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U.S. Housing Market Outlook

Written By Brian Hicks

Posted May 16, 2008

Editor’s Note:

We received the following question, and wanted to answer it publicly.

"Ian, if you’re so proud of your Pure Energy portfolio, why did you post a blurry image of it? Do you have something to hide," asked one Wealth Daily reader.

Thanks for the question. We have nothing to hide. In fact, we have plenty to celebrate. Since November 30, 2007, we haven’t closed a single Pure Energy Trader loser.

Take a look. My apologies for the prior blurry image…



If you need more information on Pure Energy Trader, which just bought oil at $73, read on.

Today’s Wealth Daily: The U.S. Housing Market Outlook

There is no bottom for banks until the housing market bottoms. And that won’t happen until 2010… if we’re lucky.

Yet, the banking community would have us believe we’re bottoming now. But they’re wrong.

Banks will continue to crumble and should be shorted.

On April 8, 2008, Morgan Stanley’s CEO John Mack said, "If you look at the subprime problem in the U.S., you would say we’re in the eighth inning or maybe the top of the ninth. Problems stemming from commercial mortgages are about half way through, said Mack.

He was wrong.

Weeks later, the same bank advised clients to "sell the rally" in financials, adding "we think we are only in the third inning of the credit cycle and expect this cycle to be worse that that in 1990-91."

Lehman Brothers’ CEO Richard Fuld told shareholders that the "worst is behind us." He was wrong.

Goldman Sachs CEO Blankfein told investors "we’re closer to the end than the beginning." He was wrong.

JPMorgan CEO Jamie Dimon said, "We’re more than halfway, maybe 75 percent to 80 percent through." He was wrong.

Merrill Lynch’s CEO said the "worst is over" a month before writing down another $6 billion and announcing that 4,000 jobs would be cut.

"The worst of the financial sector crisis is over although the impact on the broader economy will likely drag on in coming months," said IMF Managing Director Dominique Strauss-Kahn. "There are good reasons to believe that the largest part of disclosure in financial institutions has been done, especially in the United States … so that the worst news is behind us."

He’s wrong.

But this wasn’t the first time they were embarrassingly wrong… and it won’t be the last.

It’s hard to take these CEOs seriously.

Seeing that these CEOs have been consistently wrong about everything regarding their losses, why should we believe their "bottom" calls?

Take a look at Citigroup. Its recent sale of an additional $4.5 billion worth of shares (its fifth attempt to raise capital in five months) came with the promise that each would be the last.

Citigroup has now raised $40 billion by diluting shares, as they tell us everything is okay.

To believe we’ve hit bottom you must convince yourself that banks have a grip on credit losses. They don’t.

It was July 2007 when investment banks forecast losses from subprime would total $100 billion. A month later it doubled to $200 billion. By November, it stood at $400 billion. It now stands at a trillion dollars. Total write downs at the end of December 2007 came in at $97 billion. By the end of February 2008, write downs had skyrocketed to $181 billion, which brings the total write down loss since 2007 to $245 billion.

You’d also have to believe that declining home values will not create more loss.

If we really are in the ninth inning, as Morgan Stanley’s Mack says, we’re in a double header.

Why It’ll Get Worse for Banks

Again, until housing bottoms (2010, if we’re lucky) banks will not bottom.

U.S. foreclosures filings are up 65%. Bank seizures just about doubled in April, year over year. And more than 243,000 properties are in "some stage of foreclosure," says Bloomberg.

Bank repossessions were up 145% in April 2008, as compared to 54,574 in April 2007. And banks will repossess another 60,000 properties a month through December.

Worse, according to inventory numbers, there are now 4.048 million existing homes on the market, a year over year jump of 6.6%. Combine that inventory rise with tumbling sales, and we have rising months of supply. At current pace, it’d take about 9.9 months to clear supply. That’s up by 9.6 months in February and 7.5 months year over year.

And as long as buyers buy homes they can’t afford, the situation will grow worse.

But Go Ahead. Buy a Home. The Media has it All Wrong.

Why buy now? Media is wrong about housing slump, says Blanche Evans, senior editor of Realty Times.

Why buy a house now? You’ve been getting bad information. Here’s why, she says.

"The financial press is worried that they might have gone too far – paralyzing the nation into recession by piling on housing. So they’re finally beginning to question the indexes where they get their data, and whether the news is really as bad as it seems. Slowly but surely, headlines are changing from Don’t Buy A Home Now to Is It Time To Buy? Stop listening to the media. Go buy a home."

The Housing Market Outlook is Bleak

When the nation’s biggest buyer of home mortgages racks up $2 billion in quarterly losses and forecasts a steeper drop for home prices, it’s not a time to buy anything. Fannie Mae lost $2.57 a share ($2.2 billion) in Q1 2008, as compared to a year earlier profit of 85 cents a share ($961 million). And if it takes on too much financial risk, as foreclosures continue to mount, the global financial system will be rocked.

Even David Lereah has put down his housing pom-poms.

Last time we heard former NAR chief economist, David Lereah, he was leaving his post, discredited by years of pumping a dying housing market, and daily blog attacks.

But has the cheerleader that declared a market bottom in September 2006 changed his tune? Yep.

"We’re not at the bottom. [People] want it to be near the bottom, but we’re not there yet. The leading indicators are still very bad. Pending home sales are still in bad shape. Mortgage applications are low … There’s still supply out there in abundance … This thing is going to get worse before it gets better."

The housing boom he says "got so out of hand, and none of us realized the magnitude of it until it was too late."

If only we could convince Lawrence Yun, Blanche Evans, countless banking CEOs, and the sheep that believe in a mythical bottom.

Ignore the banking CEOs. Short their stocks. Oh, and ignore the realtors wearing rose-colored glasses.

Listen—we’re not economically pessimistic here at Wealth Daily. But we are realists, and we want to show you how to profit from even the most bearish of situations. This is one of them. 

Good Investing,

Ian L. Cooper