Wednesday, April 29, 2009

Real estate - the broken link

that ensures the economy continues to contract and the bear market goes on. The real estate bubble bursting is the cornerstone of the entire economic mess we are in and it ain't even close to over yet. California is one of the "ground zero" states for the mortgage mess and below is a chart copied from MyBudget360, which was taken from Field Check Group according to their site (typical lazy internet reporting on my part, but what do you expect for free?). This chart shows the "Notices of Default," which start the foreclosure process in earnest in California once someone has missed several payments (each states handles such matters differently but a foreclosure is generally 4-6 months away once this formal notice is filed with the courts when the governments aren't running around constantly changing the rules and the banks aren't hopelessly behind due to the current avalanche):

The dip at the end of 2008 was related to a temporary government-imposed moratorium on foreclosures that has now been rescinded (for the time being). March of 2009 was of course a record month for the current real estate crisis in California. Now, couple that with this chart of mortgage reset dates from Credit Suisse, which has been posted so many different places that I don't remember where in cyberspace I copied it from:

Subprime is obviously so yesterday's news but we are in the eye of the hurricane for Option ARMs and Alt-A loans. These loans are heavily concentrated in real estate bubble states like California, Florida and Nevada. These loans were for higher priced homes, generally required little or no money down and many of these products used stated income (i.e."liars loans") instead of requiring formal documentation.

Add to this the stress on the commercial real estate market, which is absolutely imploding right now, and for mainstream economists to say that an economic recovery will begin in the next year isn't just dishonest, it's insulting to my intelligence.

We are talking about trillions of dollars of loans defaulting and dragging down hundreds of banks. We are talking about all of the big Wall Street firms and the largest banks in this country being completely bankrupt right now, not at some magical time in the future. Yes, the government is suspending the laws of accounting and dousing these corporations with taxpayer money in the classic fascist theft model we used to condemn in this country, but the real economy is withering on the vine as we speak.

Why? Because the money spigots have been turned off for those not in the "inner circle" and most businesses cannot function without adequate access to credit. While these gargantuan firms heal their balance sheets and fight to survive, they won't be lending to people and businesses who need the money and those who don't need the money (the only ones the banks would consider lending to) aren't interested in taking on loans because they are largely risk averse (appropriately so). Are there exceptions? Of course. But we are talking mega trends here, not swing trades (though I like trying to gamble in the casino as much as the next guy).

Deflation is king and the bear market is in full force until the real estate tsunami calms and we ain't seen nothing yet.

Don't forget the Japanese experience - it isn't an exact replica, but the 1990 top in their stock market coincided fairly similarly with a top in their real estate market. In case you forgot what happened next, here it is (monthly chart of the Nikkei stock index followed by a Japanese real estate price chart from The Market Oracle):

By the way, don't forget the demographic trends that we keep ignoring that are another 800 pound gorilla in the room weighing on the bullish case. The baby boomers want their entitlements (Medicare and Social Security) even though the kitty has already been emptied and is filled with IOUs and unrealistic predictions of growing our way out of this mess.

Gold and Gold mining companies will fulfill their historic role and will help to re-liquefy the banking system. Short-term movements aside, holders of Gold and Gold mining companies will have a net increase in wealth while those invested in stocks, corporate bonds and real estate will have a net decrease in wealth. Trading the swings is an interest of mine for now and fraught with speculative hazard, but the longer-term trends and fundamentals are unambiguous to me.

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