In his Congressional testimony last week, Fed chairman Ben Bernanke set to the task of dutifully rearranging the deck furniture. Calm as ever he made no move whatsoever to the lifeboats and coolly turned aside all talk of icebergs.
In the face of tough and pointed questioning, the Fed chief performed brilliantly. “Sunny skies, wispy winds, and tranquil seas” he opined one day on into the next.
“Sure the water is a little cold,” he said, “but icebergs?….Not hardly.” “Besides, even if there were a cube or two, this ship clearly cannot be sunk,” he calmly reassured the markets.
Hearing this good news, the markets rallied. On Wednesday the Dow soared 212 points and bond yields fell sharply, on the hopeful belief that the fed may finally be done tightening.
(Here at the hallowed sanctum of Wealth Daily, we know nothing is ever written in stone. Birds have to fly. Fish have to swim. The Fed has to play with the rates.)
But on deck a few sailors were heard to grumble something about a short rally but to no avail. The markets clearly liked what they heard.
The bulls roared. “Full steam ahead,” they chimed and onward the ship sailed to its destiny.
Below decks, the passengers continued to party. They haven’t had this much fun since that internet thing. And downing one champagne bottle after another, they drank themselves silly with anticipation
“This baby is never going down” they chortled on into the light of the endless full moon.
Off to the side, a small group of iceberg theorists-doom and gloomers all- could be seen chatting wildly among themselves. They frantically waved their arms, but aside from an errant partier or two that stopped by to gawk, they went largely ignored. The others had apparently heard it all before.
His soothing work done the fed chief returned to his task. Entering the bridge, he gave the secret handshake, and took the wheel. In the distance lay the berg just where it had suddenly appeared in 2003. To his amazement the berg’s movements seemed to mirror his own regardless of how often he turned the wheel. He closed his eyes in hopes that it would disappear but it never did.
And so it lurks, dear reader. Out there on the dangerous horizon. Waiting to gash a huge hole in the ship.
This danger, of course, is the speculative bubble in housing created by the former captain Alan Greenspan. (The lecture circuit never looked so good… huh, Al?)
Few see it. Some insist that it doesn’t exist. But it is there.
But like the iceberg what we see now is only the tip. And like the iceberg there is much more to it…the dangerous part that the average homeowner just doesn’t see.
But their blindness to the dangers and existence of the bubble is understandable. There is after all no daily record of the gyrations in the housing market like there is in the stock market.
Homeowners can’t simply turn on CNBC and get a picture of the housing market the way they can with their stocks. Instead they must rely on spotty local and national reports, some of which are produced by the members of the real estate industrial complex themselves. This compounds and blurs their vision.
In effect, they only see a tiny percentage of the available information and miss the much larger picture that continues to emerge. Even then they only focus on what each bit of information means to their own individual situation. This blinds them even further.
In doing so they only focus on a very small part of a larger mosaic and decide that there is no picture at all. This is wrong, of course, because, standing back a larger picture clearly emerges.
And standing back, it is not a pretty picture.
Consider these facts from the larger but uglier portrait taking shape nationwide:
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Sales figures released yesterday from the National Association of Realtors reports that the inventory of unsold homes rose to a record number of 3.725 million units, which is a 6.8 months supply-the highest number since 1995.
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Nationwide housing starts fell 5.3% in June and building permits, a sign of future construction, fell 4.3% to a three year low. In the northeast, starts have plunged an incredible 32.8% year over year.
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The housing market index published by Wells Fargo fell to 39 in July from its high of 72 reached last June. This mark represented its lowest level since 1995.
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A study released last week by Global Insight and National City Mortgage Corp. concluded that 71 metropolitan markets, representing 39% of the total value of all single family homes nationwide, were in their words “extremely overvalued”. This was in stark contrast to its 2004 study that found only 3 market that were out of line on price.
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In 2005 the chief economist for the California Association of Realtors(CAR), Leslie Young-Appleton openly mocked the idea of the housing bubble. Of late she has changed her tune. In fact, she has stopped using the term “soft landing” to describe the state’s real estate market, saying she no longer feels comfortable with the mild label. “We need something new. That’s all I’m prepared to say” Young-Appleton remarked last Thursday. The CAR now predicts a 16.8% drop in 2006 sales.
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Builder DR Horton reported last week its first quarterly loss in 28 years last Thursday. It went on to report that it would sell 50,000 homes in the year that ends September 30, below the 58,000 unit estimate it gave only in late April.
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In Palm Beach Florida year over year sales plunged 39% in June. Units sold dropped from 1551 in June 2005 to 947 units.
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In Massachusetts inventories swelled. The Massachusetts Association of Realtors reported a 27% increase in year over year May inventories for single family homes. In condos it was even worse. Condo inventories rose a stunning 48% in the same period.
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In the Baltimore Metro area homes sales plunged 22% in June. Year to date the area has sold 3500 fewer homes compared to the same period in 2005.
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Mortgage giant Washington Mutual confirmed last week that it would eliminate 900 jobs in response to a slower home mortgage market.
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NVR Homes reported last week that its orders for new homes in the Baltimore- Washington market fell 27% last week. The builder also reported a cancellation rate of 21% in the Washington area, three times the rate from a year ago.
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On Monday, Centex, the nation’s 4th largest homebuilder, said its net earnings fell 31% and its new orders fell 21%. Accordingly the company slashed its earning forecast. Furthermore the company announced that with the order fall off that it was walking away from options to purchase new land and writing off $36 million in deposits in the process.
And on and on and on it goes.
Incredibly, these are just the items that have been released in the last seven days or so.
Housing after all never declines, right?
Heck, even the Fed chairman predicts a “soft landing”
So party on if you must, but keep an eye out for the rush to lifeboats. You may just need one.
This boat is on a collision course.
And I’m afraid to say I don’t see the Carpathia coming to the rescue.
