The resilience of the housing sector and home builders has been a sight to behold in recent years. Every call by journalists, Wall Street pundits and even Alan Greenspan about “irrational exuberance” was met by even higher home prices. The first signs of a slowdown in the housing boom came late last year and I am glad the bubble only deflated a little instead of going out with a bang. The last thing the US economy needs is a total crash in housing as two out of five private sector jobs created since 2001 have been in housing-related sectors.
I made a negative call on the entire home building sector in the September 2005 edition of InsideArbitrage and singled out St. Joe (JOE) as one of the most overvalued companies in the sector. The reason I made this negative call was on account of all the exotic mortgages that people were resorting to in order to buy a home. With the median price of a home rising above $700,000 in the San Francisco/San Mateo area, more than half the mortgages in the San Francisco bay area were interest only mortgages in 2005. My fear about a massive increase in mortgage defaults in the near future is finally becoming a fact. According to this story, the number of mortgage default notices hit their highest level in two years during the first quarter of 2006. The number of mortgage default notices increased 22.1% in San Francisco, 33.3% in Southern California and a whopping 62.1% in Napa when compared to last year.