Seth Chalnick

Economic Collapse Is Accelerating

Jeff, thank you for putting numbers behind the shadow inventory argument. It is refreshing to see an article succinctly isolate the problem, and make moot in one fell swoop, the ongoing debate about the way “shadow inventory” is defined, and about the reasons that drive the shadow inventory phenomena.

Bottom line: since we're only finding buyers for about 20% of the inventory, then we can't even hint at a bottom here.

To take these artificially induced low end sales statistics out of proportion the way the media has been doing… is worse than misleading… it is flat out irresponsible.

Add in the jumbo market, which is collapsing before our eyes, and the point you raised about its impact on the rest of the economy really comes into play. If a few hundred bucks per person (that we shifted from one pocket to the other) didn’t magically fix things, then what happens when the real stimulators of the economy… the folks who own the $700k to $5m homes watch their paper wealth vanish? It is probably a safe wager that spending declines further.

Since the current foreclosure problem we are (not really) dealing with right now only represents approximately 30% of the size of the impending alt-a, opt arm, and prime collapse that has not yet even come online, I would have to unequivocally agree that the idea of a housing bottom, and therefore the idea of the recession ending is absolutely absurd indeed.

It is ridiculous to see “experts” say that “the housing market correction was inevitable with all that crazy lending, etc” and then they turn around and call this the bottom.

Seriously, the only things that have changed are “mark to market” accounting relaxation, artificial pump up of demand by extending the same “zero down” philosophy in the form of 3.5% down fha, some $8k tax credits that we’ll pay for later, and the artificially limiting of supply. Not to mention the artificial suppression of interest rates. All of this hand-holding has to go away at some point. The damn is cracking.

Is There an End Game to the Recession?

Along with everyone else, I sure hope there is an end in sight to our current crisis, and the points you mentioned are good ones. I can’t speak so much to the asset side of the balance sheet, but I see an issue on the “interest rates” front, at least as it pertains to the real estate world. I would image the gist of my comment may apply to non-real estate markets in some way too, but even if it doesn’t, I believe the real estate spiral is enough to single-handedly curtail consumer spending… more so because the next wave of the spiral is coming to a theatre near you… where the higher priced homes of small business owners will be affected. If less spending by sub-prime folks can shake things up, less spending by the real economic stimulators won’t be pretty.

I am afraid the Fed can lower rates all they want, but ultimately supply equals demand. An investor who would otherwise look to lend out, say $50m in new mortgages right now sees 6% returns on conforming loan amounts. Why invest at 6%, when you can buy the underlying asset, trading at or below its intrinsic value, and get 5-10% net ROI by renting out the asset, while positioning for long term appreciation? On loans limits greater than conforming, say $700k-$2m (there are some agency jumbo programs that exceed $417k), an investor can get around 8%, but on the one hand, there is no demand for these loans when consumers have to pay it against inflated prices, and on the other hand the investors know… well… the prices are inflated. Nobody wants to touch a mortgage back security until debt-to-income ratios get back to <40%. We are nowhere near these levels in the upper middle class pricing tiers.

Regarding our liquidity crisis, even if everyone has their hearts set in the right place in our attempt to “bailout” the economy, lenders first need to cover their reserve requirements before they can lend money. If they lend out in a ratio of 12 :1, and then the asset of the 1 goes down to .9, then they need more money to preserve the ratio. By allocating more money to preserve the ratio, they are not lending, and this also contributes to downward pressure on the underlying asset value. Fact is, the time for action was when banks were leveraging profits by 30:1. Now we are experiencing the de-leveraging process... and it is just not as fun.