Back to the Homebuilders vs. the Banks

Reggie Middleton's picture

In 2007 I put out a lot of research and opinion on the home builders
and attempted to portray them in a light that the sell side analyst
community and apparently buy side investors failed to notice. See

In December of 2007 I predicted that they will compete in a losing
battle with the soon to be larger residential home and land owners
looking to move properties at highly discounted prices: the banks
sitting on foreclosed properties - Bubbles, Banks and Builders.

Well, although I do feel I have been relatively prescient in my predictions and predilections, all of you guys who were waiting for me to be wrong can now have your day. As it turns out, the largest residential land home owner will probably not turn out to be Countrywide (see Would you buy Countrywide if all of its bad mortgages were magically wiped off the books?) or any other bank or builder after all, but most likely the FDIC, or in more direct terms - You, Mr. and Mrs Taxpayer, see: FDIC Holds $1.8 Billion in Property From Closed Banks: WSJ Link
There are properties repossessed this year by the FDIC that were
actually also repossessed during the S&L Crisis. Talk about not
learning your lesson!

I see about 1,300 to 2,000 banks going
under before this is all said and done. We are at around 150 now - yes,
we have a loooong way to go. The bigger banks to fail have yet to do
so, and the government is going to attempt to prop them up by any means
necessary. The problem is that there are significant losses in the
system, and those losses must be taken by somebody, sometime. They will
not just disappear.

Countrywide and WaMu were swallowed by
bigger banks (members of the anointed 19) before they popped, but this
meal has made the diner's very, very sick. It is not as if these banks
weren't telegraphing their problems WELL in advance. If I was able to
see it, then the regulators should have seen it as well. WaMu took 5
consecutive quarters of losses in its mortgage division before the
problems hit the financial media. This was called out early in
September 2007  - Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide to its peers.

Geithner has promised that none of his anointed 19 banks will be
allowed to fail, but I do see that some of them have taken on a
significant amount of horrible (and getting worse) assets. It may very
well be that he would not allow them to fail, but that just means that
they will be dumping the liabilities upon you Mr. and Mrs. Taxpayer. 
Call me plain vanilla and old fashioned, but I still believe the
investors should bear 100% losses before any taxpayer capital is
touched. Well, just as I called out WaMu and Countrywide with
significant margin (in terms of time) to do something about the
problems - I'm calling out all of the rest as well - "You've Been Bamboozled, Hoodwinked and Lied To! Here's the Proof. What Are You Going to Do About It?"


I, again, refer you to the relationship between GDP and property values in Japan from the  "Bad CRE, Rotten Home Loans, and the End of US Banking Prominence?" post.


Yes, we may get a pop in GDP, but GDP was also soaring along when these
problems originally manifested as well. We need to focus on the actual
problem, and not the academic thesis that is falsely marketed as the
panacea to the problem. See (again) "Who are ya gonna believe, the pundits or your lying eyes?" (for pictures), "Who are you going to believe, the pundits or your lying eyes, part 2" (for numbers and a very shaky video), and Boo!!! Will Halloween Scare the Market into Respecting the Fundamentals? for an idea of what needs to be cleared up in this space before we move forward.

The markets in the links directly above actually got WORSE
over the summer, despite the Fannie Mae, FHA and Federal homebuyer tax
credit incentives - all three of which are unsustainable. What do you
think happens when these bubble blowers expire? See "City sees rise in stalled construction sites since the summer, especially in Brooklyn": The
number of stalled construction projects continues to mount, as the most
recent set of Buildings Department statistics shows an upsurge of 42
percent in Brooklyn sites and 40 percent in Manhattan sites since the
. Despite what you may have heard, the real estate problem
is getting much worse, much faster. There may be more sales occurring,
but that is at the behest of massive stimulus: hundreds of billions of
dollars of mortgage market interference from the Fed buying MBS, tax
credits, ZIRP, trillions to the banks through the back door, etc. The sales are natural and welcomed, but they pale to the source and depth of the supply. Even when said sales do occure to clean out the system, they set market marks that are way below what many lenders and investors can afford to swallow - hence the commencement of the games! These
issues of rapidly deteriorating markets that are manifesting may not
show up in popularized indices and reports, but a simple walk down the
street in major urban and suburban centers is all you need to confirm
what it is that I am saying - hence the impetus for the pics and videos
linked above. This is why Bernanke is no where near ending stimulus.
See "Bernanke Signals `Extended Period' May Be Even Longer as Joblessness Rises". If
he stops now, property markets and many banks will literally collapse,
despite the many proclamations that we have exited the recession. It is
just not true. We have succeeded in masking some of the symptoms of the
recessionary period, and even that is suspect. The main drivers of
economic health, employment, income and wealth, are moribund, indeed!

These events tie in to the land recession posts that I reposted yesterday:

  1.  Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt I
  2. Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt II
  3. and Straight Talk From the Homebuilder CFO: The tricks builders use to disguise the true losses on their,

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Anonymous's picture

Reggie, I suggest those losses will be taken by the U.S. citizen via dollar devaluation and increases in the cost of living due to the dollar carry trade.

pocomotion's picture

We have reruns of Andy of Mayberry but no reruns of the home flippers show.

Play those episodes backwards and we get housing prices stable, people working and employed and President Clinton back in office.


Reggie You do good work and thank you.

Anonymous's picture

"Well, although I do feel I have been relatively prescient in my predictions and predilections"

I wonder if Tyler will knight thou The Great Clairvoyant.

We are in the presence of greatness.

Anonymous's picture

At this point, it is quite clear that this has been the plan all along.

1. Wall Street appeals to greed, urges taxpayers to become nation of flippers so Wall Street can profit from loan securitization.
2. Bank makes loan it knows will never be repaid.
3. Wall Street and bank profit up front.
4. Losses are socialized and banks get more money (aka record profits) from taxpayers.
5. Banks repo properties, rent them back to homeowners for more profit (that's what Fannie is doing now) and wait for market to improve.
6. Eventually, banks either sell property at inflated value when the market improves or retain ownership as landlord.

We're on step 5 of a 6 step plan to rape the middle class. It's a bit late to be worried about it now.

Bear's picture

I don't think this was a conscious plan but more along the lines of whatever happens will be capitalized upon. If our duly elected representatives are either aligned with or profit from Wall Street's success by additional power then we will always be plundered.

This is simply a replay of history ... there has always been collusion between the money lenders and the power brokers at the expense of the producer class. The lenders spend resources to put the brokers in power who then repay them by mortgaging the producer's labor. When a truly powerful regime arrives, it creates wars (to increase its influence) which are financed by the lenders. Whether the power is strong or weak, it facilitates the transfer of wealth from the producer class to the lenders. The brokers usually are satisfied with power alone ... the lenders are usually satisfied with money alone ... the producers are usually unsatisfied.

During a national crisis (war or financial panic) it is problematic that power brokers win, but lenders always win ... hence Rahm Emanuel's oft quoted: “You never let a serious crisis go to waste".

Anonymous's picture

I have an email from (rhymes with)Teter Fornick(Lehman) and at the FED that would make your eyes;

Anonymous's picture

Consider if you will, the FED seeing all these sovereign wealth funds growing exponentially and them fearing the power of such wealth in foreign hands.

The FED directs Wall St to devise a way to transfer that wealth into America. Don't forget for all the buyers of Bubble Houses there were sellers of Bubble Houses who profited greatly ;)

Long live the FED!

Anonymous's picture

Wow. Just wow. 1300-2000 Banks failing!

If this number was coming from anybody else, I'd discount it. But not from Reggie, knowing his work.

Thanks, Reggie. This helps in keeping the powder dry around here. I was wondering what your opinion was.

As always, much obliged and much appreciated. I don't know of anyone else who does so much to educate the neophyte in Banking.

Miyagi_san's picture

So whats it gonna take to tip this thing over...year end tax selling or does anyone care about taxes (moral hazard)

crzyhun's picture

Has the gov't ever done anything right?? Really, this ideology is the biggest joke.

Great work. Liked the chart, always worth a 1000 words. How much more can be brushed under the rug before it become Mt Everest?


Fibozachi's picture

Another solid piece Reggie, thank you for it. 

Might be helpful for some readers if you explained why thrifts are effectively doomed (save HCBK) and how the difference between TD's (time deposits) and TR's (transaction deposits) serves as the 'fundamental' culprit. 

Great work, thanks again for presenting it!

heatbarrier's picture

This is an interesting study by the Fed, Reggie. By 2004 land accounted for 50% of house prices. It probably got higher by 2006 and then started to come down. It would be useful to compare that data with the Japanese experience.

heatbarrier's picture

Much bigger bubbles in the EU.

This is the UK,

This is Spain, trying to contain the fall but it's not possible, the consequences for the EU banking system will be dire,

Reggie Middleton's picture

Yeah, Europe is in a bigger bind. I am also very, very skeptical of China's debt driven "so-called" recovery constructing buildings that aren't being used. Sound familiar? A net export country that turns around on a dime!!!!???

I went through the Spanish bubble with my analysis of BBVA early this year, which is free to download (registration required):

Anonymous's picture

Excellent work, as always Reggie. I think the government is secretly giving these banks money to cover their bad loans. Do you? If they haven't already they will in the future. That, along with propping up the stock market, is the only reason the whole system hasn't collapsed yet. As far as being wrong about the rally, the financial system was on the verge of collapse in March. The market mysteriously turned around on a dime. As you know markets don't work that way. How can you be criticized for being wrong when the system's rigged?