SD Realtor, you make some good and valid points. I would point out a few others as well. First off, we’ve never been here before, meaning the market has never seen a bubble of this size in any asset class in history.
Second, the level of exposure in financial markets has not been fully felt, meaning the true size of the problem is only now becoming apparent. When you hear a constant and consistent drumbeat regarding the banks, investment houses, hedge funds, pension funds and their concerns about sizeable losses in the mortgage markets and beyond, it is apparent that something very bad is in the offing. There are investors in the mortgage backed securities markets selling off at approx. 11 cents on the dollar. This is not the behavior of someone who believes they are occupying a solid position. In the business, this is called a fire sale.
Lastly, while I think the big players such as Lennar, Toll Brothers and Pulte will indeed ride this out, they are sustaining catastrophic losses right now, in some cases between $125MM and $250MM in just the last quarter alone. Bob Toll, the CEO of Toll Brothers, who is generally a very optimistic guy when it comes to housing, has stated in no uncertain terms that the housing market is a long way from bottom and it is going to hurt a lot to get there. Toll Bros does not construct middle market tract homes; they are a luxury home builder, catering to the high end of the market. The market segment least likely to default and most likely to hold a fixed mortgage product and not a sub-prime loan. What this means is that the consensus view that this will be confined to the sub-prime middle market buyer is probably wrong.
As strange as it sounds, given this little epistle, I am not doom and gloom. I don’t think things are going to crash, but I also realize that we are seeing an event never before seen, and something that is dwarfing the NASDAQ boom and bust in terms of size.
