Wednesday, July 25, 2007

The Housing crash meets the oil crash. (This will be better than “Alien Vs. Predator)

Yesterday, the U.S. equity market took it in the chin as it began to dawn on rich people that poor people might not be able/or willing to pay their mortgages.

``We are experiencing home price depreciation almost like never before, with the exception of the Great Depression,'' Countrywide CEO Mozilo said of the housing slump during a three-hour conference call with investors. Bloomberg News, July 24

This is only a surprise to the coastal elites. Working people knew they couldn’t pay these mortgages when they took them. They believed that trees grow to the moon and that they would be able to sell before too many payments went by. But the housing analysts have one other problem they have managed to overlook: Energy. The funny thing is that the energy analysts may have overlooked housing. Allow me to explain:

Energy prices could quite possibly retreat hard IF housing brought the U.S. economy into a condition of deflation. This scenario is unlikely, but possible. Ignoring all of the possible outcomes is what got us into this situation, and investors need to pay attention - not get lost in some “belief system”.

This begs another question, as I believe that an oil import crisis is looming for the U.S.:

Even if housing declines Japanese style (unlikely, except for South Florida and other mania zones), will the other oil importing nations, China, Japan, and Europe come to mind, with their huge U.S. dollar reserves and their huge trade surplus with the U.S., continue to support a currency exchange rate that allows a nation with 4.5% of the world’s population to continue to consume 25% of the world’s oil (and continue to import 33% of the world’s oil exports)?

Unlikely, in the extreme.

Now let your mind wander to a world where the U.S., with 4.5% of the world’s population is only able to consume 10% of the world’s oil production, i.e. only consume its own production (either due to the aforementioned import crisis or due to currency exchange rates – pick your poison). What does that country look like? Do homes 30 to 50 miles from the primary sources of employment retain any value? I rather doubt it. What about vacation and second home markets? These would be worse, if possible. And if they retain little to no value, hasn’t the U.S. eclipsed Japan’s housing debacle of the 1980’s and 1990’s by a large margin? Most certainly. And, again, if so it would follow that the U.S. would be in the grip of a terrific deflationary period. The very thing that in the previous paragraph I said was unlikely. One could make themselves nuts going around and around and around with this. Good thing it’s too late for me. Makes things easier…

Things are far worse than they appear in housing land:

Today it was reported that existing home “Purchases declined 3.8 percent to an annual rate of 5.75 million, the slowest pace since November 2002, from a revised 5.98 million in May, the National Association of Realtors said today in Washington”. Bloomberg News

A classic case of your, and mine, mainstream media being manipulated and in turn manipulating the public, willingly or otherwise, in this case by the NAR. You see, the 5.75 million homes sold is only the numerator. The denominator, or the total number of homes has increased over 15% since 2002. When comparing apples to apples the ratio is much worse than 2002. Another important number is days of supply, and THAT number of existing homes is the worst in DECADES, not “since 2002”, and is not accurate in as much as many mortgages in default have not listed the home to be sold, and are not being counted in the supply. The number of homes has increased dramatically since 2002 from efforts like condo conversions and new home building… and that wave has not drawn to a close yet (just take a look at the Miami sky line).

Unfortunately, I do not see a resurgence in the housing market, under any circumstance, before the oil import crisis delivers the coup de grace. Many attempts will be made by certain "interests" to manipulate, cajole, motivate, misinform, and confuse you in an effort to gain some advantgage. But take a good look at what is going on in the credit and currency markets before you take the bait.

Yours for a better world,

mentatt (at)

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