The housing crash - we were warned back in the summer of 2005

Today's housing market problems gave plenty of warning. Since the summer of 2005, real estate indicators everywhere had been flashing red. Inventory, sales, new home incentives were all telling the same story. The market had peaked and it was going to crash.

For example, take a look at just one indicator - KB homes, and in particular, its share price. In early summer 2005, the stock was trading at around $84; three months later it was down at $66. Although there was a temporary rebound during the winter of 2005, thereafter it has traded at around half of what it was during those heady days of summer.

Back then, smart investors knew that the housing bubble was over. Prices were just too far out of whack with reality. The KB homes share price reflected that unsustainability. Since everyone with an Internet connection had access to KBH data, it should not have been too difficult to see where things were going.

Of course, it did not quite happen that way. People looked at the rising housing inventory, declining sales and rising interest rates and somehow could not bring themselves to admit that the market had topped out. Denial and delusion are essential ingredients to any financial catastrophe, and America had both in abundance.

Up until a few weeks ago, many people still believed that the housing slowdown was only temporary. It has taken a 5 percent mortgage delinquency rate and the disappearance of 40 or so sub prime lenders before America as a whole woke up and understand that there was a crisis.

What about KB homes today? What is it telling us about the future for US housing? Well, the recent numbers are grim. The company just reported numbers for the first quarter. Compared to the same period last year, revenues are down 20 percent; net income fell from $173 million to $27.5 million; while orders fell by 12 percent. The only ray of sunshine comes from their cancellation rate, which improved slightly compared to the fourth quarter of last year.

Chief Executive Jeffrey Mezger suggested that "it is hard to predict when the housing markets will stabilize". Perhaps Mezger should try thinking about it a little harder. If he did bother to think, two somewhat related problems would give Mezger sleepless nights. Thinking on a little further, he would understand that the market will not stabilise any time soon.

First, the recent rise in mortgage delinquency and foreclosure rates, will mean distressed sales at knock down prices. In turn, this will undermine KB homes revenue growth potential. Second, the sub prime fiasco will lead to tighter lending standards, drying up housing demand.

KB homes are looking at nasty double-dip; increased supply of unwanted houses, lower demand due to fearful mortgage lenders, this means only one thing, lower sales volumes at lower prices. Since 2005, the share price has implicitly priced in these problems. The share price was flashing red, telling us that the housing bubble is over. Take heed, it is still flashing red today, and it is telling us that the collapse has only just begun.