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 Forecasting America's Destiny ... and the World's

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Generational Dynamics Web Log for 24-Jun-07
The real estate market crisis is worsening and spreading significantly

Web Log - June, 2007

The real estate market crisis is worsening and spreading significantly

The Bear Stearns debacle is just the "tip of the iceberg."


Index price of ABX-HE-BBB- 07-1 from Jan 19 to Jun 22, 2007 <font face=Arial size=-2>(Source: Markit.com)</font>
Index price of ABX-HE-BBB- 07-1 from Jan 19 to Jun 22, 2007 (Source: Markit.com)

The recent collapse of the ABX index, as illustrated in the adjoining graph, which I discussed in the companion article on the Bear Stearns bail-out, illustrates the continuing deterioration of the subprime mortgage market, and the mortgage market in general.

In fact, the entire real estate market has been continuing to deteriorate significantly. Here's a summary from a Bloomberg article last week:

"The worst is yet to come for the U.S. housing market.

The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported.

"It's a blood bath," said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. "We're talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit."

Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession."


These charts on housing starts show the total number of single-family homes begun in rolling 12-month periods, and compare that with the number begun in the period ended a year earlier. In the 12 months through May, 1.27 million single-family homes were started, a figure that is 25 percent below the number started in the 12 months through May 2006. <font face=Arial size=-2>(Source: NY Times)</font>
These charts on housing starts show the total number of single-family homes begun in rolling 12-month periods, and compare that with the number begun in the period ended a year earlier. In the 12 months through May, 1.27 million single-family homes were started, a figure that is 25 percent below the number started in the 12 months through May 2006. (Source: NY Times)

An article in Saturday's New York Times, titled "Homes Sell. Homes Donít Sell. Builders Still Build" was accompanied by the adjoining charts. It underscores the point that home builders have been "far too optimistic," and have continued building new homes, even though existing homes weren't selling. This has resulted in historically high inventories of homes for sale.

In fact, a report last week by Bank of America analysts came out this week saying that losses in the housing market so far are just the "tip of the iceberg." Here's an excerpt:

"Losses in the U.S. mortgage market may be the "tip of the iceberg" as borrowers fail to keep up with rising payments on billions worth of adjustable-rate loans in coming months, Bank of America Corp. analysts said.

Homeowners with about $515 billion on adjustable-rate home loans will pay more this year, and another $680 billion worth of mortgages will reset next year, analysts led by Robert Lacoursiere wrote in a research note today. More than 70 percent of the total was granted to subprime borrowers, people with the riskiest credit records, they said.

Surging defaults on subprime loans have pushed at least 60 mortgage companies to close or sell operations and forced Bear Stearns Cos. to offer a $3.2 billion bailout for one of two money-losing hedge funds. New foreclosures set a record in the first quarter, with subprime borrowers leading the way, the Mortgage Bankers Association reported.

"The large volume of subprime ARMs [Adjustable Rate Mortgages] scheduled to reset at higher rates in '07 and '08 will pressure already-stretched borrowers," putting more loans into foreclosure, the Bank of America analysts wrote from New York. A collapse of the Bear Stearns funds "could be the tipping point of a broader fallout from subprime mortgage credit deterioration," they said."

What we're seeing is that more and more analysts and pundits are seeing a major financial crisis on the horizon.

When I talked to people in 2002 (five years ago) that we would be experiencing a stock market crash and a new 1930s style Great Depression, probably by the 2006-2007 time frame, my prediction was based on various long-term trends, some of them centuries old. In particular, I used a long-term exponential growth forecasting model, combined with an analysis of long-term price/earnings ratio trends to make the prediction.

This eventually led to a part of the Generational Dynamics forecasting methodology, related to long-term financial predictions.

People who dismissed this prediction at the time had three types of reasons: (1) They had no idea what I was talking about. (2) They claimed that exponential growth forecasting doesn't work. (3) They claimed that old trends are no longer relevant since "things are different" this time, because the Internet had made markets more transparent, blah, blah, blah. These people were all simply wrong.

And of course, my prediction is just as true today as it was in 2002. As with other Generational Dynamics predictions, I was able to predict what our final destination would be, but not the path we would take to reach that destination, nor the exact time frame.

As I've described before, the forecasting technique can narrow the time frame by matching short-term indicators to long-term trends.

For example, if there's a heat wave in New York in November, you don't assume that "things are different" this time, and that winter isn't coming this year. Instead, you track the temperatures from day to day until they fall back in line with the long-term trend prediction, and use matching techniques to estimate how far off winter still is.

Pundits, journalists and high-priced analysts never look at long-term trends. They look ONLY at short-term indicators. Since the short-term indicators are suddenly turning negative, the pundits are suddenly predicting a financial crisis.

If there's a blip in the figures next month, then the pundits, journalists, and high-priced analysts will turn positive again. In fact, even the tiniest improvement in the financial climate will cause them to turn positive, because that's what they do. They sell dreams and hopes and fantasies in order to make commissions and justify their salaries. They have NO IDEA what's going on in the world.

I sold my condo in 2005 and moved into an apartment because I estimated we were at the top of the housing bubble. That was obvious, based on long-term trend predictions and current indicators at that time. I have no money in stocks because I know that we're in a huge stock market bubble. I've been nowhere near a CDO in my life, as far as I know. Am I really that much smarter than all these high-priced analysts? The answer to that question is mind-boggling.

This isn't just true in the financial area. As I'm writing to this, I'm listening to some pundit criticize the Administration for not re-engaging the "peace process" in the Mideast. What is it with these guys' fantasies?

At least one thing that I've been saying for years is becoming more and more apparent to even the stupidest journalists: The major problem in the Mideast is not the Iraq war, but the conflict between Arabs and Jews. It's beginning to sink in with all but the densest journalists and politicians that the Palestinian situation is getting very dangerous.

These guys get the Mideast situation wrong for exactly the same reason that the financial analysts get the financial situation wrong: They look only at short-term indicators, and never look at long-term trends.

In 2003, I predicted that the new "Roadmap to Peace"would never succeed, it was based on long-term trends going back centuries. Especially relevant was the genocidal war between Arabs and Jews in the late 1940s, when Palestine was partitioned and the state of Israel was created. I predicted that the disappearance of Ariel Sharon and Yasser Arafat, both of whom were survivors of that war, would be part of a generational change that would lead to exactly that kind of genocidal war between Arabs and Jews.

Once again, Generational Dynamics tells you your destination, but not the path you'll take or how long it will take to get there. You narrow the window by matching short-term indicators to the long-term trends. The short-term indicators in Gaza and the West Bank are turning sharply negative, just as the financial indicators are turning sharply negative.

We know from articles in the Congressional Quarterly that Washington journalists, analysts and politicians have no idea what's going on in Iraq or the Mideast. They don't know the differences between Sunni and Shi'ite, they don't know that al-Qaeda is operating in Iraq, and they don't know that al-Qaeda is a Sunni organization.

Once again, the politicians, journalists, pundits, and high-priced analysts never look at long-term trends. They look only at short-term indicators, and that's why if some tiny bit of "positive" news appeared next week, they would all change their forecasts again.

But the long-term trend hasn't changed. The global financial system is headed for a generational crash, and the Palestine region is headed for a generational war.

The same is true of the prospect of a genocidal war with China. I mentioned this to someone recently, and he laughed and said it was "far fetched." Hell, the Chinese have been militarizing and preparing for war with us for 15 years, and they constantly threaten us with war over Taiwan. What more evidence do you need? Even if you believe that war can be avoided (it can't), then the idea certainly isn't "far fetched."

The American satirist Ambrose Bierce (1842-1913) said that "War is God's way of teaching Americans geography." He might also have said that "war is God's way of teaching Americans history," and "a Great Depression is God's way of teaching Americans economics." And he might have said the same about non-Americans as well.

Today I'm in the mood to close with a quote from the Bible -- the Old Testament, which is considered a holy book by Jews, Christians and Muslims alike. Here's Ecclesiastes 1:9-18:

"What has been will be again, what has been done will be done again; there is nothing new under the sun. Is there anything of which one can say, "Look! This is something new"? It was here already, long ago; it was here before our time.

There is no remembrance of men of old, and even those who are yet to come will not be remembered by those who follow.

I, the Teacher, was king over Israel in Jerusalem. I devoted myself to study and to explore by wisdom all that is done under heaven. What a heavy burden God has laid on men!

I have seen all the things that are done under the sun; all of them are meaningless, a chasing after the wind. What is twisted cannot be straightened; what is lacking cannot be counted. I thought to myself, "Look, I have grown and increased in wisdom more than anyone who has ruled over Jerusalem before me; I have experienced much of wisdom and knowledge."

Then I applied myself to the understanding of wisdom, and also of madness and folly, but I learned that this, too, is a chasing after the wind.

For with much wisdom comes much sorrow; the more knowledge, the more grief."

(24-Jun-07) Permanent Link
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