Home Prices Fall - No Surprise

Two major housing price indexes, a 20-city and 10-city compilation by Standard & Poor's and Case-Shiller, both hit record declines. But there's no surprise if you've been even cursorily following the economic churn in the country.

The "value" that people perceived was a result of demand, over-supply of money, speculation, and a general economic hysteria. Not being grounded in anything truly substantial, it was waiting to evaporate, and now we're seeing that happen. But I actually think this is good news for the economy, getting back to a more realistic state that might allow more moderate but supportable growth.

Blooming Housing Crisis

All the powers that be in economic circles keep saying that the housing crisis hasn't spilled over yet into the rest of the economy. But this is sounding like so much whistling in the dark - or, perhaps, trying to keep those ever irrational markets from wigging out - and it's not clear that they can keep it up with a straight face. First, the Wall Street Journal Online reports:

In a model of central-banker understatement, Mr. Bernanke noted to the Economic Club of New York that "the past several months have been an eventful period for the U.S. economy." And he recounted the mortgage meltdown, market panic and increase in Fed anxiety about the economy that prompted a reversal of the Fed's risk balance toward growth worries and the resulting half-percentage-point reduction in the cost of borrowed money last month. While members of the Federal Open Market Committee agreed Sept. 18 that "significant spillovers [from housing-market trouble] to household and business spending were not yet evident," the downside risks to both had clearly increased, exacerbated by "somewhat downbeat consumer sentiment, and slower growth in private-sector employment."

The WSJO continues, calling feedback that the Fed is getting from local bankers and executives "a darker description" than that collected and published before the Fed came out with its Beige Book report, a collection of "anecdotal information on current economic conditions" each branch of the Fed gathers from "key business contacts, economists, market experts, and other sources." The Treasury department is trying to build a coalition that will help stabilize the mortgage markets, August housing starts in Japan were down 43 percent from the same period in 2006, and, according to NPR, the US foreclosure rate is the highest it's been since the Great Depression. At this rate, how can conditions not spill into the rest of the economy. It sounds as thought it already has, only no one has wanted to be the first to say it.

Storms Gather on Housing Front ... Right?

The New York Times reported new homes sales at their slowest pace in more than seven years, with median prices down 7.5 percent from the previous year. Though, interestingly, when you look at the actual Commerce Department Report, the numbers are hardly written in stone:

Sales of new one-family houses in August 2007 were at a seasonally adjusted annual rate of 795,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 8.3 percent (±12.4%)* below the revised July rate of 867,000 and is 21.2 percent (±9.0%) below the August 2006 estimate of 1,009,000.

Those margins of error at a 90 percent confidence level are pretty big; in comparison with the revised July rate, the potential error is even larger than the estimated difference.

So, the Times is comparing a reasonably uncertain estimate to more accurate past numbers. And then other questions come up, as well. Is the drop in home sales also due to builders expecting a slow-down and scaling back their work levels? Why not look at the median number of months for sales apparently jumping from roughly 4 in 2005 and 2006 to the current 6? This is an example of the problem with reporting on economic data - it takes knowledge and effort to dig in and understand exactly what it is saying.

For those who'd like some perspective on the numbers, Investors Business Daily has a couple of informative graphs that show trends (at the bottom of the page).

Good Credit? Bad Credit? How About Smoke and Mirrors

The news of Countrywide Financial seeing more borrowers with good credit falling behind on mortgage payments sent the markets into a scurry. But, really, what have they been expecting?
The New York Times in the first graph of their story noted "that the housing market might not begin recovering until 2009 because of a decline in house prices that goes beyond anything experienced in decades." Well, folks, we had the most insane run-up of housing prices for, what, a decade? When will people start looking at history and nature? Nothing lasts forever: not reputations, not nations, and certainly not economies.

Housing prices went up giving people all sorts of wealth - on paper. So what did the mortgage lenders and banks rush to do? Get them to take out equity. As I was reading in the Financial Times (sorry, no link), what really caused the problems for Countrywide were home equity loans where deliquency rates had more than doubled over the period of a year. What compounded that problem was a practice that many lenders have entered: a form of credit washing. Lenders took combinations of loans, mixing different credit risks, and got large lump sums by selling the loans off to legally insulated subsidiaries and then selling high-yielding securities. They essentially washed off any credit taint by saying that even if some loans defaulted, the rising housing prices would ensure the ability to maintain cash flow. In other words, they were juggling numbers and betting that a rising tide would float their rears out of trouble. But it all depended on those prices going up. That's over:

a conference call with analysts that lasted three hours, Countrywide’s chairman and chief executive, Angelo R. Mozilo, said home prices were falling "almost like never before, with the exception of the Great Depression."

This shouldn't have been hard to see. Hell, I saw this coming and so did various people I know, because none of us think that the good times last forever. Prices were at a point that people could no longer afford to get more and more - there's only so much of your income you can devote to something like housing. So people stay put, buying drops, and of course the prices drop. Then people can't move, because they're in hock up to their eyelashes and can't get the price to clear them of debt, meaning that selling the family manse would leave them cowering in the financial basement, so to speak.

Now the experts are saying that it will take until 2009 for home sales to recover. I don't believe them. This is a precarious log jam. More payments will be late, panicky lenders will recall loans (because that's what they do), more houses will be on the market, driving prices lower, with even more people stuck. Every time prices drop, more people find themselves in this trap as the barrier to being dangerously financially leveraged gets lower and lower.

So, we heard in 2006 that it would get better in 2007. Then we heard 2008 earlier this year. Now it's 2009. By the time the finance types admit that there's a significant problem, it will be the next great depression. How depressing.