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The old “magazine cover as contrary indicator”… Is the housing bust really over?
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Examining the “You Are Here” housing chart… revised and updated
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Why the housing slide has at least three years to go… and how to play it now
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German, British militaries ponder an irreversible decline in oil production, starting now
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Readers write: Soaring silver, rocky refinances, 401(k) follies
It says something about the growing irrelevance of print media that this cover of Time magazine, sitting on newsstands in late August, came to our attention only this week…
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We can imagine the thought crossing the minds of at least a few readers: “Wow, maybe we really have hit bottom in housing.” You know, magazine covers as contrarian indicators — including the all-time classic…
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Today, that cover stands as a monument to bad calls, coming just as the stock market launched an epic 18-year rally. Except it didn’t, really…
What people forget is that famous BusinessWeek cover hit the newsstands in August 1979… but the stock market didn’t hit bottom until August 1982. With hindsight, we could say it forecast the bear market would stick around for another three years.
So if the Time cover is a reliable indicator, we still have another three years of housing bust ahead of us. Sure enough…
“The slide in U.S. home prices may have another three years to go,” reported Bloomberg just yesterday, “as sellers add as many as 12 million more properties to the market.”
Bloomberg cited the research of Morgan Stanley analyst Oliver Chang, who examined a phenomenon we’ve long chronicled in this space — the “shadow inventory.” That’s all the homes in foreclosure that lenders are keeping off the MLS, lest they flood the market and push down prices even further than they already are.
“The issue is there’s more supply than demand,” says Chang. “Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2% a year.”
Coming onto the market soon — 95,364 more bank repossessions that took place during August. That’s a record high, according to RealtyTrac.
But lenders sent out 5.5% fewer default notices compared to a year ago. That means there’s even more shadow inventory backing up in the pipeline. “There is a buildup in delinquent loans that are not in foreclosure,” says RealtyTrac’s Rick Sharga. “It’s a managed slowdown more than anything else.”
So the slide in prices goes on: Home prices in July were flat compared to a year earlier, according to CoreLogic. It was the first month since January that prices didn’t register a year-over-year increase, however meager. In 36 states, prices outright fell — the highest number since last November.
The number of home sellers who cut their prices grew in August for the third straight month, according to the real estate website Trulia. 26% of sellers cut their prices, the highest percentage since last October. The average price cut was 10%.
What could turn this around? “When we see job growth across America,” says Trulia CEO Pete Flint, “we can begin to discuss stability in the housing market." (Good luck with that: First-time jobless claims fell a paltry 3,000 last week, to 450,000. That total needs to be at least 100,000 less to signal economic growth.)
Even people who don’t worry about their jobs are giving up on the American Dream. Last weekend, the San Francisco Chronicle profiled a couple who qualified in 2006 for a $625,000 mortgage… yet was priced out of the market.
Fast-forward four years and prices are down… but now the couple qualifies for a mortgage of only $280,000. “Our incomes haven't changed, but the rules have changed,” the husband says, “so we don't really talk about buying houses anymore. We've shelved it.” We suspect they’re not alone.
There’s another problem facing the housing market this fall, one that a sharp-eyed reader reminded us of recently…
“Do you have a ‘we are here’ plot of the Alt-A/subprime, etc., in an upcoming 5?” the reader asks. Ah, the famous Credit Suisse chart of adjustable-rate mortgage resets.
“I think Alt-A is going to spike in September-October, so it would be nice to see that one again in an updated form.”
Ask and ye shall receive. And the reader is right: We should hit a peak in resets next month… with an even-higher peak coming late next year.
“The government's mortgage modification programs have been a complete failure,” says Dan Amoss, assessing Uncle Sam’s attempts to prop up the market. “They have not addressed the problem of negative home equity.
“The level of home equity is the leading predictor of mortgage defaults and foreclosures,” Dan explains. “With housing prices set to weaken once again, we could see several months of self-feeding downward spiral: In an environment of weak housing demand, selling adds pressure to prices, which begets more selling… There's still more room to the downside for prices to return to pre-housing bubble levels.
“In banking, they often say, ‘The first loss is the best loss.’ With a renewed downturn in housing prices, we could see a rush to liquidate the ‘real estate owned’ that's been sitting on bank and GSE balance sheets waiting for a rebound.” So the trickle of shadow inventory hitting the market now could soon become a flood.
That would trigger another severe down leg in housing. Remember, the first caused immense pain and staggering losses — except for the handful of people who knew it was impossible for home prices to rise 10% per year into perpetuity. Some of them bagged gains of up to 1,000% in the space of a year applying one simple technique.
Life doesn’t offer a lot of second chances… but here is one now. All you have to do is apply the technique Dan has refined in his Strategic Short Report — available for a limited time at a substantial 38% discount. Move on this today and you’ll be sure to get his new recommendation as soon as it comes out tomorrow — a specialty retailer that’s about to get whacked by a downturn in consumer spending.
The major U.S. stock indexes gave up most of yesterday’s gains within a few minutes of today’s open. Traders can’t get excited about the meager drop in first-time jobless claims cited above. A 0.4% rise in the producer price index last month doesn’t help, either. Nor does a widening of the U.S. balance of payments, now at 3.4% of GDP — the highest percentage since the fourth quarter of 2008.
Gold is again approaching Tuesday’s record territory at $1,273. The dollar has given up the gains it made yesterday after Japan’s move to weaken the yen, with the dollar index sitting at 81.2.
Oil is down for a third straight day, but still rests above $75 a barrel.
The research arm of the German military has concluded worldwide oil production will begin an irreversible decline as early as this year, with “the impact on security… expected to be felt 15-30 years later.”
The draft report wasn’t meant for publication, but was leaked online. According to the German newsweekly Der Spiegel, it “warns of shifts in the global balance of power, of the formation of new relationships based on interdependency, of a decline in importance of the Western industrial nations, of the ‘total collapse of the markets’ and of serious political and economic crises.”
Germany’s military isn’t alone in pondering the implications…
Great Britain’s defense ministry, energy ministry and the Bank of England have held a “Peak Oil workshop,” as disclosed by the London Observer. That indicates Whitehall is more concerned about declining production than it’s letting on.
After the paper called out the agencies on their secrecy, the energy ministry issued this statement: “We recognise the public interest arguments in favour of disclosing this information… However, any public interest in the disclosure of such information must be balanced with the need to ensure that ministers and advisers can discuss policy in a manner which allows for frank exchanges of views and opinions about important and sensitive issues."
All this secrecy is a charade for anyone who’s followed Byron King’s analysis with us, now going back six years. As he’s frequently chronicled, the “easy oil” is pretty much gone. That’s why our most promising new sources of oil are the Canadian oil sands and deep-water wells — costly and complex to develop.
Yet within those sectors, a well-chosen play can be enormously lucrative. Last week, Byron met up with the principals of a small company that sits on some enormously promising offshore acreage… and he came away even more impressed than before.
Within weeks, the firm will have a “data room” up and running — offering scads of seismic and geo-chemistry facts and figures for potential partners to examine. With his own background as an oil field geologist going back more than 30 years, Byron knows the project is not only viable, but enormously profitable.
“The data room will be a near-term kicker to the share price… probably in the November time frame,” he says. “That, and there's current and continuing interest from numerous large oil companies — operators in the deep-water realm. Anything could happen, and happen fast.” If you think you might like to be on board, here’s where you can learn more.
“From what I read,” an alert reader writes, “silver is moving up faster than gold in terms of percentages. Silver is needed in industries much more than gold. Even looking at the latest charts, it's quite obvious what is happening. I am really looking forward to these 5 Min. news emails.”
The 5: We aim to please. It’s not just recently that silver has been outpacing gold. The trend’s been in place since the first of the year. And it’s not over yet… for reasons spelled out in this report.
“I spoke with my Private Banker today at Wells Fargo,” another writes, “to inquire about refinancing my $2.4 million mortgage, which is at 6.375%… and replacing it with a new loan that they are currently quoting at 4.625%. This would be a 70% LTV. The savings to me would be $3,518 per month.
“He informed me that they would not be able to just do a loan modification to my existing loan and set it to the new interest rate…but that I would have to apply and qualify for a new loan under the new more stringent guidelines dictated by the Feds.
“In speaking with him, I determined that I would not be able to qualify for this new loan, given that my income has decreased significantly over the past two years (I am not a Wall Street banker, but self-employed) and because they no longer look to assets or reserves under the new guidelines.
“So even though it is obvious that it would be less of a burden on me to make a mortgage payment $3,500 less than what I am currently paying (on time and never missed)… thus making the risk of a default substantially less… they will not make the adjustment.
“He said they do not have any loan modification programs for people who make their payment on time every month and who are not facing foreclosure.
“At the same time, he tells me that 14% of all jumbo loans now at Wells Fargo are 90 days past due. There is a very high likelihood these will go into foreclosure, become shadow inventory and depress home prices even further… which will increase the possibility of strategic defaults which he says they are bracing for at Wells.”
The 5: Thanks for your field report… These are always eye-openers. We know lenders are being especially stingy with the self-employed right now; that’s a prime reason the couple profiled in the San Francisco Chronicle is having a devil of a time getting a mortgage.
So there’s a real-world anecdote backing up all the data we delivered above — one more sign a second-wave mortgage meltdown is on the way. Once again, here’s how you can seize the advantage in your portfolio.
“Please continue monitoring the shenanigans in D.C. concerning our retirement plans. I'm very interested, as I intend to roll my Roth over into a taxable account if they want to confiscate it.”
The 5: We’re on it. We have been since October 2008. This week’s hearings turned out to be a false alarm (as we half-suspected they might). We will remain vigilant.
Regards,
Dave Gonigam
The 5 Min. Forecast
P.S.: We’ve endeavored to get this issue out on the early side so you can take advantage of your very last chance to try out Chris Mayer’s premium advisory Mayer’s Special Situations for just $1.
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