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Housing Bust Revisited - 12 to 22 Years to the Bottom



June 06, 2008 – Comments (13) | RELATED TICKERS: CTX , KBH , BZH

It's been a while since I've written a fundamental post on the housing bubble (and yes folks, it is still a bubble, the bust is happening but valuations are still in bubble territory).   Time to see where we are, and where we are going.  I'm assuming everyone knows where we've been; most economists put the height of the housing bubble around late 2005/early 2006..

So where are we right now?

NEW YORK ( -- More than one million homes are now in foreclosure, the highest rate ever recorded, according to a trade group which warned Thursday that number will continue to climb.

The report showed about 1.2 million prime mortgages are now a month or more past due, a seasonably adjusted rate of 3.7% of those loans. That's up from a rate of 2.6% a year ago.

My Comment:  After months and years of claiming the credit crisis was contained, that it was a subprime problem, the cracks in the system are now Grand Canyon sized... uh... canyons.  Today's NOD's are tomorrows foreclosures.

Robert Toll took time out from explaining his company's dismal earnings report on June 3 to pitch a proposal. To shore up the real estate market, and the economy in general, he said, Congress should pass a bill to give tax credits to home buyers.

However, that "fix" alarms some economists and other financial experts, who think that a home-buyer subsidy will only serve to reinflate the housing bubble.

Both the House and Senate versions of the Foreclosure Prevention Act include some form of tax credit for home buyers. The House bill offers buyers who have not owned a home in at least three years up to $7,500 in refundable credits if they buy a home in the next year. Single buyers with adjusted gross incomes less than $70,000 and couples making less than $140,000 are eligible for the full credit. The Senate bill gives buyers up to $7,000 if they purchase a foreclosed home.

My Comment:  The economists are wrong.  This will not reinflate the housing bubble.  What it will do, however, is prevent the bubble from deflating as fast as it is.  It's going pretty slow to begin with.  Real estate, in case you haven't noticed, is not as liquid as stocks or bonds.  What takes one day or quarter to price into a stock can take months and years to price into real estate.  As I will show you, the fundamentals show that no bailout is big enough to reinflate the bubble; a bailout like this will get a few knifecatchers off the sidelines and prop up the share prices of TOL and other homebuilders for a few months or maybe even a year or so.  This why we might not find a true, inflation-adjusted bottom until 2030.

Now where are we going? I am going to place special emphasis on this last news piece, and some data after it, due to the effects we will see on homebuilders:

U.S. home builders, struggling under sinking demand and a credit crisis, now face a fresh obstacle: competition from a flood of homes in foreclosure.

Now, in addition to higher mortgage rates, skittish buyers and competition from other builders, they face a rising number of homes whose owners are unable to sustain their mortgage payments.

"In some regions, the supply coming to the market from home builders is now smaller than the supply coming from foreclosures," Deutsche Bank senior economist Torsten Slok said.

The rate of mortgages with payments more than 90 days late rose to 4 percent of all U.S. residential mortgages in April, up from 2.1 percent last year, according to First American CoreLogic. The rate of loans in the process of foreclosure rose to 0.7 percent from 0.4 percent in April 2007.

The number of homes that have been repossessed rose to 660,000 in April, according to First American CoreLogic. Based on April's figures from the National Association of Realtors on existing homes for sale, 14.5 percent, or one in seven homes for sale in April were the result of a foreclosure in which the home was repossessed by a lenders.

Because the foreclosure rate is highest on mortgages granted to first-time buyers, nearly all home builders have been affected, analysts said.

However, those who catered more to first-time buyers -- such as D.R. Horton Inc, Centex Corp, KB Home and Beazer Homes USA -- are more susceptible to rising foreclosure rates.

Supply is a main obstacle preventing the U.S. housing market from recovering from its two-year slump.

Centex Chief Executive Timothy Eller said foreclosures hitting the existing home market will probably get worse and pressure prices. To head off the glut, Centex has been selling its inventory of unsold homes at the expense of profits.

My Comment: As stated before, todays NOD's (that's Notice of Defaults for the newbies) are tomorrows forclosures.  And you read that right folks: 4% of ALL US residential mortgages are more than 90 days late.  This is a staggering, staggering statistic.

I believe it was floridabuilder who noted on one of his blogs that homebuilders lead markets - they led the markets up in the bubble, and are leading the markets down in the bust.  The problem many HB's face right now though is banks are finally starting to undercut all home prices.  With one in seven of all home sales now being homes that were previously foreclosed, these foreclosed homes are now setting the market comps.  The new home builders catering to first time buyers cannot compete.  And with no one selling their first or starter home, a lot of the "move-up" homebuilders like TOL are stuck because many of their clientele cannot sell their primary residence.  In short, the entire industry is locked up.  And why? It comes down to affordability.  Until homes reach the sustainable historic metric of median home = 3x median income for the locality of the real estate, we have not reached bottom.  On top of this is the total supply and demand for homes - demand continues to dwindle as credit markets normalize (not freeze up, but normalize, where 20% down payment is required and documentation for income is also required), regular folks can get loans, but at reasonable valuations for their property.

Here are the supply numbers, per the US Census Bureau (possibly the one agency that isn't completely corrupted and inept)

                                        First     First             90-Percent
                                        quarter quarter     Confidence     Interval         (±)a 2008
Type                                 2007     2008             of 2008       of              Percent
                                       estimate estimate     estimate     difference     of total

All housing units............... 127,266 129,386         (X)             (X)             100

Occupied........................ 109,704 110,824          303            275             86
Owner occupied..............  75,006   75,145           629            430             58
Renter occupied..............  34,698   35,678           544            419             28

Vacant........................... 17,562    18,563           376             331            14
Year-round vacant........... 13,392    13,853           368             316            11
For rent..........................  3,956      4,063           179             198             3
For sale only...................  2,179      2,277           114            142             2
Rented or sold,
awaiting occupancy.........  1,088      1,054            71             101             1
Held off market................  6,169      6,459           259            223             5
For occasional use..........   1,977     2,049           149            128             2
Temporarily occupied
by persons with
usual residence elsewhere. 1,252      1,205          115             101             1
For other reasons............   2,940      3,205          185            158              2

Seasonal vacant............     4,170      4,711          249            212             4

My comment: over 18.5 million vacant homes.  4 million or rent. 2.2 million for sale.  Over a million homes foreclosed.  Over  million more prime loans in danger of foreclosure. Foreclosures leading the market down, undercutting all homes, both new and resales. Mortgage rates are still low, and Freddie and Fannie are still giving out loans at 97% LTV.  At some point, the US Congress is going to shut off the spigot on this money-losing venture. Unemployment is rising.  Inflation in food, eduction, energy, and health care are costing Americans more and more money.  Credit is normalizing.  It has not yet contracted.  I repeat: it has not yet contracted.  You will know when credit has contracted.  You will need
to bring 3 years of pay stubbs to your lender and will need to sign your name in blood to get a loan.  We are no where near a bottom.  12 more years to revert to the mean, and if bailouts come to fruition, itcould be 22 more years.

As a final gift to you, the CAPS community, I now present to you the trailing earnings of many of these ridiculously money losing hombuilders. Please enjoy the music of "Carmen, Suite 1 Les Toreadores" while you laugh at the insanity of it all


Stock EPS (ticker) 

TOL -0.73
KBH -15.86

DHI -7.33

HOV -11.26

SPF -14.54 (that's almost a billion for anyone counting -.893 billion)

CTX -21.68

RYL -8.04

PHM -11.35

MDC -13.44

MHO -11.43

WCI -15.38 (note: loss of over 600m, market cap now below 100m)

BHS -0.96

BZH -16.68

LEN -13.28

MTH -13.30

OHB -6.51

TARR -13.52

And just to show I'm not biased, here's one that actually didn't lost money in the past 12 months! 

NVR 48.80


And this, folks, is just the start.  We haven't even begun to discuss the effects of inflation and Fed policy and the federal deficit and debt and derivative markets and it becomes clear, this is not a monthly thing, not a yearly thing, but a decades thing.  Remember that the next time you consider investing in a stock or real estate based investment. 

13 Comments – Post Your Own

#1) On June 06, 2008 at 2:55 AM, DemonDoug (31.22) wrote:

The bloggers here on CAPS and the fool reporters give some eduction to those of you who read our blogs about things such as macroeconomics and money supply.  However, this site is not dedicated to macroeconomics, we do a much better job of analyzing the microeceonomics of companies and funds.  For anyone seeking to expand their knowledge on the topic, I can recommend only one website, and that is  Best website for taking a very complex issue and reporting and analyzing the realities of macroeconomics and banking, and making it readable and understandable for those of us who do not have economics degrees.  Itulip, in my opinion, is a great adjunct to your financial education.

I await everyone's responses to my main blog post with eager anticipation.

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#2) On June 06, 2008 at 3:16 AM, saunafool (< 20) wrote:


Thank you for putting all the information together. I have one question.

I agree that most bubble areas are nowhere near bottom, but I don't understand the basis by which you suggest 2030 as the time until the inflation adjusted bottom occurs. Can you elaborate?

Personally, I think when the bottom occurs is totally dependent on where you live. In places where there was no bubble to begin with, but where the economy is growing (like Iowa with all the ethanol money flowing in), right now might be a good time to buy.

In California, Nevada, Arizona, Florida, D.C., and a few other places, it is clear that the bottom is several years away, but 2030? That seems a bit too pessimistic, and I'm pretty pessimistic about housing.

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#3) On June 06, 2008 at 6:54 AM, TMFDeej (97.71) wrote:

Great post, Doug.  CAPS bloggers like you and several others have been way ahead of the curve on this whole housing issue.  It's funny how analysts still don't get it.  I was going to mention this in a blog post (and probably still will) but check out Goldman's earnings estimate revision for Beazer (and Goldman has one of the better research departments):

Beazer Homes U.S.A. Inc. (BZH) Old: -$1,97 New -$11.97


Have a great weekend, 


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#4) On June 06, 2008 at 8:20 AM, alstry (< 20) wrote:

Very well thought out.  You are pretty much dead on.  A new factor that likely wasn't factored is non housing inflation.

Although 3X income may be the past metrix for balanced pricing, due to stagnant incomes coupled with rising prices of food, fuel, and insurance, we may need to correct to 2X income before any bottom is reached for housing affordibility.

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#5) On June 06, 2008 at 8:35 AM, VTEngineer2001 (< 20) wrote:

I recently read that the housing sector led the US into this economic downturn and it will be housing that leads us out. That is fine, but 12 to 22 years? If that's true, then I can kiss my retirement pretty-much good bye.

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#6) On June 06, 2008 at 9:17 AM, alstry (< 20) wrote:


We are getting closer to my 10% unemployment number....over halfway now.

Just wait until the Birth/Death numbers are reversed out of the BLS data.

The ABCs ...Airline, Banking, and Construction layoffs really start kicking in this summer....just the above plus the business that are directly affected by the above constitute a HUGE % of our economy.

Remember, healthcare only functions as long as enough people have insurance....and people are falling off the rolls daily as jobs are cut.

Once government and health care are hit, my guess is sometime by the end of the summer....TILT.

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#7) On June 06, 2008 at 1:14 PM, jesusfreakinco (28.24) wrote:

Nice job DD!  Spot on.  I guess you aren't buying into FBs green thumbs, eh?  Amazing how many red thumbs have been closed in HBs.  On what basis?  Keep up the good work :)

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#8) On June 06, 2008 at 3:36 PM, DemonDoug (31.22) wrote:

sauna, 12 years is based on a 15 year reversion to the mean (assuming 2005 as the top).  How did I come up with that number specifically?

Fifteen Years to Revert to the Mean by Eric Janszen

"Housing bubbles don't collapse suddenly. They go through a long series of self-reinforcing deflationary stages that typically last five to seven years. Given the extreme and unprecedented nature of the current housing bubble, I expect a ten- to fifteen-year downturn to follow this boom. The government will step in with all manner of supports and bailouts along the way, similar to those that created the bubble in the first place, so the exact trajectory of the decline is impossible to predict."

If you have seen all of the actions of Congress and the President recently, you will see that 15 years is about right.  Now, this doesn't mean that HB's will be a bad investment in about 5 years, because a good company can make money in any environment.  Just that you have to understand that real estate is going to be in a bear market for at least another 12 years.

Now why do I say 22 years?  Because I believe that government will intervene even more than Janszen proposes, and also we are in for a long, slow economic downturn, with similarities to Japan but not exactly like their 18+ years of deflation that has been happening since 1990.

"Step G: Ten to fifteen years after the start of the decline in housing values, prices will bottom out, setting the stage for the next boom. Time to buy."

My belief is that the bottom is going to come later than that, and if alstry is correct about 2x annual income, then 22 years doesn't seem like such a strech.

VT, don't worry about your retirement.  Japan has had one of the worst bear markets ever, and it's not like people over there are starving and can't retire.  Like always, you just have to find the right investments.  This is why people like Schiff, Soros, and Jim Rogers keep telling everyone to buy oil, natural resources, foreign dividend paying stocks.  The idea is to educate yourself and be aware of the environment you are investing in - like GOOG was a great investment in 2004, even though the nasdaq is still half of what it's high was.  But what if you had bought XOM in 2002?  You'd be sitting pretty nice right now also.

Unfortunately the problem is there is so much uncertainty in everything, it's really impossible to tell what's going to happen, although I will stick by my assertion that it is almost 100% guaranteed we will see oil at 200/barrel by 2010, so investing in oil on pullbacks a smart move.  I would also suggest a significant position in the stock PM which has sold off with the rest of the market today.  See my blog a few blogs ago about that one. 

As far as closing red thumbs, I do it for 2 reasons: 1. I believe some news or something is going to happen to cause a rally which will kill my score 2. I believe it's near a short term bottom, will pop back up, and give me another chance to re-down it.  I have red thumbed ryland 5 times successfully in this manner. 

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#9) On June 07, 2008 at 4:31 AM, saunafool (< 20) wrote:


Thanks for the basis. Basically, I agree. I think we are turning Japanese. Overloaded with debt, assets inflated way beyond reasonable value, aging population (although we aren't nearly as bad as the Japanese on that one).

Where our situation looks a bit different from Japan is that U.S. prices are falling much faster than they did in Japan. Over there, prices fell single digit percentages every year for about 15 years until they were 50% of the bubble price. In many parts of CA, AZ, NV, FL U.S. prices have allready fallen 25% or more.

To me, that's good news because the faster we get to the bottom, the faster the economy can recover. Bailouts will undoubtedly slow this down and seem to be an incredibly bad idea. 

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#10) On June 11, 2008 at 12:25 AM, abitare (30.15) wrote:

Free housing is coming, to a bubble city near you. Remember you still have to pay the taxes!


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#11) On June 14, 2008 at 10:09 AM, dwot (29.15) wrote:

saunafool, I think if the economics of rent versus mortgage, taxes and maintenance make sense at the price you'd buy the home then the home is well priced.  And I completely agree that each market is different.  Another thing that you can do is calculate replacement cost of construction and assess if the price seems reasonable relative to that.

Community that I am in right now does not have housing prices anywhere near like what I was used to in Vancouver, but they still aren't selling.  The place I am living in right now has been on the market for over a year, asking $145k.  It is a mobile home.  Energy costs mean that getting supplies here to build a home are significant.  But still, $145k for a mobile...  A 4 bedroom home with a huge patio just went onto the market for the same price.  There is another 3 bedroom with the only enclosed garage in town for $165k...  Amazing, this place got as cold as -58 with the wind chill and homes are not built with enclosed garages...

I don't think you can insure your home here for fire risk and this week we had a huge fire, probably arson, in a wood pile at a business.  It rained big time the day before but that could have wiped the town out with a couple weeks of no rain and the wind going towards town.  

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#12) On June 17, 2008 at 11:05 AM, cbwang888 (25.50) wrote:


Housing bubble will drag US economy for a long time (5+ years). Only companies trade globally will be growing. Homebuilders are doomed and so are finanical firms who invested (or keep investing) in them or their products. Every bounce of the HB sector is a good for buying puts ...

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#13) On June 22, 2008 at 4:50 PM, dexion10 (27.07) wrote:

Great post Demon - keep up  the good work!!

We're in trouble....


I abandoned my RV shorts during the fall for small profits but I'm looking to put them back on.

The RV companies are twice screwed (the opposite of Jim Cramer's twice blessed)... high fuel and weak consumer.




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