By Dennis Gartman - The Daily Gartman Letter

HOUSING; SCHMOUSING: The US housing market is, in the vernacular, "in the dinger." Houses simply are not selling as they were; brokers are not answering unsolicited bids for houses they had listed only hours before... and if they are getting calls at all it is from irate, impatient sellers whose houses have been upon the market for days and weeks and now even months. It is a market turned upside down in a very short span of time, and anyone surprised by that fact is naive.

The simple concerns are these: History is not kind to those builders who are late to the market; who build projects into the euphoria that always exists, building for demand that seems almost certain "to be there" when the project they've dreamt about is finally brought to fruition; who build on borrowed money, on optioned land, building larger and more expensive homes and condominiums, certain that the market will readily accept their wares... and that their profits can be rolled over into newer land purchases, and newer condominium projects at even higher prices ad infinitum. The "jig," however, as they say, is up. For the past several months, the last projects have come on stream (with more on the drawing boards) but the buyers have stood down. Inventories of un-sold houses are rising apace, and buyers have decided that it is far, far better to wait for lower prices than it is to stand up and pay "market" for those homes on offer.

The signs were first to be noted in the hottest of all markets here in the US: Las Vegas and Reno, Nevada and Phoenix/Scottsdale, Arizona. According to our always bearish friends at The Daily Reckoning (the difference being that this time they are right), in the Phoenix area, a year and a quarter ago there were but 5,000 homes on the market. By March of this year, there were 35,000 homes on the market, and now there are 40,000... and the number is rising.

Rents, on the other hand, have lagged so far behind the prices of homes and condominiums that there are virtual bargains galore in every major market in the US. Even here in Tidewater, Virginia, where we've lagged far behind the rest of the nation as far as escalating housing prices were concerned, prices had gotten to levels that are simply unsustainable. Two years ago, housing here sold at discounts to Raleigh, N. Carolina, which is by most estimates a nicer, more upscale area than is this; however, the demand for water views (which we have in abundance) has pushed Tidewater, Virginia property values to levels that are now material "premiums" over Raleigh... or Charlotte...or Jacksonville. Such is the endgame of speculative bubble.

At the same time, rents here, or in Raleigh, or Charlotte have held steady.. if they've risen at all, pushing the rent/own ratio out to untenable levels and allowing potential buyers of property the ability to breathe deeply, delay action, and wait for even lower prices in the future.

This will end in tears, we fear, and it will not end nicely for the nation's consumers or the nation's banks. As housing prices turn lower, and as consumers finally cannot and will not be able to tap into equity there, as they have in the past ten years, their buying propensities for durable and non-durable goods will fall like stock prices have been. We are not ones to give into bearish concerns, but we are becoming more and more disconcerted by what is happening and far more concerned about the balance sheets of the nation's consumers than we have in many, many years. Others may have been concerned two and three years ago; that was premature. Now, however it is not, for the game has changed and the psychology shall change behind it.

We note then that S&P is going to begin making life a good deal more difficult for borrowers and lenders as of the 1st of July, for it is then that they shall put into effect a new system of rating mortgages. So called "piggy-back" mortgages that allow banks to finance downpayments for housing ( a circumstance we never in our lives thought we'd ever see... for we remember how hard it was to save for a downpayment, and how important it was that a home owner show his/her interest in accumulating that downpayment through thrift or hard work before a financial institution would consider granting the mortgage in question) are now going to become, for all intents, a thing of the past, for S&P is doing to make it far more difficult for those mortgages to pass muster. At the margin, where things first change, this has changed. More such shall follow.

What then can we expect to happen? Firstly, banks will make money for mortgages materially less available. Secondly, some banks and mortgage companies will find that their default rates are doing to begin soaring. Thirdly, as housing prices begin to weaken, more not less houses will be put upon the market, for the "spec" buyers will be forced to disgorge their inventories by their lenders.... it will be almost as if the margin clerks in the brokerage business will slip quietly over into the mortgage industry and force those who are too aggressively long to become demonstrably less so. Fourthly, consumers will shutter their buying and will ramp up their savings. Indeed, we shall not be surprised if a year or more hence we shall hear calls for Washington to do something to slow the savings rate, just as Washington was called upon in recent months to do something to ramp the savings rate up! Such is the vengeance when things turn south.