CHESSNOID

I keep reading the headlines that the housing crisis is over or the worse is behind us. That the bottom is here and that the business cycle has flattened and will soon reverse directions. These are predictions being made by many who got it wrong from the beginning and refused to believe there was a housing bubble nor would believe that a housing bust would pop it. Even though most of us accept the fact we are in a recession, our leaders (Bush of Bush-it fame) in the White House can’t bring themselves to say the “R” word. The Federal Reserve and the US Treasury keep making piss poor decisions to muck up the economy. They ignore the global consequences of making our US dollar cheaper against other currencies and now instead of just foreclosures getting the housing back to reality prices, the majority of American consumers are battling to keep their head above water as they prioritize gas purchases, food purchases, and utility bills to be paid.

The stock market seems to be resilient and already switched gears and is heading back up. The technicals have changed and point the moving averages in the upward direction. I still haven’t jumped in the stock market and have the recent run up. I guess the fundamentals I see is that the market is on its way back down and that this is a bear market trap. What I mean by this is that I don’t believe the housing bust is near the end. I think we are just getting to the middle of it and the worse is not over. I read a great blog post analyzing the fundamentals by Michael Goode called the Impending Mortgage Crisis. It is a great analysis and I agree with most everything he states.

The coming crisis will be caused by option ARM recasts, falling prices, and banks’ increasing reluctance to lend. The crisis will manifest itself in people simply walking away from houses where their mortgage is worth more than the house. Considering how many people have used home equity loans to remove equity, how many have had negative amortization in their loans, and considering how small down payments became over the last few years, very few homeowners will be left with equity in their houses. Economy.com currently estimates that nine million households have negative equity. That figure could easily double or triple as house prices fall by another 20% to 30%.

The assumption on the part of mortgage lenders, regulators, and housing market optimists is that as long as people can afford to pay their mortgages, they will. But homedebtors faced with 20% to 30% negative equity will be much better off going through foreclosure than they will paying off their debts. Helping them is the fact that in a number of states, purchase money mortgages are non-recourse debt, meaning that banks cannot sue to recover the money they lose. The sheer number of foreclosures will mean that banks will not have the manpower to go after domedebtors even when they want to do so.

The rising tide of foreclosures caused by people walking away from houses in which they have negative equity will act as part of a positive-feedback loop to increase the rate of price declines. The housing market is not getting better anytime soon and it will soon get much, much worse.

Just to clarify, these loans are not the subprimes that we have been hearing in the news for the last couple of months. These ARMS are different and people who have these loans don’t necessarily have bad or poor credit. They just took on loans they couldn’t afford in the long term. Short term they probably would have been fine if they were able to “flip” their house before the housing market downturn. Unfortunately, there are millions of these loans, and Micheal Goode makes a great point on the psychology of these home buyers walking away from these purchase money mortgages (which many are non-recourse debt).

The stock market barely reacted to these important news pieces:

New home sales plunge to lowest level in 16 1/2 years

– AP – Thu 6:16 pm ET
Sales of new homes plunged in March to the slowest pace in 16 1/2 years as a two-year housing downturn extended into the start of another spring sales season. The median price of a new home in March compared to a year ago fell at the fastest clip in 38 years

Recession Engulfs U.S. States as Taxes Receipts Dwindle, Legislators Say U.S. states expect to have at least $26 billion less than they need to pay their bills during the next budget year as a slumping economy erodes tax receipts, according to a national survey.

New home glut: Inventory at 27-year-high
Los Angeles Times, CA - 13 hours ago
Breaking news from MarketWatch: “US home builders have slashed their prices by a record amount, but sales still plunged by 8.5% to a 17-year low in March, …

 

 

I consider these the headlines that will drive the short term market. The housing headlines will get worse as main street media catches up with the reality of how bad this housing bust truly is. I expect the Federal Reserve to make another bonehead move and lower interest rates again. This will make the dollar weaker and of course drive up the price of gas and food prices which will exacerbate the effects of the recession.

Even though I want to jump back into the stock market because the technicals say it is time, the fundamentals seem to contradict the timing. I will stay conservative and keep all my investments in cash until I feel more comfortable about the worse being over. All I can see right now is higher costs for everything, more layoffs, and more business bankruptcies.