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The housing stocks peaked four months after our observation about the sub-prime lending market appeared in the March 2005 issue of The Elliott Wave Financial Forecast. In July 2005, as the slide was getting underway, EWFF added this comment about the likely focus of the next scandal phase on Wall Street:
Forget the 30-year mortgage; 40-year home loans are now “mainstream” and 60-year, no-interest terms are offered in hot markets like San Francisco. This time there is no mistaking who the Enrons of the bust phase will be. They will be the firms now pedaling adjustable-rate, no-interest/nothing-down and assorted other types of “sub-prime” mortgages.

A very Enron-ish calamity is now taking shape in Las Vegas:
USA Capital Bankruptcy Filing Leaves Investors Stunned
Investors say they are stunned, angry and frustrated at Las Vegas-based USA Capital, a short-term mortgage lender that filed for bankruptcy protection last week.

The lender, with $950 million in assets, filed for bankruptcy court protection on April 13. It’s the latest in a series of private lenders who have failed in Las Vegas.

Investors were attracted by interest rates of 12 percent to 14 percent on their investments and by the relative security of having real estate for collateral. Robert Ulm, a retired airline pilot living in Georgia, said he invested $200,000 with USA Capital and feels betrayed.

"It's illegal. It's a fraud. It's a cheat. It's a scam. That's what I think," Ulm said.
Associated Press, April 20, 2006

A chain reaction of real estate wooes is visible in Seattle:
Mortgage Firm to Let Most of Its Workers Go
Kirkland-based mortgage company Merit Financial will meet with its 300 employees this morning to let most of them go as executives decide whether to file for bankruptcy, according to two people familiar with the company's plans.
The Seattle Times,May 4, 2006

Phoenix:
Homeowners Beginning to Pay Price for Non-Traditional Mortgages
Thousands of people who used non-traditional mortgages last year to afford a home in Phoenix's hot housing market are paying for that decision now. The "teaser" payments that drew them into their adjustable-rate mortgages, or ARMs, are quickly disappearing, meaning monthly payments are going up.
The Associated Press, May 5, 2006

China:
China Bank Regulator Warns State Lenders 
China's banking regulator has warned state-owned lenders, including Bank of China, for the second time in five months after discovering 750 million yuan of fraud related to bank bills. The amount is equivalent to $94 million.

The criticism is the second since the regulator issued a note Dec. 31 saying "lax" property lending increased the risk of bad loans at the nation's biggest state-owned banks. More bad assets may emerge as lenders make new loans and the real estate industry overheats, Ernst & Young said.
Bloomberg, May 4, 2006

Mississippi:
"Flipping" Without a Real Estate License Examined in Mississippi
Houston real estate investors, particularly "wholesalers," will watch carefully the outcome of a new Mortgage Fraud case in Mississippi. The practice of buying and selling property on the same day without a real estate license is being examined for legality for the case in which 11 have been indicted.

"These 11 indictments are only the tip of the iceberg,” said the Mississippi Real Estate Commission.
HoustonRealNews Market Analyst, May 5, 2006

And Denver:
Homes Piling Up
The number of unsold homes on the Denver-area market hit a record 29,045 in April, according to reports released Thursday. Rising foreclosures were the driving force for the skyrocketing inventory, which is 19.2 percent higher than a year ago, experts said.

"There's a glut of unsold homes on the market," a metro broker.
Rocky Mountain News, May 5, 2006

EWFF, July 2005
For Real Estate, It’s Time
There’s no mistaking it now: The extreme psychology of the Grand Supercycle peak has taken up residence in real estate. The public demand for periodically illiquid pieces of property is an eerie facsimile of the zany excitement for stocks in 2000. It now includes a record high price of $90 million for a U.S. residential property; a TV show, Property Ladder, in which subjects buy houses and resell them for a quick profit; and an online trading service, Condoflip.com, where “flippers, brokers and developers come together” to trade as yet unbuilt condominiums. “Bubbles Are For Bathtubs,” reads the top line on the site. While the number of stock market investment clubs has decreased 46% since its peak year of 1999, the number of real estate investment clubs is up 400% since 2002. One California club member explains proudly, “I quit my day job of 30 years. It’s the wave of the future, of working smarter, not working harder.” The easy-money, “I’m a wizard now” ethos of the mania is coursing through real estate as furiously as it raged through the stock market in 2000. “Get Rich Without Leaving Home,” says a CNN Money headline. “If you’ve dreamed of investing in real estate but don’t want to miss out on the kids’ Little League games, [real estate] partnerships may be the answer.”
The leverage upon which “the dream” is built is way beyond the record high margin levels in stocks in 2000. “I’ve been playing with the bank’s money,” says the cover girl on the May issue of Money Magazine.

 Forget the 30-year mortgage; 40-year home loans are now “mainstream” and 60-year, no-interest terms are offered in hot markets like San Francisco. This time there is no mistaking who the enrons of the bust phase will be. They will be the firms now pedaling adjustable-rate, no-interest/nothing-down and assorted other types of “sub-prime” mortgages. According to the ISI Group, homeowner equity was 56.3% in March, a slight uptick from the lowest level on record. A strong undercurrent of envy is another tie to the dot-com era. “Desperation is driving people,” says the director of Harvard’s Joint Center for Housing Studies. “People are not looking at what they are going to have to pay over the long term. They are asking what is the lowest possible payment I have to make over the next 12-months so I can get in.” Says a California disc jockey, “I saw my friends and colleagues getting rich. I wanted to get rich too.”

To top it off, Time magazine issued a real estate cover story in early June. As EWFF explained in January and February 2000, major magazine cover stories have a “strong record of marking a trend change in the fortunes of a profiled firm, sector or market,” and Time magazine’s record is among the most distinguished. Back in 2000, we were referring to a slew of covers on the New Economy, Amazon, AOL and Martha Stewart that did, in fact, mark the all-time peak with glowing profiles. Here on the right shoulder of the same long-term peak, Time has done it again. It’s “Home Sweet Home” cover focuses on the most ubiquitous holding in the average American’s investment portfolio. Now that its editors are all on board, it is the most dangerous, too.

March 2005, EWFF
THE REAL ESTATE BUST BEGINS
With real estate now the focus of investment clubs, a Chicago Mercantile Exchange futures instrument, full page ads in the local newspaper and best-selling books like Building Wealth One House at a Time, The ABC of real estate Investing and The Millionaire real estate Agent, it is clear that the optimism of the Grand Supercycle bull market peak attends the real estate market. As shown in Figure 1, the transference of focus from stocks to property began four days after the NASDAQ’s March 10, 2000 peak, when the S&P 500 Homebuilding Index bottomed. Since then, the index has soared to more than a 700% gain, which resembles the NASDAQ’s October 1998-March 2000 ascent. As with the NASDAQ in March 2000, the man on the street is now captivated by the concept of easy wealth through real estate. “Middle Class Drives Soaring Purchases of Second Homes,” says a headline in Wednesday’s Washington Post. The New York Times reports that “a growing number of ordinary people” are “buying and selling residences they do not intend to occupy.” According to the National Association of Realtors, a stunning 25% of the 7.7 million homes sold in 2004 were purchased strictly as investments.

The potential for a serious unraveling of the housing market is confirmed by the stock prices of four major subprime lenders. As the most aggressive dispensers of credit to the housing industry, these firms are on the front edge of the last two remnants of the financial bubble’s great surge, the debt and housing bubbles. Their bursting is signaled by the five-wave rise through January 3, followed by a similarly impulsive short-term decline, which breaks the support line of the trend channel. These clean five-wave patterns portend a fall to much lower levels. Such a retrenchment fits with the Federal Reserve’s latest plans for Fannie Mae and Freddie Mac, the two government-backed engines of the U.S. housing industry. On February 17, Alan Greenspan proposed cutting back their portfolios of mortgages from $1.7 trillion to $100 or $200 billion.

Meanwhile, various other government agencies are flashing contrary signals of a nearby turn with programs designed to drive home ownership above the already historic extreme of 69% of U.S. households. The state of Arizona joined forces with CitiMortgage to create the largest “affordable-housing” lending program in the state’s history. The aid, which is modeled after a $4.5 billion California program that was started in 2001, will allow homes to be bought for as little as $500 in paperwork costs. “We encourage all borrowers,” says one lender. “We’re not excluding anybody.” Obviously, these lending policies are part of the reason prices have gone up so high, but the newfound zeal for universal homeownership signals that it is now time for the new environment of falling prices to overwhelm their influence. With zero equity loans, a 1% decline will put homeowners underwater. The reversal will certainly be historic as these instruments and others like them make the 1920s stock leverage look like 100% cash.