Wikinvest Wire

Maybe housing is fixing itself

Wednesday, October 15, 2008

Just in case the economy needs any "piling on" at this juncture, Ruth Simon and Michal Corkery provide it in this (free) report at the Wall Street Journal on tumbling home prices and the absence of even more government bailouts to prevent even more price declines.

[Only a small portion of the content at seems to be behind the subscription wall these days - are they headed toward an "all-free" online model as rumored last year?]

Anyway, Ruth and Michael badly miss on their "root cause" argument and their selection of interview subjects could be much improved, but, they have a really nice graphic showing how, in some parts of the country, home prices are falling as fast as stock prices.

No Quick Fix for Housing Prices
The Treasury Department's rescue plan for the U.S. financial industry doesn't directly address the root cause of the crisis: falling home prices.
But some economists say the government needs to do more to address the underlying problems that triggered the credit crisis. "It's very disappointing" that the plan doesn't do anything "to stop the spiral in home prices," which is reducing net worth and creating a falloff in consumer spending, says Harvard University economist Martin Feldstein.
Nationwide, house prices have fallen 18% from their peak in the first quarter of 2006, according to Case Shiller. By another measure, from the National Association of Realtors, home prices are off 12% from their peak. They are expected to fall an additional 10% to 15% between now and mid-2009, says Mark Zandi, chief economist at Moody's
IMAGEFalling prices are feeding a vicious cycle that leads to more mortgage delinquencies and foreclosures. As more Americans end up "under water," or owing more on homes than they are currently worth, more people are likely to walk away from mortgages, causing foreclosures to rise further and adding to negative market psychology.
Chris Mayer, vice dean of Columbia Business School, says the government should push mortgage rates down to 5.25% in order to spur demand. Prof. Mayer has proposed that the government refinance homeowners who live in their homes, can document their income and show they can afford the new mortgage. When borrowers owe more than their homes are worth, he says, the government and the mortgage holder should share the write-down in equity when the loan is refinanced.
Geez! Martin Feldstein and Chris Mayer.

You know we're still a long way from a bottom in the housing market when these are the kinds of solutions being offered.

Maybe we should just let housing fix itself. That is, allow home prices to find their natural market level and then start over again.

Last week's op-ed by Feldstein was really shocking - see Feldstein lays an egg - and Chris Mayer has appeared in these pages off and on over the years.

Remember Money Magazine Does a One-Eighty from a few years ago? Mayer was the lone voice of optimism in a piece that signalled the peak in the housing bubble in late-2005.

At the time, Mayer was still peddling his theory that home prices in big cities were justified for a variety of factors that, in hindsight, were all quite delusional.

Not surprisingly, the paper can longer be located, but an interview is still up at Money Magazine - Big Cities, Bright Prospects.

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Nostradamus, apparently said...

You write:

"Mayer was still peddling his theory that home prices in big cities were justified for a variety of factors that, in hindsight, were all quite delusional."

That reminds me of the ridiculous new 'metrics' various financial analysts were dreaming up to justify the insane stock prices of internet companies before the tech stock bubble burst in the late 1990's.

I was an active investor/speculator at that time and I used to LOL at some of the theories propounded by the 'experts.' The one that sticks in my mind is the idea that net profits don't matter; what matters is the number of "eyeballs" a company has. This refers to the number people looking at the company's web site.

It's so disappointing to keep reading over and over these ridiculous statements like "the problem is that house prices have fallen too much."

It's as if no one remembers this is supposed to be a market driven economy. Something is worth what someone else will pay for it today - not what YOU paid for it yesterday.

As a bankruptcy lawyer for 25 years, I've heard countless debtors testify that their house is worth at least $X because "that's what I paid for it." I've often thought, "Maybe you paid too much for it and that's WHY you're in bankruptcy today."

If "The Problem" we keep hearing about is the contraction of our economy, then the cause is the over indulgence in credit.

If the cause is the over indulgence in credit, the solution is to stop borrowing, dig in and start paying off the debt.

Instead, our so-called leaders propose MORE debt.

You know you're in trouble when the WSJ can't even figure it out!

Welcome to Wonderland, Alice...

Erik said...

Interesting article.

Recently, I’ve noticed that there is a new house price index that comes out before Case-Shiller’s and reports on a national and county level. This new index, IAS360 HPI was created by Integrated Asset Services who deal with default management and residential collateral valuation. It’s interesting to see in their data for August, that house prices are continuing to see declines in all three regions except for the Northeast… I’m convinced that this is truly the index to keep your eyes on if you’re trying to get a glimpse of recovery…Has anyone else been following this?

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