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
- Voodoo, Zombies, Lennar’s Off Balance Sheet Accounting and Other Things of Mystery & Myth (I believe this was the first time anyone ever called the homebuilders on their off balance sheet debt through unconsolidated JVs),
- Lennar Insolvent: Enron redux??? Lennar, Voodoo & the Year of the Living Dead!
- Now, a "Realistic" View of Lennar's Solvency
- Bubble, Banks and Builders - Pt III: Do or Die BedStuy
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.
Now, 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 summer. 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: