DemonDoug (98.90)

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 (CNNMoney.com) -- 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

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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.