Housing Heading for a "Near Perfect Storm"

Housing Heading for a "Near Perfect Storm"

Are those the words of an alarmist, lefty blogger, calling for the sky to fall? No. They are the words of Washington Mutual's CEO in a conference call. I guess he now either hates America or is in fact a lefty blogger calling for the sky to fall.

WaMu (WM - Cramer's Take - Stockpickr - Rating) dropped 3% after CEO Kerry Killinger said at a Lehman Brothers conference in New York that the housing industry is headed for a "near perfect storm."

He said the lender, which has already boosted its provision for loan losses this year, may have to sock away an added $500 million as housing markets continue to weaken.

First, it's important to remember that Wamu is by far the biggest publicly traded S&L. It has a market capitalization of 30 billion. The next largest company by market cap is Sovereign Bancorp with a market cap of $8.4 billion. In other words, Washington Mutual is the big kid on the block by a fairly wide margin.

Secondly, CEOs are well aware of their status. They know their words can move markets. As such, they are very good at being perma-bulls. No matter what the news, they usually try and spin it in a positive way. That's one of the reasons this statement is news. The CEO of the largest S&L in the US is saying housing is in really bad shape.

To sum up where housing is, let's look at some basic numbers.

According to the National Association of Realtors the total inventory available for sale of existing homes was 4,592,000 in July. That is the largest absolute amount of homes ever on the market by a wide margin. At the same time, we are seeing home prices drop in a big way:

The annual returns of the U.S. National Home Price Index, the 10-City Composite, and the 20-City Composite shows all three still yielding negative returns as of June 2007. The quarterly S&P/Case-Shiller(R) U.S. National Home Price Index -- which covers all nine U.S. census divisions -- was down 0.9% from Q1 2007 and down 3.2% from Q2 2006.

"The pullback in the U.S. residential real estate market is showing no signs of slowing down," says Robert J. Shiller, Chief Economist at MacroMarkets LLC. "The year-over-year decline reported in the 2nd quarter of 2007 for the National Home Price Index is the lowest point in its reported history, which dates back to January 1987. On a regional level 17 of the 20 metro areas are showing declines in their annual growth rate from what was reported in May."

This is at a time when the credit markets are seizing up and lending standards are tightening. And to make matters that much worse, here is a chart of when mortgages reset.

Notice there are a ton of resets in the first half of next year.

So we have:

1.) The largest total amount of existing homes available for sale ever
2.) Declining home prices
3.) Tightening credit standards, and
3.) A huge wave of mortgage resets coming down the pike.

This translates into the following simple economic formula.

Massive supply (record existing home inventory) = declining prices
Shrinking demand (tighter credit) = declining prices

Maybe that's why the homebuilder stock index has been dropping for the last two years.

In short, the housing market is going to be ugly for a really long time.