What would be the sector ordering of a Housing Crash?

Discussion in 'Economics' started by swtrader, Aug 27, 2005.

  1. First of all, this is NOT meant to be a debate of whether there is a bubble or not. And for that matter, I'm not even saying there is one.

    What I'm asking is, hypothetically, if there WERE one, in what order would it unfold? Would the ordering of ascent be a guide?

    In hindsight, it was easy to see the wave cascade through tech - hi-fly internets, then telco, then telco equip, then computer hadware. It was a heck of a wave to surf.

    There should be a good model here, as 1989 experienced a housing bubble, although more limited to regions, so more research would be needed to find the stocks exposed to each sector *in the affected regions*

    Realtors, mortgage companies, REITS, builders etc.

    What order did they fall?

    What are the signifigant players now, and what order would they fall?

    (And I really mean it, I don't want this be be an is there/isnt there thread, there's already several LONG boring threads on that. If you think there isn't and therefore this topic is irrelevant, your task is easy - ignore this thread)
  2. homebuilders and allied operations, lender, relenders. concurrently with the general economy as there is less disposable cap.

    on the other hand, look for conversions to fixed rate mortgages, and watch for where the liquidity that comes out goes -- mutual funds? commodities? long term real estate? real estate in other countries?
  3. that brings up an interesting point, the 'outer layer' of the model, ie, where the outgoing money flows into, and secondary consequences, such as home equity currently spent on retail and other sectors

    but remember *if* there is a bubble, only part of the money escapes. Some of it gets exposed as having never really existed, because the nations portfolio is marked to market by the selling price of the last sale in each area
  4. Arnie


    I think the lenders have the biggest exposure since some could be held liable for inflated appraisals, faulty underwriting etc...Not only would a crash affect current operations, but these guys could be on the hook for some past behaviour.

    I recently closed my appraisal business in part because of the absolutely fraudualent requests I have been getting. More in the past few months than in the prior 15 years. Requests to inflate the value, take out photos of deferred maintenance, change the zoning, it goes on and on. You guys would not believe it. It is one sick industry.

    Home builders actually may not suffer as much as some expect due to their being fewer, larger, better capitalized and better able to control inventory levels.

  5. Forget about 1989. Can you tell me the impetus of chained events that have led to our current economic and natural resources condition, as you say the order of ascent?

    Our government is protecting partner lenders. So, perhaps we need to examine the monetary and resources shift that would take place in the event that they would liquidate and implicate these large entities.

    We need to look at changes in the natural resource domains. Our government did not invade foreign lands to make these resources cheap for Americans but did so in order to have a monopoly and be able to manage the population with these resources.

    Lumber and synthetic building materials will fall on the speculation that there will be fewer renewed and new contracts. Cement producers would give back their recent runs.

    Energy prices would cycle down as well because of the likelihood of lower logistic and business activity.

    Most mortgage lenders especially the small ones have seen a peak in business and are now left with excess capacity, at least the stagnant ones.

    If housing prices fall across the board for several quarters you will have a plethora of shorts to choose. Too many to list. This is why i think verifying chained events is important and will lead you to conclusions instead of assumptions and opinions.

    It is a great thought and question to prepare for this type of macro event and cycle. I am more interested in the catalyst--for example, an assassination of a global figure head. The possibilities of managed expectations are endless and the scenario and order can be quantified in different ways.
  6. Well, as I said in my first post, I don't want to pre-suppose that a bubble exists, and that one would pop

    But, if one were to believe that one exists, Greenspan's recent remarks, including today's sure sound like someone trying to cover his rear, and absolve himself from blame for any losses resulting from risks taken from this point onward

    '"The housing boom will inevitably simmer down," Greenspan said in the prepared remarks. "As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease." '

    Now, I know that many will immediatly think of his 1996 'Irrational exhuberence' comments' and note that the break occurred 3 years later.

    Yet, the fact that it occurred 3 years later is only known in hindsight. It could have occurred soon afterward, or not at all. Same is true here.

    Really, all it takes for the trend to reverse, is an expectation in the majority of those who might buy, that prices could actually be LOWER in the future, rather than higher. In fact, that is the definition of a trend reversal. And clearly, Greenspan is attempting to create that expectation

    It fits into Greenspan's pattern - recall that he was trying to bust the tech boom, and frustrated by his inability, he over-did the rate increases, then it crashed

    Conversely, he over did it with cuts through 2001-2002, and again, the economy refused to respond to his actions, until early 2003, and once again, he over did it, pouring too much gas on the fire.

    Now, after a series of increases, he's expressing frustration with the lack of response to his increases and........?

  7. SteveD


    A significant loss of jobs in an area is really the only event that will cause housing to decrease in value, assuming no outlandish overbuilding has occurred.

    Take a look at the Silicon Valley area after the tech "bubble" burst. Thousands of jobs and entire companies just simply vanished and yet the basic housing did not take a big hit.

    Why not?

    Most people on ET do not understand the basics of real estate and how it does and does not connect.

    New home construction is where the major public homebuilders are. They build, mostly, single family detached homes. Not condos, not apartments, just good old fashion homes for people to live in. They are more kin to manufacturing companies than to real estate as you know it. They do not have a lot of employees or obligations, like say a GM. Most of their people would be laid off but most of the workers are subcontractors in that small geographical area, carpenters, plumbers, concrete, etc etc. They would probably be a good short, especially the ones who build the most "starter" homes.

    Now, resales are where the appreciation has been the strongest but this is such a very fragmented business it is hard to find anyone with any kind of market share. Maybe Cendent that owns Century 21 and Coldwell Banker?? The lenders are in pretty good shape and fairly well diversified with other types of loans besides SF. Most have been securitized and sold to institutional buyers.

    The commercial REIT's have not seen a major run-up in value as they trade off of the yield on the 10 year bond.


  8. JR97


    Interesting article someone sent me:

    Looming Credit Squeeze
    On American Banks
    Reality Check
    By Gary North

    If you are looking at your financial position, you should consider your assets in relation to your liabilities.

    What you should do, a bank by law must do.

    Banks have assets. A huge asset on the books of the biggest American banks is credit card debt. That money is owed by borrowers. Interest rates paid on these cards is far higher than rates obtainable by banks from any other class of loans.

    The written credit card debt contracts are also beneficial to banks. Low card rates can be hiked without warning overnight to 20% or even 30% per annum if a borrower misses a payment to his mortgage company or any other creditor. This missed-payment information goes from the third-party creditor to a credit rating agency, and from there to the bank.

    Credit card debtors have agreed to contracts that pass most of the power to the lending agencies, which are banks.

    All this sounds like good news for the banking industry. But then the banking industry got into the game of politics. (Actually, I can think of few industries that got into politics earlier: the fifteenth century at the latest.) The banks began to pressure Congress last year to pass legislation to toughen the bankruptcy law. Congress complied with bank lobbying early this year, and President Bush signed this legislation into law, just as he has done with every proposed law that Congress has put on his desk since January, 2001.


    Few people understand that the minimum monthly payment required by banks kept the borrower in debt for over two decades. Now, that's a loan that pays and pays and pays!

    The borrowers, not understanding compound interest and paying attention only to the monthly payment's effect on their budgets, willingly locked themselves into a long-term debt contract.

    This was a bonanza for the banks, which was why American banks since 1965 have dramatically increased the assets on their books attributable to credit card loans.

    On October 17, the new bankruptcy law will go into effect. That is the day that the banks will see their cash cow wander off into the field toward the butcher's.

    The new law cuts those juicy 20-year loans to 10 years. Monthly payments will jump accordingly.

    Also, the new law requires borrowers to repay these loans even after bankruptcy.

    The banks asked Congress to intervene and make things less risky for the banks. Congress did as it was told, but there will be a cost: the doubling of the minimum-balance monthly payoff. That will hit borrowers like any unexpected bill does. They will have to adjust their monthly budgets.

    This will come at a time when gasoline price increases are already forcing major budget readjustments.

    So, it will become more difficult for banks to increase the number of takers when they advertise their "low, low, low" rates. An asset that had been ideally suited for growth -- a long-term loan based on low monthly payback -- will now find new market resistance.

    Here is the assessment of business journalist Dana Blankenhorn, who has been in the field for 25 years.

    Faster write-downs of credits by borrowers means fewer assets for credit card banks. Forcing borrowers to pay back their loans, even after bankruptcy, means those assets can't be written-off, and those bankrupt borrowers can't be extended new credit. It's a squeeze on bank assets, from both sides of the ledger. So two things happen, even in the best of all possible worlds. Assets decline, while new assets become harder to generate.

    For the industry that, more than any other, is an industry of contracts -- banking -- a change in the terms of contracts can have repercussions. The bankers know what's coming. The average Joe, who is up to his eyeballs in credit card debt -- maxed out -- doesn't see what's coming. He will in November, when he gets his new bill on his credit card statement. It's the law!

    Millions of people (I have no idea how many, but the number may be in the 10s of millions) are already at their limits, squeaking by and paying the minimum on their credit card balances. To protect themselves, the banks made it the law that rates on balances that fall past-due automatically jump to over 30%. But this is, in fact, no protection at all. The banks' assets are frozen, and while they might be paid back in time, the chances of raising more assets (remember, loans are assets to the banks) declines dramatically once the hammer falls on borrowers.


    New home owners have gotten in late. They are paying up to half of their monthly take-home pay to live in their newly purchased homes. Property taxes have not been hiked. This tax hike is coming. OPEC is also squeezing them. Now comes the new bankruptcy law.

    People have been encouraged (by subsidies, and the fact that banks can always sell their loans to Fannie Mae and Freddie Mac) to create a mortgage "asset bubble," with interest-only and adjustable-rate loans. People were then encouraged to furnish these palaces through credit cards or second-mortgages.

    This has happened nationwide, not just in the areas where the supply of new housing has been tight.

    So let's say you're stretched and October rolls around. The credit card bill jumps. The natural inclination (the one encouraged by banks) is to tap the home equity. But that may already be tapped. With many tapped people forced to put homes on the market (to stave off bankruptcy) a downward spiral begins. Home equity values fall, and with each turn more over-extended homeowners find themselves with negative equity. Home equity loans must be called, mortgage loans start to default, foreclosures add more assets to the pile. (Those who deal in foreclosures are already cheering.)

    No doubt, this chain of events in the housing market will be described as a side effect of the new bankruptcy law. The biologist Garrett Hardin once wrote that there are no side effects. There are only effects. Those effects that are both unpleasant and unexpected are called side effects.

    The Federal Reserve will probably continue to announce increases of .25 percentage points at the next three FOMC meetings scheduled for 2005. This will push up short-term rates, which will negatively affect the adjustable rate mortgage market.

    Blankenhorn's conclusions are what mine were even before I read his article.

    My advice is to get in the best equity position you can before the hammer falls. Look for stocks in companies that export. Look for hard assets, foreign assets. The natural inclination in this situation will be for the government to print more dollars, but the government too is overextended, thanks to Iraq, pork and tax cuts, so when more dollars are printed the value of each dollar falls. Thus, you don't want to be in dollars.

    He is speaking of dollars in relation to foreign currencies. But it's better to be in dollars during the early phase of a recession than to be in the stock market. He is predicting a recession. I will be when I see the interest rate on 90-day T-bills above the 10-year T-bond rate. We are approaching this scenario.

    Get into cash, into hard assets, into foreign currencies. You have two months. If I'm wrong you can always re-adjust the portfolio next year. But I don't think I'm wrong.

    And look at the bright side. Few knew, except in retrospect, that AOL's takeover of Time-Warner in 2000 meant the end of the Internet bubble.
  9. while i am somewhat sympathetic to some of his musings, please keep in mind that gary north was camped out in a bunker for y2k. i am not kidding.
  10. #10     Aug 31, 2005