This week witnessed the final nail in the housing bubble coffin. We have reached what seems to be the Minsky moment for the housing market. Named after the US economist Hyman Minsky, the idea holds that over long periods of economic stability leverage tends to grow in predictable stages. This economic stability leads to a fertile environment sprouting trunks of easy credit access with little perceived risk. However, as the growth continues there seems to be a movement from moderate lending, risky lending, and finally outright irresponsible Ponzi like lending. With 100+ subprime lenders imploding on their own convoluted mortgages, the housing market is like a fish out of water gasping for life and clearly in the last stage of the lending cycle. The first event occurred on Tuesday when the gargantuan mortgage lender, Countrywide Financial announced dismal second quarter results. They announced that second quarter profits shrank by a third due to growing delinquencies and get this, creditworthy borrowers defaulting. The talk early in the year about subprime being contained turns out to be an absolute ruse. Now we have prime mortgage borrowers swept up in the housing slump. Yet the bigger news came from Countrywide’s CEO Mozilo, saying that he does not see housing recovering until 2009. Imagine that.

Then we have the inability of the mainstream news media to inform us regarding critical issues. Instead, we have the morning news plastered with Lohan up to her usual debauchery and athletes gone wild. As a matter of fact, while California set a new record in the foreclosure department, the mainstream media felt this only warranted a footnote at the end of the newscast. We don’t hear much about Iraq anymore. And what of the collapsing dollar? I think I hear Nero Fiddling while something burns.

In this article we’ll examine three critical factors that propelled housing into its public Minsky moment; prime contagion, record number of foreclosures, and negative publicity.

Prime Contagion

Mozilo likened the housing market to a gigantic ship needing to turn in the ocean. It will take time was his underlying point. I like to think of the housing market more like a NASA mortgage rocket with no turning back. Have you ever tried turning back a rocket-propelled vessel? His statement seems to offer some hope that housing will return even though he unloaded millions in his company stock. Maybe he forgot to mention that the ship he was referencing was the Titanic. Either way, housing is passed the shaky ground stage. I’ve shown countless examples in our Real Homes of Genius series that clearly highlights an outrageous bubble housing psychology. We also discussed a few months back the subprime implosion as credit suddenly tightened and subprime lenders started dropping like moths heading toward the light. In fact, I felt this was the watershed event and would set the tone for the summer.

Yet glorious housing bull pundits at this time championed the amazing summer rebound and the silo mentality of containing the subprime debacle. Ignoring rising inventory, $1 trillion in mortgage resets, and a stagnant market they decided to jump on the housing Pollyanna bandwagon. After all, this summer was housing’s last shot to demonstrate continued bubble resilience. Unfortunately, this summer is only the beginning of a very difficult downturn in the housing market and most likely the overall economy. The market has ballooned beyond any economic model of sustainability. I discussed the pseudo $5 trillion in wealth created by this housing bubble and all credit linked to it. How much of this wealth will disappear is yet to be seen.

Yet now we are realizing that prime loans are also taking a hit. No longer is this implosion contained to one segment of the housing market. For a large part, we have this entitlement mentality of folks thinking their homes are worth more than what they truly are. Say you bought in 1997 for $200,000. Now your home is worth $600,000. This is a very typical scenario in California. You’d feel $400,000 richer simply by living in your home. And many folks had this wealth effect. In fact, they converted their homes into ATM machines and used mortgage equity withdrawals to prop the economy. Unfortunately, many folks are now realizing that some appraisals may be bubblicious in their estimates. Say this given home drops to $400,000 in a few years. Nothing is lost, in fact they are “up” $200,000 but the psychology and perceived loss does make people feel poorer. When people feel poorer, they spend less. In our economy based on 70 percent consumption, that equals a recession. Clearly, this is where we are heading. We have scheduled mortgage adjustments set for 2008 and 2009 to the tune of approximately $2 trillion:

This housing market followed no economic rules and like the Minsky moments of past, greed and irresponsible credit will once again collapse another bubble. Chalk it up to history repeating itself. Which leads us to the historical moment set in California.

Record Foreclosures

Southern California has reached a record number of foreclosures. That is correct, we are swimming in uncharted territory. Notice of defaults are quickly approaching record territory as well. To be exact we are off by 102 homes, which by the time this article is posted, we will surpass. So we can say that we have record numbers of Notice of Defaults and foreclosures. Take a look at the chart below and see if you can spot the trend in California:

The interesting tidbit of this information is NODs are turning over and going into foreclosure. If anything, you can consider the NODs as a canary in the mine; and if we are to read the data correctly we are in for some massive foreclosures. As stated by DataQuick:

“Most of the loans that went into default last quarter were originated between July 2005 and August 2006. The median age was 16 months. Loan originations peaked in August 2005. The use of adjustable-rate mortgages for primary purchase home loans peaked at 77.8% in May 2005 and has since fallen.”

Now if you examine the rate reset chart in conjunction with the foreclosure data, there really isn’t anything stopping this train. Over 75 percent of loans originated in August 2005 were adjustable-rate mortgages. Given the hot product was 2/28 teaser suicide loans, what special date are we approaching? That is right, August 2007 where a massive batch of these loans will be resetting in a declining market with higher rates. So even if these folks want to refinance, they will be hit by higher rates and a larger payment.

Amazingly, these loans are also fairly new. With a median age of 16 months. Clearly the problem here is people jumping into homes they cannot afford by horrible mortgage products. In addition, the rate of default on second mortgages is also skyrocketing. This would seem obvious since missing the payment on the primary loan implies you are not paying your second. But guess what? In the midst of all this there is good news. The median price for a home keeps on going up! We won’t go into exposing the inaccuracy of using a tiny sample size of higher priced homes skewing overall market stats. We want to leave you with one piece of good housing news for the day.

Negative Publicity

This may turn out to be the only good news left for housing. The media is fickle and suffers from long-term memory loss. Even a year ago, we were reading about stories of people making thousands in real estate transactions. People were racing over like NASCAR drivers ready to become brokers and agents as reflected by the number of licenses issued by the Department of Real Estate here in California. Now, you are more likely to find negative housing information permeating the media machine. And don’t you find this odd in a state where housing is still flirting with a median price of $600,000? If the media dug deeper into this implication and did constructive journalism, it would be clear that we are in a full fledged housing bubble bursting. Why are they afraid to come out and simply admit what the data is suggesting? That housing is in for a major correction and housing prices grew on the back of irresponsible lending and greed. The key ingredients from any historical bubble are present again.

The issue is the real estate industry employs countless people, pays high amounts of money for advertising, and has many politicians bought. So of course they carry clout. But this will only get you so far. You can only fool the market for so long. It is becoming apparent that this system will collapse on its own weight. In a way we haven’t felt the ramifications of what is to come. We are only getting a sneak peak of the real housing bear market. I was looking at old LA Times articles and the positive rhetoric from housing peak to negative bubble chicken little print took about 3 to 4 years. So given this past reference, you can expect a bottom somewhere in 2009 or 2010. Employment numbers still do not accurately reflect the coming job losses we will face. Our economy was based on this bubble via credit, mortgage equity withdrawals, trading houses up like baseball cards, and a cultural neurosis on all things housing.

When do you think we will reach a housing bottom?

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This entry was posted on Sunday, August 12th, 2007 at 5:02 pm and is filed under Real-estate news. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.