Investing in Housing: Uncommon Common Sense
By Ian Cooper
Stop me if you’ve heard this joke before… Three guys walk into a bar: a Stanford University graduate, a Harvard Business School graduate, and Harvard University graduate.
The Stanford University would have us believe the U.S. economy will soon reaccelerate because the housing boom is ending.
The Harvard Business School graduate tells us for the “umpteenth” time that we’re at or near a bottom, and that the housing debacle poses no economic threat.
And the Harvard University graduate tells us, with conviction, that housing problems are not spilling over into the greater economy.
Get the joke? Yeah… neither do I.
Yet, it remains one of the longest running jokes developed by the comedic genius of Kenneth Lewis, Paulson and Bernanke, who believe the spillover won’t be major, and that the housing correction is almost over.
Let’s start with Bank of America CEO Kenneth Lewis, the Stanford guy…
Says Lewis, according to Bloomberg.com, “U.S. growth is about to accelerate because the worst housing slump since 1991 is coming to an end. You'll see the economy begin to pick up in the third and fourth quarters'” and the slowdown in home sales is “just about to be over.”
But ask the National Association of Realtors, and they’ll tell you that 2007 existing home sales will come in around 6.18 million, a year over year decline of 4.6%. Existing home sales are forecast to come in around 6.4 million.
Hank Paulson, U.S. Treasury Secretary…
As long as Paulson can keep his foot far enough from his mouth, he’s fine. But that, it seems, isn’t easy for the Harvard grad.
Says Herb Greenberg’s blog, “Recent comments by Treasury Secretary Hank Paulson that the housing slump is largely contained apparently didn't get lost on builders. As the story goes, CSFB analyst Ivy Zelman told her company's sales force today that builders attending the Builder 100 Conference in San Diego laughed when the comments were mentioned as if Paulson didn't know what he was talking about.”
On April 20, 2007, according to Reuters, Paulson said the market downturn and subprime foreclosures appeared to be “contained” and that he was “encouraged by signs that the housing downturn was at or near a bottom.” Soon afterwards (May 31, 2007), Times Online reported that the “U.S. economy slowed to its weakest pace in four years in the first quarter of this year as a housing slump, growing trade deficit and factory inventories weighed.”
On May 24, 2007, Paulson jumped the gun when he said the U.S. housing slump “petered out” (as reported on Euro2Day.com), and that the housing slowdown is “largely over” and “contained.” Soon after, Toll Brothers reported a 79% decline in net.
Then, on June 20, 2007, Paulson was again quoted (at TheStar.com) as saying, “The major slump in the housing market is nearing an end and should not have a significant impact on the overall economy.” He continued, “We have had a major housing correction in this country. I do believe we are at or near the bottom.”
Now, it seems he’s just guessing on a month-to-month basis.
The sad reality is this: We’re not nearing a bottom. We won’t see a bottom until spring 2008 (best-case scenario). Homebuilder confidence just fell to its lowest rate since February 1991 on surging interest rates and sky-high delinquency rates. Before I divulge the number, please consider this: Any reading below 30 is an indication of poor conditions. Thursday’s reading came in at 28 from 30 in May, according to the National Association of Homebuilders (NAHB).
Given subprime woes and rising mortgage rates, homebuilders are losing confidence and rightfully so. 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.
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%.
And it doesn’t 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.
Foreclosures are rising. Glut is rising. Homebuilder confidence is plummeting. And would you believe that Paulson’s old firm, Goldman Sachs, as of April 2007 was worried? According to MarketWatch.com, “Investment bank Goldman Sachs is increasingly concerned about the health of California's real estate market and reckons mortgage giant Countrywide Financial could be harder hit than other lenders because of its big exposure to the state.”
Fed boss Ben Bernanke, another Harvard guy…
According to Bernanke, “We have not seen major spillovers from housing onto other sectors of the economy.” First of all, by saying “major,” he’s protecting himself from any minor happenstance.
We can already see the spillover in retail. Bed Bath & Beyond, not famous for warnings, warned of weaker-than-expected numbers because of merchandising related to the home. According to an auto dealer group in San Diego, housing sales have led to the loss of 1,300 auto jobs.
That just reinforces what AutoNation CEO Mike Jackson has been saying (as reported on MoneyNews.com): “A weak housing market will likely hurt new vehicle sales in the U.S. auto Indus try through the rest of the year.” He adds that weaker housing starts affected pickup trucks among construction workers and construction workers, given a lack of construction.
All highly educated, all wrong… We’re not nearing a housing bottom. We’re not even close. End of story…
Ian L. Cooper
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