Monday, February 05, 2007

How housing masked a weak economy / fleckenstein

i´m not sure but i think this sign shows a bumpy road ahead and not a b...sty. ..
important to hear that the credit tightening is now under way

wichtig zu erkennen das nun so langsam aber sicher die kreditbestimmungen angezogen haben.

Since 2001, the nation's economic growth has been powered by the real estate industry, particularly mortgage-equity withdrawals. Without housing to prop it up, the economy is in trouble.
"Housing mania will end in tears." That belief served as the headline of my column back on March 7, 2005. Now this scenario is slowly playing out as, directly or indirectly, the noose around the housing ATM continues to tighten.

Withdrawing equity from one's home was the economy, from essentially 2001 through sometime last year. A statistic from a recent report by John Mauldin says it all: Real GDP growth, excluding mortgage-equity withdrawals, averaged less than 1% over the past six years (it averaged a little more than 2.5% a year overall). During the thick of it, the real estate industry was responsible, directly or indirectly, for 40% of all jobs created. more from calculated risk

That 40% contribution to job creation has, in the past 18 months or so, declined to about 13% of new jobs. It will soon be responsible for the bulk of job losses, in my opinion. In fact, my friend in the subprime business said that WMC Mortgage, a wholly owned subsidiary of General Electric (GE, news, msgs), is laying off 35% of its work force, taking a $100 million charge and cutting back on its writing of loans. (here is a a calculation done from roubini )

But what's even more important, he notes: "They (WMC folks) are going to get rid of all 100% financing on all borrowers below 700 FICO. Also, (there will be a) 95% cap on first-time homebuyers. All we talked about is coming to a head. Now watch the home builders suffer." .....

This is a story with far greater ramifications than just for the subprime sector, and we need to keep that in mind, even as the lunatic fringe -- i.e., the banking industry -- once again lusts after last cycle's winners: the mortgage originators.

In 2000, banks were busy buying brokerage firms, particularly those of a tech bent, such as Montgomery Securities and Robertson Stephens. In past cycles, they wanted to lend to leveraged-buyout artists, and before that there were "oil patch" loans, etc. Banks have an uncanny ability to pour capital into the wrong place at the wrong time. Bottom line: Wherever they are busy making acquisitions will be the source of problems .......

At some point, the amount of damage being done will rapidly accelerate. I am certain that one day, when we look back on this period -- which witnessed the incredible housing-stock rally that ran from summer 2006 through early 2007, before it collapsed -- and we describe it to folks who may not have seen it firsthand, they will shake their heads in disbelief, the same way that folks now look back at the Nifty 50, the stocks that propelled a doomed early-1970s bull market, and ask: How could anyone have been so naive to have believed that concept?

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