Thursday, April 16, 2009

What We're Seeing Now Is The Housing Bottom

Seems kind of obvious, but housing bottoms form when homebuilders finally stop building. They come when permits dry up. They come when foreclosures are so many that they drive down the prices to affordable levels. Housing bottoms come when the homebuilders give up and merge (or go out of business). They come when mortgage rates go really low. They come when unemployment claims level out.

We are seeing a huge wave of buying of foreclosed homes in Northern and Southern California and in Florida. The numbers are too positive to think that these, the hardest-hit areas, aren't putting in long-term bottoms. Of course, where legacy housing is coming on, most notably in Florida and Las Vegas, where lenders like CORS abetted ridiculous levels of condominium construction, or New York, where the economy was on fire, courtesy the brokers and the lawyers and the foreign tourists taking advantage of a cheap dollar, you are not going to get a bottom for a year or more. In New York's case, the building continued right through the layoffs because of tax advantages that ran out inopportunely right at the top. It will most likely be a tough market for a while.

The areas surrounding GM and Chrysler plants will also take some time, and I suspect that many houses will be razed in the end.

But when you stop new housing, it makes old housing much more valuable, so we are in the final throes of the debacle that got us here. This will make the public-private partnerships tempting for those who simply don't seem interested right now or haven't been able to raise the money yet, because the risk capital in the country has been so decimated.

The desire to avoid calling a housing bottom is so pronounced that it will obviously happen long before it is remarked upon, just like the recession that began in September of 2007. It also means that the bottom in banks gets put in earlier, and I believe we have seen it. The bottom might be drawn out by capital raises -- witness fears of such capital increases in BK and STT today.

And we know there are some big shotgun weddings to occur -- they haven't since the disastrous deals done in anticipation of selling bad properties to TARP by the likes of PNC, BAC (Merrill Lynch, which had a considerable bad loan portfolio), WFC (Wachovia, which every short believes will be the end of the bank, but I believe WFC will earn its way out of the jam through the yield curve and the bottom in California housing) and JPM with Washington Mutual, which I believe is already being well-integrated, making the bank a huge buy.

The stubborn homeowners have almost all refused to merge - thanks, CTX - and that will drag out the bottom until the summer.

No matter, the markets should know better than to even contemplate selling off on bad permits and housing starts. How do people think housing bottoms, with loads of new construction and burgeoning inventories and higher rates?

No, just the opposite.

Soon you will hear people say, "I have to move and buy a home now." You will also hear people say, "The stock market's corrupt and dirty, thanks to the shorts and the absent regulators, so I might as well buy something substantial like a house, as they may never be this affordable again."

I agree with all of the sentiments above.

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