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Every month, I get asked if there’s any evidence whatsoever of a turnaround in the housing industry. So far — every month — I’ve had to emphatically say “NO.”
And I’m going to give it to you straight about the numbers that were just released: They are some of the worst I’ve ever seen.
Here’s what happened for the month of October …
- Existing home sales dropped almost 21% from a year ago. The seasonally adjusted annual sales rate, at 4.97 million, is the worst since the National Association of Realtors started tracking combined sales of single-family homes, condos, and co-ops.
- What about inventories? Well, at the current sales pace, it would take 10.5 months to move all the existing single-family homes on the market. That’s the highest since July 1985! Yes, I’m talking more than 22 years ago!
- As for home prices — they were down 5.1% from a year ago. That’s the biggest drop on record.
- A separate research firm, S&P/Case Shiller, says real estate prices just suffered the single largest quarterly decline they’ve ever seen … and they started tracking the data in the late 1980s.
It was much the same story for new homes, too. Sales were down almost 24% from a year earlier, while the government’s September sales estimate was dramatically slashed — by 54,000 homes.
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Meanwhile, new home prices plunged an astounding 13%, or almost $33,000! That hasn’t happened since 1970, when Richard Nixon was president and the U.S. was mired in the Vietnam War.
I don’t mean to be glib, but these latest housing stats really stink. The only comforting fact is that I’m no longer one of the very few who recognize what’s happening.
The First Step to Fixing a Problem
Is Acknowledging You Have One
Finally, some of the same people who helped cause these problems are starting to acknowledge today’s harsh housing reality. Take a look at three very telling comments from this past week:
Fed Vice Chairman Donald Kohn:
“I think the housing sector has continued to decline and erode at a very, very rapid rate, and while this was expected, I think it would be nice to see some early signs that it was beginning to stabilize and we haven’t seen that yet.”
Wells Fargo President, John Stumpf:
“I don’t think we’re in the ninth inning of unwinding this … if we are, it’s an extra-inning game.”
Stumpf went on to tell an investment conference that this is the worst real estate market he’s seen in his 30-year career. In fact, he compared this downturn to the Great Depression!
Goldman Sachs’ Economists:
“[The real estate sector is] mired in a full-blown vicious cycle.”
Goldman also warned that home prices nationally will decline 15% from their highs — and could drop as much as 30% if the economy slips into recession. The firm’s analysts cut ratings on everything from airlines to automobile makers to REITs and even dining stocks.
I’ve been warning you about this for a long time, of course. But to hear it from some of the nation’s top financiers and economists is truly amazing.
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| Donald Kohn and Ben Bernanke are finally waking up and smelling the coffee! |
IF there’s any glint of good news in all this, it’s that key political and industry leaders are finally waking up.
They aren’t trying to ignore the worst housing crisis in modern history anymore …
They aren’t trying to claim the mortgage collapse is “well-contained” …
And they are finally starting to explore some potential solutions, like FHA mortgage reform and loan modifications for distressed borrowers.
So, Is It Finally Time to Start
Plowing into Housing Investments?
No! In my opinion, your best approach to the housing sector is to avoid it.
Some smaller, private home builders are already going bankrupt. They include Kara Homes in New Jersey, Neumann Homes in the Chicago area, and Levitt and Sons here in Florida.
Many of the larger publicly-held builders are struggling with high debt loads, plunging sales, and surging cancellations — including Hovnanian Enterprises and Beazer Homes.
As far as I’m concerned, this is no time for bottom fishing.
So what about the banks … the ones that financed the mortgages behind the bubble? Again, most of ’em are still too dangerous to touch. Sure, you might catch a dead cat bounce or two. But for your longer-term money, there is great uncertainty and too much risk.
Remember, only two or three months ago mainstream pundits and analysts were saying Fannie Mae and Freddie Mac would dodge the mortgage problems. Now, those stocks have been cut in half! Freddie Mac has been forced to slash its dividend by 50% and go hat in hand to investors in order to raise $6 billion in capital.
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There ARE a few isolated survival stories — banks with little mortgage loan exposure and institutions that generate most of their income from fees.
I’m even toying with the idea of a recommendation or two in the Safe Money Report. Heck, at some point, even mainstream financial stocks will have tanked enough to make the risk of dabbling worth the reward. But in most cases, “Stay Away” is still the best advice.
One last thing: You should also take a serious look at your other stock holdings right now. Are you loaded up with retailers who need strong consumer spending to make their numbers? Are you hitching a ride on the high-tech express, expecting business spending to pad these firms’ bottom lines? If so, I think you’re risking a visit to the slaughterhouse. Recession risks are simply too high right now.
Look, the private equity boom that I flagged back in April has burst, just as I expected.
Ditto for the commercial real estate bubble, which I warned you about in May.
Now, the entire U.S. economy is poised to grind to a near standstill — with corporate profits suffering as a result. So consider yourself warned again about the risk of broader market losses!
Until next time,
Mike
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