Friday, July 27, 2007

Franco Is Still Dead, and Housing Is Still Bust: Caroline Baum

Courtesy of Bloomberg.com
By Caroline Baum

Foreclosure resolutions ad displayed in front of a home July 27 (Bloomberg) -- The latest round of housing statistics -- sales, starts, homebuilders' outlook surveys and earnings reports -- offered little hope that residential real estate would be back on its feet anytime soon.

``Housing is bust, and wishful thinking cannot unbust it anytime soon,'' says Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

Just to recap what we learned this week: New home sales plunged 6.6 percent in June to 834,000, just above the seven- year low set in March. Sales are down 22 percent from a year earlier, even with builders throwing in the kitchen sink to sweeten incentives and lighten the load (inventories).

Home resales fell 3.9 percent last month to 5.75 million, a five-year low. They're down 11 percent in the last 12 months.

The only surprise is that prices haven't fallen more. The median price of an existing home was unchanged from a year earlier while new home prices fell 2.2 percent, removing the refinancing/cash-out option for strapped homeowners but not much of a real loss given soaring home prices from about 2001 through 2005.

Shepherdson warns against taking any comfort in the stabilization in home prices for two reasons: one, the deterioration in the supply picture; and two, the lack of adjustment in median prices for either seasonal variations or the mix of properties sold from one month to the next.

Because most of the problems have been in the subprime and Alt-A sectors, and because non-prime borrowers probably buy lower-priced homes, ``their absence from the market will limit the speed of the decline in the median home price,'' he says.

`Challenging'

Moving along to the builder side, things are equally glum. (The outlook is ``challenging,'' in homebuilder speak.) Six U.S. homebuilders, including D.R. Horton Inc. and Pulte Homes Inc., reported losses in the second calendar quarter this week. The chief executives of these companies were not optimistic about the rest of this year. Many weren't optimistic about next year either. Homebuilders' stock prices, which early this year saw a housing renaissance, plunged, with the Standard & Poor's Supercomposite Homebuilding Index dropping to a three-year low.

Yet the real blow this week seemed to come from someone outside the homebuilding industry. Countrywide Financial Corp., the biggest U.S. mortgage lender, did to the stock market this week what HSBC Holdings Plc did to the subprime loan market back in February. Countrywide's road-side bomb, delivered with its second-quarter earnings report, was news that the stress in the home-loan market was spreading from deadbeats to folks with good credit histories.

Rising delinquencies on mortgage payments on prime loans contributed to the company's third consecutive quarterly loss and a one-day 10 percent loss in its stock price.

Technology Redux

On top of rising late payments, Chief Executive Officer Angelo Mozilo said on a conference call that the U.S. was experiencing ``home price depreciation almost like never before, with the exception of the Great Depression.''

The Dow Jones Industrial Average fell 226 points, or 1.6 percent, following the news, and another 312 points yesterday.

``We've been looking at the same data on housing for months, and it took the CEO of a lender to make everyone say, ouch,'' says Joe Carson, director of global economic research at AllianceBernstein in New York.

Carson says Mozilo's comments were not unlike those of Cisco Systems Inc. CEO John Chambers when technology companies woke up in late 2000/early 2001 to find their order books had evaporated (at least that's when companies owned up to it).

Chambers rattled the stock market in early 2001 when he admitted that the previous quarter had been ``a little bit more challenging than expected.''

Visibility, Hindsight

One year earlier, when capital spending and the economy were plowing headfirst into a brick wall, Chambers said he had ``never been more optimistic about the market opportunities for our industry as a whole and for Cisco within that market.''

Just call it visibility in hindsight.

While everyone from the Federal Reserve chairman to the Treasury secretary has been talking housing containment, the damage has started to seep out from under the foundation and spill over to other parts of the economy. Home improvement retailers such as Home Depot and Lowe's Cos. are feeling the pinch. Consumer spending slowed markedly in the second quarter. Wall Street is having trouble finding buyers for loans to finance leveraged buyouts. Investors are starting to reprice risk.

The yield curve has inverted again as the yield on the 10- year Treasury plummeted 50 basis points in the last six weeks.

Rerun Time

Haven't we seen this movie before? Every bubble has a credit kicker when the price of whatever asset folks were chasing stops rising. Banks find religion when it comes to making new loans. Regulators step in to make sure there will be no repeat of the last bubble. Consumers save more; businesses invest less.

Housing has been the economy's weakest link for some time, subtracting about 1 percentage point from growth in every quarter from the second quarter of 2006 through the first quarter of 2007.

Residential investment, as it's referred to in the gross domestic product accounts, may not be the real threat to the U.S. economy. The danger lies in the fact that ``there's a lot more household debt associated with housing'' than there was with the stock-market bubble, Carson says.

Maybe you can take housing out of the economy for analytical purposes (see ``GDP ex-housing''). But when it comes to the real world, the two are inextricably linked.

(Caroline Baum, author of ``Just What I Said,'' is a columnist for Bloomberg News. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net

Last Updated: July 27, 2007 00:03 EDT

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