Remember when "safe as houses" was a legitimate expression? Now it's a bit of an ironic joke. What counts as no joke at all, however, is the chaos investors will face when the second wave of housing market turmoil hits.
There has been such a grand buffet of top-down troubles to choose from - collapsing eurozone, overheating China, the BP (BP: 31.76 +0.05 +0.16%) oil spill - that global real estate markets have been back-burnered. Based on the way things are unfolding, though, they will soon come back to the fore.
Aussie Aussie!
Before we talk about "second waves," let's talk about first waves. There are yet a few housing bubbles in the world ready to pop in grand style - with vicious outcomes to count on when they do.
Take the land down under, for example. Australia has long been known as "the lucky country" for its beautiful climate and abundant natural resources. But the Aussies won't be feeling so lucky when their bubble goes kablooey…
The Australian housing market is a "time bomb," says legendary investor and renowned bubble-spotter Jeremy Grantham. "You cannot possibly miss it," he adds, further noting that "sooner or later, the rates will go up and the game is over."
Grantham's logic is irresistibly simple:
The price of housing is typically in the range of 3.5 times family income.
Australia's home prices are now trading at an average of 7.5 times, i.e. superbubble territory.
Real estate bubbles are the same because they are all "unique and different."
That is to say, the bulls always advance "special" reasons why such and such bubble won't pop.
Without fail, the "special case" bubble always pops anyway. By the keen-eyed measure of Grantham's quantitative asset management firm - which runs $106 billion at last count - every major asset bubble in all of recorded history has burst.
And thus, if Grantham's expectations play out in accordance with the unblemished track record of historical norms, Aussie home prices would have to fall more than forty percent (!) to revert back to long-term trend.
By various measures, China, Canada, and the U.K. are also home to unpopped housing bubbles of disconcerting size. They, too, will burst. And unlike the U.S. housing bubble and bust, these latter burstings will appear against a backdrop of spent stimulus and gargantuan government debt burdens, making it that much harder for Keynesian-minded politicians to ride to the rescue with checks they can't cash.
Have we mentioned that now would be a good time to learn how to go short, if you aren't versed in the practice already? Have we further mentioned, oh, maybe just a few hundred times or so, that now is a good time to consider gold? (Perhaps it should be mentioned again, just in case.)
American Bubble Redux
For the moment at least, the worrisome housing market action is not in the "waiting to pop" countries. It is back in the United States, where an already busted market is getting ready for another lurch downward.
Meredith Whitney, the Wall Street analyst who made a name for herself predicting Citigroup (C: 4.01 +0.05 +1.26%) would crash, is ready and waiting for more housing pain. "The housing market will surely double dip," she said in March of this year. And now it appears she is right.
The troubles circle round in a giant feedback loop. Persistent weakness in the economy - high unemployment, high concentrations of temporary workers, and reduced wages for those who kept their jobs - are deterring would-be home buyers from shelling out on new home purchases.
Meanwhile, the much-vaunted homebuyer tax credit is fading away. Like other forms of stimulus, it was a temporary remedy… a short-term goose, not any type of permanent solution.
Thanks to the soon-to-expire credit, U.S. homebuilders are sweating bullets. They know that once the credit goes away, so will new home sales.
"U.S. builders such as LGI Homes are on a tight deadline to finish houses by the end of June," Bloomberg reports, "so purchasers can get a federal tax credit of as much as $8,000… That's speeding up a construction process that for some builders can take five to six months."
In fact some builders, like KB Home (KBH: 12.30 -0.24 -1.91%), are so desperate to move inventory they are giving away teeny-bopper concert tickets. Per the WSJ:
KB Home, the nation's largest builder, is dangling the chance to see YouTube/Twitter phenom Justin Bieber in concert. Visitors to any Las Vegas-area community before July 5 can enter to win four tickets and a soundcheck pass to Mr. Bieber's sold-out July 24th concert at the Las Vegas Planet Hollywood Resort & Casino.
If you're over the age of 14, you may not be familiar with Mr. Bieber…
Mr. Market doesn't seem all that thrilled by this pre-teen enticement strategy, seeing as how KB Home's stock price is down circa 35% in the past two months or so.
Squeezing Blood From a Stone
Nor is it just the builders feeling heat. "Over the past year," The Washington Post reports, "lenders have become much more aggressive in trying to recoup money lost in foreclosures and other distressed sales, creating more grief for people who thought their real estate headaches were far behind."
Imagine the indignity faced by men like Fernando Palacio, who lost his home to the bank… saw the property sold off in foreclosure auction… and then received a bill for a whopping $148,062, the bank's calculated shortfall on the sale.
To go through the hell of losing a home, only to be hit by a six-figure bill afterwards - to be emotionally and fiscally broken, and then left less than broke - is almost too much financial torture for the average Joe to take. Yet this is exactly what is happening in states where lenders are allowed such maneuvers.
A Self-Feeding Spiral
Adding to this litany of woes: "Numerous municipalities are struggling financially," the WSJ reports. "A Rhode Island city recently said it faces insolvency. Harrisburg, the capital of Pennsylvania, is considering a municipal bankruptcy filing…."
When banks start dumping foreclosed homes at fire-sale prices, real estate values drop. And as municipalities struggle to pay bills, property taxes rise and local services - water, trash, policing, schools etc. - are cut back.
Of course, the more that real estate values drop, the lower the income from property taxes the municipality receives. And so property taxes have to rise further in percentage terms to make up for the shortfall… or local services have to experience even deeper cuts, which in turn reduces local employment and depresses property values further. And so it goes in a self-feeding spiral.
Thank you so much, oh wise government leaders, for turning the "American dream" of home ownership into a full-fledged nightmare by distorting the U.S. housing market with a slew of harebrained gimmicks and incentives that never made sense in the first place. You sold us warm apple pie with pure B.S. filling, and we ate the whole thing.
A Target-Rich Environment
So how to respond to all this, other than shaking one's head or gnashing one's teeth?
By figuring out what to buy… what to sell… and what to sell short. As bond giant PIMCO observes, Real Estate Investment Trusts, or REITs, could be badly hit by the fallout from a slowing economy and a housing market double dip. Other consumer retail names are heavily exposed to a pattern of declining consumer spending among the middle and lower tiers.
For most investors, the housing market double-dip fallout will not be pleasant. But for those willing to do a little trading, it will be what one might call a "target-rich environment."
