Here an excerpt from recent cover
Bottom's Up: This Real-Estate Rout May Be Short-Lived
This real-estate rout has been more painful than prior ones, but it may be shorter-lived. Indeed, there are early signs of recovery.
A FEW YEARS AGO, AN ACQUAINTANCE SENT Wellesley College economist Karl "Chip" Case a T-shirt depicting a cartoon of a smiley-face house surrounded by soap bubbles, called "Mr. Housing Bubble." But it was the words captured in a comic-book cloud on the shirt that gave this otherwise goofy image its bite: "If I pop, you're screwed!"
The dark humor hardly was lost on Case, co-creator along with Yale economist Robert Shiller of the now-canonical S&P/Case-Shiller Home Price Indices. In pairing recent sale prices of U.S. homes with the prices those same homes fetched previously, the index is substantiating what every sentient American knows: The U.S. housing market is in a deep funk, probably the worst in 50 years, according to Harvard's respected Joint Center for Housing Studies.
Home prices are down nearly 18% from the market's peak, according to Case-Shiller, and inventories of unsold homes are at near-record levels. Foreclosures are mushrooming on "subprime" properties, or homes whose purchase was financed with subprime debt. Blowback from the crisis has left mortgage-finance giants Fannie Mae (ticker: FNM) and Freddie Mac (FRE) financially strapped, while many other lenders lack the stomach -- or money -- to offer new mortgages. Noted market experts such as Pimco bond-fund manager Bill Gross and economist Mark Zandi of Moody's Economy.com predict the meltdown in housing will continue for many months, with home prices declining by 10% or more from today's depressed levels.
Yet, such pessimism appears overdone, based on much recent data. Sales of existing homes are showing tentative signs of increasing, while the plunge in prices likely is nearing an end. Total inventories fell in May to 4.49 million existing homes for sale, or a 10.8-month supply at the current sales pace, down from an 11.2-month supply in April, according to the National Association of Realtors, in just one statistic emblematic of the nascent trend.
The point is the foreclosure rate is exploding but we have a bottleneck in the process, so the houses in the foreclosure process lagging by a year roughly are not on the market yet and unemployment will get worse over time. So there is no quick end to this - just the opposite, with Bond markets due to drop or even crash over time, it will get worse. This is common sense, I thought, but these days it's not the common sense people are looking for. About one year ago, a person saying anything negative about the market would be aggressively attacked. Where are the 'goldilocks', who now lose their jobs because they did not want to see the inevitable? Bankers blew away in one year the profits made in decades. That is a scary fact but politicians who pushed for deregulation (more leverage) and the authorities supervising the banks have done big harm. As Jim Rogers said correctly today, they should sit in jail with some Wall Street CEOs for a terrorist attack on the financial system. During September 11, unfortunately a few thousand people died, but the consequences now will have a severe consequence for hundreds of millions in America and elsewhere. Half a trillion of good money has been thrown into bad investments for Wall Street, which took out the biggest bonus ever undeserved. It's going to get worse to a degree, which might have consequences beyond financial matters. The depression of the 1930's was the trigger point for WW2, since people in great distress might reach out for wrong remedies once again.Abby Cohen from Goldman again said strange things today - even troubling things - like do not listen to the negative stuff people are saying during the last weeks and months. Funnily enough, Goldman's economist was one of the first to call for a big housing slump and is it not obvious even to her that we are in a huge mess with no end in sight. She said this is not comparable to the 1970's, with inflation of 15% in those days. Well, Ms. Cohen, using the same calculation method, we would already have inflation around 8% right now and, as you might figure out, the trend is rising and soon core inflation kicks in with Main Street asking for raises. One should put the lady on $30k a year and let her make a living on that. Actually, her calls the last years do not really entitle her for any higher pay anyway.