Dueling Views on Housing: Buffett's Expert Sees Rebound Underway, Jim Rogers Sees More Pain

When asked about their outlook for the crisis-ridden U.S. housing and financial-services markets, two U.S. financial experts provided outlooks that completely contradicted one another - once again underscoring how tough it is for investors to predict when the U.S. economy will turn around.

Jim Rogers, a best-selling author who co-founded the famed Quantum Fund with George Soros back in 1970, told Bloomberg News Thursday that the global credit crisis caused by the subprime mortgage meltdown is nowhere near over.

"I doubt that we’re half way through the financial crisis," Rogers stated at a Barclays PLC (BCS) news conference Thursday in Singapore, where he now lives with his family. "We certainly haven’t hit the bottom as far as I’m concerned."

Not only did Rogers’ comments contradict those put forth this week by the heads of several Wall Street investment banks, they even ran counter to statements made by former partner Soros, who said this week that he believed the "acute phase" of the worldwide financial crisis was nearly done - meaning the U.S. economy might soon start displaying the benefits.

Rogers’ downbeat outlook also ran counter to some upbeat observations made by Ronald J. Peltier, the chairman and chief executive officer of investing guru Warren Buffet’s HomeServices of America Inc. real estate company, who told CNBC-TV that the beaten-up U.S. housing market has leveled out and is poised for a move to higher ground.

"I think the real truth is the market has been in a phase of correction," Peltier said Thursday morning during an interview on the popular financial cable channel. "We are seeing some light at the end of the tunnel."

So who’s correct?

Rogers, currently the chairman of Rogers Holdings and the author of the new investment bestseller, "A Bull in China," seems to think that’s a pretty easy question to answer. After all, big global securities firms and commercial banking enterprises have taken about $319 billion in write-downs since the start of 2007 and have slashed away 65,000 jobs in the past 10 months as the financial crisis spread across the globe, Bloomberg reported.

And there’s more to come.

"Most of the European banks and Asian banks haven’t taken a huge write-off yet," Rogers said. "I suspect there are more write-offs to come in Europe and Asia."

Echoing comments he made two months ago during an exclusive interview with Money Morning Investment Director Keith Fitz-Gerald, Rogers told listeners in Singapore Thursday that he’s avoiding financial stocks and is betting that the share prices of U.S. investment banks have a lot further to fall. He also sees continued major problems for U.S. homebuilders that very often doled out mortgages that did not require documentation regarding assets or income, and for government-sponsored mortgage financier Fannie Mae (FNM). That’s why he’s expecting housing stocks and Fannie Mae’s shares to decline even more than they already have as investors avoid all but the safest assets - such as U.S. Treasury debt.

Such ongoing uncertainty and fearfulness can’t help but cause overall stock-and-bond prices to fall even further, Rogers told reporters.

Indeed, during his recent exclusive interview with Money Morning’s Fitz-Gerald, Rogers said it’s even possible that the U.S. Federal Reserve could ultimately fail.

As if to defy his gloomy predictions, stocks have rallied since mid-March, when JPMorgan Chase & Co. (JPM), the No. 3 U.S. commercial bank, agreed to buy The Bear Stearns Cos. Inc. (BSC), in a central-bank-sponsored bailout deal. In fact, the MSCI World Index has gained 10% since touching a one-year low on March 17, Bloomberg reported.

While HomeServices’ Peltier agrees that was a problem - a "lot of people bought ahead of themselves," and speculators damaged the market even more - he told CNBC that he now believes the U.S. housing market has actually returned to its pre-boom times, with home sales running at an annual rate of about 5 million.

"I think that’s a normalized market and I think that’s a sustainable level," he told an interviewer. But he also divided the market into two distinct parts:

• The primary market of discretionary sellers.
• And the distressed market, which includes some of the regions that experienced the "meteoric" rise in housing prices - and which now are suffering the fallout.

Even after that, however, it’s clear that "housing prices are still within 8% to 10% of all-time highs," Peltier said. "The markets that have fallen off the most are actually the markets that were the most overheated."

As the housing market returns to its more-normal operation, Peltier believes stability will return and that prices and sales numbers will return to a point that was sustainable.

There is one wild card that has the executive concerned, however: Will the pressures of soaring fuel costs and a tight credit market put an inordinate amount of pressure on consumers who are attempting to work out their housing problem - as opposed to just walking away?

"A lot of people bought ahead of themselves," Peltier said in the interview. "Frankly, I think to some degree the lending industry, the mortgage business, lost its moral compass in terms of providing the proper credit standards and qualifications."

Speculators proved to be the real troublemakers: From 2001 to 2006, a full 25% of sales were made to buyers who believed they could turn a quick profit, and not to people who were planning to live in the houses and make them into a home.

In retrospect, Peltier said it’s clear the U.S. housing market got way ahead of itself from a price standpoint, with the flames of speculation getting fanned by unscrupulous appraisers and lenders who ended up putting lots of consumers into houses that they couldn’t afford.

Industry officials "knew it was an overheated market," Peltier said. "There were people for the first time ever having opportunity to buy part of the American dream under credit conditions and credit guidelines that were very, very shaky at best … And they were buying at the peak of the market with very low teaser rates, not fully understanding the implications of that adjustable-rate mortgage [re-setting at a much-higher rate] sometime in the future, and the probability that they could not afford that home under the new reset conditions. That’s a travesty, because there are a lot of people that got hurt."

He called on Congress to find a workable solution to the housing crisis, something that has been elusive as the legislators and President Bush spar over who should benefit from pending legislation.

On the broader political landscape, Peltier said the housing industry generally does better when Republicans are in office, though he did not endorse a specific candidate in the presidential race.

"There has been more showboating and discussion than actual rubber that meets the road," he said regarding the legislative impasse. "The fact of the matter is we really need to have some new legislation in place to slow down and stall the foreclosures where people basically bought into a home under mortgage financing programs they didn’t understand."

Comments

[JonathanChristopher]

Is there a way both pundits could be correct? This is my take:

1. There could be a huge NEGATIVE impact if the CDS (Credit Default Swap) market collapses. Growing from $45 Trillion to $65 Trillion in a short period mkes this look like a bubble ( Did the money go here after exiting CDO (Collateralized Debt Obligations)?
2. The shifts in population taking place due to retirements and changes in job locations (Go South young man/woman) may keep prices dropping in the Far West, Central and the North East States, while real estate stabilizes in states like North Carolina (which have new jobs and industries moving in). Location - Location- Location.
3. Long term demographics with retiring baby boomers do not look good, but the next two or three do, with booming exports , especially in food, aircraft and other specialty manufacture.
4. Then the boomers start retiring, moving to smaller houses in warmer climates (especially if it's cheap), and racking up those medical bills (paid for by the expanded Govt medical system they voted for). Why not - they are retiring and not going to be hit with the tax bill. Economy heads south (figuratively and literally) led by long-term declines in some types of housing and inflationary increases in medical system costs.

So perhaps both are correct?

[ArnoldCountry]

I guess we have to be careful who is giving the advice these days. If you have been buying real estate based assets as Buffet's group has, through its Clayton Financial, if they can talk to the economy and get it to improve based on an emotionally driven response, they are poised to profit.

If one thing has been clear in this recession is that it has a mind of its own. No matter how much the fed lowers rates or the pundits come forth talking about a bottom, consumers are not buying homes and foreclosures are increasing. So, no matter what is said, all indicators are that home values will continue to decline.

When we look at the price of food and energy soaring, that appears to be more of the same as to why the housing industry soared. Big money from the world shifted money from bonds secured by mortgages to commodities such as oil and food. With such large amounts of money being thrown at these commodities, it is driving the prices up. Once that bubble bursts, and it will, we can all chuckle at the huge losses the average joe will suffer by investing in them. We are all operating on a kind of global ponzi scheme... leaving the dumb last investor holding the bag with no coins in it.

[Malkiel]

Someone needs to take a look at what's happening at ground level; anecdote seems to indicate that buying is grinding to a halt because first-time buyers are having trouble getting mortgages due to various requirements lenders and insurers are adding on, making it impossible for existing owners to move up for lack of a buyer on their current house. The food chain can't digest all this inventory if new buyers are cut out; prices will free-fall if lending becomes prohibitively restrictive. Right now it's nobody's business to worry about what's happening on street level, but that's where the problems are...