Additional References
August 2006, EWFF
The coming deflationary depression is probably best represented by the action in the real estate market, but it is by no means contained by it. Notice the similarity between the S&P Retail Index on the bottom of the [chart on page 9 of the August issue of EWFF] and the housing stocks on top. Retail stocks are down less, but that index also peaked in July 2005, and it displays a similar downward arc. The new low in the index suggests that consumers are beginning to suffer from the same deflationary forces that are beating at the door of real estate.
Debt and the optimism that has propelled its monumental growth are the key to this outlook. As we noted in January, the root cause of the unfolding deflation is a burgeoning conservatism on the part of debtors and creditors. Part of the shift to the cautious credit environment forecast in conquer the crash is the recognition that indebtedness went too far and must be reined in. This is evident in a stream of articles about the current overwhelming societal debt burden. “Debt Forces One in Four to Fall Behind on Monthly Bills” is a typical recent headline. A “Debt Matters” survey of 1,000 people found that 82% say that debt is a “very serious or somewhat serious problem” that’s growing worse. An even higher 86% said that they believe more Americans are struggling with debt in the past five years. “Eighty-six percent is a stunning number,” said one pollster. It’s not the number, but the new sense of fear that’s important.
September 2006, EWFF
Living the Life of Retrenchment
Ivana’s investment plunge into war-torn Lebanon comes even as builders in the U.S. are starting to retreat. Just a few weeks ago, Chicago was a construction boom town. But the Chicago Tribune reported on Sunday that budgets are being reshaped and projects are being delayed, cancelled and redesigned. A spare-no-expense mentality is being replaced by a drive to spare every possible expense. “Amenities will be sacrificed.” Stone is replacing marble; underground parking is being eliminated; lower quality ventilation systems are being installed; elevators will be less ornate and slower. “No shared mental state, including confidence, holds forever,” explains CTC in a section on “A Reversal In the Making.” Outside construction, there are many more signs of the new conservatism including a “Demand Is the Devil” headline in our local paper. CouchSurfing.com, a web site through which travelers “find like-minded folks who let them sleep on a couch or in a spare room” is thriving. So is Craigslist.com, a massive internet swap meet. In the “face of a melt-down in same-store sales,” casual-dining restaurants like Outback Steakhouse and Applebee’s are taking the unprecedented step of chopping prices.
Resistance is futile, but as in the establishment of any new world order, many will resist nonetheless. When Northwest Airlines printed a booklet, “101 Ways to Save Money,” for laid-off employees, it was roundly criticized for encouraging the former employees to “dumpster dive.” But in trendy places like New York City, Washington and Berkeley, CA., dumpster diving is the hip new thing. A recent Washington Post story identifies the practitioners of the emerging art as “freegans,” a “melding of the words ‘free’ and ‘vegan.’” “The number of freegans in the D.C. region is anybody’s guess, but the ranks appear to be growing,” says the Post.
September 2005, EWFF
Why The End Is Near
The July issue showed Time magazine’s “Home Sweet Home” cover story and labeled it “Housing’s Home Stretch.” There are many reasons to believe that a bear market in real estate has, in fact, just begun, including the latest reading on that chart of bank mortgage holdings. At 61%, bank mortgage holdings touched a Fibonacci point of likely reversal. Another factor is the action in the EWI Sub-Prime Lenders Index, which the March issue of EWFF identified as the “front edge” of the great financial bubble. After completing five waves up at three degrees of trend in January (see chart on page 2 of the March issue), the index declined in five waves, sputtered higher in a countertrend bounce and reversed in what should be a powerful decline to much lower levels. The homebuilders have also joined in with a five-wave decline of their own. The decline’s break of the exponential curve formed by its near vertical rise (shown on the chart at the top of the page) is a powerful sign that a long, hard fall is starting.
Homebuilding company insiders apparently contributed to the fall as their sales at several key firms are running at their highest levels since 1985. Richard Bernstein of Merrill Lynch notes that the one-sided selling levels are similar to insider sales of technology stocks on the approach to their March 2000 peak. New home sales are still strong, but as the August issue of The Elliott Wave Theorist noted, the decline is now underway in several foreign markets and a tell-tale inventory build-up, which Conquer the Crash cited as the first sign of the big collapse, has started. Reports of rising inventories are surfacing from California to Massachusetts. In Sacramento, inventories rose to a 7-year high in July then shot up another 26% in August. Nationally, prices for condominiums fell for a second straight month, while the number of condos on the market rose sharply. In the once-torrid South Florida market, “the word ‘correction’ is being increasingly whispered” and agents report a “subtle change” in the tone of business over the last six months. More houses fail to sell and more listings expire—“something that would have been unheard of a year ago”—and asking prices are falling. “The market is turning,” says a Palm Beach realtor. Houses purchased by speculators in hopes of a quick flip are “killing the market in certain areas.”
Then there’s the uh-oh effect, which, as our collage shows, continues to mount within the real estate sector. Noting that reversals from “the biggest tops of all” are accompanied by ignored warnings of imminent reversal, the January EWFF stated that a flurry of concern about a housing bubble is similar to concern in 2000 about high prices for NASDAQ stocks, which EWFF used to successfully anticipate the NASDAQ’s peak in March of that year. Contrarians continue to contend that the housing boom cannot end because many pundits are worried, but the majority and its conviction are what matters. At this point, there is one key difference between concerns about the NASDAQ in 2000 and real estate worries: the effect is much stronger this time. “Talk of the current prospects for ‘the bubble’ has become an evening-news staple and is fueling endless cocktail party conversations and Internet blogger musings.” The National Association of Realtors’ web site even posted an unusual “wait-to-buy” advisory. The message was quickly removed because it was being “viewed incorrectly as a pronouncement that the bubble was popping.”
July 2005, EWFF
For Real Estate, It’s Time
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.”
Some say real estate can’t go down because far too many people are concerned about a real estate bubble, a worry that is now even greater than it was for stocks at the March 2000 NASDAQ peak. But as our section on “Real Estate and the Uh-Oh Effect” in January explained, it is actually another sign of a top when participants are dismissive of the warnings. The June 22 issue of Business Week asked a roster of economists if housing prices were “soaring unsustainably and due to plunge?” Not one said yes, though one did admit that the market “is caught up in the psychology of a bubble.” The rest agreed that the concept of “a national housing bubble is relatively silly.” The man on the street remains largely oblivious to the debate. A poll by the National Association of Realtors found that only 23% have heard of the potential of a housing bubble, and many didn’t know what pollsters meant by “bubble.” When informed, 37% said that a housing bubble is “somewhat” or “very likely.” The survey may explain the uh-oh effect. Apparently, a significant percentage of the population does not know that a return to earth is implicit in a financial asset’s pole-vault to record heights.
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