Karl E. Case, one of the economists that developed the 20 MSA methodology, a widely used subset by Standard & Poors in the S&P/Case Shiller Home Price Index, thinks that the housing market may be near a bottom.
According to WSJ – Mr. Case, in a paper presented this week before the Brookings Institution in Washington, argued that the relationship between incomes and home prices has neared a level seen at the end of past housing slumps. He also noted that of the 20 metropolitan areas covered by the Case/Shiller index, nine have shown prices slightly improving in recent months.
Obviously, anyone making specific predictions on the Housing sector should be regarded with some doze of skepticism. After all, the housing collapse led to rapidly falling home prices and massive defaults on mortgages, causing major dislocations in financial markets – the ongoing negative effects of which, in terms of write-downs, credit contraction and dilutive capital raises, continue to heavily weigh on both Financials and the housing market. However, considering Mr. Case’s authority in the field, his model of predictions, and expertize on real estate markets and prices ; we can argue that while the economics has never been a controlled science, perhaps, there is some cause for optimism here.
At the same time, the Case-Shiller index most recent reading was 19% below its July 2006 peak, and many analysts, including Robert Shiller, the co-creator of the Case/Shiller index, say the decline is far from over since inventory of unsold homes on the market is still very high. The main basis for Shiller’s argument is that until that excess is absorbed, home prices will continue to be negatively affected. This has further fueled the debate of whether the deterioration in the Housing sector will continue, or if we are seeing the beginning of the end of the crisis. And if so, if there is some sort of consolidation taking place at current levels.
Irrespective of these suppositions and as the debate continues, it would be naive and unreasonable to pretend that the Housing sector, which has undergone the biggest speculative boom in U.S. history, will start immediately uptrending or come back with a bang. Instead, a slow languishing bottoming action is the most likely scenario.
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There are reported to be over 750 thousand homes in the U.S.A. that are currently lender owned, commonly refered to as Real Estate Owned (“REO”). This means that the homes were foreclosed by a lender, no one out bid the lender at the foreclosure sale, and the lender ended up owning the home in place of holding a performing loan. There are reportedly 10 million homeowners who owe more on their 1st morgtage that their home is now worth as result of the fallen demand for homes in the U.S.A. Many of these 10 million homeowners will be tempted to walk away from thier homes because the debt they owe is more than the value of thier property. How many will be an important question that must be addressed by any “economist” who is trying to determine when the end of the housing problem will bottom out. In addtion the overall economy has suffered with many people not able to make thier mortgage payments because of job loss, business failure and/or other changes brought on by the housing bust. Just consider all those realtors, mortgage borkers, and construction workers who purchased homes duing the housing boom and are now jobless.
Anyone who thinks this housing problem is near the bottom is probably the same person who didn’t see it coming 3-4 years ago. Wall Street created a false demand for housing by pretending that every Tom, Dick and Harriet could qualify for a mortage loan, when in fact they really could not. Then they took this questionable debt, packaged inot “trusts” and then sold bonds from these trusts to investors around the world. Everyone on Wall Street and the Beltway got rich while the scheme lasted. Now the chickens have come home to roost. However no one on Wall Street of the Beltway seem to want to know how few chickens there are vs. what there should be. So bondholders and prospective investors are we are left to GUESS what the asset values are of thousands of “trusts” that were created to hold this questionable debt. We do know that a LOT of debt has defaulted and been converted to homeownership by these lender trusts. We do know that a lot more of the debt is going to default. But we don’t know how much.
Because Wall Street and the Beltway keep coming up with ways of concealing the actualy value of these assets which back the bonds. Like rescuing Bear Stearns or forcing Fannie Mae and Freddie Mac into a “conservatorship”!
I think the first order of business in that so-called “conservatorship” should be to determine how much bad debt Fannie Mae and Freddie Mac are holding, how many REO’S they hold, and how much debt that they sold to outsdie investors which they guarantied that is also in defualt. The fact that Fannie Mae and Freddie Mac have foreclosed and now hold thousands of REO homes around the country is a bit hard to see from the legal new papers and country records because 12 years ago Fannie and Freddie along with Countrywide Financial set up a Delaware Corporation called Mortgage Electronic Registration Inc., commonly refered to as “MERS”. MERS is named as a front or “nominee” on mortgages which are supposed to be securing Fannie, Freddie and Countrywide mortgages. Therefore you rarely ever see Fannie, Mae, Freddie of Countrywide PUBLICALLY listed as the foreclosing party when a Fannie Mae, Freddie Mac and Countrywide loan defaults. MERS was set up so the big three mortgage, and a few of thier smaller friends could origninate, securitize and then flip these onto the financial markets faster, while concealing who was actually making the olans from the public. Faster is always better when your a senior executive who is looking for reported profits to bolster stock prices and his or her bonuses.
I think we have a long way to go before this housing market bottoms out. I firmly beleive that the American public is still being defrauded into thinking this is just a run of the mill economic down turn with a recovery right around the corner. When in fact the economy is shaking as a result of the greatest top to bottom financial fraud ever perpetrated by Wall Street. I don;t think a bunch of manipulations by the U.S Treasury or its financing arm the Federal Reserve will fix or cover up this mess anytime soon.
Six months after U. S. regulators hoped a bailout of Bear Stearns Cos. would help put an end to the credit crisis, the worst could be yet to come as fresh fears about the viability of financial firms are rocking Wall Street. Now, Lehman Brothers, until recently the fourth-largest securities firm on Wall Street just ahead of Bear Stearns, is facing the same fate.
In order to stave off a loss of faith in U.S financial institutions the U.S. Government decided in underwrite a sale of Bear Stearns to JP. Morgan. A conservative estimate of the cost of this bail out was thirty billion dollars $30,000,000,000,00. This was promoted by the Bush Administration, the Federal Reserve and the U.S. Treasury as necessary because a “collapse of Bear Stearns” would “stager the financial markets” and “undercut confidence in the U.S. Financial System”.
In place of determining what these bonds were really worth, the U.S. Government decided to step in and blindly guarantee up to 30 billion dollars of supposedly bad paper using the full faith and of the U.S. taxpayers. Our Government took this action on the premise that a “collapse of Bear Stearns” would “stager the financial markets” and “undercut confidence in the “U.S. Financial System”. As can be seen from events over the last three months this Bear Stearn’s bailout and Guarantee by our government did nothing much to reassure investor confidence in the bailout U.S. Financial System.
Over the past week alone, the United States’ two main mortgage-finance firms — Fannie Mae and Freddie Mac, in place of filing bankruptcy, were put into a “conservatorship” under government, while Lehman Brothers Holdings Inc. is now being pushed by the Government into a possible take over by a rival bank and foreign investors, in place of seeking bankruptcy protection. A Bankruptcy proceeding by design would of course require a complete accounting and valuation of Lehman’s various assets to determine the value of assets vs. the liabilities. Heaven forbid anyone knowing what their bonds are really worth!
Even though Bear Stearns, Fannie Mae, Freddie Mac, and Lehman Bros, have so far escaped having to expose the true value of their respective assets by filing bankrutpcy, their respective shareholder’s lost hundreds of billions of dollars, despite being repeatedly assured by management in press release after press release that everything was OK. The U.S. Government along with the management of these once prestigious firms went so far as attacking anyone who was publically warning people that these entities might acutally be insolvent or on the edge of insolvancy.
The stocks of other U. S. financial firms, including savings and loan giant Washington Mutual, Wall Street investment bank Merrill Lynch & Co. and insurance behemoth American International Group Inc. (AIG) have been whipsawed this week as investors fret about further dominoes to fall.
The immediate challenge for the Bush administration is resolving the fate of Lehman Brothers. It was again reported that “Global fears intensified over the weekend that Lehman’s collapse would “stagger markets” and “undercut confidence in the U.S. financial system”. Will the U.S Government once again try to calm “Global fears” by forcing a U.S Investment Bank to sell its good operations and assets to a rival bank while the U.S. Government puts its tax payers on the hook for taking the bad assets? This continued scheme of privatizing profits while socializing losses to ensure “Global confidence in the U.S. Financial System” is in this writers view short sited and doomed to fail, costing U.S. Taxpayers billions if not trillions of dollars. I mean really who in their right mind would guaranty a debt owed by someone else that was already in default and where the asset backing the debt was of questionable value? The answer appears to be no one will do this other than the good old U.S. Government. The only unanswered questions are; 1) how much will the U.S. Government ultimately lose by gambling tax payer money to bailout all these U.S. Financial Institutions and; 2) How much can the U.S. Treasury borrow from the Federal Reserve to finance the losses it takes from these bailouts?
Your considered opinions and thoughtful comments are invited.
On Tuesday, September 9 Integrated Asset Services, LLC (IAS, http://www.iasreo.com/ias360update.html), a leader in default management and residential collateral valuation, released its IAS360 House Price Index for July 2008. The monthly report, which includes the most current and granular data available in the industry, showed a 0.9% appreciation in house prices on a national level in July, and a -11.4% decline from July 2007 to July 2008.
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