Quote from Forum Archives on August 30, 2006, 2:33 pm

Posted by: prophetic <prophetic@...>

ANDREW WRITES: After all our discussion about money and
finances from a kingdom perspective in recent years, I hope nobody
on this List is getting caught out by the current housing slump. I
recently heard of some Christians who had made the mistake of
taking out & spending all the equity from their home and now it is
worth less than what they owe on it. Things are so bad for them
that they may be about to lose everything. How many more are in
this predicament? -And this is just the tip of the iceberg.

Most of us know that the recent boom in America was built on
people taking the equity out of their homes and spending it on
new cars, boats, holidays, etc. This is one of the most foolish
things that U.S banks have ever allowed to happen. Now the
housing crunch is on, and things may be about to get a lot worse
in this country. Only time will tell, but the article below by a
respected economics Professor raises some alarming probabilities.
Many newspapers are also publishing articles now about this slump.

The below article is by respected Professor Nouriel Roubini who is
a Professor of Economics at the Stern School of Business at New
York University:

"The BIGGEST SLUMP in US HOUSING
in the LAST 40 YEARS - OR 53 YEARS?"

-Extracts by Nouriel Roubini,
Aug 23, 2006.

The Biggest Slump in US Housing in the Last 40 Years: These are
not my views but those of the Toll Brothers, the famous luxury
McMansions homebuilders, as CNN reported last week. Also, as
reported by the WSJ today: In his 40 years as a home builder, Mr.
Toll says, he has never seen a slump unfold like the current one.
"I've never seen a downturn in housing without a downturn in
employment or... some macroeconomic nasty condition that took
housing down along with other elements of the economy," he says.
"This time, you've got low unemployment, you've got job creation,
you've got a stable stock market and relatively low interest rates.".
This followed last week's CNN headline: "Builder: Oversupply
slump worst in 40 years. Toll Brothers slashes outlook on new
homes as orders plunge and revenue misses forecasts" Indeed,
yesterday's sharply falling profit results from the Toll Brothers
confirmed their view that this is the worst housing slump in
decades. Similarly, Angelo Mozilo, the CEO of Countrywide -- the
country's largest independent home mortgage lender - recently
stated: "I've never seen a soft-landing in 53 years, so we have a
ways to go before this levels out. I have to prepare the company for
the worst that can happen." So, effectively the only debate now is
whether housing conditions are the worst in the last 40 years or in
the last 53 years. So much for the bullish soft-landing wishful
thinking coming out of Wall Street these days...

Of course, the message from the Toll Brothers and Countrywide is
like the proverbial canary in the mine that is reflective of an ongoing
rout -- calling it slowdown or slump is a misnomer by now -- in the
US housing market. Every possible indicator of the housing sector
that has been coming out in the last few weeks -- and I will discuss
their details below - suggests that the housing market is in free fall.
And today's figures on existing home sales and unsold homes say
it all; as Bloomberg concisely headlined this morning: U.S.
Existing-Home Sales Tumble; Unsold Inventory Is Highest in a Decade.

I have also argued before that the effects of housing on US
economic growth and the role of housing in tipping the US
economy into a recession in early 2007 are more significant than
the role that the tech sector bust in 2000 played in tipping the
economy into a recession in 2001. [Some] reasons:

1. The wealth effect of the tech bust was limited to the elite of
folks who had stocks in the NASDAQ. The wealth effect of now
falling housing prices -- yes median prices are starting to fall at
the national level - affects every home-owning household: the
value of residential real estate has also increased to 48.5% of
household wealth in 2006 from from 38.7% in 1996. Note that
this year there will be large increases in the borrowing costs
for $1 trillion of ARM's... Thus, debt servicing costs for millions
of homeowners will sharply increase this year and next.

2. The employment effects of housing are serious; up to 30% of
the employment growth in the last three years was due directly
and indirectly to housing. The direct effects are jobs lost in
construction, building materials, real estate brokers and sales
agents, and employees of the mortgage finance industry. The
indirect effects imply that the role of housing is even larger than
30%. The housing boom led to a boom in consumer durables
spending on home appliances and furniture. Indeed, in Q2 real
consumption of such goods was already negative: as you have
less new homes built and purchased and less old homes
refurbished and expanded, you get less purchases of home
appliances and furniture. There are also other indirect effects of
the housing bust on employment, even on the purchases of
motor vehicles. Indeed, the current auto sector slump is not
unrelated to the housing slump. As the Financial Times put
recently, the sharp fall in the sales of Ford's pick-up trucks is
related to the housing slump as such trucks are widely purchased
by real estate contractors. And indeed in Q2 real consumer
durables (that include both cars, home appliances and furniture
all related to housing) already fell, consistent with the view that
we have now have a glut in the stock of consumer durables
(durables consumption has a investment-like nature to it as such
goods last for a long time). Thus, as housing sector slumps, the
job and income and wage losses in housing will percolate
throughout the economy.

How bad are the signals coming from the housing sector? As a
recent news headline clearly put it: it is simply UGLY. Indeed, all
the indicators from the housing sectors - including the latest
housing starts and the homebuilders (NAHB) forward looking
business conditions - indicate a housing sector that is literally in
free fall. New home sales started to fall since the beginning of 2006
and in some regions they are down over 30% relative to a year ago.
As Bloomberg summarized today the new housing data: "Sales of
previously owned homes in the U.S. fell more than expected in
July, resulting in the biggest supply of unsold homes in more than
a decade, as higher mortgage rates discouraged would-be home
buyers... Sales fell 11.2 percent compared with a year earlier."

The value of home builders' shares on the NYSE has fallen by
almost 50% relative to a year ago.

The evidence on falling home prices is now becoming clearer.
Since the end of World War II, there has never been a year on
year fall in housing prices. There have been instead several
quarters in which housing prices declined... The fact that the
latest housing bubble was concentrated on the two coasts
(North East all the way to Florida; and West Coast, especially
California) does not mean that the coming housing bust in these
regions will not have national macro effects. For one thing, the
value of the housing stock in those two regions is close to 50%
of the total housing stock given the bubble of recent years. Thus,
a housing bust in the two coasts can and will have macro effects.

Not only housing prices are falling in the bubbly two coast; they
are also starting to fall in the Mid-West, the region where the
conventional wisdom was that there was no housing bubble. The
fact that home prices are falling in the Mid-West where prices did
not skyrocket in the bubble years is a scary signal of how much
the housing bust and glut in supply will lead to a sharp fall in
housing prices in the quarters ahead with painful effects on the
wealth, and thus consumption, of households. You can expect
falling median housing prices, on a year-on-year basis, at the
national level starting this month of August: indeed, today's figures
on the glut of unsold homes - much larger than in the housing bust
of the early 1990s - are only consistent with a highly likely actual
fall in home prices in the months ahead and throughout most of
2007. Note also that, on an inflation adjusted basis, real home
prices (relative to the CPI index) are already falling at a 4% plus
rate.... You can expect falling housing prices throughout most of 2007.

So, the simple conclusion from the analysis above is that this is
indeed the biggest housing slump in the last four or five decades:
every housing indictor is in free fall, including now housing prices.
By itself this slump is enough to trigger a US recession: its effects
on real residential investment, wealth and consumption, and
employment will be more severe than the tech bust that triggered
the 2001 recession. And on top of the housing bust, US consumers
are facing oil above $70, the delayed effects of rising Fed Fund and
long term rates, falling real wages, negative savings, high debt
ratios and higher and higher debt servicing ratios. This is the tipping
point for the US consumer and the effects will be ugly. Expect the
great recession of 2007 to be much nastier, deeper and more
protracted than the 2001 recession.

And the housing bust is not going to be only a US phenomenon.
As I will discuss in another blog, housing bubbles festered in many
other economies including many European ones. Thus, the
combination of high oil prices, delayed effects of rising interest
rates and slump of housing that is now leading to a US recession
is a phenomenon that is common to many other economies,
including several European ones. So, expect the same deadly
combinations of three ugly bears (slumping housing, high oil prices
and rising interest rates) to hammer Goldilocks and sharply hurt
Europe and other economies in the world.

[LATER...] This morning's data on new homes sales, inventories of
new homes and prices of new homes fully confirm and reinforce my
analysis.. that this will be the worst housing bust - calling it slump
is too mild - in decades. And since median home prices may
actually fall on a year-on-year basis in 2007 - something that has
not happened since the Great Depression of the 1930s - this may
end up being the biggest housing bust in the last 75 years...

~Professor Nouriel Roubini.
[READ FULL ARTICLE: http://www.rgemonitor.com/blog/roubini ]

(Thanks to John Mauldin of 'investorsinsight.com' for originally
sending this out).