The American house dream turned into the American nightmare months ago. But instead of finding a sustainable low and climbing higher – as housing stocks did so powerfully from 2002 to the middle of 2005 – the supposed bottoms just keep falling out. Here’s the first part of a New York Times story this week that captures a picture of the latest lows giving way:
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Mortgage Fears Cast Shadow Over 2 Agencies, New York Times, July 9, 2008
NEW YORK — As home prices decline and Washington struggles to end the economic malaise, Wall Street is starting to send a sobering message: The worst is yet to come.
One of the strongest warning signs came as the week began, when shares of the nation’s most important mortgage companies, Fannie Mae [the Federal National Mortgage Corp.] and Freddie Mac [the Federal Home Loan Mortgage Corp], plummeted. After falling almost continuously over the past month, Freddie Mac tumbled another 18 percent and Fannie Mae lost 16 percent on Monday amid concerns that the companies would need to raise billions of dollars in fresh capital.
With renewed prospects for turmoil in the financial markets, global stocks fell Tuesday from Sydney to Stockholm.
“Across the board, there are probably more write-downs to come,” said Florian Esterer, a fund manager at Swisscanto Asset Management in Zurich. Investors need to look beyond the subprime problems, he said, and consider the decline in the quality of home-equity loans, credit card debt and commercial real estate — problems associated with the end of a “traditional credit cycle.”
Banks seem to be “in denial” about the degree of problems, he said, adding, “I think there is much more pain to come than they are telling you.”
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Now, this “news” comes as no surprise to readers of The Elliott Wave Financial Forecast. In fact, all the way back in 2005 – when housing stocks and housing prices were still roaring, and the mortgage industry still soaring on the wings of a home-buying flight to no-interest, no-money-down home loans – The Elliott Wave Financial Forecast created the Elliott Wave International Subprime Lender's Index and dubbed it “the leading edge of the real estate bust.” Here’s the chart that we showed in the March 2005 issue:
The key to the forecast is the completed five-wave pattern shown as 5 of (5) on the chart, which did, in fact, mark the beginning of the end for the subprime industry. The ensuing decline turned out to be a whopper. As a matter of fact, the subprime industry is down so far that we cannot update this chart because two of the four lenders in our index, New Century (NEW) and Countrywide (CFC), no longer exist and because subprime loans are no longer available.
However, there are other ways to measure the status of the overall industry. A key one is the performance of Fannie Mae and Freddie Mac, the largest U.S. buyers of home mortgages. Here’s how The Elliott Wave Financial Forecast appraised their situation late last year:
"Fannie Mae (shown above) and Freddie Mac are in at least as much trouble as most home builders. This is why they started circling the drain in 2002 when most home builders were still rising. EWFF [The Elliott Wave Financial Forecast] argued that their problems would mushroom into a much bigger scandal that would trash their respective stock prices."
We added the following quote from Conquer the Crash, Bob Prechter’s 2002 book that made the case for a leveling of the real estate market:
"Government-sponsored mortgage lenders, Fannie Mae and Freddie Mac, have extended $3 trillion worth of mortgage credit. Major financial institutions actually invest in huge packages of these mortgages, an investment that they and their clients (which may include you) will surely regret."
Incredibly, Fannie Mae is down another 60% since the beginning of 2008. Here’s its chart updated through July 8:
In the same New York Times article mentioned above, here’s how the reporter rates the “government’s backstop for the housing economy":
“The declines, along with a falling stock market and growing unease about the possibility of more losses at big banks, reflect a growing consensus among investors that the current housing slump will last longer, and prove more severe, than initially feared.”
The media is suddenly awakening to the alarm that the Wave Principle first sounded back in 2005. After five waves up follow three waves down. It doesn't matter if it's five waves up in our EWI Subprime Lenders Index or five waves up in the Dow. The correction always follows.
The most remarkable aspect of this particular Fannie Mae story is that even after a decline of better than 80% shown on this chart, it is not too late to heed many of the most important warnings issued in Conquer the Crash and The Elliott Wave Financial Forecast. As we noted in December, the chaos in housing is just the leading edge of a “great transformation,” one that extends beyond real estate to the larger economy and many aspects of our everyday lives.
Summer Doldrums ... A Real Downside Barn Burner?
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