Don W

Housing Bottom Should Signal Financials Rally

3 words. Annual cyclic variation. Summer months are always positive for the housing industry - as well as market indicators. Look at housing sales and market indexes as they fluctuate on a month by month versus previous years, and you will see that May/June/July/August are always climbing. This supposed "slowdown" of the market fall is nothing but a part of that yearly cyclic nature of these markets. The decline this year from 2007 is as big of a gap as 2007 was from 2006. Come October, the cycle will go the other way, and everything will turn down hard - based on both the cyclic nature as well as the slide from 2007 that we are still well entrenched in following through the elections in November.

Is it the nature of analysts and economists to be the first on the bandwagon of "the market is getting better now" - ignoring major trends and data that any decently studied person would bring up to deflate their opinions? How many times are we going to hear someone predict "we are close to the bottom", only to hear the latest hard and reality-based figures that show that the slide continues until the markets have contracted to the levels of sustainability that we had been well over-reaching for 5 years (corrected for nominal growth over 5 years, of course). Look at charts and data that shows nominal averaged growth figures, and they show that we have contracted 18% or so and still have another 9% to contract before we are in the region of where we should have been without the out-of-control financial excesses. Add to those figures that we are paying slightly higher than average per disposable income (dollar adjusted, of course) for energy, and we should be below that nominal growth estimate. Now that China is now slowing down as well, and this winter should prove to be the major world market recession clincher. Once we have caught back up to the re-adjusted indexes - about a year out from here (hopefully) - then we might start saying that we are bottoming out. Until then, don't believe any 'expert' who keeps trying to blow happy smoke.

June Existing Home Sales Dip While Supply Rises

One thing missing from this analysis: by-month-adjusted-sale... Everyone in the industry knows that home sales in the summer months are easily 20% higher than winter months, with late July and early August being peak sales - regardless of the market. Saying that the rate of decline from May to June being less than previous months/years shows that the market is close to a bottom is completely missing important market trends and factors. Come November and December when the sales figures show an substantial decrease in sales month by month (due to the periodic nature of home sales as well as the economy/interest rates/tightening loan requirements), and those who try to 'slow the panic' by writing optimistic columns will be left with little to stand on as far as credibility. Oh, wait - they'll just write another column to explain why they were right but that unforeseen influences thwarted their 'expert projections.'

Consensus Subprime Mortgage Loss Estimates: Mathematically Impossible?

I'd be willing to bet that it's somewhere between the two estimates.

First, in the market, perception *makes* reality. If the pessimistic structure continues, the market will continue to decline. The latest unemployment numbers as well as the estimates for peak oil prices continue to put more numbers into the bases of those assumptions.

Let's not also forget that the remaining subprime mortgages of the 3 year ARMs, as well as the 5 and 7 year ARMs, are still coming due and will continue to throw a higher than expected default into the pipeline until the current approved loan performance numbers make up the majority of the loan balance on the ledgers. Remember, we peaked at over 1.4 million houses sold per month in Q3 and Q4 of 2005 - three times the houses being sold per month in Q1 & Q2 of 2008. The last turnovers of the subprime mortgages will not start to become a smaller fraction of default loans until well into 2010, with no help from the economy to bolster those already on the thin edge of toppling into default. Add that to the inventory and average time on the market running to almost a year before the loss can be appreciably calculated, then figure in the future depreciation of market value (which any even wildly optimistic person knows will continue at least well into 2009, if not 2010), and you find that the base assumptions above will not fit until mid next year. Maybe. It depends on the perception of that time - and the reality that gets generated from there.