U.S. Housing Market Blast From the Past
Housing-Market / US Housing Jul 02, 2009 - 12:54 AMBy: Mike_Stathis
Real Estate Then and Now - I thought I’d take a look at where we are currently in real estate versus what I predicted a few years ago for those of you who never read either of my books.
And of course, I also wanted to remind you that the so-called experts really have no idea what’s going on. Rather than forecasters and investment strategists, they’re broadcasters and extremists, whose only goal is to make money from your desperation or influence policy decisions.
So let’s begin.
One of the most closely followed measures of real estate prices is the Case-Shiller Index. This of course tracks average home values based on recent single-family homes sold in 20 major metropolitan areas across the United States. It is run principally by Karl Case and Robert Shiller.
Through March, the results have continued to get worse.
http://blogs.wsj.com/economics/2009/04/28/a-look-at-case-shiller-numbers-by-metro-area-8/
http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_052619.pdf
Recently, data from various sources suggest things appear to be improving somewhat, but that simply isn't the case based upon my own analysis.
Now, a few excerpts from one chapter of my 2006 book,
America’s Financial Apocalypse: How to Profit from the Next Great Depression.
“Ironically, it has been the flight from the (dotcom) scandals of the recent stock market bubble that have caused many to seek real estate as a “safe” investment alternative. And while the stock market is by no means finished correcting from the bull market period of the 1990s, we now have a real estate bubble that must also correct.”
“In many parts of America, home prices have risen as high as 150 percent in just a few years. Amongst the cities with the biggest housing bubbles are Phoenix, Las Vegas, Portland, Los Angeles, Boston, San Diego, San Francisco, Miami, and Washington D.C. As well, much of California and Florida have experienced a huge surge in home prices in just a few years.”
“Washington has permitted this industry to engage in irresponsible lending practices to increase access to credit for the purpose of fueling the phantom recovery. This has served to enhance consumer spending that has boosted many industry wages; fees and commissions of brokers in the real estate and mortgage industry, commercial banking salaries, and revenues in all industries as a result of reckless debt spending. Hence, without this real estate bubble, there would be very few signs of improvement in the economy since 2003.”
“As well, remember that the majority of government discretionary spending items have been for Iraq, Afghanistan, Katrina, and homeland security—none of which resulted in a direct improvement in living standards, as normally implied by GDP numbers. Therefore, if we adjust for the effects of spending due to credit released from the real estate bubble and due to government expenditures that have not resulted in an improved economic benefit, America has actually registered negative GDP growth since 2003. Yet, aided by the loose monetary policies of Greenspan, the financial industry has helped create the illusion of a recovery.”
“Even the riskiest of these loans can be manipulated into AAA-rated debt and sold to pensions and other large funds because the same standards that apply to corporate debt are not applied to collateralized debt products. In addition, these ratings do not account for whether investors will receive a return on principal.”
“Because Fannie and Freddie lack sufficient government oversight, they haven’t maintained adequate capital reserves needed to safeguard the security of payments to investors.”
“Furthermore, the GSEs have created very risky derivatives exposures for themselves and many financial institutions. As these debt instruments evolve into different products, less transparency and more uncertainty is created. These mortgage derivatives are complex and considered very speculative.”
“What would happen if one or more GSE (i.e. Fannie or Freddie) got into financial trouble Not only would investors get crushed, but taxpayers would have to bail them out since the GSEs are backed by the government. Everyone would feel the effects. With close to $2 trillion in debt between Freddie Mac and Fannie Mae alone, as well as several trillion held by commercial banks, failure of just one GSE or related entity could create a huge disaster that would easily eclipse the Savings & Loan Crisis of the late 1980s.”
“At its bottom, I would estimate a 30 to 35 percent correction for the average home. And in ‘hot spots’ such as Las Vegas, selected areas of Northern and Southern California and Florida, home prices could plummet by 55 to 60 percent from peak values.”
“Americans view their homes as a significant portion of their future wealth. Therefore, when home prices increase rapidly, they save less. Instead, they consume excessively because they feel richer than before (i.e. the “wealth effect”). A similar situation occurs during bullish stock markets, as previously discussed. But can not the opposite be true as well (the “poor effect”)?
“Declines of this magnitude would wipe out the wealth effect, as many watch their home equity evaporate into thin air. This will not only halt consumer spending, but it will also force millions of foreclosures across America, causing housing inventories to rise, which could cause a further collapse in home prices. The aftermath of record foreclosures will send shockwaves to the stock and bond markets.”
“I want you to stop and think for a minute about all of the fraudulent practices that have occurred within the housing industry, from known problems of poor workmanship and cheap materials by some builders, to inflated appraisals performed to generate ease of lending and to support cash-out deals.”
“From inflated appraisals alone, 10 to 15 percent of MBS securities or up to $1.5 trillion have been overvalued by conservative estimates. Combine that with the lack of transparency, questionable risk exposure and fraudulent practices by executives at Fannie and Freddie, and you have a disaster ready to strike.”
“Now combine that with over 10 million Americans holding interest-only and ARM mortgages, throw in a million or two job losses due to say the failure of Delta, Ford, General Motors, or some other large vulnerable company, and you could end up with a blowup in the MBS market. This scenario would devastate the stock, bond and real estate markets. Most likely, there would also be an even bigger mess in the swaps and derivatives markets.”
“The real estate fallout will no doubt cripple smaller companies such as mortgage lenders, home builders, and home improvement stores. But it will also affect huge financial institutions such as Citigroup, Bank of America, Chase, General Motors (GMAC), General Electric (GE Finance), and Washington Mutual, depending upon the extent of their exposure. As well, if things get really nasty the credit problems could extend to the ABS market which would cause further devastation.”
“Based on today’s grossly overvalued housing prices, a 35 percent correction on average seems very likely. And in some areas, a 50 to 60 percent correction is possible. However, don’t expect a sudden collapse. Most likely, it will take several years for the real estate washout to be completed. We can only hope that the MBS market doesn’t experience its first blow up since inception, but don’t bet on it.”
“Under normal conditions, anywhere from 25 to 30 percent of the U.S. economy is directly affected by the housing sector. However, due to exaggerated asset prices from the housing bubble, this share is significantly higher. I have shown the magnified effects of a loss of housing value on home equity, but this also has a magnified affect on the stock market because the wealth effect is reversed, resulting in dampened consumer spending. Accordingly, numerous studies have shown that housing prices have up to two times the effect on consumer spending as they do on declines in stock prices. Consequently, if housing prices decline by 25 percent, the economic impact will be as if the stock market declined by 50 percent.”
Now look at what has happened since 2006…
- Nationwide, median real estate prices are down by an average of 32% from the peak reached in 2006, and still declining
- Nearly all of the cities/regions I warned about are down by 50-60%
- The stock market has already declined by over 55% (the real estate/stock market double whammy effect) as I warned
- The MBS and ABS market has blown up
- My warnings about the derivatives blowup have materialized
- My warnings of Fannie and Freddie failure have materialized
- My warnings of a Fannie and Freddie bailout materialized
- The banking system has collapsed
- My warnings of major problems for GM and GE materialized
You might also recall the specific guidance I provided in my other book, Cashing in on the real Estate Bubble, advising readers to consider shorting FNM, FRE, LEND, NFI, FMT, C, BAC, JPM, WM, LEN, BZH, TOL, KBH, and CTX.
http://www.avaresearch.com/files/20090510131858.pdf
Who might you think would best know what to expect in the future?
By Mike Stathis
www.avaresearch.com
Copyright © 2009. All Rights Reserved. Mike Stathis.
Mike Stathis is the Managing Principal of Apex Venture Advisors , a business and investment intelligence firm serving the needs of venture firms, corporations and hedge funds on a variety of projects. Mike's work in the private markets includes valuation analysis, deal structuring, and business strategy. In the public markets he has assisted hedge funds with investment strategy, valuation analysis, market forecasting, risk management, and distressed securities analysis. Prior to Apex Advisors, Mike worked at UBS and Bear Stearns, focusing on asset management and merchant banking.
The accuracy of his predictions and insights detailed in the 2006 release of America's Financial Apocalypse and Cashing in on the Real Estate Bubble have positioned him as one of America's most insightful and creative financial minds. These books serve as proof that he remains well ahead of the curve, as he continues to position his clients with a unique competitive advantage. His first book, The Startup Company Bible for Entrepreneurs has become required reading for high-tech entrepreneurs, and is used in several business schools as a required text for completion of the MBA program.
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