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The housing bubble is deflating -- but gently
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But in 56 metropolitan areas in 16 states, default rates are well above the national average. Default rates for prime and subprime loans in these areas were 3.23 and 2.2 times higher, respectively, than the national average.
And where are these high-default metropolitan areas located? Well, they correlate pretty closely with the auto industry. The industrial belt from Indiana through Ohio into Pennsylvania and western New York is dense in high-default areas. Cities such as Akron, Ohio, Buffalo, N.Y., Flint, Mich. and South Bend, Ind., make the list. (I haven't done a complete breakdown of the list, but I suspect that many of the cities in the South that qualify are or were home to auto plants.)
And this was in October 2005, before the big job cuts of the most recent round of cutbacks hit. Friedman, Billings, Ramsey believes that default rates correlate very closely with economic growth -- or lack of it, actually -- and they've projected recent trends out into October 2006. Default rates in the 56 currently high-default metropolitan areas will climb to 14.5% on subprime loans from the current 13.8% rate. For reference, the current national average default rate on subprime loans was 6.16% in October 2005.
In these areas, as workers lose their jobs and as hours and hourly wages are cut, people will increasingly lose their homes, as well.
I'd expect that will have a negative effect on housing sales and sale prices in these individual markets. Not having any money in your pocket or wondering where your next paycheck is coming from will tend to do that.
The Midwest as a preview scenario
Fortunately, as the economists and the Wall Street investment strategists tell us again and again, housing markets are local. So the pain in the Midwest (and South) created by the jobs hemorrhaging in the U.S. auto industry isn't a problem for those of us who own homes in other parts of the country.
Unless, of course, you happen to believe that what's happening to the U.S. auto industry is part of a pattern that stretches across the entire U.S. economy, just not as visibly. Higher wage jobs are replaced by lower wage jobs with fewer benefits that add up to less health care and lower retirement incomes.
Then what's happening in the Midwest is a kind of preview for what we might all face when the economic cycle turns, as cycles always do, or when the cold calculus of the global economy turns its attention to your industry or mine.
Of course, by that time we should have enough data from the Midwest to know exactly how badly an economic decline affects home sales and sale prices.
That makes me feel much, much better.
New developments on past columns
"3 stocks riding the big trends of 2006": Conergy (CEYHF, news, msgs) hit my December 2006 target just a little early -- in mid-January 2006. Amazing what a natural-gas crisis in Europe that won't go away (plus chaos in the Nigerian oil fields and threats of a supply reduction from Iran) will do for the shares of a solar-energy stock. But the gains in the stock aren't all a result of global oil politics. On Jan. 13, Conergy, the largest photovoltaic system integrator and wholesaler in Europe, announced that it had acquired Ostwind Technic, a German operator of wind power parks. The deal will give Conergy 800 megawatts of wind power electric production by the end of 2006. The Hamburg company calls Germany, Europe's biggest market for photovoltaic systems, its home market, but Conergy moved into Spain as early as 2001 and is now the market leader in what is likely to be the next big boom market in Europe for solar power. Commerzbank forecasts that the company will grow sales by 48% a year from 2004 to 2008. But the other recent development driving the stock comes from outside Europe. With the passage of new solar incentives in California, Conergy forecast, on Jan. 19, that it will triple its U.S. revenue to at least $75 million in 2006. The company currently estimates it has about 5% of the U.S. market for solar components and systems. Deutsche Bank forecasts that in fiscal 2006 the company will increase sales growth outside of Germany to 25%-30% (from the 15% growth in fiscal 2005). Shares of the Frankfurt-exchange-listed company trade in the United States as an unsponsored ADR under the symbol CEYHF. As of Jan. 27, I'm raising my Jubak's Picks price target on Conergy to $147 by June 2006. (Full disclosure: I own shares of Conergy in my personal portfolio.)
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Conergy. He does not own short positions in any stock mentioned in this column.
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