AvlGuy

Unintended Socialization of the Housing Market and Its Consequences

That said (whew), I agree with you, Mark..we need to get median home prices to get closer to median wages and salaries, by market and by category. The only thing sustainable is different housing markets and prices (for-sale and rental) that are affordable to job-holders at every wage level.
But there’s too many forces affecting equilibrium and preventing sustainability, so I expect house prices to move like waves in an ocean seeking an elusive equilibrium.

Unintended Socialization of the Housing Market and Its Consequences

Mark, current homebuyer psychology could result in Frank's proposal rapidly escalating the downward trend of home prices thanks to the high likelihood of panicked-crowd-behavio... documented ad nausea via public tragedies as well as stock market crashes. Here’s how:
An unmanageable swelling of mortgage-current homeowners (the big pool of 9 out of 10) will choose delinquency, slowly at first and then escalating in numbers, thus hemorrhaging bank revenues and brutalizing compliance with reserve requirements. This crashes bank stocks as well as investor confidence.
Simultaneously, the above rapidly accelerates the decline in appraised values of homes, far faster than appraisers can handle and document.
Simultaneously, there's an unmanageable mad dash by the 1-of-10 delinquent homeowners to Frank’s program, overwhelming the government staff as well as the appraisal industry. Frank's new program seizes up mid-stream like a Bush-era FEMA program <snicker>.
Any delusions of a feasible and orderly fix of America's housing crisis are vanquished. The stocks of all residential-real estate related industries sink at an accelerated rate in search of a new bottom.
Voila.....we hit the new equilibrium in home pricing faster than planned….unfortunately with tremendous velocity and inertia..
Unable to overcome inertia, home prices overshoot the equilibrium point, downward. Meanwhile, banks, Fannie/Freddie/FHA, gov't and the appraisal industry try to untangle the mess after months of finger-pointing (there’s always an election coming up). The public freezes up like deer-caught-in-headlig... refusing to enter into any buy/sell transactions.
It's so inter-connected that the sequence of the above can unfold numerous ways but ultimately still arriving at the same destination.
The lubricant for the above is the speed of news information: it allows panic behavior to occur far more easily than before. A nation of 300 million hears the bad news all at the same time, thus allowing mass panic.

BUT WAIT. There’s more!
The creator of the 90s TV Show, Babylon 5 wisely noted that it’s not wars that are so interesting, it’s the unfolding aftermath (e.g. compare the 6 years of military and survival tactics of WWII against the 45 years of ensuing Cold War politics, economic and social shifts, military counter-moves and feints, that followed).
The battle for a new equilibrium in housing prices across different markets and related stocks will see reformists battling socialists battling capitalists in terms of new regulatory and market agencies, intermediaries, and rules.

So…to prevent all the above, the Frank Proposal will have to include targeted moratoriums on certain transaction, probably by geography, housing market, or by date-of-default….kind of like how the Dow uses circuit breakers. It, in turn, will fuel incredibly resentment across congressional districts as homeowners have to “wait their turn” at the trough.

The Folly in Calling a Housing Market Bottom

Great post, Lee.
The good thing that may come out of the on-going De-Leveraging is the market’s battle for equilibrium, i.e. new valuations of assets. Median home prices need to sink much further relative to median American incomes, and so far no one has figured out how to stop this sinking…though Homer at the WSJ is pushing for mass-bulldozing of excess housing inventory to rapidly speed-up the market’s search for a housing bottom (bulldoze excess supply to meet a very tepid demand).

The good thing about collapsing home prices is that it uses the market (not government) to distribute the pain (loss of paper wealth)…so everyone from Donald Trump to the Bush family to Wall Street Hedge Fund managers to the guy & gal on Main Street will potentially share in the collective loss of wealth…if given enough time. Hence, Homer’s call for a bull-dozing. Of course, the truly wealthier have other assets: massive stock portfolios, business ownerships, etc.

It’s an ugly process, no doubt.
The bad news is that all of the public policy and tax incentives remain in play to repeat trumpeting consumerism and center it around housing whenever a recovery starts. Those policies and incentives need to be changed.

Still, let’s face it..consumerism and greed have deep psycho-social underpinnings. Ever hear a 3-yr-old headstarter scream, “It’s Mine !!!”. All the time.
I see no programs to derail the re-metastasizing of this mind-set once the economy starts rebounding. Besides the fact that ‘acquisitiveness’ may be basic human trait, modern America genuinely fears economic systems not built upon individual acquisitiveness; US foreign policy has been to undermine non-capitalist systems wherever found.

Our best bet may lay in a perfect storm of opportunity posed by the intersection of the sustainable building / living movement, and a long “L”-shaped recession. The latter may provide the timeframe needed for the former to gain a stronger foothold in America.

The Two Housing Crises

Great post, Kevin.
You hit the nail on the head..too much public policy pushing resources towards consumerism. Glad to see many readers grasp that.
The good thing that may come out of the on-going De-Leveraging is the market’s battle for equilibrium, i.e. new valuations of assets. Median home prices need to sink much further relative to median American incomes, and so far no one has figured out how to stop this sinking…though Homer at the WSJ is pushing for mass-bulldozing of excess housing inventory to rapidly speed-up the market’s search for a housing bottom.

The good thing about collapsing home prices is that it uses the market (not government) to distribute the pain (loss of paper wealth)…so everyone from Donald Trump to the Bush family to Wall Street Hedge Fund managers to the guy & gal on Main Street will potentially share in the collective loss of wealth…if given enough time. Hence, Homer’s call for a bull-dozing.

It’s an ugly process, no doubt.
The bad news is that all of the public policy and tax incentives remain in play to repeat trumpeting consumerism and center it around housing whenever a recovery starts. Those policies and incentives need to be changed.

Still, let’s face it..consumerism has huge psycho-social underpinnings. Ever hear a 3-yr-old head-starter scream, “It’s Mine !!!”. All the time.
I see no programs to derail the re-metastasizing of this mind-set once the economy starts rebounding. Besides the fact that ‘acquisitiveness’ may be basic human trait, modern America genuinely fears economic systems not built upon individual acquisitiveness; US foreign policy has been to undermine non-capitalist systems wherever found.

Our best bet may lie in a perfect storm of opportunity posed by the intersection of the sustainable building and living movement, and a long “L”-shaped recession. The latter may provide the timeframe needed for the former to gain a stronger foothold in America.

Late Payments on Loans the Highest in 16 Years: The Pooring of America Continues

Great post, TM! I'm not a professional trader like you. I just dabble via a small Scottrade Acct. Yet, though I know this de-leveraging will be brutishly long in duration, I still earn spending change trading stocks because I know there are too many guys unwilling to abandon the market at this point, instead, they trade on the market's reaction to 'good news' like WAMU diluting shares 100%, Bear getting bailed out, deceptively small unemployment #s due to not counting the under-employed and the 1099 contract workers, Fannie/Freddie getting authorization to buy bigger loans despite not having enough spare capital to actually do so, etc. It’s upticks in response to whatever CNBC and WSJ can spin as ‘good news’.
So, in a way, I'm willingly contributing to the Dow's appearance of ‘denial’, though I'm fully expecting a long lumpy period of de-leveraging. So, Thornburg can bounce 90% up and down on consecutive days; and RIMM can bounce from $90 to $120. Thanks to RIMM, I have some pocket change to buy a new Canon digital cam at a discount.
A little guy likes me still plays in the market...I just don't bet the farm...or my savings...or my 401K. That’s why the US markets will be a sluggishly lagging trailing indicator in 2008 for a downward spiraling economy.

NAR Optimists Drubbed by their Own Dismal Data

What do focus groups (FG) have to do with the housing crisis? In FGs, we learn what pitches consumers are most vulnerable to, and what it takes to finally get them to shuck rationale decision-making for emotional choices.
That’s why there are so many players involved in our housing crisis, financial wizards, debt rating enablers, and the front men (realtors, mortgage brokers) who attended numerous seminars to learn the most effective way to get consumers in big numbers to fall for all 11 traps in tuma’s 3/28 comment.
Now look for renters to jack up rents as more homeowners are forced into renting. Then look for the housing cabal to do more FGs and uncover new ways to get big numbers of consumers to make “new” bad choices whenever the market recovers.