Major Real Estate Trouble From Florida To Shanghai (IYR, SRS, URE, DRV, XRT, FXI)

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October 4, 2011 1:24pm NYSE:DRV NYSE:IYR

Justice Litle: The housing bubble aftermath has reached a new stage as banks sue homeowners, and China (NYSE:FXI) looks more ready than ever for a property bust.

“Jingle Mail” is a darkly comic phrase born of the housing bubble and bust. It refers to the act of giving up a house — leaving the keys in the mailbox and walking away.

Now, though, “Jingle Mail” could be changed to “Jingle Jail,” because leaving the keys no longer brings freedom.

The aftermath of the housing bubble has reached a new stage. Lenders are suing homeowners… or rather, ex-homeowners who thought they had moved on.

The WSJ tells the tale of Joseph Reilly, highlighting this disturbing new trend:

LeHigh Acres, Fla — Joseph Reilly lost his vacation home here last year when he was out of work and stopped paying his mortgage. The bank took the house and sold it. Mr. Reilly thought that was the end of it.

In June, he learned otherwise. A phone call informed him of a court judgment against him for $192,576.71.

It turned out that at a foreclosure sale, his former house fetched less than a quarter of what Mr. Reilly owed on it. His bank sued him for the rest…

Forty-one states and the District of Columbia allow lenders to sue borrowers for unpaid mortgage debt, the WSJ reports. The leftover amount between the loan and the foreclosure sale is known as a “deficiency judgment.” If the amount is large enough — say, more than $100K — the banks have incentive to try and claw it back.

This is grim news against a backdrop of stagnating wages. Median household income hit its lowest levels in a decade in 2010, according to the U.S. Census Bureau, as the poverty rate hit a 17-year high.

For the stock market, the impact ties back into consumer spending trends.

At one point, the “strategic default” option of walking away from one’s home actually contributed to consumer spending, as upside-down homeowners ditched hefty mortgage payments and tapped the freed-up cash. That headwind has now become a tailwind.

Consumer psychology is another key factor. Those who gave up a house and thought they were “free” now have to wonder what sort of “deficiency judgment” might show up in the mail. And those thinking about foreclosure — keeping it as an option in the back of their minds — have new issues to contend with.

In relation to consumer spending, an easy way to monitor the market’s mood is via the S&P Retail Index ETF (NYSE:XRT). If the trend in discretionary spending points lower, XRT will show it.

XRT Chart

For Mr. Market, the most pressing near-term focus is perhaps China. (Europe is still there, but taking a slight breather.)

The Shanghai Stock Exchange composite is down more than 20% from its April highs — bear market territory. Not to be outdone, Dr. Copper continued to plunge this week, highlighting the China concern message. Oil has also tumbled, breaking below $80 per barrel.

“The fabric of China’s investment led growth is starting to fray and unravel,” says Patrick Chovanec of Tsinghua University in Beijing.

Property developers have been playing a game of chicken with the Chinese government. It is a game the developers will lose, given the only way to win is for prices to rise indefinitely.

The government has slowly been choking off the developers’ access to credit, via state-owned banks, as alarming signs of bad loans and real estate Ponzi schemes abound.

And so, as the developers feel pressure from a credit squeeze, they grow ever more tempted to liquidate inventory for cash.

But what happens when a whole slew of players catch this notion at the same time? It is the way of all bubbles — a mad rush to the exits as sellers overwhelm buyers. It’s practically a foregone conclusion to the script, the main question being when.

The pressure on China is translating over to pressure on commodity-oriented hedge funds. This is visible in industrial favorites like Cliffs Natural Resources (NYSE:CLF). In late July, CLF was trading above $100 per share. Now it is below $50.

Or, for a whole industry feeling the squeeze, look to the Global X Copper Miners ETF (NYSE:COPX). The copper miners have nearly been cut in half since August. There is a contagion effect in play, as nearly all things China related and commodity related get caught up in the sale.

These are warning signs that a major driver of the global economy — China’s ability to sustain growth through stimulus — is rapidly breaking down. It comes as the juggernaut of U.S. consumer spending hits the breakdown lane too.

The good news is, in the months ahead, we may finally get a break from the Europe-dominated news cycle. Unfortunately, those headlines may be switching over to a U.S. recession watch and China. Watch copper, oil and the consumer retail indexes for tells.

Related:  iShares Dow Jones US Real Estate ETF (NYSE:IYR), ProShares UltraShort Real Estate ETF (NYSE:SRS), ProShares Ultra Real Estate ETF (NYSE:URE), Direxion Daily Real Estate Bear 3X Shrs ETF (NYSE:DRV).

Written By Justice Litle From Taipan Publishing Group

Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader and Managing Editor of the free financial market news e-letter Taipan Daily. Justice began his career by pursuing a Ph.D. in literature and philosophy at Oxford University in England, and continued his education at Pulacki University in Olomouc, Czech Republic, and Macquarie University in Sydney, Australia.

Article brought to you by Taipan Publishing Group,

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