[anzac] WORST HOUSING SLUMP in 50 YRS?

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From: "REVIVAL List" <prophetic@...>
Date: Wed, 30 Aug 2006 13:33:21 -0500
ANDREW WRITES:  After all our discussion about money and 
finances from a kingdom perspective in recent years, I hope nobody 
on this List is getting caught out by the current housing slump. I 
recently heard of some Christians who had made the mistake of
taking out & spending all the equity from their home and now it is 
worth less than what they owe on it. Things are so bad for them 
that they may be about to lose everything. How many more are in 
this predicament? -And this is just the tip of the iceberg.

Most of us know that the recent boom in America was built on 
people taking the equity out of their homes and spending it on 
new cars, boats, holidays, etc. This is one of the most foolish 
things that U.S banks have ever allowed to happen. Now the 
housing crunch is on, and things may be about to get a lot worse 
in this country. Only time will tell, but the article below by a 
respected economics Professor raises some alarming probabilities. 
Many newspapers are also publishing articles now about this slump.

The below article is by respected Professor Nouriel Roubini who is 
a Professor of Economics at the Stern School of Business at New 
York University:  

"The BIGGEST SLUMP in US HOUSING
in the LAST 40 YEARS - OR 53 YEARS?"

-Extracts by Nouriel Roubini,
Aug 23, 2006.

The Biggest Slump in US Housing in the Last 40 Years: These are 
not my views but those of the Toll Brothers, the famous luxury 
McMansions homebuilders, as CNN reported last week. Also, as 
reported by the WSJ today: In his 40 years as a home builder, Mr. 
Toll says, he has never seen a slump unfold like the current one. 
"I've never seen a downturn in housing without a downturn in 
employment or... some macroeconomic nasty condition that took 
housing down along with other elements of the economy," he says. 
"This time, you've got low unemployment, you've got job creation, 
you've got a stable stock market and relatively low interest rates.". 
This followed last week's CNN headline: "Builder: Oversupply 
slump worst in 40 years. Toll Brothers slashes outlook on new 
homes as orders plunge and revenue misses forecasts" Indeed, 
yesterday's sharply falling profit results from the Toll Brothers 
confirmed their view that this is the worst housing slump in 
decades. Similarly, Angelo Mozilo, the CEO of Countrywide -- the 
country's largest independent home mortgage lender - recently 
stated: "I've never seen a soft-landing in 53 years, so we have a 
ways to go before this levels out. I have to prepare the company for 
the worst that can happen." So, effectively the only debate now is 
whether housing conditions are the worst in the last 40 years or in 
the last 53 years. So much for the bullish soft-landing wishful 
thinking coming out of Wall Street these days...

Of course, the message from the Toll Brothers and Countrywide is 
like the proverbial canary in the mine that is reflective of an ongoing 
rout -- calling it slowdown or slump is a misnomer by now -- in the 
US housing market. Every possible indicator of the housing sector 
that has been coming out in the last few weeks -- and I will discuss 
their details below - suggests that the housing market is in free fall. 
And today's figures on existing home sales and unsold homes say 
it all; as Bloomberg concisely headlined this morning: U.S. 
Existing-Home Sales Tumble; Unsold Inventory Is Highest in a Decade.

I have also argued before that the effects of housing on US 
economic growth and the role of housing in tipping the US 
economy into a recession in early 2007 are more significant than 
the role that the tech sector bust in 2000 played in tipping the 
economy into a recession in 2001. [Some] reasons:

   1. The wealth effect of the tech bust was limited to the elite of 
   folks who had stocks in the NASDAQ. The wealth effect of now 
   falling housing prices -- yes median prices are starting to fall at 
   the national level - affects every home-owning household: the 
   value of residential real estate has also increased to 48.5% of 
   household wealth in 2006 from from 38.7% in 1996. Note that 
   this year there will be large increases in the borrowing costs 
   for $1 trillion of ARM's... Thus, debt servicing costs for millions 
   of homeowners will sharply increase this year and next.

   2. The employment effects of housing are serious; up to 30% of 
   the employment growth in the last three years was due directly 
   and indirectly to housing. The direct effects are jobs lost in 
   construction, building materials, real estate brokers and sales 
   agents, and employees of the mortgage finance industry. The 
   indirect effects imply that the role of housing is even larger than 
   30%. The housing boom led to a boom in consumer durables 
   spending on home appliances and furniture. Indeed, in Q2 real 
   consumption of such goods was already negative: as you have 
   less new homes built and purchased and less old homes 
   refurbished and expanded, you get less purchases of home 
   appliances and furniture. There are also other indirect effects of 
   the housing bust on employment, even on the purchases of 
   motor vehicles. Indeed, the current auto sector slump is not 
   unrelated to the housing slump. As the Financial Times put 
   recently, the sharp fall in the sales of Ford's pick-up trucks is 
   related to the housing slump as such trucks are widely purchased 
   by real estate contractors. And indeed in Q2 real consumer 
   durables (that include both cars, home appliances and furniture 
   all related to housing) already fell, consistent with the view that 
   we have now have a glut in the stock of consumer durables 
   (durables consumption has a investment-like nature to it as such 
   goods last for a long time). Thus, as housing sector slumps, the 
   job and income and wage losses in housing will percolate 
   throughout the economy. 

How bad are the signals coming from the housing sector? As a 
recent news headline clearly put it: it is simply UGLY. Indeed, all 
the indicators from the housing sectors - including the latest 
housing starts and the homebuilders (NAHB) forward looking 
business conditions - indicate a housing sector that is literally in 
free fall. New home sales started to fall since the beginning of 2006 
and in some regions they are down over 30% relative to a year ago.
As Bloomberg summarized today the new housing data: "Sales of 
previously owned homes in the U.S. fell more than expected in 
July, resulting in the biggest supply of unsold homes in more than 
a decade, as higher mortgage rates discouraged would-be home 
buyers... Sales fell 11.2 percent compared with a year earlier." 

The value of home builders' shares on the NYSE has fallen by 
almost 50% relative to a year ago. 

The evidence on falling home prices is now becoming clearer. 
Since the end of World War II, there has never been a year on 
year fall in housing prices. There have been instead several 
quarters in which housing prices declined... The fact that the 
latest housing bubble was concentrated on the two coasts 
(North East all the way to Florida; and West Coast, especially 
California) does not mean that the coming housing bust in these 
regions will not have national macro effects. For one thing, the 
value of the housing stock in those two regions is close to 50% 
of the total housing stock given the bubble of recent years. Thus, 
a housing bust in the two coasts can and will have macro effects.

Not only housing prices are falling in the bubbly two coast; they 
are also starting to fall in the Mid-West, the region where the 
conventional wisdom was that there was no housing bubble. The 
fact that home prices are falling in the Mid-West where prices did 
not skyrocket in the bubble years is a scary signal of how much 
the housing bust and glut in supply will lead to a sharp fall in 
housing prices in the quarters ahead with painful effects on the 
wealth, and thus consumption, of households. You can expect 
falling median housing prices, on a year-on-year basis, at the 
national level starting this month of August: indeed, today's figures 
on the glut of unsold homes - much larger than in the housing bust 
of the early 1990s - are only consistent with a highly likely actual 
fall in home prices in the months ahead and throughout most of 
2007. Note also that, on an inflation adjusted basis, real home 
prices (relative to the CPI index) are already falling at a 4% plus 
rate.... You can expect falling housing prices throughout most of 2007.

So, the simple conclusion from the analysis above is that this is 
indeed the biggest housing slump in the last four or five decades: 
every housing indictor is in free fall, including now housing prices. 
By itself this slump is enough to trigger a US recession: its effects 
on real residential investment, wealth and consumption, and 
employment will be more severe than the tech bust that triggered 
the 2001 recession. And on top of the housing bust, US consumers 
are facing oil above $70, the delayed effects of rising Fed Fund and 
long term rates, falling real wages, negative savings, high debt 
ratios and higher and higher debt servicing ratios. This is the tipping 
point for the US consumer and the effects will be ugly. Expect the 
great recession of 2007 to be much nastier, deeper and more 
protracted than the 2001 recession.

And the housing bust is not going to be only a US phenomenon. 
As I will discuss in another blog, housing bubbles festered in many 
other economies including many European ones. Thus, the 
combination of high oil prices, delayed effects of rising interest 
rates and slump of housing that is now leading to a US recession 
is a phenomenon that is common to many other economies, 
including several European ones. So, expect the same deadly 
combinations of three ugly bears (slumping housing, high oil prices 
and rising interest rates) to hammer Goldilocks and sharply hurt 
Europe and other economies in the world. 

[LATER...] This morning's data on new homes sales, inventories of 
new homes and prices of new homes fully confirm and reinforce my 
analysis.. that this will be the worst housing bust - calling it slump 
is too mild - in decades. And since median home prices may 
actually fall on a year-on-year basis in 2007 - something that has 
not happened since the Great Depression of the 1930s - this may 
end up being the biggest housing bust in the last 75 years...

~Professor Nouriel Roubini.
[READ FULL ARTICLE:  http://www.rgemonitor.com/blog/roubini ]

(Thanks to John Mauldin of 'investorsinsight.com' for originally
sending this out).