Housing: The 800 pound gorilla

When talk turns to how the national economy is doing, housing is the 800-pound gorilla in the room.

It's big. It's ugly (and purple!). Everyone in the room is terrified of it. Maybe it will go away softly if we whisper.

Sorry. With the latest GDP numbers out, it's getting harder to deny what everybody already knows: Housing has been the primary economic driver for the last five years. And the gorilla is going to eat our lunch.

For at least the last five years, irresponsible bank lending meant anyone with a pulse could get a mortgage. Speculators bid up the cost of homes to unimaginable heights. Homeowners cashed in on their equity windfalls to propel this consumer-driven economy forward, and everyone and his grandma wanted to jump on the real estate bandwagon. Be a real estate agent! Flip houses! Build on spec! It was buckets of money for everyone and nobody thought the party would ever end because, after all, real estate only goes up.

Except for that it doesn't. And when you have an orgiastic market built atop bad fundamentals, the orgy is bound to end. It has. And now comes the hangover.

Like this, for example: Subprime lender ECC Capital Corporation (NYSE:ECR) posted its third quarter numbers yesterday, showing a jaw-dropping $54 million loss, citing loan buybacks and early payment defaults. Through the first nine months of the year, the publicly traded nondepository, based in Irvine, California, lost almost $80 million. Yikes.

ECC said it is continuing to "experience higher levels of repurchase claims generally relating to early payment defaults." Almost 6% of Encore's loans are in foreclosure. The company also has a 30-plus day delinquency rate of 3.3%, according to the National Mortgage News.

You mean regular people couldn't really afford those half-million dollar two-bedroom tear-downs? Uh-oh. That's pretty grim. And that's just one subprime lender. There are lots of them. And while we're looking at it, lots of Adjustable Rate Mortgages (ARMs) that are due to reset in 2007. To the tune of trillions of dollars.

Meanwhile, construction and real estate services that have been driving job growth in many states have come to a grinding halt. Inventories have skyrocketed in places like Las Vegas, San Diego, and maybe the entire state of Florida. Builders report dramatically lowered orders and have put the brakes on future new building while offering every manner of incentive to push the inventory already finished and sitting empty. The less-bright flippers and speculators have realized the jig is up and are also putting their properties on the market adding to the ever-growing glut. How many for-sale signs are on your street? Anything moving? No?

Prices drop when inventory festers. That's Econ 101.

Just the beginning folks. It's all a big house of, er, cards. And pundits are whispering that by 2Q 2007, things are going to start to fall. Stay tuned!