The Housing Market

A different topic: the housing market is in the tank. Surprised? I hope not. But apparently the “all knowing financial markets” are! Here’s today’s news from MarketWatch.com:
U.S. new-home sales drop 6.6% to 834,000 in June – MarketWatch

Now there have been some, including myself, who have been talking about the rotten state of the housing market for a while. It has taken the collapse of some lousy sub-prime lenders and a free-fall in home prices to get the attention of the markets.

Frankly this is absurd.

The financial rating agencies [Moodys, Fitch, and S&P] have so screwed up in their evaluations of securities backed by housing assets that they should be investigated by Congress. They routinely gave AAA [i.e. the best possible] ratings to packages of low grade loans generated by lenders on the totally stupid assumption that the housing market was secure. Nuts! No market is ever secure. It’s called risk!

The housing market has been riding hell for leather towards the cliff for years. Alan Greenspan and his appalling monetary policies from about 2000 onwards are the prime culprit. Followed closely by the rating agencies and the banks who forgot that lending money is a risky business. They fell into the 1990’s trap of thinking the world has somehow changed and that prices will never fall even if they reach stratospheric levels. There has always been some headline grabbing nut job of an analyst who creates an entirely specious reason for prices to continue upward regardless of the real economy.

These people are idiots and if you believe them you are a fool too!

House prices rose on a wave of speculation fueled mainly by the historically low interest rates America has seen for about eight or nine years. Those rates were originally “necessary” to help mitigate the effects of the collapse of the dotcom speculation in the 1990’s. They then became a convenient way to prop up the economy during the Bush regime’s absentee supervision of the economy. Add in the innovative way in which the sub-prime lenders sold and packaged loans and we had the present recipe for potential disaster.

For those off you who want to act sensibly: the only financial indicator to watch with respect to housing is affordability. Historically the ratio between house prices and earnings [aka affordability] has been reasonably stable. In the past few years it blew way out of whack. Homes became historically less and less affordable. Why? Prices rose much faster than earnings on the basis that mortgages were cheap [because of low interest rates]. So on the surface analysts could say that low rates were keeping affordability in line. What they failed to realize is that those rates were untenable in the longer term. Even a modicum of sensitivity analysis would have shown the yawning gap opening up between prices and earnings [at more normal interest rate levels].

So what’s happened?

Rates have risen. Mortgages have become more costly. Re-financing is becoming more difficult. The banks are pulling back [making mortgages even more costly to get!]; and a downward spiral has begun.

All utterly predictable.

The bottom is a way off. Don’t go buying a house until 2009 or 2010. Meantime ignore the experts and save your money!