The Housing Crisis: Symptom or Cause of Market Volatility?

I have never been in the housing market is going to crash camp, and still am not. But, I do think this business with Bear Stearns, and any other stories like it, have the potential to be disruptive, and further impact capital markets.

To the extent that markets are interconnected, something unusual in some big segment, like the mortgage market, can cause problems for asset prices without causing people to lose their houses, or causing home values to be cut in half, as some fear.

However the the bond market is very complex, the equilibrium between various bond market segments is complex, disruptions to that equilibrium will cause visible reactions. I am not calling for Armageddon, but the thought that this increased stock market volatility will persist seems very plausible.

Something at sometime will cause the next real correction, I suppose this could be it but I am not sure yet. For now the increased volatility for stocks looks more like a stalling out than anything else, if it deteriorates more so be it but whatever happens I can't imagine it will be unprecedented.

Comments

[John Gaats:]

Tough time for the hedge funds. If they don't lose on the housing market, they lose on equity market. Bond market is tough to figure so there are hardly any sure bets. They can still go short on equity like crasy. Then that is not a sure bet either.

2007 Jun 27 11:47 AM

[brynaw:]

<i>I have never been in the housing market is going to crash camp,</i>

So, how exactly would you define a "crash"?

If by "crash" you mean a near-overnight plunge in RE values, similar in magnitude to the NASDAQ 2000 crash, then I would agree. Of course, the RE market has never "crashed" in this way before in recorded history. On the other hand, if we define a RE market "crash" as a slow, gradual drip-drip erosion in nominal and/or real (inflation-adjusted) prices over several years that results in a cumulatively large drop in real value --say in the range of 30-50%-- then please count me in that kooky "housing market is going to crash camp".

2007 Jun 27 09:41 PM

[Roger Nusbaum:]

cutting in half on something of a widespread basis is probably a good definition.

2007 Jun 28 09:40 AM

[joyofyoga:]

"On the other hand, if we define a RE market "crash" as a slow, gradual drip-drip erosion in nominal and/or real (inflation-adjusted) prices over several years that results in a cumulatively large drop in real value --say in the range of 30-50%-- then please count me in that kooky "housing market is going to crash camp".

Yep, I concur, this is exactly how real estate crashes. Slow and protracted so everyone second guesses themselves about what they remembered the value to be and why that thought it was that number. When you look back a year from now, you think, "Whatever was I thinking when all data indicated a value of say, $500,000, and this year the value is $400,000." And then next year it is $300,000.

The ARMS that are set to recast in 2007 are $1,500,000,000,000 ($1.5 Trillion). That's a lot of bananas that will be owned by monkeys.

2007 Jun 28 10:20 PM

[Paul Meisel:]

With fixed rates within 1 percent of ARM rates at the moment, that shouldn't be a problem for people who financed wisely. On the other hand, those that were in trouble already will be in worse trouble.

It reminds me of my friend who was late for curfew and low on gas, so he drove faster, through a speed trap, to get home before he ran out... it didn't work out for him.

2007 Jun 29 08:21 AM

[Paul Meisel:]

I suppose conditions differ geographically, and where you stand depends upon where you sit... but in my area, as bad as it is, only one major builder has sold out, and one small one closed its doors. The only realty agency that closed did so because the owner of a very small firm chose to retire to Florida with her husband for the winter months. The people who make their livings on the business do not appear jolly but there haven't been any suicides, I still see most of them eating out.... There has been some bad news in housing stocks but no major bankruptcies I have noted.

So in my book it is not a crash. I guess its a perspective issue.

2007 Jun 28 09:31 AM