Before You Jump Back Into Real Estate, Read This

Time for a little public service for those crazies buying back into housing. Amherst Securities did a report on the huge shadow overhang in the housing market. They count 7M units already delinquent, up from 1.3M in 2005 and more than the 5.2M annual home sales right now. They estimate an additional 300K go delinquent each month, or another 1M since this chart ended in Q2. 

The government's vaunted modification program doesn't seem to have much impact, as 70% of them go delinquent again within a year. Maybe 1M of the overhang could be modified if all went well, but then 700K would go back into the overhang a year later. In other words, best case the modifications would only save a month's accumulation of more overhang. 

They look a little deeper into Riverside CA, which has 1,372 units for sale out of 34,800 total properties. If you add to the listings the foreclosures not yet listed, houses about to be auctioned off, and houses with a notice of default, you find over 7,000 units are in the shadow inventory - 20% of all houses in the city! Now, Riverside like Vegas and places in Florida was at the center of the irresponsible government-backed no-money-down loans of the housing bubble, so this sort of shadow inventory of 5x the listings is at the extreme. But they sample other places, and find LA is a 3x overhang, Vegas is 4x and NYC over 1x. San Diego, where some of the crazy buying is going on, is at 3.4x overhang - the buyers are nuts! 

The problem right now is that defaults are happening much faster than liquidations, so the overhang is growing. See chart, which divides by loan type. Subprime are past their peak defaults, and the liquidation has caught up. AltA and OptionARMs are close. The problem is now in the Prime loans.

They conclude with an analysis why prices and sales seems to have bottomed: seasonal factors have given a temporary plateau.  But the seasonal buoyant period is over, and both prices and sales should now resume a slump. 

If you jumped back in and are now stuck, you have another option: sue! Bloomberg reports how condo buyers in Florida are suing for deposit refunds. Condos they put a deposit on in 2006 at $1000 sq ft are now down as much as 8x, and the worry is they will soon drop 10x or below $100 sq ft, the level in 1989! At those levels, maybe the crazies will jump back in and bottom fish ... 

Comments

[Jing]

This morning, DJIA came down in a sharp impulse wave. Then it spent rest of the day rallying in a A-B-C correction, where B is a triangle, and wave 5 of C is a diagonal triangle. Going into the close, DJIA completed the A-B-C correction, retracing slightly over 61.8% of the decline. Then it put in another small impulse wave down right into the close.

http://www.google.com/finance?q=INDEXDJX:.DJI

If this wave count is correct, DJIA is slowly setting up a series of 1-2 waves and subwaves downward. What this means is that Monday will be slightly negative, but mid-next week, there will be a third wave down. We all know what that means.

See you next week, DJIA.

[min]

Jing good observation but NDX is usually the first to faint in these situations.

If Dow is heading south first, odds are higher that this is a correction with more upside to come.

No disrespect intended just food for thought and something to keep an eye on?

[twitter.com/Frac_Man]

The Open today was a Top as posted. gapped 14 points down ( top tick at the close from Thursday )

Oh btw, I'll being discussing my new revolutionary indicator on Ike Iossif Interview this Saturday.

The audio will be posted here.

Topic is the "The Wernicki Fractal."

Hank

[Jing]

Min:

You are right. The COMP (Naz) wave pattern does not look impulsive on the way down and I cannot count any decent 5 waves down without resorting to 5th wave truncation. I guess my previous DJIA wave count is probably in jeopardy now.

I guess I will look at COMP wave patterns more, in addition to DJIA.

And no worries. This is a place for everyone to share and learn. :)

Thanks

[min]

Sure thing.

Don't throw away your DJ30 count just yet though. Look at it with that other data point in mind instead. NDX could morph into something impulsive yet. I've seen stranger things happen.

Only thing you could say for sure is the DJ30 count is somewhat weakened by this at this moment. NDX could be at the start of a 1-2, 1-2 ready for a gap down on Monday. One step at a time with caution and you'll stay safe and on top of things.

I personally don't care if I miss wave 1 down and wave 2 up. Would rather wait to jump in at start of a wave 3. A lot safer and you save a lot of bad/costly false alarms. Catch my drift?

Good to know you are open to learning and that idiots like Dorkoteo are an insignificant minority.

[Jing]

Min:

Thanks. They are all good points to think about. I have some positions in currency markets, so I won't go into stocks until P3 is well under way. :)

As you can probably see from Yelnick's latest blog entry and the comments there, at this moment, long-term Elliott Wave patterns are kind of unclear, to say the least. This actually makes sense, as it is generally hard to map out a corrective wave, as there are just too many variations. At this moment, it is probably best to stay out and let the market complete the wave pattern. Hopefully it will be clear soon.

In the meantime, I have resorted to studying show-term wave patterns, hoping to gain some insight on near-term moves. That is why I posted my thoughts this week.

Along the same line, I have been looking intently at the breadth charts. There are some breadth divergences such as Bullish Percentage Index, McClellan Oscillator and Summation Index etc. But NYSE A/D line is confirming and holding up very well, though Naz A/D line is flattening out and weakening. What does all this mean, considering that Naz is the leading indicator and has been dropping harder along with RUT on recent down days?

I think what this means is that the rally is aging, and its days are numbered. But for NYSE A/D to weaken enough, we will probably need a nasty correction and then another top.

I am somewhat disappointed that people have been arguing about wave counts on this board, while completely ignoring technical indicators, which are essential to evaluating validity of wave counts. For a wave count to be valid, it will have to fit into all the technical indicators very well.