The Impact of Housing Problems: Doom-and-Gloom Scenario Overstated

We recently objected to a Doug Kass prediction that demand for new housing would fall by 50%. Doug used an approach that identified potential foreclosures and eliminated entire classes of buyers. He also cited secondary effects.

Our Objection

We suggested that the economy does not work this way. A potential buyer may qualify for a lower mortgage, even if standards tighten. New buyers emerge. Existing loans get restructured. Prices move lower, of course, until a market-clearing point is reached. Briefly put, supply and demand are not absolutes, but intersecting curves that shift until the market-clearing price is reached.

Already there is substantial support for our viewpoint. In a typically excellent summary of Dallas Fed President Fisher's speech today, Gary D. Smith points out (among other things - read the whole post) that Fisher sees the market, the Fed, and lenders working to resolve the problem. Fisher sees the damage as "contained." (Here is the Bloomberg summary, and here is the entire speech.)

Meanwhile, news stories like this one (Lenders willing to help struggling homeowners) cite a rather obvious point. Lenders prefer to work with existing owners rather than to foreclose.

Anecdotal Evidence

This weekend I heard of a young couple that waited for a price reduction on a home in Madison, Wisconsin and can now qualify for a suitable mortgage.

My home construction contacts in the Chicago suburbs continue to find new work.

My real estate contact in Minneapolis reports a brisk business in the 300K to 700K range, with prices down 5 to 10 percent from last year.

While we like to use macro-level quantification, sometimes the individual cases help to see the economy at work.

Summary

Taken together, this is all evidence that the doom-and-gloom scenario for mortgages and housing is overstated.

Comments

[Quaker:]

I'm not quite sure what your saying. A second hand mortgage story. Lumber prices are falling like a rock. My brother is a commercial real estate broker in the ultra hot Rehobith area of Delaware. It's a wasteland there. Another friend sells residential flooring. There IS no residential business.

Sophisticated mortgage derivatives HIDE losses, they don't eliminate them. It'll take months if not years to unravel this mess.

2007 Apr 05 10:04 AM