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[iloli way]

Jim Sinclair’s Commentary

Operation "White Noise" continues to make every effort to hide the OTC credit derivative meltdown reality while broadcasting illusion via the equity markets. However, it is the truth that makes us free, and that truth seems to be seeping out.

http://money.cnn.com...te/subprime.ap/

[TTHQ Staff]

Here's Sy Harding's take as well:

Why must home prices fall?

In any market, be it for beanie babies, cabbage patch dolls, iPhones, or yes, real estate, when demand outstrips supply, prices soar beyond reason. But to borrow a phrase from my friend Joe Shaefer (Stanford Advisory Group), after every wild party there is always the morning after.

When the other side of the cycle arrives, and supply outstrips demand, look out below for prices. And it’s hard to imagine a greater chasm between supply and demand than currently exists in the housing market. The glut of unsold homes is at an all-time record. Builders are still building, although at a slower pace, as witness the new housing starts numbers. And existing homes are coming on the market at a record pace as teaser mortgage rates reset.

Meanwhile the demand side has disappeared. ‘Flippers’ are not interested since the upside is no longer there. Some would-be buyers are frozen out by tightened lending standards, while others are waiting patiently for the much lower prices they expect a year or more down the road. Some builders see the writing on the wall, and are determined to unload inventory, free up the cash, and get out from under the ongoing maintenance costs, before conditions get any worse. So they, mostly those who have been around for a few of these cycles,are already cutting prices on inventory homes by 30% and more.

Others, particularly individual home-owners, are in denial, thinking their home is still worth as much as in 2006. So we see overall prices just beginning to decline. Economists predict prices will have to decline 25% to 30% on average, to become affordable again based on average income levels, now that normal financing has returned. (Interest only, and ‘pick your own payments’ financing have gone away for good).

With the freeze-up of mortgage-lending this summer, affordability has certainly not improved since the first quarter. So it is not just the glut of unsold homes, but a serious affordability issue that promises the usual result of a reversal of the supply/demand situation -lower prices. Home-builder confidence, as well as the confidence of investors in the home-builder stocks, reflect that situation. The Home Builders Association/Wells Fargo index of home builder confidence is at its lowest level ever, going back to the index’s inception in 1985.

Profit margins, as high as 35% in 2005 and 2006, disappear completely when builders sell homes at deep discounts. That can be seen by the losses they are posting. But as Frank Lee, analyst at highly ranked credit research firm Credit Sights, says, “Raising a cash cushion, and improving the ratios on their balance sheets is extremely prudent, given that this downturn can get much worse.”

Yet because sales are so hard to come by they still can’t sell the inventory fast enough to improve their
worsening ratio of sales to inventory. Banc of America Securities says idle assets (unsold inventory) are taking an increasing toll on the industry’s health. A year ago the ratio of builders’ debt payments to cash flow was roughly 1:1. Now with cash flow declining, debt payments are running at 2 1/2 times cash flow.

Meanwhile, on average, home-builder stocks are down 65% from their previous peaks, in spite of brief pops once in awhile when Wall Street breathlessly claims “The bottom is in, the bottom is now in”. The problem for the overall economy is that the housing industry is the source of all the economy’s other problems. Until it bottoms its problems will continue to flow outward into the rest of the economy.

The Street Smart Report