Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Friday, September 08, 2006

Housing Market....It's Not Rescuable Anymore

“The housing market is looking sicker by the day. Economist Ian Shepherdson said that the housing market is so far gone that ‘it’s not rescuable anymore."

"Mortgage rates, shmortgage rates. No one's paying attention to the cost of borrowing money these days because it seems trivial next to the risk of losing money by buying high and selling low—catching a falling knife, in the Wall Street vernacular."

"Ian Shepherdson of High Frequency Economics, an early bear on housing, said in a conference call with clients on Sept. 7 that the housing market is so far gone that "it's not rescuable anymore. The housing market is beyond the control of the Fed."'

"He compared it to a football game played on a mountaintop. Once the football goes off the edge, he said, it doesn't stop until it reaches the very bottom (see, 6/20/06, "Beware False Housing Hopes")."'

"Even the homebuilders, long an optimistic bunch, are all but throwing in the towel on the current market's condition. "We're running our business today as if we're in a prolonged downturn," CEO Ara Hovnanian of Hovnanian Enterprises told analysts Sept. 6."

The National Association of Realtors has been reliably upbeat on the market for months, but on Sept. 7, Chief Economist David Lereah said, "We'll probably see prices dip temporarily below year-ago levels as the market works through a build up in housing inventory."

What he means by temporarily is... "several years..."

"Atlanta-based Beazer lowered its forecast for fiscal 2006. It said net sales through the two months ended Aug. 31 were 49% below a year earlier, and cancellations of existing contracts rose to 50% from 26% a year earlier."

"Los Angeles-based KB Home also lowered earnings guidance as it said that preliminary net orders for the third quarter were down 43% from the year-earlier quarter."


At 9/08/2006 02:34:00 PM , Anonymous Anonymous said...

Good story..loved that "Mountain Football" analogy. It's 3rd down on the the cliff...Hey you..Lereah...go out long for the Pass !

At 9/08/2006 06:02:00 PM , Anonymous tom stone said...

we're looking at a 5 year downturn,at least.i'm very doubtful about any kind of spring recovery at all,we will be about halfway through the mortgage resets by the end of march,and i suspect the screams and blood will discourage buyers...

At 9/08/2006 09:39:00 PM , Blogger Athena said...

SAN FRANCISCO (MarketWatch) — Standard Pacific Corp. (SPF : Standard Pacific Corp. late Friday said it expects third-quarter earnings to come in below its previous forecast of 80 cents to 85 cents a share. The Irvine, Calif.-based homebuilder also said it expects to lower its full-year earnings and delivery outlook.

Standard Pacific said net new home orders for the first two months of the third quarter were down 58% from the same period last year, driven mainly by an increase in the company’s cancellation rate and further weakening of demand in many of its larger markets.

At 9/08/2006 10:31:00 PM , Anonymous Anonymous said...

So, why the heck are the home mortgage and home builder stocks going up? It's driving me nuts because I bought a bunch of put options for October and January.

At 9/08/2006 10:34:00 PM , Blogger Athena said...

Hey Anon,

Here's a great answer to your question from MarketMaven over at Ben's blog:

Comment by mrktMaven FL
2006-09-08 09:25:10

Yesterday you inquired about the bad news bounce in HB stocks. I replied rather loosely that it might be short covering and it did’nt make sense. After some reflection, here is why it makes sense for HB stocks to rise on bad news.

As you know, to short a stock you borrow it from a broker and immediatly sell it in the open market at a high price. Sometime later in the future, you buy it at a low price and return it to the broker, profiting the difference.

Now, suppose 6 months ago you borrowed 100 HOV shares at $50 and today it trades at $25 a share and you want to realize a gain. In order to realize this gain, you have to go in the open market and purchase the 100 shares you borrowed to cover or close your position. To maximize your gain, you wait until sentiment is at its worse (like when HOV announces bad news) then you buy the 100 replacement shares, closing or covering your short position.

Now, suppose their are many other short sellers like you simultaneously trying to close or cover their short positions and there are’nt enough long sellers willing to bail on the stock. The result is temporary upward pressure on the stock’s price. As a result, you see a bounce in the stock’s price on bad news, “the bad news bounce.”

At 9/08/2006 11:08:00 PM , Blogger Athena said...


“Washington Mutual Inc. announced this week at an investors’ conference that it plans to close 80 branches, including 34 underperforming offices in metro Atlanta, by the end of the year.

“The Seattle-based banking company (NYSE: WM - News) also said it plans to close stores in Chicago, Dallas, Houston and Denver.”


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