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Jonathan Miller

Jonathan Miller

Posted: July 17, 2009 09:43 AM

Why Housing Hasn't Found A Bottom

What's Your Reaction:

Back in August 2008 I wrote a post on Matrix called "[Analysis Paralysis] Calling The Bottom Of Calling The Bottom Of The Real Estate Market" as a response to growing weary of being asked when I thought housing was going to turn around. Well it's nearly a year later and the status quo still remains fully in place--not much has changed on the housing front.

After all, it's been a quiet year.

We have since welcomed a new presidential administration, seen a few million more foreclosures, a few trillion in lost home equity, a few hundred bank failures, the National Association of Realtors continues to pump out monthly pronouncements of improving housing conditions, the Fed Chair adds "green shoots" into the conversation, several million more become unemployed, the S&P/Case-Shiller Index declines by 18%, trillions in federal debt and exposure have been added to the faith and credit of the US, a few more big ponzi schemes were exposed, record quarterly profits at Goldman Sachs (yawn), the home of the Mets, Citi Field, hasn't been renamed US Treasury Field yet, Congress wanted a $500K cap on salaries of senior executives of institutions that took TARP money, Institutions who took money fought hard to give it back, no significant investors surfaced to buy those toxic mortgages, appraisers have formerly joined the housing blame list, there was a surge in the equity markets since the beginning of the year, Michael Jackson may be buried at the house he lost to foreclosure and a new and perhaps last Harry Potter movie has hit the theatres. [gulp]

In other words, housing hasn't hit bottom.

One of the problems with the new housing market is that it remains with the old housing market and our expectations. During the credit boom from 2003-2007 that enabled housing to actually boom, housing became a leading economic force in the economy. In fact, more than 60% of new job creation during the boom was housing related. Housing was leading the economy rather than the other way around. Fast and easy credit will do that.

Of course during that period, buyers didn't need to provide those pesky details on mortgage applications like proof of employment, how much income they made, what their debt exposure was. Lending was all about borrowers being able to:

1. have a pulse; or
2. fog a mirror

The banking industry, credit rating agencies, investment banks, regulators and others saw no risk in lending to anyone because of several key conventional-like wisdom factors:

1. housing always goes up
2. shift risk to others who were able to shift risk to others (aka do unto others as they would do to you)

So now that everyone connected with housing has emerged from this vast illusion, reality is something everyone is still slow to adapt to.

Embrace logic and take our medicine.

The housing market follows unemployment trends (unemployment and layoffs continue to trend higher), mortgage rates are likely to rise in the mid to long term (the Fed is facing challenges in keeping rates in check as US pumps out bonds to cover the debt), consumer confidence (remains low) and access to credit (banks are not interested in mortgage lending in the current environment because they are in self-preservation mode and are dictating the terms).

While we can all probably agree that the worst in housing market's decline is behind us, lets also agree to follow the economy more closely and be patient. Housing will stabilize at some point in the future, just not right now.

 

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