Nobody believed him. Or at least they didnât want to believe him.
They all had evidence, personal or anecdotal, that âprovedâ him wrong.
They told him about a brother turning a small sum into a fortune ... about a neighborâs house getting fifteen bids within minutes of being listed ... and about housewives becoming million-dollar-a-year real estate agents.
They were equally quick to come up with âfundamentalâ reasons why the boom would continue for years to come â low mortgage rates, baby boomers buying second and third homes, land becoming scarce in many parts of the country, and more.
Thatâs natural. It was hard for them to see. But now, thatâs changing rapidly, as Mike will now explain ...
The Signs of a Housing Slowdown
Are as Prevalent as the âFor Saleâ
Signs on Front Lawns
by Michael Larson
Thanks, Martin. The signs are definitely getting easier to see. If people still donât recognize them, itâs because theyâre choosing not to. Let me cut to the chase ...
Consider Toll Brothers (TOL). If you donât know Toll, itâs the biggest publicly traded builder of âMcMansionsâ â those ostentatious, oversized homes that popped up all over the U.S.
It was flying high. But now look at how itâs getting utterly slaughtered.
This is a stock that was trading for about $58 and has now plunged by more than HALF in just a few months, crashing through all support levels, and heading still lower.
In short, the market has spoken, and weâre no longer alone: The market itself is now forecasting a real estate bust. Not a âsoft landing.â Not a âmaybe-bust someday.â Itâs forecasting an outright collapse, starting right now.
Still not convinced? Then take a look at the chart of another major homebuilder, KB Home (KBH). Youâll see the exact same kind of action.
What this tells me is that weâre not seeing a company-specific problem, but rather an industry-wide trend.
Need more proof?
Right now, weâre in âconfession seasonâ for the big public builders. And boy do they have a lot to talk about:
- Pulte Homes says its orders dropped 29% year-over-year in April and May
- Toll Brothers reports second-quarter orders plunged 33%
- Standard Pacificâs orders are down a whopping 41% year over year
- But the title of âMVB,â or âmost vulnerable builder,â has to go to WCI Communities. This firm has been throwing up single-family homes and condo buildings all over Florida, greater Washington D.C., and New York City. First-quarter âtowerâ orders â high-rise condo units â imploded, falling 71%. Thatâs astounding!
These are the stocks Wall Street kept telling you would âoutperform the marketâ ... the ones they said âwould keep posting record profits for years to comeâ ... the ones whose shares they kept flogging with âbuyâ recommendation after âbuyâ recommendation.
Sound familiar? It should â itâs the same kind of garbage we heard about tech stocks in 1999.
And what youâre seeing in these homebuilder stocks is the same kind of action we saw back in the tech wreck in stocks like Cisco ... Intel ... Amazon.com ... Pets.com.
Remember: Cisco went from $10 to $80 and back in the span of just over two years; stocks like Pets.com just vanished into thin air. Thatâs what we see happening in housing stocks.
That makes sense. Like the tech boom in the 1990s, the housing boom was a falsely inflated, super-juiced, speculative bubble.
And like the tech boom, it was set into motion by a reckless, money-pumping Federal Reserve Board.
The men and women at the Fed have repeatedly demonstrated contempt for the true value of our money and financial security. They keep inflating bubble after bubble. Then when those bubbles burst, they donât let the darn market work its cleansing magic. Instead, they pour even more liquidity into the market ... giving rise to the next mania.
The Speculators Are Going to Lose
Big Money; Save Yourself
What does all this mean for home prices? That itâs too late to avoid a major bust.
Is the Fed going to sit by and let it happen without lifting a finger? Of course not. But the most they can do is temporarily cushion the blow.
No matter what the Fed does, I just donât see an easy way out for housing. Instead, I see a multi-year downturn and real economic pain.
Real estate is already starting to fall apart all around us. No, prices arenât going to collapse almost 90% like Ciscoâs shares did. But mark my words: Calling this a âsoft landingâ will be like calling the dot-bomb bust a âgentle correctionâ ...
- Sales are going to keep falling.
- Inventories are going to keep rising.
- Defaults and foreclosures are going to skyrocket.
- And prices on a wide variety of properties are going to fall in vast swaths of the U.S.
You can follow the signs of the housing bust right down the chain to local markets.
Heck, right here in my zip code (33458), there were recently 574 properties with at least two bedrooms and two bathrooms for sale between $100,000 and $500,000, according to Realtor.com. When I started tracking almost a year ago, only 150 fit that description. Thatâs a 283% increase. Almost four times as many houses, condos, and town homes are piling up, still unsold.
In one nearby community, called Chasewood, the same listings have been sitting on the market month after month. The lowest priced unit used to be listed at around $210,000. Now, you can score one for just under $175,000. Thatâs almost a 17% drop in just the past several months!
You think these kinds of price declines are over? No freaking way! Thatâs because so much of the surging demand for houses in the past couple of years was âfalseâ demand from wild-eyed speculators.
These people have no idea how true real estate investors make money â buying low and selling high, generating positive cash flow from rent once all expenses are deducted, etc.
Instead, the speculators bought houses by the dozen, hoping to unload them to âgreater fools.â Many never even expected to have to close â they planned on buying contracts and flipping them before the places were even built.
Now, the market is collapsing under their feet, and theyâre getting hosed. Theyâre being forced to take possession of properties they canât afford ... canât rent out at positive cash flow ... and canât carry.
So theyâre trying to sell. But whoâs buying? After all, the speculators were a huge chunk of the âbuy sideâ of the market in the first place.
Meet Dena Webster, recently
profiled by our local paper,
The Palm Beach Post ...
Ms. Webster bought 14 houses in my area during the boom. Now, sheâs stuck with a whopping $50,000 in monthly mortgage payments.
But only four of those properties have tenants, and those tenants are paying monthly rents that are far lower than Ms. Websterâs payments. Cash is gushing out the door month after month!
And it gets worse: Ms. Webster is a real estate agent herself. Not only is she loaded up with poorly performing real estate investments, she also relies on real estate sales to make a living. Talk about a recipe for disaster! And donât think for a minute that similar stories arenât playing out all over this country.
My view: If youâre overexposed to the residential real estate market, you have a choice. You can go down with the ship or you can take steps to protect yourself ...
First, if youâre selling a home right now, donât muck around on price. Price your property at, even below, recent comparable sales. If you start high, chances are your property will just sit and sit. The listing will get stale â and cutting prices by dribs and drabs will merely leave you chasing the market down.
Second, if you have residential investment property that doesnât produce positive cash flow, dump it. Thereâs no telling how long this downturn will last. But Iâm expecting at least a few years ... maybe more.
Remember, real estate investments arenât like stocks. If you buy a stock and hold it, you donât have to pay carrying costs. However, when you borrow money to buy real estate, you have to pay for it â mortgage, taxes, insurance, upkeep â month in and month out. Even if prices merely flatten out, you could still be losing real money.
Third, if youâre in the market for a place to live, compare the costs of renting vs. owning. Prices are so out of whack in many markets, that renting beats owning hands down. Just go back to that Post story I mentioned earlier. It said:
âAccording to local real-estate agents, condominiums and single-family homes throughout Palm Beach County and the Treasure Coast are leasing for 30 to 50 percent less than the monthly costs, including property taxes and sky-high insurance premiums, of owning the same property.â
Fourth, take a good look at your other investments. No matter what happens to the broad market, I can tell you that certain sectors look ridiculously vulnerable to me. As Iâve shown you, the housing stocks are already collapsing. But what about the companies that supply all those builders with cement and kitchen cabinets? Or the temp agencies supplying construction labor? Or the lenders making the high-risk mortgages behind the bubble?
Fifth, seriously consider taking out âreal estate crash insurance.â You wouldnât dream of owning a home without insurance to protect you against fire, storms or theft. And yet, the financial damage we see ahead could be greater and more widespread than all the other threats combined. For more details, see my report, just posted to my Web page last night.
Until next time,
Mike
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