Double Your Money in an Ugly Market

July 09, 2008



Click here to watch a video of Toby's rant. Or click here to listen.

EDITOR'S NOTE: ChangeWave Shorts Editor Michael Shulman is filling in for Toby Smith this week.

ChangeWave Shorts is a service designed to make you money as stocks go down.

It doesn't matter which direction the market is headed, a bad company means a lousy stock. And using proprietary ChangeWave research and third-party data, my goal is to get ahead of Wall Street in identifying weak sectors and companies to help my subscribers make a ton of money using simple put option plays.

Today I want to talk about the housing market and homebuilders, which is the epicenter of all that's going wrong in the stock market right now.

You can double your money in this lousy market -- yes, double -- if you understand what is really happening in the housing sector.

Homebuilders are being propped up by hope and hype, and are currently in survival mode. The issue for them this summer is the ability to get new financing to sustain their businesses or pay off old debt.

Last week, the consumer confidence number came in at its worst level since 1967 in terms of people's expectations for the rest of the year. The pundits put most of the blame on $4-per-gallon gasoline, but the real villain may be home prices.

Am I exaggerating?

No.

The Case-Shiller home price index -- one of the most widely used gauges for home prices -- was down more than 15% in May compared to 2007. And analysts expect another 10% to 15% drop. Add inflation into the equation and home prices will be down by one-third before this whole mess is finished.

Why am I so certain?

Just follow the money lent and track when mortgages were given to weak, and then even weaker borrowers.

Things Are Worse Than They Appear

My forecast, which is based on mortgages, foreclosures, inventory and housing starts -- i.e., hard data rather than rainbows and wishes -- is for home prices to hit bottom and stabilize in the first or second quarter of 2011.

Right now many analysts are calling for a bottom, in part because housing starts dropped below 1 million -- the historic level of most bottoms. But these analysts seem to be ignoring the current and projected rate of foreclosures.

If you add the number of foreclosures each month above the historical trend to the supposedly low number of new homes being built, you have what I call a "synthetic housing starts" figure. That figure is now almost equal to housing starts at the peak of the building boom in 2006 -- roughly 1.8 million units.

Currently, almost 9% of homeowners are in default or foreclosure -- that's 4.8 million homes. With 1.2 million of these homes already foreclosed upon, that leaves 3.6 million potential candidates.

If just 50% of those homeowners find themselves in foreclosure, that's another 1.8 million homes that will enter the market on top of the already extraordinarily high inventory levels that are increasing each month.