Beware The False Bottom In Housing

Business Insider ^ | Aug. 25, 2009 | Charles Hugh Smith

[Lorianne]

In February 2007 I suggested a 4% mortgage delinquency rate could trigger a decline in the entire housing market. Since that proved prescient, we should revisit the analytic tool behind that call: the Pareto Principle.

There is a whiff of euphoria in the housing market, a heavily touted confidence that "the bottom is in." It's all roaring back--rising sales, multiple bids by anxious buyers, 3.5% down payments, low mortgage rates and the bonus of an $8,000 first-time home buyer credit (a gift from U.S. taxpayers). Housing Lifts Recovery Hopes (Wall Street Journal)

Foreclosure-related sales account for over 30% of all sales nationally, and over 70% in hard-hit markets such as Las Vegas, but like piranhas feasting on a school of weakened fish, nobody in the real estate business mentions the huge losses of capital and equity which created all these "bargains."

All we need for a complete bubble reflation is people avidly gaming the system... oh wait, we have that, too. A recent Time magazine cover story on Las Vegas contained this informative tidbit (courtesy of Michael Goodfellow):

[Attention Surplus Disorder]

I’m equivocal as to whether we’re at or near a “bottom” in housing. If we are, I see no indication that the bounce is going to take off like a roman candle.

However, I believe a second shoe to drop will be the commercial real estate sector, and the difference here is that there is no Fannie Mae and Freddie Mac to shove the overwhelming bulk of the worthless paper into. In CRE, the trash holders are pension funds, banks, ins cos. and misc other investors and I believe the carnage could be quite serious. Of course, the banks will be probably be able to bribe or otherwise coerce Congress and the FASB into accepting some kind of [further] voodoo accounting scheme.

I thought this article covered it extremely well, and by sober folks, not pumpers.

http://www.financialsense.com/Market/wrapup.htm

[WILLIALAL]

After reading so many economic prediction articles the past few months, I guess a person is left with their own gut feeling about the US economy and the future. Right now my gut feeling is that things just don't add up to a re-surging economy.

[Attention Surplus Disorder]

The “economy” (whatever that means to you; corporate profits; employment; asset prices; capacity utilization; debt serviceability; real estate values) would have an unfathomably larger chance to recover if it weren’t for the tremendously anti-business and pro-tax stance of the 0bama regime and what it portends in the minds of businessmen and businesswomen. Unless you’re Goldman or Morgan or George Soros, you know, ‘cause this regime is really so out for the “little guy”.

[Trod Upon]

It will be surging sort of like that little jet in the bottom of your toilet bowl—right down the drain.

[Finny]

Thank you for posting this. My common sense has been telling me that it must be a false bottom, and for the reasons (many, at least) detailed in this article. Again, thanks for posting.

[Vince Ferrer]

There are two good reasons this is a false bottom which are not explained in the article. First, the lending standards which caused the housing prices to increase will not continue over the long run. Yes, even now there are banks and government programs with the same loose standards, but they are in a losing battle to hold up housing prices. The 30 year, 20% down model will triumph, and will cap the prices of housing to that level of funding.

Second, interest rates will rise, and this will cause the price of housing to come down as well.

[Caipirabob]

The question for many poeple looking at this point is "Do I wait to buy because prices may drop further" or "Do I buy now because interest rates are low?"

With the continue devaluation of the dollar, anyone in the industry will tell you we are unlikely to see rates hit the lows of early 2009 for quite some time. Many expect an inevitable climb to the carteresque levels exceeding 10% or more.

[Joan Kerrey]

Obozo is in charge of the economy now. What brilliant solution does he have

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The solution is easy. Far too many folks own their homes free and clear. That means there is a lot of untapped equity out there that could solve the problem for all Americans. /s