A Trip down the Housing Graveyard: The Casualties of the Housing Bear Market.

Housing has taken a toll on the credit markets and is starting to create a whisper that we may be heading toward a recession. There is now chatter that the next sub-prime market may occur in the credit card markets. This is not good news as we are in the top 2 shopping months of the year. Retailers are hoping that the consumer will be out in full force. The next two months will be very telling since the US consumption© makes up 70 percent of our economy. When looking at the housing calculus, what is the actual number of jobs lost and the financial impact with some of the housing and mortgage companies?

Estimated Job Losses from Companies

Countrywide: 11,520

American Home Mortgage: 6,000

First Magnus: 5,000

New Century: 5,200

Bank of America: 3,000

Lehman Brothers: 2,225

HSBC mortgage businesses: 1,760

Washington Mutual: 1,640

First Horizon: 1,560

NovaStar Financial: 775

Lending Tree: 650

E-Loan: 627

Wells Fargo Home Mortgage:500

Mohawk Industries: 200

You can read the longer list here. In total, there have been more than 100,000 job cuts in the housing and mortgage industries. Comparing this to the total nationwide announced job layoffs of 650,708 job losses in the housing and mortgage sectors account for 15 percent of all job layoffs. That is a large sum in relation to the overall economy. Taking a look at some of these larger institutions we also realize that a large portion of equity has evaporated with the declining market. Let us take a look at a few companies that have been hit the hardest:

Countrywide Financial:

52 Week High/Price Per Share: $45.26

Market cap at Peak: $26,070,665,200

Current Price Per Share: $14.76

Current Market cap: $8,500,000,000

Loss of $17.5 billion in market cap in one year.

NovaStar Financial:

52 Week High/Price Per Share: $127.2

Market cap at Peak: $1,204,584,000

Current Price Per Share: $4.17

Current Market cap: $39,490,000

Loss of $1.16 billion in market cap in one year.

Washington Mutual

52 Week High/Price Per Share: $46.38

Market cap at Peak: $40,016,664,000

Current Price Per Share: $23.9

Current Market cap: $20,650,000,000

Loss of $20 billion in market cap in one year.

Citigroup Inc.

52 Week High/Price Per Share: $57

Market cap at Peak: $283,290,000,000

Current Price Per Share: $34.81

Current Market cap: $173,000,000,000

Loss of $110.29 billion in market cap in one year.

The list does go on. But with these 4 examples, we have a total market loss of approximately $150 billion. Should we tally up other hitters such as Wells Fargo, Bank of America, New Century Financial, and others, we are quickly off to the races and you can see that reaching $1 trillion in market losses due to the credit market problems isn’t so far fetched.

We also get a keen idea why so many of these companies are trying ever so vigilantly to try and hold onto their current portfolios until they have an exit strategy in place. The smaller lenders simply do not have the capital to sit and wait for a bailout and there are now 182 companies that have suffered because of the housing and credit downturn. And when we say the housing and credit downturn, you could use both in the same breath since they are two sides of one coin. The housing market would not have boomed without easy access to credit and credit markets would not have thrived if Wall Street didn’t engineer fancy ways of slicing mortgage debt and selling it off as far from the actual secured asset as possible. Now the asset backed paper is making its long and painful journey through the labyrinth of financial alchemy back to its rightful home, literally. Sorting this mess out will take years if not a decade and enormous amounts of litigation. Is there an ETF for lawyers?

If you think this housing mess is nearing an end there is nothing that can stop the two major waves of resets that will hit in Q1 and Q2 of 2008 and then, a later wave that will start in 2010. This is going to be a prolonged challenge and we really haven’t dealt with the brutal reality of where these mortgages are really residing. The big players know and that is why they are trying to engineer a super structured investment vehicle SIV bailout with the blessing of the government. And I’m surprised how little Fannie Mae and Freddie Mac have been mentioned in this entire credit debacle. Expect to hear much more about these two large government sponsored entities in 2008. If they are trying to fly under the radar they are doing an excellent job but they will be forced next year into the game either by the markets or political pressure.

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7 Responses to “A Trip down the Housing Graveyard: The Casualties of the Housing Bear Market.”

  • Everyone is saying that Countrywide is going to come out of wholesale….and eventually close up shop! BofA already stepped out of wholesale

  • Forgive the analogy, but as someone in the industry and keenly interested in what is happening, I am reminded of the scene in the movie Titanic where passengers kept moving higher and higher on the ship in order to buy time. That is what it appears that Wamu, Countrywide, Citi, and others are doing. Hang on long enough and the rescue ship/life raft, i.e. the Fed, will appear.

  • Dr:
    I agree.

    In addition to the mortgage lenders, and the hedge funds based on these poison loans, we have to be prepared for the collapse of some the mortgage insurance companies, and some municipalities who spent based on the mythical home values.

    I also heard that a number of non-financial related companies are also in trouble, not because they engaged in bad loans themselves, but because they invested in the poison funds. I can’t remember the company, but there was a well-known mid-size company who invested ALL of their profits in these funds, and have lost nearly all.

    As I (and many) have said: House values are a myth. Stock prices are a myth. The “Value” of a house, a stock, or the prostitute on the street corner is determined by the amount of CASH a person hands over when they buy it.

    Even though it’s surely doom and gloom for anyone involved in the mortgage and financial industries, there are still companies out there who refused to buy into the pipe dream. These are the companies who will survive, and possibly thrive in these troubling times.

    For example, Prudential (PRU). I think they have already written off what little exposure they had in the subprime market. Their stock price suffered about 1%, but they’ve held most of their value because they have historically been a very conservative company.

    Another indicator: While some companies are in the news for robbing their pension funds to pay off bad debt or operating expenses, the PRU retirement fund is fully funded, in cash. In fact, it was over-funded by $1 billion, so they used that money for retiree health care.

    (Disclosure: I am a stockholder of PRU, and PRU paid for my college education)

  • Update, these numbers as of this post are now different since:

    WaMu is down 16 percent for the day
    CFC is down 7 percent
    NFI is down 5 percent

    And the bigger news is Fannie Mae is nearly down 10 percent. Another big issue that we will be seeing in the next few months is in the process of foreclosure, everything is opened and we can see what dirt was swept under the rug. So far what we are seeing is not good.

  • I just wanted to say thanks for the blog. My primary investment theme since July, 2005 has been shorting the housing bubble and this is one of several blogs I check frequently and it is BY FAR the most entertaining. The Real Homes of Genius Awards always make me laugh. Keep up the good work.

  • As an interested spectator from New Zealand, who lived in MA until early 2006, I am looking on with interest to the upcoming few months. In New Zealand we have had a bubble of sorts, with prices rising on average 13% per year since 2001.

    While we haven’t had the exotic mortgages here, we do have a different bubble. With the government here promoting “state” housing via property investors, there are tax benefits for negative gearing of rental property. There has been an over supply of money via the influx of capital from the Pacific nations due to the absence of capital gains tax on property.

    This has prompted the banks to allow people to purchase investment properties by pyramiding the negative gearing and interest only loans. They have also loaned people more than the purchase price on property (sound familiar?) allowing people to use the accrued equity gains to finance the shortfall of the rent and tax rebates. In my opinion this has created a potential Domino effect where people may find themselves on the wrong side of the equation should property values not appreciate or heaven forbid, decline!

    As I write this, values have topped and look poised for a correction, despite the cries of “Property always appreciates in the long run” and “This time its different”. I am sitting here watching the events play out in the USA and wondering what could happen here if the financial cancer manages to travel all around the globe.

    Keep up the good work as you provide a wonderful insight to the potential market direction. I am sitting here with my cash looking for the bargains that I know are bound to appear one day.

  • And it appears that Uncle Ben, once again, hasn’t missed an opportunity to miss an opportunity. Up til the start of today’s testimony, the market was waiting to hear what he had to say, what he was going to DO to address the issues that everyone (everyone except perhaps him) sees.

    Well, he visited the hill, he said nothing, and now the market is down another 150.

    The questions: Would an infinite number of monkeys, typing at an infinite number of typewriters, eventually write a fed policy?

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