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See below. This is the latest report from Hovde Capital Advisors in the USA. Whilst the report is on the US property market, HCA describe the 4 Phases of a Property Downturn.
You can see Phase 1 & 2 have already hit Ireland and where we are heading with Phase 3 & 4:
"In light of the recent developments in the residential housing and mortgage lending markets, we thought this would be a good opportunity to provide an update of our latest views on the most pronounced real estate crisis the U.S. has faced since the Great Depression. As we are now into the full swing of the traditional spring selling season, we feel it prudent to comment on our interpretation of the most recent residential real estate data points, our view of where we stand in the housing cycle, and what we believe is in store for the markets ahead.
Recent housing data points have led certain pundits and commentators to opine that we are nearing a bottom in the slumping housing market. Some of the data which they are using to support their thesis include:
• Existing home sales in February rose an unexpected 2.9% in February, higher than the -0.8% decline forecasted month-over-month and the first increase in seven months.
• Overall inventory levels declined by -3.0% month-over-month, despite remaining near historically high levels.
• New homes sales in February fell a modest -1.8% and the year-over-year sales for new homes declined by -29.8%, better than the forecasted -32.1% decline.
Despite this seemingly positive data, we believe the market has mistaken an inflection point in the cycle for the beginning of the bottoming process. Although we concur that these data points may represent a crossroads, our expectations are quite different from the consensus view. Instead, we believe the inflection point we are nearing will not be the bottom of, but merely the next phase in, the cycle. To better understand our view of the housing cycle and where this market currently resides, we would like to walk you through the four phases as we see them:
• Phase One: Home prices stop rising and buyers strike while sellers still have expectations for continued escalating values. As a result, a dramatic slowdown in activity begins. This phase started—depending on the particular market—anywhere
from August 2005 to March 2006.
• Phase Two: Activity begins to slow even more dramatically as buyers realize home prices are overvalued. Sellers start to accept some price declines; however, they do not accept the degree of pricing adjustments needed in order to generate a sale. Conversely, new home builders begin to lower prices substantially and/or provide concessions in
order to stimulate and drive demand. As a result, they become the market pricing leaders and drive prices lower. This phase of the cycle began—depending on the market—in the summer of 2006.
• Phase Three: As foreclosures escalate, thereby becoming the new price leader in the market, home prices begin to plummet at an accelerating pace. Although this stimulates some levels of activity from those buyers who have been waiting on the sidelines. For new homes, builders can no longer offer the concessions because, for any new product
they build, not only are they losing money on the lot but also on the construction costs. This is a very dangerous scenario for the economy, leads to the failure of struggling home builders and dramatically increases the loss rates for banks and mortgage
investors. We believe this phase has started over the last few months.
• Phase Four: New construction finally grinds to a halt which enables inventory levels to narrow. The market does not deviate too far from this bottom until there is employment and wage growth which reinvigorates demand to the point that it exceeds supply, therefore, causing prices to rise again. It is worth noting that this final phase can last for a period of many years and, given the excessive inventory and continued payment shocks coming out of the IO and, soon, the payment options market, it will not be short-lived.
All of this leads us to the most important issue at hand: what phase are we in currently? We believe that we are currently seeing signs of the third phase in the housing cycle—which may be mistakenly interpreted as a bottom in the housing market. The reasons for our views are as follows:
• Based on the S&P/Case-Shiller Home Price Index, a -10.7% drop from January to February and an implied -20% annual decline in nationwide home prices clearly signals that the price collapse has begun. Additionally, we would like to point out, that there are flaws in the Case-Shiller Index as it excludes foreclosures, excludes new home sales, and excludes repeat transactions inside a span of six months. Therefore, the actual pricing declines are much worse than these numbers indicate.
• When you dig below the new homes sales in February—which were down -1.8% month-over-month—the numbers are also much worse than they appear. Why? New home sales do not factor in cancellation rates, which have risen from the 25-30% range to the 45-50% range. Further, it is vital to recognize that concessions are not reflected in the sales price; builders have offered massive concessions through numerous discounts and sales initiatives over the past few months in attempts to increase sales.
• Another important data point came from the recent earnings releases from KB Home and Lennar, which showed that their current sales had declined dramatically as a resultof new home sales. KB Home saw a decline of approximately -75% and Lennar experienced a -57% drop.
Unfortunately, as cited above, the beginning of this phase represents a period of significant distress for banks, mortgage investors, and companies engaged in the new residential construction industry. Based on the unprecedented pace of declines in home prices, we fear this phase will go deeper and be more painful than even we have contemplated. Although equity investors remain fixated on the hope of the stabilization in the housing market—which has recently incited a strong rally in the financial and housing sectors—we beg to differ in this belief. In our opinion, the opposite is true, as we expect another sharp decline in the equity markets in the near-term as investors begin to realize that this in fact is not the bottom of the housing cycle. Further, there are far greater losses than previously anticipated yet to be realized for banks and mortgage investors.
We hope that this has shed some light on where we see the housing market cycle and what investors can expect in the months to come. As always, please do not hesitate to contact us with any questions.
Sincerely,
Eric Hovde
Portfolio Manager"
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