Great exposition by Doug Nolan in that article, Telemarker.
I believe the economically, historically inevitable adjustments to reality as laid out in that article have not even come close to running their course.
Agree that, as many here believe, the real estate asset bubble is the last one standing. But I think it may stand awhile. For those shorting homebuilders now, Noland says:
Households definitely continue to borrow and spend, we would argue in dangerous excess. This past week, the Mortgage Bankers Association composite mortgage application index jumped to a new record, almost doubling in seven weeks. Total application dollar volume up is now running more than triple the level from one year ago. Notably, purchase applications jumped 20% last week to the highest level since early August (purchase dollar volume running up almost 5% y-o-y). Mortgage refi applications jumped 24% last week, almost returning to the all-time record set three weeks ago (refi dollar volume up 763% from last year). To put the current environment into perspective, compare last week’s purchase index level of 318.4 to readings during the first week of respective Novembers for the years 1995 through 1997. The index was at 183.7 in November 1995, 189.7 in November 1996, and 202.1 during the first week of November 1997. The U.S. economy has now experienced seven weeks of extreme financial stimulus, and we’ll be on watch for consequences. We’ve already witnessed booming auto sales and home refinancings, a meaningful bump in home sales, stronger retail sales, and a better than expected pop in consumer confidence.
I realize that shorting homebuilders is betting against growth in demand for new homes, not existing ones. Shorting logic is that new residence demand and prices will eventually have to reflect demand at the margin for all residence purchases, if the recession is long enough or asset deflation hard enough. Boom-times' relatively inelastic demand for new houses will become much more price-responsive demand. But when? Builders will face very hard competition from distressed sellers at high- and mid-price ranges if this recession is long, as always, but I'm not ready to add to my meager puts on builders yet.
The present new mortgage applications growth will later be compared to current change in building demand; I expect new apps growth is mostly refis of existing residences. But until I see that growth in demand for new housing stock has started to slide, I'll respect how lagging an indicator residential housing demand can be and be slow to short. (I say this partly because demand for capital goods in tech land has already fallen off a cliff, yet stock prices don't reflect that! I'd much rather short stuff where fundamentals have already collapsed, with no turn in sight, yet price is held up by persons betting on the come).
Residential price decline lagged our hard 1980s downturn in Houston by several years. The change in commercial real estate demand comes sooner; I'd have been shorting REITs long ago but for dividends. Anyone have any commercial space short ideas? |
