Homebuilding Stocks Are In For A Nasty Surprise

Decision makers have been duped.

"You can't believe how screwed up things are down here… "

This weekend, I met up with a real estate expert, M, from South Florida. M specializes in REO. REO stands for "Real Estate Owned." Banks lend money to homeowners. Sometimes homeowners don't make their interest payments. The bank kicks the owner out and seizes the property. In the industry, they call this repossessed, bank-owned property "REO." The government is the nation's biggest holder of REO. M says the government owns 80% of the properties he deals with.

M says it's really hard selling houses right now. It's the government. They drag their feet on every sale and no one makes decisions. He made a sale last week. He said it took 18 months for the deal to close.

Then there are the checklists. The government uses a bureaucratic process for managing its property. Every time you miss one of the "boxes," the deal gets delayed another six months. M told me he recently got an e-mail from the Department of Veterans Affairs asking him to "winterize" all their properties. They wanted him to pour anti-freeze in all the toilets and insulate all the windows. They were going to pay him $300 per house.

"I told them to use some common sense. This is South Florida. Their houses don't need winterizing. They didn't care."

There's already a massive inventory of homes for sale in America. At the latest count, it's around four million houses. But partly because of the government's inefficiency at processing paperwork, there are almost three million households still in foreclosure and another eight million households behind on their mortgage payments. Wall Street research I received this week predicts these "delinquent borrowers" will add another five million houses to the unsold inventory over the next two years.

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