Keeping an Eye on the Entire U.S. Housing Picture, Part 1

I read much of what is posted on the mortgage/real estate/housing section as that his my career background. When I read many of the posts, most of which tend to report and recycle the news, and present very little in the way of objective analysis and resolution, I’ll admit that I get a little perturbed by the narrowly focused mindset that tends to dominate the general tone and tenor of the commentators.

Let’s take a look at two popular obsessions: the 1890 Shiller Inflation Adjusted Index; and the foreclosure inventory issue.

First, let’s look at the infamous 1890 Shiller Inflation Adjusted Home Price Index. As I understand basic economics of this index, when the line is flat…housing matches inflation. When the trend is down, the inflation rate exceeds housing. And when the trend is up, housing values are increasing at a rate greater than inflation.

Isn’t this true of any economic statistic which is measureable and has a data history? If we take a McDonald’s hamburger, currently at $1.09….how does its inflation adjusted price display on a chart? Probably flat! Take the 1965 hamburger price (15 cents) versus the 2009 hamburger price ($1.09), graph it, and the graph will be relatively flat.

If we take the price of Gold, and graph it from 1975 ($200) to 2009 (say $960) what do we get? The rate of growth in the price of Gold was 4.62%...just about the rate of inflation (+/- 4.5%) during this period, and the graph will profile relatively flat.

So, are McDonald’s hamburgers over priced? Is gold over priced? Most goods and services will probably profile in a similar manner.

So, why the obsession with housing and inflation, when impact of inflation on other goods and services seems to be obvious as well? And, if you must be obsessed, then housing only needs to meet or exceed inflation for make financial sense. And, historically, it has. Plus, you get to stay there and enjoy it.

Let’s take a look at the second obsession, the foreclosure inventory issue. I read a great deal of how the impact of the volume of resets, and job losses, and the additional negative measureable downward pressure from impending foreclosures, will drive housing back into the dark ages, where it is supposed to belong.

I read a lot about “market driven prices”, supply and demand”, and how the “free market” that will solve all of the housing problems through the foreclosure cleansing process.

I hear about sellers not wanting to face “reality”. I read about how housing has 20%...30% or more to fall, as if the commentators were pulling data and conclusions out of their nether-brains…..

Now, I read about banks withholding foreclosed inventory from the market…not aggressively managing the default and foreclosure process with respect to current servicing problems…and, from the tone of these posts, this is somehow not fair?

First, I think our “free market” concept is awfully blurred. I my mind, a “free market” can be defined as rational and responsible interaction between market participants. We just left a period of years where the market was neither rational and responsible, at least in my opinion, and, also my opinion, we may be arriving at a more rational and responsible market…so this is good.

So, why is a seller of a home on Main Street to be so criticized by the nether-brainers for not lowering their price? Isn’t that the free market at work? Why are banks held to task for choosing just how they manage their business? Isn’t that the free market at work?

Let’s look at banks and other lenders, and foreclosure. When banks began to increase the rate of foreclosures and foreclosure sales 18+/- months ago, there is a really good chance that their BPO's and pre-foreclosure/post foreclosure valuations probably showed great promise for recovery of their mortgage investment. So, they rushed to judgment, so to speak, and crushed their own balance sheets along the balance sheets on Main Street, and sent the economy into a severe downward spiral. This was not very rational, nor very responsible.

They really didn't do the math....they didn’t take the time to fully grasp the magnitude of the problem, and in their rush to exercise their “contractual rights”, they began to shoot off their toes....and everyone else’s toes, too.

Studies have shown that foreclosures have around a 25% negative impact on local housing values. What we have seen is a rolling 25% process for 18+/- months…which has truly not helped the economy, and should not really be considered a correction, but rather a mistake or miscalculation….following an extended period of mistakes and miscalculations.

I believe that banks and lenders really missed the mark on this issue, and that, given a “do-over”, they would manage the process differently.

The cost of this problem is immense. Lost equities, both real properties and stocks; lost jobs and productivity; the use huge sums of taxpayer funds; and the unnecessary redirection of money to pay for the cleanup, is incalculable at this time. And, we may never fully comprehend the cost resulting from the psychological impact of this mess on the economy.

In the “chicken-or-egg” debate…income/jobs versus housing/foreclosure…I am in the income/jobs camp. I believe that irrational and irresponsible lending left the homeowner with no fudge factor in their monthly budget, and that even minimal cut backs in hours worked could be the tipping point that launched the whole problem.

So, when I see references to the Shiller Index discussed above, and I read about how banks are fudging on the system by not aggressively foreclosing, seemingly posted to satisfy their nether-brain formed opinions, let’s try to keep an eye on the entire picture.

Comments

[John Galt]

"which has truly not helped the economy, and should not really be considered a correction, but rather a mistake or miscalculation….following an extended period of mistakes and miscalculations"

That's really what a recession is. It was a misallocation of resources due to easy lending by banks, buyers seeing dollar signs, cheap money, the securititzation market, poor ratings from the rating agencies and political factors. Now we see the after effects of that. It's a law of nature. You drink too much, you are hung over the next day. That's the way it works. You don't want to be hung over? Well, you shouldn't have drank too much. Not everybody was drunk last night Mr. Preston and not everybody wants to take care of the sick hung over partyers.

"I believe that banks and lenders really missed the mark on this issue, and that, given a “do-over”, they would manage the process differently."

A do-over would be nice wouldn't it. But it isn't that simple now is it? It really would be nice to deny reality and ask for other people to take responsibility for poor actions wouldn't it? Shoulda woulda coulda.

"The cost of this problem is immense. Lost equities, both real properties and stocks; lost jobs and productivity; the use huge sums of taxpayer funds; and the unnecessary redirection of money to pay for the cleanup, is incalculable at this time. And, we may never fully comprehend the cost resulting from the psychological impact of this mess on the economy."

- The hangover is severe indeed, but so was the drunken stupidity. I also feel bad for "what could have been" if all of this fradulent and irresponsible behavior didn't happen, but the truth is we'll never know.

2009 Aug 03 11:45 AM

[Griz]

Case Shiller is the correct way to look at asset values. Problem with housing now is that it's falling nominally too. Nothing like 4x levered losses (or with 125% LTV how about infinite levered losses - sure, just keep paying your mortgage for that kind of return).

2009 Aug 04 10:04 AM