aren't that bad.

WARNING: I suspect inventories in this price range will rise sharply once again at the end of '09. I say this because the tax credit focused on this end of the market because first time buyers usually buy the lower end.

Stay on the sidelines folks. The housing time bomb is about to explode, and my guess is the fireworks start to go off when the tax credit disappears at the end of the year.

I think you will see a very different housing market down the road with much lower prices even several years from now.





Stocks: KBH, BZH, TOL