LA Times today:

“The chief economist for the Mortgage Bankers Assn. is worried enough about the torrid housing market to get out of it.

“I’m going to rent for a while,” said Douglas Duncan, who expects “significant reversals” in regions that have enjoyed strong home price appreciation, including Washington, D.C., Florida and California. He plans to sell his suburban Washington home, which has tripled in value since he bought it a dozen years ago, and move into an apartment.”

LA Times

Moving our new sailboat up the East coast and so out of touch. Reading papers to find much denial of housing bubble, justified on the basis that not all markets are being pumped and chased. Well neither were all stocks in the tech bubble. Just think of cities as analogous to industry groups and you’ll see that they don’t all need to be up for a bubble to happen.

But the tech bubble didn’t have zero down and negative amortization financing. So the sell-off was relatively mild. Folks just lost their retirement money. This time they will lose everything.

“Intricate and risky trading strategies in credit markets are suddenly causing pain, amid concerns about diminishing corporate credit quality.

Among the credit-derivative products facing pressure: collateralized-debt obligations, or CDOs, and credit-default swaps. CDOs typically are repackaged corporate debt with varying yields and levels of corporate risk. Investors can opt for CDO slices ranging from investment-grade corporate debt to unrated, extremely risky debt. Credit-default swaps are essentially products that provide insurance against a potential corporate debt failure.

In both markets, turmoil has erupted, raising the pressure on investors such as hedge funds and Wall Street dealers to cut losses or reprice their positions. Speculation of hedge-fund troubles dogged the credit markets throughout yesterday’s trading session.”

Risky Strategies Take Toll on Traders

These widening spreads are a sign of liquidity problems. Watch out.

Dr. Faber points out that housing stocks have risen more since 1994 than the NASDAQ did at its peak. He also points out that they have put in a head-and-shoulders reversal. This excellent summary of the situation is a “must read” IMO.

Dr. Marc Faber

I was interested to notice as I walked by the vending machines (I don’t buy newspapers anymore, I’m 100% web-based) that the local San Jose Mercury News featured a headline “Will the housing bubble burst?” with a tag that 47% of mortgages in California last year were interest-only. (Hardly surprising, given that statewide households, with a median household income of $53,540, are $60,380 short of the $113,920 qualifying income needed to purchase a median-priced home at $488,600 in California, according to the California Association of Realtors (C.A.R.) Homebuyer Income Gap Index (HIGI) report for the first quarter of 2005.)

“The PMI Risk Index, which weighs incomes, mortgage payments and changes in employment, rates Santa Clara County’s chance of price depreciation in the next two years at 48.1 percent — the fourth highest in the nation. It gives the East Bay a rating of 48.7 percent, third highest in the nation; and San Francisco, San Mateo and Redwood City a rating of 39.5 percent, 10th in the nation.”

San Jose Mercury News

Leaving aside the facts of the situation, the appearance of articles like this probably corroborates Dr. Faber’s thesis that the housing bubble has begun to crack. It is just this kind of article in the mainstream press that starts to break the confidence of buyers by reinforcing any doubt that may be in their minds. Bubbles, of course, are largely psychological (although there are other pre-requisites, such as loose monetary policy) and so fail when fear overcomes greed.

The following article illustrates the situation pretty well. People become convinced that churning houses to ever-higher valuations and extracting the money through refinancing creates genuine wealth.

It’s on the house

At some point, however, cracks begin to appear.

“San Diego County’s housing market, on fire a year ago, has cooled dramatically, according to figures from Sandicor Inc., the local real estate industry’s multiple listing service.

In March, the average days on the market – the time a property spends from its listing date to when it enters escrow – was 54 days for resale single-family homes, compared to 31 last August and 40 in March 2004…..

The market change is most worrisome to sellers who face a deadline, such as Bill Holz, 47, of Eastlake….But with San Diego’s high cost of living facing him 3½ years before his scheduled retirement, he and his wife Nancy decided to put their 2,963-square-foot home on the market after less than two years of ownership. They have two children, 11 and 17.

Using prices of comparable homes as their guide, they listed it in early February for $919,000, nearly double the $509,000 they paid originally, and saw immediate interest from many potential buyers.

But by end of the last month, they had received no offers and reduced the price to $869,000…..

“People don’t make enough money to buy them,” he said of his and other similarly priced homes. “Your buyer pool is like a pyramid – the higher the prices, the smaller the pool of qualified buyers.”

If his home doesn’t sell by the end of May, he said he will probably rent it and sell it later.”

Ask for less

And that’s what happens - liquidity dries up. We’ll see.

Munger: “I think money management is a low calling relative to being a surgeon. I don’t like the percentage of our GDP and brainpower and professional effort that’s in money management. I don’t think it’s a good thing for our country, and don’t expect it to end well. The present era has no comparable precedent in the history of capitalism when so many people are trading pieces of paper. We have a higher proportion of the intelligent sections of society involved in buying and selling bits of paper and trying to make money doing it. There are more people doing this than at any time in history. A lot of this reminds me of Sodom and Gomorrah.”

Buffett: “When we’ve seen baby versions of this in the past, there have been future [very negative] implications [for the stock market].”

Munger: “When you get so much nonsense going on, it feeds on itself and creates a frenzy. [When this has happened historically,] there have been serious implications.”