Housing crashing
I think today's HSBC announcement ($10B in loan write-offs) pretty much ends the period of denial that the housing market is a massive bubble in the process of popping.
At this point, the question is degree of impact, and that too is still being low-balled in my opinion.
For example, a few months ago Toll Brothers expected 2007 write-downs to amount to $170M. Today they updated that view to say Q1 writedowns will be $170M. That is evidence that they have zero visibility to th emarket.
The two area of concern at this stage are the homeowners and the folks employed in the real estate business.
Anyone who bought a house 2004~2006 overpaid. The real estate bubble was initially inflated by super low interest rates. It stayed alive, however, via exotic loans. The era of exotic loans is over: HSBC announced, for example, that they will use FICA rates of 700 and above and insist on downpayments. Access to easy loans is shut off at the absolute wrong time: home prices are dropping just as a massive wave of ARMs are re-setting and interest rates are 3% higher than they were when the boom started.
Removing exotic loans re-sets the home prices to 2004 levels. Higher interest rates pushes them back to 2002 levels. A recession will push them back to 2000 levels.
Bottom line: foreclosures are spiking and will accelerate. The SF Bay Area is somewhat immune but not entirely - a lot of housing supply will re-enter the market as investors are driven out. But it won't be as bad as San Diego, for example, where new communities sprung up all over.
Mortgage Banks are about to be very impacted, as well as investment banks which bought this silly paper or funded the boom. But individual homeowners will be most affected because they will see unprecedented drops in home value.
The other group At least 1 million people will be fired this year. I said it a few months ago and it was recently echoed by Merrill Lynch. For starters, if construction employment levels re-visit 2002 levels, that's 500,000 fewer workers. Given the accelerating rate of cancellations of new home building, I'd say it is guaranteed.
My prediction: Spring/Summer 2007 will be a very cold shower for home sellers as massive inventory chases fewer buyers. Look for panic to set in in the Fall. But ugly as it seems in 2007, 2008 will be much worse. Right now, many homeowners /investors are hanging in there, taking small hits to their cash position in the hopes that somehow prices will stabilize or grow. When they see continued price erosion in the face of increasing carrying costs, that's when the market collapses.
Another prediction: The Fed will do nothing and neither will the government. They can't do anything that won't cause even more problems.
A final prediction: with housing over as an investment, the stock market will continue to boom.
At this point, the question is degree of impact, and that too is still being low-balled in my opinion.
For example, a few months ago Toll Brothers expected 2007 write-downs to amount to $170M. Today they updated that view to say Q1 writedowns will be $170M. That is evidence that they have zero visibility to th emarket.
The two area of concern at this stage are the homeowners and the folks employed in the real estate business.
Anyone who bought a house 2004~2006 overpaid. The real estate bubble was initially inflated by super low interest rates. It stayed alive, however, via exotic loans. The era of exotic loans is over: HSBC announced, for example, that they will use FICA rates of 700 and above and insist on downpayments. Access to easy loans is shut off at the absolute wrong time: home prices are dropping just as a massive wave of ARMs are re-setting and interest rates are 3% higher than they were when the boom started.
Removing exotic loans re-sets the home prices to 2004 levels. Higher interest rates pushes them back to 2002 levels. A recession will push them back to 2000 levels.
Bottom line: foreclosures are spiking and will accelerate. The SF Bay Area is somewhat immune but not entirely - a lot of housing supply will re-enter the market as investors are driven out. But it won't be as bad as San Diego, for example, where new communities sprung up all over.
Mortgage Banks are about to be very impacted, as well as investment banks which bought this silly paper or funded the boom. But individual homeowners will be most affected because they will see unprecedented drops in home value.
The other group At least 1 million people will be fired this year. I said it a few months ago and it was recently echoed by Merrill Lynch. For starters, if construction employment levels re-visit 2002 levels, that's 500,000 fewer workers. Given the accelerating rate of cancellations of new home building, I'd say it is guaranteed.
My prediction: Spring/Summer 2007 will be a very cold shower for home sellers as massive inventory chases fewer buyers. Look for panic to set in in the Fall. But ugly as it seems in 2007, 2008 will be much worse. Right now, many homeowners /investors are hanging in there, taking small hits to their cash position in the hopes that somehow prices will stabilize or grow. When they see continued price erosion in the face of increasing carrying costs, that's when the market collapses.
Another prediction: The Fed will do nothing and neither will the government. They can't do anything that won't cause even more problems.
A final prediction: with housing over as an investment, the stock market will continue to boom.
posted by Andrew at
10:55 PM
3 Comments:
andrew, if housing collapse, how could the market be boom ?
wondering if there is domimo effect when housing collapse, such as consumer confidence drop, people spend less money, implying company make less profit, etc.. any further comment or insight.
thanks. your follower. :-)
andrew, if housing collapse, how could the market be boom ?
wondering if there is domimo effect when housing collapse, such as consumer confidence drop, people spend less money, implying company make less profit, etc.. any further comment or insight.
thanks. your follower. :-)
Any idea on housing play... most housing stocks seem near year high or much higher then yearly low. Are they good short (puts ) candidate ?
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