Related topics: housing, real estate, banks, economy, Bill Fleckenstein
Remember the housing crisis? It's over, right? Well, the crisis part is, but the underlying problems in that sector are not. With so much else going on in the world (and obviously not just in the world of money), it's easy to forget about certain issues, especially if they no longer appear as threatening as they once did.
But every so often, it is important to check the rearview mirror and see which of our troubles we have, in fact, left behind.
Even though it is has been relegated to the inside pages in terms of media coverage, the real estate market is still an area to be concerned about. For those who don't know, one of the best sources on that topic is mortgage lending expert Mark Hanson, who has been warning anyone who will listen that the stimulants that helped housing in 2010 have worn off and that the sector is liable to hit the skids once again.
On a clear day, you can sell forever
Last week's existing home sales data corroborated that view: Supply increased, prices fell, and about 40% of transactions were from distressed sales. Having said that, and noting that there has already been a tremendous decline in prices, in many cases the real estate market still has not "cleared" -- i.e., prices have not fallen enough to bring out buyers at the margin.
Bill Fleckenstein
Part of the reason is that banks have been pursuing an "extend-and-pretend" strategy and have not yet forced out many delinquent home "owners," for two reasons. One is the pressure the banks are under from a documentation standpoint. The other is the fact that they don't want to recognize the losses on their books as they continue to present themselves as healthy, bolstered as they have been by free money from the Federal Reserve.
Nevertheless, at some point the banks will have to foreclose on people who are not making payments and will then be forced to sell those foreclosed properties. That will increase supply and create another round of lower prices, forcing lenders to take even more real estate back onto their balance sheets.
I believe the real estate market won't bottom out until we get through a second round of liquidation. In the meantime, at some point interest rates are liable to rise, which will only add to the pressures on that market.
Your lack of results may vary
So while real estate is not still the front page news it was for some time, it remains a smoldering problem that has not gone away. And it won't until the bear market has run its course.
Not all price points and communities will experience this phenomenon at the same time; thus, certain locales will see the lows well before others do (while some markets will see prices decline less than others will). I may be off in my thinking as far as how this will play out, but something different will need to happen to convince me of that. For now, this is my view.
This is a stickup
One area to keep an eye on as this tale unfolds is the financial sector. The March 19 Wall Street Journal contained an interview with Paul Singer, the extremely smart and successful founder of Elliott Management. A couple of his comments I thought were worth passing along. (I encourage folks to read the article "Mega-Banks and the Next Financial Crisis.")
Singer sees the likely trigger for the next crisis as monetary policy, which he deems "extremely risky . . . the risk being massive inflation." He also worries that folks could finally lose confidence in the dollar due to money-printing. When asked what that would look like, he answered, "Gold going absolutely nuts."
In addition, he expects that if we have raging inflation, it will hurt the big financial institutions, which he thinks will be at the epicenter of the next crisis. Singer notes that the Dodd-Frank financial reform bill "has made the system more brittle and has shaped the next crisis in a very negative way."
He also made a point that I have made many times, which is that the financial statements of the banksters are essentially black holes and tell you nothing: "'The opacity of financial institution financial statements has not been addressed or changed at all. . . . We have a very large analytical research effort here and we have not found anybody that can parse' the sensitivity of big banks to changes in interest rates, asset prices and the like. 'You can't do it.'"
Through a Glass-Steagall, darkly
Well, I've got news for you. If the people at his shop, who are extremely capable, can't determine how the moving parts in banks will respond to changes in interest rates, loan losses, etc., no one can. Thus, Singer believes that financial institutions will be at the heart of the next crisis, and I certainly wouldn't argue with that.
Dodd-Frank essentially didn't do anything, in the same way Sarbanes-Oxley failed, with the latter creating plenty of work for accountants, and additional costs for corporations, but obviously doing nothing to stop the disasters we saw as financial stocks melted down two years ago.
One might have thought, in the wake of two burst bubbles, that the government would have made some intelligent changes in the laws in order to prevent abuses. In the end, they created more work, but didn't solve many problems.
Regrettably, real estate and financial companies will be sources of grief for some time still.
On the air
For readers who enjoy my interview series with Eric King, our latest exchange is now available here.
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
