Mission Accomplished: 3 Housing Issues: Multiple Bottoms, Declining Dollar, and More Sub-prime and Alt-A Defaults.

It is said that the definition of insanity is doing the same thing over and over and expecting a different result. If we adhere to this definition, housing pundits must be clinically insane because since the middle of 2006 we’ve been hearing rhetoric of “yes, today we’ve reached bottom.” Amazing how these folks live on one way streets. During the past seven years, each new record high was welcomed and when asked if this was a peak most would respond that the sky was the limit. No end in their immediate future. If up to them, housing would appreciate 20% each year until the end of time. Yet now that we’ve experienced only two moderately challenging quarters the housing complex is ready to throw in the towel and issue a Siren call that this is the absolute bottom, mission accomplished. They would like us to believe their rhetoric as gospel and ignore every fundamental economic indicator pointing to the contrary.

Multiple Bottoms

Let us take a look at a few bottom calls from David Lereah, the chief economist for the National Association of Realtors:

May 25, 06: "This may be the bottom. It appears May is a little better." (Real Estate Journal)

September 25, 06: "We've been anticipating a price correction and now it's here. The price drop has stopped the bleeding for housing sales. We think the housing market has now hit bottom." (Bloomberg)

Dec 29, 06: "It appears we've hit bottom, the price drops are necessary to stir sales. It is working." (Globe and Mail )

Mr. Lereah also issued a bottom call in March but at this point why keep track? We also have Leslie Appleton-Young from the California Association of Realtors saying "Our economy is growing. We're running about on par with what we see nationally.” Apparently she didn’t take a look at the massive hit in GDP during the first quarter that came out last week. And of course we have the talking heads over at the Fed saying that we’ve reached bottom in the housing market. Sometimes I feel like I’m taking crazy pills listening to these folks. How can we be at bottom if for the next two years we will be facing resets of approximately $100 billion per month according to the MBA. Take a look at this chart:

Those in the housing syndicate would like you to believe that we lived through this in 2006 and housing was still resilient. Well for one thing housing was still trading in Pollyanna and easy money was flowing on Main Street USA. That came to a screeching halt in late February and March of 2007 with the sub-prime spigot being turned off. In addition, many folks that found themselves in trouble in 2006 were able unload to a greater fool since appreciation was still present. Now that appreciation is MIA and the sub-prime market is gone we are seeing incredible drops such as the 800% increase in NODs in California.

Declining Dollar

As Wall Street is dancing with the stars on the boulevard with 13,000, the dollar is heading in the opposite direction. Last week the dollar reached a new low and the DOW hit a new high. What the public doesn’t seem to understand or even care about is that massive orgy credit hurts an economy's currency. Even though a gallon of milk will cost you $5.00, twice the price from only a few short years ago, they are happy they have a 10% increase in pay over five years. Inflation is a stupid tax and apparently this is fleecing many in the public. Instead of decrying the government step in and protect the currency folks are happy that their 401k is up 4% for the year. In addition, this is another reason that housing prices are in the stratosphere. A declining dollar crushes purchasing power. So even though you are making more nominally overall you aren’t keeping up with the true inflation in assets. The CPI is a joke and I’ve discussed this many times, I doubt anyone believes inflation is 3% a year. Is healthcare 3% higher? Is housing 3% higher? The bulk of where Americans spend their incomes is massively up. Not sure if many care or even understand the implications of a declining currency. Maybe American Idol should have a PSA with Seacrest saying, “today please call your local congressman and tell them that you will not stand for your dollar being fleeced; and now, here’s American Idol.”

Sub-prime and Alt-A Resets and Defaults

We’ve all heard about the debacle in sub-prime loans. The absolute debauchery going on in companies such as New Century Financial have made many people recoil. Or cases where a 102 year old man was able to obtain a 25 year mortgage loan, apparently with new modified underwriting standards. Or the immigrant worker with a $15,000 salary purchasing a $700,000 home. These stories are tips of the iceberg of what we will be expecting in the next few years. But again, the pundits in the real estate industry maintained that Alt-A loans, those given to prime borrowers but with lax underwriting standards, are now taking a hit. Apparently good credit can turn bad instantly if put in a precarious situation. We are starting to see cracks in this system as well. Maybe this could be part of the fact that 30% of all jobs contributed in the past 7 years have direct ties to real estate. So if real estate goes down, these folks lose their jobs, and no credit can stay good with unemployment.

But don’t listen to the facts. This mission is accomplished. Housing has hit bottom. Go out and buy a home, it is your patriotic duty.