Housing Doom

There were apparently a lot of people who didn’t think that Cramer was serious yesterday.  So today on The Street he says  "Just default- - it makes huge economic sense."

Transcript below.
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I keep seeing comments like this time and again:

The Phoenix-area rental market is strong, with rents heading upward.

Or like this from Businessweek, [via MSN]

Fewer homes are selling because of volatile prices and subprime uncertainties, pushing up rents from San Francisco to Baltimore.

Generally I see these comments from the folks that want to see sideliners back in the game, assuring us that with rents going up and home prices going down, it only makes sense to buy.

Let’s consider something here though.  Fewer buyers means more unsold homes.  When sellers can’t or won’t lower prices, what do they do with their homes?  They rent them out.  This increases supply more than demand- which depresses prices, it does not raise them.
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Cramer gets religion- You’ll love this one:

Edit: Updated to use a new source.
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Tom Peters said, "If you’re not confused, you’re not paying attention." If he hadn’t already thought of that one, somebody commenting on the markets last week could have had a first. Still, we’re heading into August, when the Wall Street A-team heads for the beach and the hills, come what may. This morning’s calm could well be the calm before the calm.

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Can We Afford the War We Want? - I
Partial Transcript of AEI Seminar "Can We Afford the Military We Need?"

"Someday this war’s gonna end …"
               Calculated Risk commenter AllenM’s signature line, borrowed from Apocalypse Now (1979)

For many years, this blogger has felt that the greatest threats to the security of the Western world were economic, not political. Others have shared this concern. For example, MarketWatch’s Paul B. Farrell recently summed up [1] the difficulty as follows.

"Foreign banks are dumping dollar reserves, while we gorge on cheap toys and bad pet food. Actually, our biggest "terrorist" threat is internal: Distorted values are downgrading our nation’s ‘creditworthiness.’ We’re like out-of-control kids with stolen credit cards, spending our future with no plans to repay."

Farrell framed his theme around an interview with Robert D. Hormats, Vice Chairman and Managing Director of Goldman, Sachs. Hormats is promoting a book [2] titled "The Price of Liberty: Paying For America’s Wars," where he argues for fiscal prudence as a precondition for America’s national security. Other venues where the author discussed his thesis were major seminars at The Council on Foreign Relations [3] and The American Enterprise Institute.[4] The CFR event site includes a transcript, but the AEI one has only an audio file of the 2 hour long proceedings. Doom is in the process of creating a transcript of this last effort. Today we present a preliminary transcript of the first 82 minutes (up to the beginning of the Q&A).[5]

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Here’s what happens when demand is gone and developers are out of money:

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DOOM - August 7, 2006 …

To a certain extent,[1] Fannie’s QSPE adventure so far has been a largely academic accounting event. More graphically, perhaps it’s like a military training exercise where the referee (the accountants and regulators) judged Fannie not to have “died” in the course of this story. They have passed a positive judgement on Fannie’s “readiness”, but the real war is about to begin. Fannie’s QSPEs provide a bulwark (like a system of levees) against a real surge of defaults. The nation wide house price declines predicted by Goldman Sachs will most likely provide just such a surge. The QSPEs are designed to move the resulting losses around the financial system in such a way that the system as a whole survives. FASB, the GSEs, OFHEO, the banks and hedge funds have all expended a lot of thought in modeling the system for just such an eventuality. Within a year or so, we will all know if they prepared well.

FOX - July 29, 2007 …

That’s where Wall Street is right now [2] – hoping the levees will hold as investment bankers try to sandbag the rest of us with lots of placating talk. Well, it turns out that New Orleans was about as safe as the subprime bonds that are now below their own "C" level.

Although Wall Street bankers have been doing one heckuva job, I think it’s too soon to breathe easy, just as it was too soon then for those in the Big Easy to breathe easy. Because right now, we’re in that eerie quiet period when everyone thinks that the subprime storm has blown over and headed east. We’re all oblivious to the larger problems coming behind it. Just like when New Orleanians breathed their collective sigh of relief, oblivious to what a few city engineers worried about and watched for: Would the levees hold, or would they be breached?

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You know that mantra "Nobody Saw This Coming"? Fugeddaboutit! Let’s crack open the kindling box and have a look at The Chattanoogan for July 29, 2006.[1]

HOUSE prices are set to drop in the US for the first time on record, US investment bank Goldman Sachs warned this weekend.

Prices in several segments of the market have already started to fall, and the overall market will move into the red even in nominal terms next year, fuelling fears that this will trigger a downturn in consumer spending and hit an already slowing US economy.

“The risk is rising that nominal US home prices may be headed for an outright decline in 2007. It would be the first decline in national home prices ever recorded, at least in nominal terms,” said Jan Hatzius, economist at Goldman Sachs.

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In August 2006, Doom started reporting on "Vacantvilles" in the Phoenix SE Valley.  Yesterday the Arizona Republic reported that  new homes aren’t the only ones sitting empty:

Increasing numbers of newer Chandler homes are being abandoned by cash-strapped owners, leaving weeds, green pools and headaches for neighbors and city officials.

"It’s scaring me," neighborhood services Sgt. Greg Carr said of the trend. "We’re trying to figure out how we can approach this, who do we call when homeowners walk away and we can’t find them?"

Carr doesn’t have statistics but said home foreclosures are rising and along with them code violations. His counterparts in Mesa, Gilbert and Peoria said the phenomenon is affecting those municipalities, too. A significant portion of the recent Chandler complaints are from newer neighborhoods in southeastern parts of the city where homes once sold for $400,000 or more and values have dropped, Carr said. Buyers who divorce, lose a job or can’t afford rising adjustable-rate interest are finding they can’t sell their houses for what they owe on them, he said.

How large is the problem?
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Some years ago when I was down in Mexico working on my  masters thesis, I would periodically watch a "telenovela" [Spanish for soap opera] called "Los Ricos También Lloran" [The Rich Cry Too]

That title came to mind when I read about the subprime problems of United Capital CEO John Devaney in an article from The Street by Mark DeCambre:

TheStreet.com has learned that the hedge fund manager has put one of his most prized possessions — a 142-foot Trinity yacht dubbed Positive Carry — up for sale, along with his $16.5 million second-home in Aspen, Colo. The house, called Sardy House, is the site of the nation’s largest living Christmas tree.

A call to Devaney was not returned and officials at his Key Biscayne, Fla.-based hedge fund declined to comment. But according to Web site YachtCouncil.com, Devaney is asking $23.5 million for Positive Carry, which boasts a 42-inch retractable plasma screen with theater sound, a sun deck, an eight-person jacuzzi and barbecue area.

The motor-yacht’s name is derived from a trade in which one borrows at low interest rates at the short end of the yield curve and invests at higher rates at the long end. How much the trader is asking for Sardy House — an 1892 Victorian mansion that isn’t believed to be named after any trading strategies — couldn’t be learned.

What has brought about this tragic situation?

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