“[We] must control the risk of real estate loans,” said a mystery banker. “In the first half of the year, our country’s banking loans expanded rapidly… but the loans growth has led to accumulated risks also increasing.” Our man of the moment said his banking sector had become “not prudent and impulsive” in issuing loans for new housing projects, many of which have falsified their capital levels to meet current standards. He urged lenders to “strengthen risk management” right way, before they loan themselves into poor credit positions.

So who is he? Robert Shiller, who just recently suggested another housing bubble could be in the mix? Or maybe some vintage Ben Bernanke, circa 2007? Nope… Liu Mingkang, the head of China’s version of the FDIC, said the above over the weekend at a conference in Beijing. China bulls take heed.

And at the risk of belaboring the obvious — he’s Chinese. We know what kind of exigency would get an American regulator to speak out against a bubble in the making. We imagine it’s far more politically dangerous for a member of the Chinese government to publicly go against the grain.
Back in America, the housing market rejoices: Housing starts climbed an unexpected 3.6% in June. According to the latest from the Commerce Department, builders broke ground on new homes at an annual rate of 582,000 in June, well above the Street’s expectations and the “best” month for housing starts since November. Curiously, single-family homes led the way, with a 14% building boom from the month before. That’s the biggest one-month gain since 2004.

Of course, this is a “signal that the housing market was improving” in June, as The New York Times suggests. But we dug up a longer-term chart of housing starts this morning that didn’t inspire as much confidence. Starts may have come up from the deep blue abyss, but we’re yet to emerge from uncharted waters

And who says more housing starts are a good thing? We may be market simpletons, but we’re under the impression home prices are falling because demand is exceptionally weak and supply is exceptionally high. So explain to us again how adding more inventory to the 3.8 million existing homes on the market helps stop the bleeding.
Over 1.53 million homeowners were in the foreclosure process in the first half of 2009. That’s an all-time high, said RealtyTrac late last week — and up 9% from the last half of 2008 and up 15% from the same time last year.

Around 1.9 million individual properties are in some form of foreclosure, or one in every 84 U.S. properties. And we’re adding new homes at an annual rate of 582,000? Really, we must be missing something this morning.
The stock market is still giddy over recent earnings surprises. The S&P 500 finished last week up 7% after companies like Intel, Goldman Sachs, JP Morgan, IBM and Citigroup all beat earnings.

Today the market looks poised to finish in the black again. CIT, the commercial lender we discussed Friday looks like it might live to fight another day. The lender managed a last-minute debt-equity deal with bondholders that will give them another $3 billion to play with. (Look for this crisis to repeat in a couple weeks.) Still, the market has dodged a bullet, and is up about 0.5% as we write.
“In last week’s market, you could almost feel portfolio managers reacting to the prospect of missing a rally,”writes Dan Amoss, a former money manager himself. “Career risk drives many irrational investing decisions. And missing out on a rally is a cardinal sin for portfolio managers. This goes a long way toward explaining this week’s rally.

“The consensus seems to be looking for a return to something resembling the environment before the credit crisis. They’ll be waiting for a long time. Sure, there are still lots of wealthy people. But the essence of the financial crisis has to do with most consumers and businesses stretching their budgets and capital spending plans in unsustainable fashion. The next few years will reverse this trend, and we’ll continue to see economic development in emerging markets maintain pressure on commodity prices.

“Mr. Market is now testing the conviction of the bears. But through the rest of 2009, the momentum favors the bears. The stock market is far below its peak, but this is justified by long-term fundamentals. In fact, the recent rally has priced in very rosy earnings for many sectors and stocks, including our short ideas.

“Remain patient with your short positions. This rally will end soon enough, probably by the time the fourth branch of government — the mega banks — are done reporting their paper trading profits and we learn more about the bleak outlook for earnings in the real economy.”
Four more banks failed this weekend. Two in California, one in Georgia and another in South Dakota got the FDIC kibosh late Friday. That makes 57 failed financials for 2009, at an FDIC cost of over $13.4 billion.
After a long flight from Baltimore to Vancouver, we were able to move through Canadian immigration last night with relative ease, but many Czechs and Mexicans were suddenly not welcome. Just another sign of the times… the Canadian government recently legislated rules that prohibit any Mexican or Czechoslovakian from entering Canada without a visa.

Canadians say political and economic strife in both nations has caused a wave of immigrants seeking refugee status, many of which are bogus. So the Canadian government drafted the law last Monday and enacted it on Tuesday… Canadian diplomats in Mexico City have been ripping their hair out ever since:

The scrum for last-minute visas at the
Canadian embassy in Mexico City

Heh, nothing stokes a free market like sudden and severe travel restrictions.
We’re in Canada this week for our Investment Symposium (more below in the P.S.) and got a visceral reminder of the loonie’s recent strength. 98 cents to the U.S. dollar at the airport currency exchange! No thanks… we’ll wait till we stumble upon a bank.

The Canadian dollar is once again rapidly approaching parity. The ol’ loonie is officially at 90 cents today, up a full cent since Friday and about a nickel in July. Most of the loonie’s strength can be attributed to dollar weakness. Since breaking through that historic barrier at 80 last week, the dollar index has been in steady decline. It’s at 78.9 today, nearly a two-month low.
Oil’s recent stabilization has been helping out the Canadian dollar, too. Light sweet crude traded as high as $64 a barrel today, a $4 bump from last week’s low.
Gold is performing nicely as the U.S. dollar falls. The spot price is up $20 from Friday’s low, to $955 an ounce.
“The first thing to understand,” writes Mr. Byron King, “as an old geology professor at Harvard once told me, is that ‘gold is where you find it.’ And the second thing to understand is that no matter where you look, gold is hard to find — and getting harder.

“In the past decade, gold-related exploration efforts and expenditures have increased dramatically. I’ve seen numbers adding up to tens of billions of dollars poured by mining companies into gold exploration.

“But despite the best efforts of the global mining industry, world gold production has DECREASED since early in this decade. Take a look at the chart below, depicting world gold production 1850-2008.

“I love this chart. I could spend all day discussing it. For example, look at the very steep rise in gold output during the 1930s. That was during the depths of the worldwide Great Depression. In both the U.S./Canada (blue area), and the rest of the world (gray area), people were digging more and more gold. The Soviets (purple area) increased their gold output too, courtesy of Joseph Stalin and his Gulag. Desperate times call for desperate measures, I suppose. Will that sort of history repeat this time around?”

If it does, will you be ready? Check out Byron’s favorite gold plays here.
“To back up Mr. Shiller,” writes a reader in response toRobert Shiller’s call that the new wave of “cheap” homes might cause another housing bubble, “I was Skyping a friend in Phoenix last week, and they were all excited that they just bought a foreclosed home for a ‘steal,’ with an 80/20 FNMA-backed mortgage. Not five minutes later, I read the 5 article regarding that the Phoenix market is still dropping. I still don’t think that many people (my friend included) get it that prices can still drop, and that just a 10% drop wipes out almost all their equity, since they will have to pay some sort of 6% commission. I myself have seen a greater than 20% drop on my very expensive house in Atlanta, costing me hundreds of thousands of dollars.

”My wife is an agent, and she has counted three (yes, three) home sales in our area in six months. Two of them were foreclosures. The unsold homes continue to accumulate, and the market is moving toward ‘the only sale is a short sale.’ I live in Augusta, and my prayers go to my neighbor who was just transferred up to an area outside of Detroit. I can see the wealth destruction personally, and can only imagine the nationwide ramifications.”

Source:   China’s Bubble Warning, New Home Paradox, Gold Production Sea Change, Vancouver Updates and More!

The U.S. housing market continued its tepid trek toward recovery as housing starts in May exceeded expectations, the U.S. Commerce Department said yesterday (Tuesday).

Housing starts soared 17.2% from April to May, nearly double the 7% increase economists were projecting, Actual housing starts reached a seasonally adjusted annual rate of 532,000, also well ahead of the 490,000 economists surveyed by the Dow Jones Newswires had projected, The Wall Street Journal reported.

Despite the unexpected month-to-month uptick, U.S. housing starts are still more than 45% below the pace of a year ago when the housing-start rate was 971,000.

And just because there’s been an increase in home construction doesn’t mean there’s been an accompanying increase in housing demand, Andrew Waite, a former institutional investor who is now the publisher ofPersonal Real Estate Investor magazine, told Money Morning in a telephone interview.

In fact, says Steve Hagenbuckle, managing principal of real estate private equity fund TerraCap Management, homebuilders may be continuing to construct new homes in the hope that a sale at breakeven – or even at a slight loss – will allow them to continue operation.

“We feel that builders need to keep building a minimal amount of product in order to keep the machine running, meaning their companies running,” Hagenbuckle toldThe Journal. “Even if they’re selling these new homes at break-even or even a slight loss, they need to do it to have the revenue in order to keep their doors open and pay their staff. That’s part of what’s really happening.”

The upshot: The continued construction in the absence of growing demand could translate into lower profits for homebuilders.

Builders could battle back by building cheaper houses, says Waite, the magazine publisher. Homebuilders operate on the so-called “33% rule,” which dictates that the land a house is built on must cost less than 33% of the retail price of the finished home’s sale price. Adding another 33% for construction and a margin of 33% or more attains that retail price.

In this economy where burned consumers are wising up, the cost of ownership of a home beyond its price may come back to haunt builders who had been constructing homes on cheaper lots in more distant locales – a living situation known in industry parlance as the “far-burbs.”

This allows the builder to build a cheaper house and meet the apparent pricing sweet spot,” Waite said.

As housing prices soared during the uphill side of the U.S. housing bubble, prospective homeowners often opted for cheaper houses in those more-distant communities – accepting the longer and costlier commute in return for a still-affordable large house, or a lower mortgage payment. But when housing prices swooned – and then plunged – these homes became less attractive to new buyers.

And as the economic slump turned into an actual recession, and job cuts turned many two-income households into single-income families, those commutes became too expensive to afford.

Often, the mortgages became too expensive, too.

The rise in May housing starts for single-family homes, which grew 7.5% to a rate of 401,000, could result in additional unsold homes for builders, according to JPMorgan Chase & Co. (NYSE: JPM) analyst Daniel Oppenheim, who called the gain a “modest negative from a supply standpoint.”

Even far-burb houses built on the distant locale “cheap-dirt” lots may go unsold, as the housing market in many areas continues to stagnate. Factors such as rising energy costs-particularly natural gas, which jumped 13.9% in May-could keep homebuyers on the sidelines as they balance their recession-riddled budgets.

One potential wild card is the real estate investor, who buys homes in order to rent them out. For consumers whose poor credit, strained budgets or ebbing cash flow keeps them from qualifying for a mortgage, even renting a far-burbs house is a sound second-tier option to an apartment. And for builders, selling to a real-estate investor is almost as good as selling to the actual tenant.

“The new house market is separate from the resale house market,” said Waite. “The question is, are they rentable to the folks that have just lost their homes because of fragile budgets partially brought about by energy and lifestyle costs of an extended commute?”

There are rays of hope in the housing market, due in part to the aforementioned fact that starts are significantly down year-on-year. Inventories in major cities in the western United States are shrinking, Money Morning reported earlier this month.

Source: New Home Starts Up, But is There Demand? ]]> http://www.contrarianprofits.com/articles/new-home-starts-up-but-is-there-demand/17998/feed 0 http://www.contrarianprofits.com/articles/a-busy-10-days-for-the-housing-market/16901 http://www.contrarianprofits.com/articles/a-busy-10-days-for-the-housing-market/16901#comments Wed, 20 May 2009 16:00:20 +0000 Christian Hill http://www.contrarianprofits.com/?p=16901 On Monday it was announced that Homebuilder Sentiment rose again in April, marking the eight-straight month of increases. Yesterday the April Building Permit and Housing Start reports came out, and they both woefully missed estimates.

Next week we will find out how Existing Home Sales and New Home Sales fared in April (as of writing this article, Existing Home Sales are expected to increase, New Home Sales are expected to stay flat from last month).