Wednesday, June 13, 2007
You needn't enlarge the pic. Here's what Steve Forbes said about housing in the June 18th, 2007 issue.
Thanks to Fed-created inflation, housing prices in most of the country will firm and then rise. This won't save overextended subprime lenders and most come-lately speculators. But it will give much of the industry something of a second - albeit brief - wind.
Housing will "firm" and then "rise"?
The recent demise of 30-year Treasuries just shaved more than 5% off the value of every piece of real estate in the nation.
So much for a bounce!
Steve Forbes is a formidable intellectual but his puerile analysis on housing shows that an unshakable optimistic bias can be just as distortionary as its opposite.
(Steve's been bearish, and very wrong, on oil prices for a few years now as well.)
Believe me, since I have been watching every tick of the housing market these last few months - THERE IS NO UPTICK ANYWHERE IN SIGHT FOR HOME PRICES. We are still in the early innings of the real estate crash.
First, housing dropped due to the momentum of its own weight - due to gravity, if you will. That is what has happened over the past 2 years.
Next, negative leverage starts to pummel housing further, i.e. adjustable mortgages. (Feb 2007)
Then, interest rates start to rise - as they have been doing so sharply since December 2006. At that nadir, the long bond was yielding 4.52%. As I type this, it's yielding 5.35%.
As rates tighten the vice on a weak market, foreclosures proliferate and start to put a hurting on so-called Alt-A mortgages. (That will be this summer/fall)
The next leg down may be catalyzed by one of the following: a hurricane battering in the Southeast, a cold winter's heating bills in New England, or something like a massive municipal crisis (NJ?) that will decimate the real estate of an entire region. Or dare I say a terrorist attack in Manhattan?
The final nail in the coffin for home prices will be an economic recession. If you can't sell your house today, with low rates and the backdrop of a very strong economy, you are going to be totally screwed if you still have the "for sale" sign up when a recession eventually comes.
Remember "short the bond" is a key component of the End-of-the-World Trade. In fact, I just covered my bond short yesterday and will look to put it back on. The bulk of my trading profits this year have come from this position.
And of course, as the bond has dumped, I have been a double winner - since my "first house" drops in price along with it.