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JOHN PAULSON WILL BE WRONG THIS TIME

By       Message Jim Quinn     Permalink
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We have arrived at critical juncture in the ongoing financial crisis. Have the government actions of the last year successfully spurred the animal spirits of Americans, resulting in a self-sustaining recovery?

The Obama administration and most of the mainstream media would answer yes. GDP has been positive for the last four quarters. Consumer spending has increased in five consecutive months. Corporate profits have been relatively strong. The country has stopped losing jobs. The missing piece has been a housing recovery.

No need to worry. Famous or infamous (depending on your point of view) $15 billion man John Paulson has assured the world that house prices will rise 8% to 10% in 2011. His basis for this forecast is that California prices have rebounded 8% to 10% in the last year, and this recovery will spread to the rest of the nation.

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Maybe Paulson has teamed up with his buddies at Goldman Sachs to develop a product that guarantees a housing recovery. I tend to not believe anything that comes out of the mouth of anyone associated with Wall Street, but let's assess the facts and see if they point to an impressive housing recovery in 2011.

The man who has been right on housing for the last ten years has been Yale Professor Robert Shiller. His analysis of U.S. housing prices from 1890 until present, which he first published in 2005, unequivocally proved that we were in the midst of the greatest housing bubble in history. At the same time, David Lereah, the chief economist (shill) for the National Association of Realtors, was pronouncing it was the best time to buy. He published his masterpiece of market tops, Are You Missing the Real Estate Boom? at the 2005 housing peak. He called a bottom in January 2007, and the NAR has continued to tell Americans it is the best time to buy for the last five years as prices have dropped 36% nationally.

Dr. Shiller continues to be the voice of reason when it comes to the housing market. He is doubtful that the recent "recovery" will continue:

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"Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast. Momentum may be on the forecasts' side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue."

Whom do you believe? The paid mouthpiece for the National Association of Realtors, the Wall Street shill, or an impartial economics professor who has done rigorous analysis using 120 years of housing data?

Government Manipulation and Failure

The Obama administration has taken unprecedented actions using taxpayer money to keep housing from reaching its natural equilibrium level. The Keynesians who inhabit the White House decided that a first-time home buyer credit of $8,000 would boost home sales and have a multiplier effect by spurring home furnishing sales. It is obvious these people have not spent much time in the real world. No one decides to purchase a home because of a tax credit. They may accelerate a home purchase in order to take advantage of free money, but an incremental purchase will not be generated.

The tax credit was set to expire in November 2009, and the bean counters at CBO projected it would cost taxpayers $8 billion. The NAR estimated that 1.9 million first-time home buyers took advantage of the government handout, resulting in 350,000 additional sales over that time frame. Therefore, the total cost to the taxpayer was $15 billion, and each additional home sale cost you $43,000. Dean Baker of the Center for Economic and Policy Research called the credit "a questionable redistributive policy" from renters to home buyers, but said that he used it himself when he bought a house. He wrote on his blog: "Thank you very much, suckers!"

Congress deemed a 100% over-budget program that dispensed $8,000 to people for doing something they were going to do anyway such a raging success, they extended it and expanded it to all home sales. The new and improved program extended the $8,000 credit for first-time home buyers and added a $6,500 credit for any home purchase. It was restricted to "poor" folks who made less than $225,000. The credits run out on April 30, 2010. The mainstream media was positively ecstatic over the home sales "surge" in March. They will be astonished again next month as these handouts have pushed forward demand from later in the year.

Economists have estimated phase two of this program will cost taxpayers $100,000 for each additional home sold. The following chart unmistakably shows a surge in home sales from the government giveaways and then a plunge immediately thereafter.

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The Home Affordable Modification Program (HAMP) makes the home tax credit program look like an astonishing success. The Obamanistas took $75 billion of taxpayer funds and have been distributing it to millions of reckless homeowners in order to keep them in homes they can't afford. The administration sold this plan as keeping 4 million people in their homes. A veteran in the mortgage industry recently noted that a HAMP application he reviewed showed that these poor people needed a reduction in their $1,880 mortgage payment while incurring the following expenses in the prior month:

  • Visits to the tanning salon
  • Visits to the nail spa
  • Purchases at a gourmet produce market
  • Various liquor store purchases
  • A DirecTV bill that must involve some serious premium programming or pay-per-view events
  • And over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy's, Pac Sun, Urban Behavior, Sears, Staples, and Footlocker.

The conception behind this plan was that these homeowners were just down on their luck and needed a little help. The facts have proven otherwise. Despite threats and tremendous pressure from the administration on the banks, the program has been a miserable failure. After one year, only 228,000 permanent loan modifications have been completed. Modifications made by banks in 2008 have re-defaulted at a rate of 60%. If this program results in 500,000 modifications, the cost to taxpayers per modification will be $150,000.

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James Quinn is a senior director of strategic planning for a major university. James has held financial positions with a retailer, homebuilder and university in his 22-year career. Those positions included treasurer, controller, and head of (more...)
 

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