Friday, February 17, 2006
Housing Report & Looming Bubble Collapse
Many economic optimists feel that yesterday’s report on January’s record number of housing starts was dirt kicked in the face of Housing Bubble theorists. I completely disagree with that position, and believe the news only exacerbates the coming Bubble collapse.
Recently, Toll Brothers CEO, Robert Toll, said that speculators are canceling their contracts and exiting the market, while prospective buyers, sensing a slowdown, are no longer eager to commit to homes with a long delivery lag time.
With the increasing number of canceled home orders, and a drop of new-home sales (as reported by KB, Toll Brothers, Ryland, and Standard Pacific home builders) what will happen to all these new homes once they are actually built and on the market? Answer: They will add to the already increasing inventories, and with increasing mortgage rates, fewer speculators and a cooling housing market, these homes will have a very difficult time finding new owners.
We are already starting to see builders engage in heavy discounting and promotional activity. According to Capuchinomics, a recent National Association of Homebuilders survey found that 64% of builders are offering incentives like free upgrades and/or reduced/zero closing costs; and 19% are cutting prices.
With all this said, recent congressional comments from Big Money Ben Bernanke (BMBB) suggest that he may raise rates well beyond what many had previously forecasted (1 more hike w/stop at 4.75%). This new info is certainly great news for the US dollar--which is the real “unspoken” reason for higher rates, but it’s terrible for the housing sector, as any further increase beyond the already assumed 4.75% stopping point will drive mortgage rates even higher, will further invert the yield curve (a telltale sign of looming recession), and will clobber roughly 7 million homeowners (holding > $1 Trillion in mortgages) when their interest-only ARM’s reset in the coming 12-18 months.
Add the issues above to the numerous other concerns that I have previously pointed out, (negative personal savings rates--not seen since the Great Depression, home delinquency notice increases, increases in credit card delinquencies, record bankruptcies, potential oil supply concerns, higher energy prices, higher inflation than that reported, completely oblivious consumers displaying irrational exuberance, etc), and I think we have a catastrophe waiting to happen.
Time will only tell, but I’m definitely not optimistic about the report.
What are your thoughts on the subject?