Wednesday, August 12, 2009

More on the Real Estate 'Recovery'

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The bubble in real estate caused the Credit Crisis and cleaning up the mess in real estate is the key to getting the financial system and ultimately the economy back to normal functioning. Articles have appeared in the mainstream press stating that residential real estate has bottomed and prices are headed up. You would have to ignore the overwhelming amount of bad news coming out of the real estate sector in order to believe this.

The Mortgage Banker's Association recent numbers for mortgage applications for home purchases are falling. The four-week moving average is down 0.7%. So demand is down during the heavy buying summer season. So prices are supposedly going up, even though demand is falling. Well that could happen if supply was falling even faster as is the case with oil. Don't hold your breadth though. The worse form of real estate supply is still rising rapidly. Mortgage defaults are expected to come in at 3.85 million this year compared to 2.7 million last year according to Moody'

It is estimated that 14 million (out of a total of 52 million) mortgage holders in the U.S. had negative equity in their homes by the end of the first quarter of this year. Moody's predicts that that number will rise to 17.5 million by the first quarter of 2010. In a recent report, Deutsche bank estimates that nearly half of U.S. mortgage holders will have negative equity in their homes by the first quarter of 2011. By the first quarter of this year, 50% of subprime borrowers were underwater as were 77% of Option-ARM mortgage. Mortgages on homes with negative equity are where defaults and foreclosures come from. There seems to be a potentially unlimited supply of these in the next few years.

Home builder Toll Brothers earnings report today illustrates quite clearly how the mainstream media is handling real estate coverage. The report was described as upbeat. Toll said that signed contracts were up 44% and only 9% of buyers backed out. While the percentages look good, the total number of homes sold were only 792. Toll also stated that demand was so strong that it scaled back on incentives. Revenue was down 44% however because of much lower prices charged for their houses. Slashing prices at that level seems like one giant incentive to me. The market is also so 'good' that Toll is writing down its land and house inventory by $90 to $160 million. The stock of course went up on the upbeat news of collapsing revenue and massive write downs. You should assume that the overall U.S. real estate market is just as 'upbeat' as the Toll Brothers earnings report.

NEXT: Fed's Actions Speak Louder Than Words

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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