Investing in Housing: Straight from the House's Mouth...
By Ian Cooper
“Master of Puppets I’m pulling your strings, twisting your mind and smashing your dreams. Blinded by me, you can’t see a thing…” – Metallica
You have to admit those are fitting lyrics for housing bulls…
The naivety of housing bulls still surprises me, sending me into fits of hysteria as self-confessed know-it-alls try to convince me we’re bottoming out in housing. I’ve actually lost count of the number of faces I’ve laughed at over this. Heck, on May 25, 2007, Forbes headlined an article, “Housing Market Nears Bottom.” Even U.S. Treasury Secretary Henry Paulson reportedly told CNBC that “…the U.S. housing market correction is ‘largely behind us.’”
Truth is, we’re not bottoming. We’re not even close. As of now, let’s just say the bulls are still stuck in the first stages of Kubler-Ross with regards to subconscious housing grief -- denial. Housing will get worse before it gets better. Payment delinquencies and foreclosures with subprime ARMs spiked to 15.75% in Q1 2007, as compared to Q4 2006’s 14.44%. Plus, the foreclosure process in Q1 moved to 3.23%, the highest on record. Both only stand to worsen, as two million ARMs are set to reset this year and next.
Plus, mortgages are on the rise. The average rate on a 30-year fixed now stands at 6.74% from 6.53%. That one-week move was the biggest since 2003. And it’s likely we’re headed to 7% on a 30-year. On the 15-year, we’re at an average 6.37% from 6.22%. A five-year ARM now sits at 6.37% from 6.24%.
Nor does it help that the National Association of Realtors is reporting that the housing market will be weaker than expected this year. In its forecast, the group said 2007 existing home sales would come in around 6.18 million, a year-over-year decline of 4.6%. Prices are also forecast to fall a more-than- expected 1.3% year over year. Plus, 2008 existing home sales forecasts are down to 6.4 million.
Here’s what else we know. According to the National Association of Homebuilders (NAHB), April new home sales were 10.6% below earlier numbers a year ago. Builder confidence is down. Pending home sales, which sat at 101.4 as of June 1, 2007, are down 3.2% from a revised March 2007 read of 104.8, and are 10.2% lower than April 2006. Building permits as of the May 16, 2007 NAHB report fell to the slowest pace since June 1997.
Still, according to Forbes (May 25, 2007), “Housing Market Nears Bottom.” And, according to Paulson, our correction is “largely behind us,” to which I respond, “Huhh?”
We’ve said this ad nauseam folks, we’re not out of the woods… not even close. We’re calling a spring 2008 bottom as worst-case scenario. We said this right before calling the subprime, Alt-A top, and are reiterating our belief.
Ian L. Cooper,
Death Cross Trader
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