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Posted 10/10/2005
Contrarian Chronicles
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Waking up to the housing market's ills
Even the New York Times has realized the housing boom may be ending. Their evidence: flat or falling prices, unsold homes and too many real-estate agents.
By Bill Fleckenstein
A longstanding theme of mine -- the creaking of the housing ATM -- became above-the-fold, front-page news on Oct. 4, when The New York Times published a story headlined "Slowing Is Seen in Housing Prices in Hot Markets." Allow me to share a couple of nuggets, starting with this: "A real-estate slowdown that began in a handful of cities this summer has spread to almost every hot housing market in the country, including New York."
Why we're gagging over real estate
Okay, class, when did Time magazine put "Home $weet Home: Why We're Going Gaga Over Real Estate" on the cover? Answer: Its June 13 issue. As I noted then, though it seemed almost impossible that Time could be nailing the top, Time had in fact nailed the top.
The New York Times story had plenty of gory details about New York real estate, including an interesting chart showing that, year-over-year, the price of virtually everything on a per-square-foot basis is up. But now, so are :
- The number of days that properties sit on the market.
- The number of properties for sale.
In light of those two data points, unless some macroeconomic tailwind comes, the next step is going to be lower prices. Given the fact that we've experienced such a mania, I don't even think that lower interest rates could restart this boom -- just as 13 rate cuts between 2001 and 2003 didn't really matter to the stock market until prices had collapsed and the cumulative effect of those cuts and other stimuli managed to get the market moving again.
Who moved my mania?
Back to the story, writers David Leonhardt and Motoko Rich note that "some of today's sellers appear to be pricing their homes as if the frenzy were continuing." But as a Massachusetts real-estate agent said, "Their neighbors sold their house when the market was red-hot, and everybody thinks their house is better than their neighbor's house. But when the neighbor sold, there may not have been five other houses on the market." Of course, that is the supply problem I just cited.
Segueing to the oversupply-of-real-estate agents department, the article reprised what would be a humorous anecdote -- if it wasn't destined to be so serious -- about the flood of newbies into that community: Observed a 20-year veteran real-estate agent in Frederick, Md.: "I've gotten these calls from newer agents saying, 'I've had this property on the market for 60 to 90 days. What do I do?'" His advice: "It's called, 'Reduce your price.'"
Once sellers start to reduce their prices, the process will likely feed on itself. But some time may elapse between when the market peaked, as it did this past summer, and when the damage becomes universally apparent and precipitates behavior modification.
Related news and commentary on MSN Money
The mop-up after the mania
Though that time lag is not knowable at this juncture, we do know that folks have been living beyond their means via the housing ATM. We also know that consumers face huge headwinds, not least of which will be the psychological fallout from the creaking housing market. Potentially, that could engender some angst -- even before the consequences of lower prices begin to bite them seriously.
Tapped-out consumers will fuel a recession. And, as the real-estate market worsens, we'll see bad debts and bad assets in the financial system. (It's not yet knowable if the rate of this incipient deterioration will accelerate or stay the same, though I doubt it will decrease.)
As if to foreshadow that outcome, last week saw considerable weakness in the stocks of companies that draw nourishment from the housing-ATM food chain. That includes "Fanron" -- Fannie Mae (FNM, news, msgs), Washington Mutual (WM, news, msgs), and MGIC Investment (MTG, news, msgs).
Trouble stalks tech
During the recent market dip, chip stocks have been a port in the storm. As beneficiaries of the inventory build now under way, many of them will be immune this quarter to margin-pressure problems -- something I discussed last earnings season and something I think we'll hear a lot more about as we progress through the upcoming earnings season. In any case, whether those chips get sold won't be knowable for a while (though I have my suspicions), which is why I am not short any chip stocks, with the exception of Intel (INTC, news, msgs).
Less black ink for Lexmark
However, from an end-demand standpoint, I think technology will be in for plenty of pain. Lexmark International (LXK, news, msgs) saw that in spades last Tuesday. The shares slid about 30% after the company announced that although its third-quarter sales would only be about 4% to 5% below what had been expected. Its earnings will likely be halved. Lexmark cited problems with end demand and pricing. It also lowered fourth-quarter guidance.
Dell (DELL, news, msgs), too, could be headed for a big miss (and not just the penny-light variety of its past stumbles). Recently, the company announced its abandonment of the low end of the PC market. I think that the vaunted Dell "model" is slowly unraveling before our very eyes, and I would expect to see some big hiccups in the next couple of quarters.
Negative news notwithstanding, many people continue to expect the market to rally for the rest of the year -- just because it happened to rally in the fourth quarter of last year. My expectation is otherwise. The collective weight of their "bets" going sour could quickly precipitate violent action, should we get any momentum to the downside.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckensteincapital.com Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of MSN Money. At the time of publication, Fleckenstein was short Intel and long Intel puts, short Dell, Washington Mutual and MGIC Investment and long Fannie Mae puts.
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