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I would contend that Dr. Bernanke (Curly), Dr. Geithner (Larry), and Dr. Obama (Moe) have placed an abnormal brain into the seven and a half foot, fifty-four inch wide GORILLA that is the American economy. Only stooges would expect the same borrow and spend policies that ruined our economic system in the 1st place to fix the problem. The housing and debt crisis needs the attention of reality based, blunt, straight shooting doers. Not a 3 Stooges solution.
Housing Normality
As soon as we can stabilize housing, all of our troubles will be solved. This is the mantra we hear night after night on CNBC. The chart below unmistakably paints an abnormal picture of home prices. Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5% to 3% a year, about the same as per capita income.
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The American population has steadily increased from 100 million to 300 million over the last 120 years. Home prices gained at an uneven rate from 1890 until 2000. Then the combination of bubble boy Alan Greenspan, Harvard MBA George Bush, delusional home buyers, criminal investment bankers, pizza delivery boys turned mortgage brokers, and blind regulators led to the greatest bubble in history. Prices doubled in many places in six years versus a 15% expected historical return.
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Prices have now declined back within the range seen during the period from the 1970s through the 1990s. This is why the eternal optimists are proclaiming a housing bottom. These people don’t seem to understand the concept of averages. An average is created by prices being above average for a period of time and then below average for a period of time. The current downturn will over correct to the downside. The most respected housing expert on the planet, Robert Shiller, recently gave his opinion on the future of our housing market:
“Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years. Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline. After the bursting of the Japanese housing bubble in 1991, land prices in Japan’s major cities fell every single year for 15 consecutive years. Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.”
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Residential investment and home improvement expenditures have averaged 1.07% of GDP over the last 50 years. This is the 4th time it has peaked above 1.2%. After the three previous peaks it bottomed below 1%. Based on history, it will bottom out at .8% in the middle of the next decade. This would be a reduction of $70 billion in housing investment from the peak. Great news for Home Depot and Lowes.
A housing rebound is a virtual impossibility based on any honest assessment of the facts. Homeowners currently have the least amount of equity in their homes on record. Real-estate Web site Zillow.com said that overall, the number of borrowers who are underwater climbed to 20.4 million at the end of the first quarter from 16.3 million at the end of the fourth quarter. The latest figure represents 21.9% of all homeowners, according to Zillow, up from 17.6% in the fourth quarter and 14.3% in the third quarter. There are 75 million homes in the United States. One third of homeowners have no mortgage, so that means that 41% of all homeowners with a mortgage are underwater. With prices destined for another 10% to 20% drop, the number of underwater borrowers will reach 25 million.
MORTGAGE DEBT
There are over 4 million homes for sale in the U.S. today. This is about one year’s worth of inventory at current sales levels. You can be sure that another one million people would love to sell their homes, but haven’t put their homes on the market. The shills touting their investments on CNBC every day fail to mention the approaching tsunami of Alt-A mortgage resets that will get under way in 2010 and not peak until 2013. These Alt-A mortgages are already defaulting at a 20% rate today. There are $2.4 trillion Alt-A loans outstanding. Alt-A mortgages are characterized by borrowers with less than full documentation, lower credit scores, higher loan-to-values, and more investment properties.
There are more than 2 million Alt-A loans in the U.S. 28 percent of these loans are held by investors who don’t live in the properties they own. That includes interest-only home loans and pay-option adjustable rate mortgages. Option ARMs allow borrowers to pay less than they owe, with the rest added to the principal of the loan. When the debt exceeds a pre-set amount, or after a pre- determined time period has passed, the loan requires a bigger monthly payment.
