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Mark's Market Blog

5-15-10: The State of the Housing Market

By Mark Lawrence

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On Monday the S&P "gapped up" 400 points, 4%, on news that the European Central Bank would buy $1T worth of the PIIGS near-junk bonds. Historically, gaps like this get "filled in," meaning in the not too distant future many expect that the market will drop back down to at least 1100, then perhaps rise back on a more orderly basis. Or perhaps not rise back up, we'll see about that. Since Monday we've already retraced (filled in) more than half the gap. The ECB's $1T announcement is the equivalent of an emergency room doctor injecting adrenalin into someone's heart - they leap up, but that doesn't mean they're all better. Since the ECB's announcement the S&P has bounced off the bottom of the 50 day moving average and resumed trending down. 1100 is roughly the 200 day moving average, we've seen that crossing that is a Portent of Dangerous Things to Come.


S&P 500 November 15 2009 to May 14 2010

It's been a bad week for democracy. The Thai government apparently had a sniper shoot one of their generals in the head for supporting the protestors. While he was on camera being interviewed by CNN. Poor PR, if you ask me. Yesterday 16 Thais died and 140 were injured in a confrontation with the army. Last week they threw grenades at the unarmed protestors, killing several. Venezuela sent a former minister to jail for 9 years for criticizing President-for-life Chavez. Iran hung five dissidents to let the rest of the populace know what happens if you question the legitimacy of God's Own Government. Apparently "Thou Shalt Not Kill" has a political exclusion of which I had been unaware. I suppose it's hard to read the fine print when it's written with lightning on rocks. Bombs in Iraq killed about 50, letting people know that voting comes with certain risks.

Seen all the Lincoln ads lately? Ford has sold off Aston-Marton, Jaguar and Volvo, and after several years of ignoring Lincoln they find themselves with a very sick luxury brand that they desperately need to revive.

How Your Car Identifies You

BrandBuyer's AveragePercent
College
AgeIncome
Audi 49 $183,601 31.66%
BMW 49 $169,289 29.07%
Mercedes-Benz 53 $174,558 27.74%
Lexus 56 $141,745 26.45%
Cadillac 62 $129,656 21.90%
Lincoln 62 $113,782 25.47%

"I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody." -- James Carville. The bond market pricing Portugal's debt at over 5% with Spain's rising was enough to scare European politicians into spending major money. But $1 trillion won't solve the fundamental questions facing Europe, says economist Nouriel Roubini. All of the bailout money is conditional on countries approving big austerity packages like Greece's parliament just passed. Spain and Portugal's bonds are back under 2%, at least for now. The euro bailout is working for this week. Now the big questions start: can the PIIGS actually cut government spending, layoff employees, cut retirements and live through the resulting multi-year recessions? Or will they just make a bunch of noise and keep trying to live on cheap credit? No worries, mate: of course politicians will face the problems head on and make the difficult if unpopular decisions, they won't try to kick the can down the road for the next generation. In the chart below, notice that Greece is not even close to being the worst offender for deficit spending.


Deficits of some European Countries

In the past, when the world had a recession it was the job of the US consumer to spend the way out of it. The world is tacitly counting on this happening again. It won't. US unemployment will remain persistently high for several more years. US consumers, stung by the drop in their home's value (and about to get stung further by the coming second drop) are busy paying down debt, not accumulating more stuff. The Euro sinks further each week from a high of $1.55 to $1.24 (today) to $1 (coming soon to a theatre near you) in hopes that the US consumer will bail out Club Med. Bad news guys: you got nothin' we want. In the last ten years of cheap money, much of the world's governments went on a debt-driven spending spree. Now that debt is coming due, and the result will be that not only will the government programs need to be cut, but cut even further to allow for extra money for the pay back. The all too foreseeable result will be a severe recession, one might say depression in several of the world's most highly leveraged economies: Portugal, Ireland, Italy, Spain, Greece followed soon thereafter by UK, France, US.

A new eminent domain law in Utah authorizes seizure of some of the federal government's land holdings. It's designed to pick a fight with Uncle Sam. Utah wants to spark a revolt in which Western states attempt to wrest control of federal lands within their borders. Utah's new law was tailor-made to provoke a lawsuit, possibly reaching the US Supreme Court, and to inspire other Western states to enact similar legislation. The US government owns more than 60 percent of Utah, thus dictating whether land has been set aside for preservation or can be accessed for mineral deposits.

Over the past 15 or so years, Utah has taken an increasingly aggressive stance against the expansion of federally protected land. The catalyst: In 1996, President Clinton designated the Grand Staircase-Escalante National Monument, a 1.9 million-acre swath of southern Utah that the state had eyed for energy developments. "One small section of the Grand Staircase has a trillion dollars in natural resources," says Rep. Chris Herrod, the Republican state legislator from Provo who sponsored the eminent domain bill. "The people of Utah are being robbed." Then last year, the Obama administration revoked 77 leases for development on Bureau of Land Management land in Utah.

Nearly one in five Israeli men between the ages of 35 and 54 do not work, including Arabs and ultra-Orthodox Jews, says Israeli economist Dan Ben-David. As their numbers rise, so does the economic peril, he says. Officially, Israel's unemployment rate is about 8%. But that doesn't include Israeli citizens who are not trying to find work. Nearly 27% of Arab men and 65% of ultra- Orthodox Jews don't work, government figures show. The non-employment rate for ultra-Orthodox men has tripled since 1970.

How's California doing? Without a federal bailout, here's what you can expect. Healthy Families, CalWORKS, Adult Day Health Care, In-Home Supportive Services, California Food Assistance Program, and Transitional Housing Placement for foster kids will all be terminated. California's Governor, Arnold, is livid over his inability to cut back on these programs: every time he cuts them, the spending is restored by a federal court that says federal law obligates California if they take the federal funds. Arnold's new proposed solution is to stop taking the federal funds and cut the programs entirely.

He also proposes $1B+ cuts in medi-cal, 10% cuts in state employee wages, and 20,000+ teachers to be laid off. California's 12.7% unemployment rate is about to go up, and these state workers are not going to find it easy to replace their jobs at anything like their previous wages. Businesses hire few $75,000 / year people whose major expertise is preparing power point slides and attending meetings.

The biggest Wall Street banks slashed their small business loan portfolios by more than double the rate at which they cut their overall lending, according to a government report released Thursday. "Big banks pulled back on everyone, but they pulled back harder on small businesses," said Elizabeth Warren, chairwoman of the congressional oversight committee.

Meredith Whitney of T2 Partners recently gave a talk on the state of the housing market in the US. Following is a brief summary of her talk.

Although there are lots of anecdotes in the newspapers about the housing market turning around, and Washington would dearly love for us to believe the worst is behind us, the simple truth is mortgage defaults and delinquencies continue to get worse. They have been growing exponentially since 2006. The largest problem facing the mortgage market is the shadow inventory or housing overhang of 7 million units. Each year about 5.2 million houses are sold, most due to people relocating. We have 300,000 new units/month becoming delinquent. These 7 million houses plus 300,000 per month will need to be sold, in addition to the houses normally sold as people move around.


Mortgage Delinquencies, 1979 to 2009

Originally we had foreclosures due to liar's loans; the owners simply couldn't realistically make the payments on their house. Those defaults - subprime - are mostly behind us now. Now we're moving into new territory as Option-ARM and Alt-A mortgages reset.


Mortgage resets by date

The liar's loans were most frequently given out for small, inexpensive homes - in many eastern cities, smaller houses (800-1200 sq.ft) sell for $60,000 to $85,000, so the subprime mortgages didn't tend to be for a lot of money. As the defaults move out into the suburbs, the house prices and mortgage amounts are climbing, and the stakes are getting higher.


Average size of mortgage going into default, 2005 to 2009

Today roughly half of all mortgages are underwater. While before 2008 there was some feeling that one did not walk away on a mortgage, that feeling has mostly dissipated. Today more and more people are walking on houses that they can in principle afford, but where the business case for making the mortgage payments is poor.


Percent of mortgages underwater, Q1 2010

There is talk in Washington that people just need a little help, if their mortgage was adjusted then they would keep their home. The banks know better. The "cure rate," people who get behind on their payments but then catch back up, perhaps with some help, has been shrinking for a few years and is currently almost vanishing.


Mortgage cure rate, 2005 to 2009

Today the banks own a huge inventory of houses, and have even more that are on their foreclosure list, but on which for their own purposes they chose to delay foreclosure. This is the housing overhang, the houses that belong on the market but aren't on it yet. Until this overhang is substantially cleared, there is no hope of prices going up. The overhang rate is roughly triple the historic rate and climbing.


Housing Overhang, 2005 to 2009

What does this overhang rate really mean? In one particularly bad place, Riverside County (near Los Angeles), there are currently 1372 houses listed for sale. There is an overhang of another 5700 houses waiting to be put on the market - more than four houses waiting for each house currently for sale. This number, 5700, does not include the normal number of houses that will come onto the market because the owners wish to relocate.


Housing overhang in Riverside County

Housing is nowhere near a recovery; in fact I believe it's clear we're at the leading edge of the second wave of this housing crisis. It's going to get substantially worse before it gets better.

I strongly recommend you go to your doctor and get a prescription for Efudex generic, then fax it off to Canada Medicine Shop. 10 grams, $19 worth, is more than enough. Apply it to your face, a ball about the size of a small pea, twice a day, for 10-14 days. If nothing happens, you're done. If you develop any lesions (spots that look like cold sores), continue the treatment for 21 days total. After 21 days let everything heal up for a couple weeks. Perhaps consider a 2nd round of treatment if the first was dramatic. This stuff gets in the way of DNA replication during cell division, so anything pre-cancerous will die off. I tan easily, but this stuff has found at least 4 pre-cancerous spots on my face, which I'm in the middle of killing off. It's likely you have lighter skin than I, and are more susceptible to skin cancer. Warning: if you buy this same stuff in the US, it will be several hundred dollars, not $19.

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