The Housing Market Continues Its Plunge

"The power of accurate observation is frequently called cynicism by those who don't have it."

- George Bernard Shaw (1856-1950)

Let me start first by addressing yesterday's release of the monthly Case-Shiller index of home prices, which showed a gain for April.  But if you take a look underneath the hood at how CS is calculated you'll understand why that "gain" is illusory.  CS is based on a home sale price survey of the 20 larges metro areas, and it emphasizes "organic" sales vs. forclosure sales.  Because of the homebuyer tax credit and seasonal factors, the data pool used by CS de-emphasizes transactions which occur at "distressed" sale prices in favor of the fully-loaded, tax-benefit propped up "organic" sales transactions.  In other words, the CS index is statistically skewed to upside, unless you believe that foreclosures are going away and the tax credit had no effect on prices.  Mark Hanson did an analysis on the CS flaws last year if you are interested:  LINK.

So let's toss out the Case-Shiller price report and look at two other very significant developments.  Yesterday the nation's third largest homebuilder, Lennar, announced that it was cutting prices on its new homes by up to 15%.  Last week Lennar reported its earnings and it also reported that new orders for May fell by an unexpectedly large 10%.  KB Homes, the 8th largest homebuilder, reported last week that new orders for its homes plunged 23% in its most recent quarter.  And the Commerce Dept reported last week that new home sales took a 32% cliff dive in May.  Starting to get the picture?

Today the Mortgage Bankers Association reported its weekly mortgage applications index, which is comprised of purchase and refinance mortgage applications.  Once again the purchase applications index dropped another 3.8% from the previous week and was 36% lower than the same week last year.  Here's the link to the report if you are interested: MBAA Mortgage Index.

The point here is that the housing market is in a serious freefall.  Yesterday's widespread sell-off in the stock market, for sure, reflects the growing understanding by those who are paying attention that the economy is in serious trouble, with housing being one of the major components of U.S. GDP ever since World War Two.  Given that the mortgage market is over $12 trillion, as housing economics go into a tailspin, big bank balance sheets are sure to follow.  In other words, we are barrelling head-first toward a credit collapse that will make the one in 2008 seem insignificant.

The even bigger underlying implication here is that it is increasingly becoming apparent - and is even being reflected in mass financial media commentary - that the Fed has only one policy choice left to try and address this problem and that's to engage in "crank" economics - i.e. "crank" up that printing press.  Unless the Government/Fed is wiling to allow the whole system to crater, we can expect a big stimulus/quantitative easing/printing press program to be implemented, likely before year-end and possibly in time to jump-start the system ahead of November's elections.  I hope everyone understands that the only way to protect yourself from the collateral damages this will cause is to load up on gold/silver/mining stocks.  Anyone want to operate a hot dog stand?