The market had a capitulation event this week. The Dow Jones Industrial Average fell 507 points to 12,099 essentially wiping out a year of gains. While Boom Boom Bernanke left the alter of Fed-speak and practically told the market that we are in a world of hurt in a moment of candor, it would seem that the market did not like his response since it tanked almost in symphonic unison with each word he uttered. Like an amateur conductor, the CNBC ticker tape did an inverse to the intention that his words were trying to play on the market. Bank of America was off 6.5 percent for the week since it appears that buying junk at low prices does not make you a sage and wise investor. Bond insurer Ambac did a bit of cliff diving dropping a whopping 71 percent on news that it would have its rating slashed. It went from AAA to AA. But at this point investors realize that the rating system is as useless as the Department of Homeland Securities’ now defunct color coding warning system:
This method of keeping everyone in perpetual fear failed because what the hell were you suppose to do if the rating went from green to orange? Or red? What the does general risk of terrorist attacks mean? How do we distinguish between high and severe? It was there to keep everyone in this constant state of fear. In this same fashion the rating agencies were there giving out AAA ratings on practically every company keeping investors in this perpetual delusion that all was well in credit bubble land. As investors realized that ratings meant very little and the downgrades started coming, a domino effect ensued.
It is easy to get overwhelmed by all this data. In fact, it is so confusing you may even mistake the Fed Chairmen for someone else. Bwahaha! Someone thought Ben Bernanke was Hank Paulson. They get that all the time in her defense. When you are tagging up on the dollar and pounding it into submission does it really matter if it is the Fed Chairman or the Secretary of the Treasury who is throwing the punches? It was a moment showing how disconnected politicians on the Hill are with the true economic issues of middle class Americans. Then on Friday we have President Bush rolling out his $140 billion proposed stimulus package that of course, includes tax cuts. You get $500 bucks to blow on boos and pay per view while financial institutions get to write off billions of dollars in bad loans and jump out of Manhattan investment firms with diamond encrusted parachutes. Seems like a fair trade.
The End of the Tribe of Housing
With this as our weekly back drop, we can now safely say that this mass hysteria is now fragmenting into warring factions. The national neurosis and infatuation with housing is now going away. Whether people admit it or not we still have many tribal instincts. Just because we walk around in tailored suits and drive nice cars doesn’t mean we don’t have primordial instincts that still emerge once in awhile. Need we remember the diaper astronaut? Think of a baseball game. If anyone has ever been to a Dodgers versus Giants game here in Los Angeles and has seen Barry Bonds step up to the plate, you will understand what it is to have tens of thousands of people in unison booing. You will have a few Giants fans but god forbid should they start clapping. Or think of watching a comedy at a movie theater. Even a somewhat funny scene seems funnier when you are laughing with others; watch the same movie at home and you’ll wonder why you wasted your Blockbuster bucks. This mass psychology took hold on housing. It was a massive rally around one asset. It was simple to understand. Housing is good. Money is good. Housing requires money therefore housing is double-good. The poor soul who decided to speak against the tribe was publicly stoned and flogged for going off message.
Now that the tribe realizes that this cannot go on forever, we have to find our scapegoat. Mortgage brokers are now blaming Wall Street for creating the game in the first place with mortgage backed securities. Wall Street is blaming the ratings agencies for not doing their due diligence. Recent buyers are blaming the lenders for not telling them a Pay Option ARM doesn’t really give you any options and makes you pay with your physical arms. The government is blaming regulators for not doing their job even though these fall under the government jurisdiction. Agents are blaming buyers for pressuring them to find bigger and more expensive homes. Appraisers are blaming banks for turning up the heat on meeting higher prices. Blame, blame, and blame. What happened to all the love amongst these folks? Only a few years ago it was a total love fest in the tribe. Who cares if we mortgage our future away and put the next generation at a disadvantage as long as we get a McMansion with a helipad. We have dug such a disastrous hole that we may in fact look at this decade as a lost one. With a tsunami of mortgages resetting in the next four years, the reality of what no politician is capable of saying is going to happen. We are going to have a reduced standard of living.
Four Reasons Why Housing Will Not Recover in 2008
The tribe needs answers and many in the tribe believe that the media is talking down prices and this is the main culprit of the correction. “Stop talking bad about housing!” as if housing was some living being with feelings. Plus, can you really talk down $13 trillion in mortgage debt? If you had that strong of a voice you should audition for the new season of American Idol. Yet there is dissention in the tribe. Some are digging up facts not provided by the mainstream media and many are realizing that this entire game is a sham. Word is spreading like wild fire and no longer is there a honeymoon for housing. Yet some in the tribe require concrete facts and some still believe that the tribal fire dances around housing wealth are only a matter of a few months away. Let us now outline the fall of the tribe of housing:
#1 – New Home Median Prices Falling
Last year we witnessed our first national year over year decline in median home prices since the Great Depression. We are now back down to the median prices of December of 2005 and this is for new home sales. Why does this matter? Since construction and new home spending fueled a lot of this economy, having new homes drop in price is a big deal. Also, winter is a seasonally weak time of the year seeing prices drop this early only signifies more pain ahead. Yet some in the tribe call this a seasonal adjustment and we’ll see prices jump again this summer. Why is this time different?
#2 - Record Amounts of New Homes for Sale
We have never had this much inventory on the market. Never. We are swimming in uncharted territory. As you can see from this chart we hit our monthly peak in June of 2006 and have slowly started depleting the inventory since then. Unfortunately, the only thing that will deplete inventory is sales and this is not happening. We still have a record amount of housing inventory on the market and as you are all aware, housing sales have come to a near screeching halt. Yet this is good for housing since it shows pent up demand cries the shaman of the housing tribe. Let us look at this pent up demand shall we?
#3 – New Homes Sold Per Month Cliff Diving
This chart should be taken in reference with the previous chart. If we are at record inventories and sales are at record lows, what does this mean? It means that we have 11.1 months of supply at the current sales rate. When was the last time we had a monthly double-digit supply of new homes? How about January of 1991. New homes sales started trending downward significantly in March of 2006, plenty of time and heads up to the tribe to prepare themselves but now it is simply easier to pass the blame. The chart is still diving lower and there is yet to be a bottom. Given the winter season and the incredibly weak economy, we may see sales numbers fall even further. Yet more proof is needed you say. Maybe there is a minor funk but people are still building!
#4 – New Housing Starts
Housing starts are on an annual 12 year low but if we are to look at last month’s data, we are at a monthly 25 year low. What this means is we can expect further cuts in construction and all industries related to this field. Meaning your home accessory stores and those involved in selling and manufacturing these homes will see more contraction in their industry. As you can see from the chart, the trend is clearly toward the downside. What we are now left with is historically high inventory which will increase not from housing starts, but added foreclosure inventory created by the weak economy. Never in our history have we been so dependent as a nation on housing for our economic health. Now unless you are part of the now growing minority faction of the tribe that believes housing has bottomed, you will have to invest accordingly in the next few years and get out there and vote! The tribe will continue to fight throughout the year until some semblance of normalcy is arrived at. But given the current insanity expect the delusion to flow from the alters of financial irresponsibility. Enjoy the few hundred you get in the mail while those on Wall Street figure out ways to write off billions in losses and pass them on to the tribe without calling it the sacred bailout word; after all, much of the tribe is fixated on screaming mental patients on American Idol and they won’t even notice.
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Ted Allrich is the founder of The Online Investor and author of Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he offers advice to investors who are just getting started.
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