Hail, Greenspan
Alan Greenspan declared last week that the housing market has most likely seen its darkest days. I did a double take. Has the maestro fallen prey to the same ill-conceived thinking that is so pervasive on Wall Street?
Just last week a number of major investment upgraded home building stocks. This week some of those very same companies reported that they saw nothing less than disaster ahead. One of the healthiest builders, DR Horton, a very well managed company with a pristine balance sheet, and a portfolio that encompasses all economic strata, has this to say: ” the company’s cancellation rate (homes canceled divided by gross homes sold) for the 4th quarter of 2006 was 40%. Almost 1 out every two potential buyers backed out. Heck, I don’t need to see DR Horton’s numbers, I can just look down the street to see a for sale sign on every other house.
I have always wondered who owned these houses that were up for sale everywhere. No one I knew had more than one house, unless it was their business to buy and sell homes as investments. Yet, there was an inexplicable number of homes being built, apartments being converted, and real estate wealth seminars being held. Who are these people? Could they be the NASDAQ 2000 investors resurrected? No, nobody needs to learn that lesson twice.
During the NASDAQ bubble, the regular guy got sucked into a market that was manipulated from start to finish by low float Nasdaq small caps. The manipulation was concocted and implemented by irresponsible investment banks that sold their reputations for quick hits from IPOs. For the most part, THEY got away with it. Joe Sixpack got killed. And, now, he is back at it again, sucked in by the lure of quick profits from dirt. And, unfortunately, he is once again being helped along by the irresponsible comments from people like Greenspan, and the Commerce Secretaries, and the Housing Lobby, and high dollar realty companies. What do you expect them to say when rates were at 3%? Lock in a fixed rate mortgage and don’t speculate? No, instead, Greenspan said, at the time, adjustable rate mortgages make a lot of sense. Here’s one of the early results:
Thanks largely to massive adjustable-rate-mortgage debt many took on during the housing boom.
Homeowners, especially those who have interest-only or so-called “teaser-rate” mortgages, could see their monthly payments more than double.
“Some just won’t be able to make the new monthly payments,” said Jules Cohen, a bankruptcy lawyer and partner in Akerman Senterfitt, an Orlando law firm. “They’ll get two or three months behind, and then you’ll see a lot of them file Chapter 13 bankruptcy in hopes they can set up a debt-payment plan and prevent foreclosure.”
Interest rates will rise on about $300 billion in adjustable-rate mortgages this year alone, according to First American Real Estate Solutions, a research group. That figure is projected to skyrocket to more than $1 trillion in each of the next two years.
So, while the brokers are upgrading homebuilding stocks, and trying to make it seem that the worst is over for housing, I have some news for you. The housing bust is not today’s news. It is going to be tomorrows. By this time next year, home prices in places like Nevada, California, Florida and Arizona will not be down 5% as the experts are saying, but could fall twice or three times that number. Right now sellers aren’t selling. They are in denial – still waiting for Santa to deliver their asking price…or close to it. My advice is to take the first reasonable offer and count yourself lucky.
A contractor who does some work for me is selling his house. He told me six months ago that it was on the market. I asked him if he had any bites. He said he had one, but was offered $5,000 less than his asking price. He would wait it out. I mentioned politely that he should call the potential buyer back and offer to sell it to him at the lower price. He, of course declined. The house is still on the market today and will likely be on the market this time next year as well. In the meantime the owner will have spent at least $20,000 in mortgage interest, maintenance, insurance and property taxes. Multiply that by several thousand and you see what the future of real state in the US looks like a few months down the line. And, for readers in Canada – take note, you are next.
Back to Greenspan for a minute. Greenie has an impeccable history of being right. But, even more impressive is his ability of being right too early. Remember “irrational exuberance”? If you had listened to him then, you would have missed out on huge gains in the market. He was right of course; two years later the market did crash. So, what can we learn from his latest statement?
Jonathan Alper, a bankruptcy lawyer in Heathrow, said a couple that recently visited his office faced insolvency after buying two $400,000 homes as investment properties. With annual household income of only $75,000, the couple quickly defaulted on the loans. They blamed the ill-advised venture on tips from a “wealth-in-real-estate” seminar.
Based on the GIRLI Indicator (Greenspan Internal Real Estate Loss Indicator) we are about two years away from the seeing the bottom in the real estate market.
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