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Housing Woes and Pain Avoidance

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There is simply no ability for US consumers in aggregate to take on more debt in an environment of global wage arbitrage and falling home prices.

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I am in a friendly game of "top this" with Prof. Fil Zucchi on housing. His latest post was More Gore In Housing Land in response to Homebuilders Feeling the Crunch. Following is a brief snip of Prof. Zucchi's post:

Comstock Homes (CHCI), [last] Friday announced that net orders for the third quarter were... 3 (that's three without any zeros) and net new order revenues were -$11.5 mln (as in negative revenues). For the entire month of September, CHCI managed to close on four units at The Eclipse project, which is becoming pretty much synonymous with the faith of the company. The "big enchilada" looms in January of 2008, when the already extended, limited-recourse $40 mln balance on The Eclipse loan comes due to Corus Bank (CORS). To pay that off CHCI will have to sell more than 100 of the remaining 145 units, not a likely event at the current pace.

Still, CHCI is in great shape when compared to Tousa Inc. (TOA), which recently hired Lazard to advise it on its capital structure, i.e. "Please tell us how to get rid of our billion dollars' worth of debt because we don't really like it anymore."

And then there is Standard Pacific (SPF), whose stock price slinked below the $5 mark, putting its equity market cap at less than 25% of its $2 bln in debt. Incidentally, the seven-year portion of that debt is back to its lows of 70 cents of the dollar for a yield of 13%, and its Credit Default Swaps are breaking to new highs.

OK Fil, that's pretty tough to top. Instead I am going to "Pile On" just as you did. If this was a football game there would be penalty flags all over the place. Please consider these headlines:

  • Foreclosures hit record high in metro Atlanta:

    Foreclosure actions for metro Atlanta hit an all-time high this month, with 6,809 properties in 13 counties threatened with public auction in November. "This is the largest swing we have ever seen from month to month," said Barry Bramlett, an Equity Depot vice president.

    The total estimated value of properties entering foreclosure in metro Atlanta was $1,076,975,783. For those behind on mortgage payments, the options for saving a home are more limited than in the past. That's because the mortgage meltdown has virtually halted new mortgage loans to borrowers with poor credit. Those who might have refinanced their way out of a problem in the past have little hope of doing that today.

  • Olson halts big Oakland condo project:

Developer Olson Co. quietly halted construction on a half-finished condominium project in downtown Oakland, a troublesome turn for a project long seen by city officials as the centerpiece of their downtown housing push.


Also, Patrick at Patrick.net sent me this image.



The question in my mind is "how many half completed monuments to stupidity like that are banks going to be stuck with?"

In Florida there a dozens of questionable projects that Corus Bank might get stuck with. Still the building goes on as if buyers will be there on completion. They won't.

There is an interesting video on You Tube that I encourage everyone to read. It is also about canceled projects. Click the following link to see the video: Central California Housing Crash.

Loan defaults in the Palm Beach area topped $1 billion over six months:

Between Jan. 1 and July 1, homeowners in Palm Beach, Martin and St. Lucie counties defaulted on 4,318 mortgages worth $1.05 billion. That's a 311 percent increase in defaults from the 1,051 recorded during the same period in 2006.

Along some streets, next-door neighbors defaulted like dominoes: Waterway Cove in Wellington; Gazetta and Cresta Way in the Terracina subdivision in West Palm Beach; Strawberry Lakes Circle west of Lake Worth; Gull Road in Palm Beach Gardens.

Millions of dollars in mortgages collapsed before a single payment was made. Borrowers holding pre-construction loans defaulted on dirt before homes could come out of the ground.

Dr. Housing Bubble is reporting a record 10,000+ Short Sales in Southern California:


Click here to enlarge.


Southern California, for the first time this millennium has hit a record of 10,000 short sales. The record occurred this week and we are currently riding high with 10,195 short sales. As you can see from the above chart, the trajectory is rather clear unlike the predictions many housing pundits are making. It is interesting to also note that while short sales are drastically increasing, inventory is either holding steady or dropping. Even if it is slightly down, this is a major change in the market as well.

Since overall sales are dropping off the cliff we can safely assume one thing is going on. For each short sale that hits the market, we have some stuntman mortgage holder taking his home off the market thinking that housing Santa Clause will come in December. Why do people think winter is a good selling season? Clearly it is not a good selling season and this trend will only continue with rates resetting quicker than a broken down Atari.

Also of note, Bay Area home foreclosures triple in September:

Foreclosure filings across the United States nearly doubled last month compared with September 2006, as financially strapped homeowners already behind on mortgage payments defaulted on their loans or came closer to losing their homes to foreclosure, a real estate information company said Thursday.

A total of 223,538 foreclosure filings were reported in September, up from 112,210 in the same month a year ago, according to RealtyTrac Inc.

Foreclosure filings in the Bay Area tripled in September compared with a year ago. The most dramatic spike was in the number of bank-owned properties, which rose more than tenfold to 1,017 in the nine counties, compared with 95 at the same time last year.

Southern California Median Home Prices

A friend going by the name B.C. sent me the following chart yesterday.


Click here to enlarge.


Seeing this stuff day in and day out, I am now pretty much immune to it. But a several things stand out in this "Pile On."

  • Condo projects are now being halted mid-construction. That is a new development.

  • "The mortgage meltdown has virtually halted new mortgage loans to borrowers with poor credit. Those who might have refinanced their way out of a problem in the past have little hope of doing that today."

  • Bay area bank-owned properties (REOs) rose more than tenfold.

Those three points show why Paulson is spooked. He should be spooked. Point number three above is probably frightening. Banks like Citigroup are desperately trying to prevent more assets from coming on the books. REOs rising tenfold will do just that. So would bringing SIVs onto balance sheets.

But it is disingenuous for Paulson to suggest that the proposed Super SIV bailout of Citigroup is a "market based solution". When government invites businesses to the table to dream up solutions to protect the invitees from blatantly poor loan decisions, you can rest assured there is nothing "market based" about it.

Please see Paulson Media Blitz on Mortgage Backed Securities for more on "market based" proposals of the Treasury Department.

What's really happening is a "Don't Ask - Don't Sell" Fraudulent Attempt at Concealment orchestrated by Paulson. Professor Depew poised similar thoughts in a Special Edition Five Things You Need to Know.

No one wants to take the punishment now for mistakes that were made earlier. Greenspan made the wrong choice when he willingly created the housing bubble to bail out banks in the wake of the dotcom bust. A similar decision faces the Fed and the Treasury today in the mortgage backed debt crisis.

On that note I would like to welcome Eugene Linden, Minyanville's newest professor, who is writing about the Risk of Avoided Pain:

It seems that everybody wants to sell their mortgaged-backed securities, except that nobody wants to see a price established in the marketplace because that would force them to mark down or sell their other holdings. We've seen this movie before, but the most recent version was in Japanese.

Before the Japanese real-estate bubble burst in 1991, it looked as though the island nation was well on its way to rivaling the U.S . as the preeminent economy on the planet. Even after the bubble had begun to deflate, Michael Crichton (who is turning out to be one of the better reverse indicators in the world) published Rising Sun, which painted a scary picture of an unstoppable, ruthless, rapacious Japanese machine.

So think: when was the last time you worried about the Japanese taking over the world economy? Even as Rising Sun scaled the best-seller lists, the Japanese machine was grinding down towards a wallow in deflation and anemic economic growth that afflicted the nation for the next fifteen years and continues today. A number of factors halted the Japanese juggernaut, but prominent among them was the reluctance of the banks and government to acknowledge and accurately price more than $1 trln in bad debts left behind as commercial real estate lost 80% of its peak value...

Thanks for that Eugene, because many think I am batty for pointing out similarities between the US and Japan. It was not that long ago that the US was chiding Japan to write off bad debts and get on with things. Now the US is attempting to conceal bad loans just as Japan did for decades.

To be sure, there are differences between Japan and the US. Most point out the huge amount of consumer debt in the US relative to Japan at the start of its decline. Oddly enough, that is a hugely deflationary force as opposed to the other way around. Most people stumble over this issue.

There is simply no ability for US consumers in aggregate to take on more debt in an environment of global wage arbitrage and falling home prices. It is only the willingness and ability to take on debt that prevents a deflationary collapse once debt levels exceed certain thresholds. I believe we are well beyond those thresholds with housing exceeding rental prices and wage growth by orders of magnitude.

On the other hand, demographics and xenophobia are far greater in Japan than the US. Then again, look at the wall we are building along Mexico. How long will it be before Japan and the US cross paths on this issue. Japan will open up at some point it for the simple reason it will have to in order to survive. Right now, the US is headed in the opposite direction.

Welcome aboard, Professor Linden. I look forward to seeing more of your thoughts on these issues.

No positions in stocks mentioned.
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