Low rates: Good news, bad news
Commentary: Pent-up housing demand not enough
By Lou Barnes, Friday, June 26, 2009.
Flickr photo by cygnus921.Long-term interest rates have fallen in dramatic fashion in the last 24 hours, the 10-year Treasury-note to 3.51 percent and low-fee mortgages to 5.25 percent.
Inflation freaks and dollar bears caved in, as no data supported their theories. "Green shooters" were confounded by a rise in new claims for unemployment insurance to 627,000, halfway back to the April peak, and their hopes do not square with Warren Buffet's description of the economy as "a wreck."
The most important catalyst for the bond rally: The European Central Bank loaned half a trillion euros in one whack to Euro-zone banks, at a cost of 1 percent for one year -- unmistakable commitment to low rates for a long time. That ECB action gave context to our Fed's "extended period" language, and blew up the silly talk of a Fed rate hike.
Low rates are good news, but they are low because we're still in trouble.
Public commentary on "housing bottom" is still detached from reality, a peculiar thing three-and-a-half years after housing began its bubble deflation. This shortage of good thinking is unique to housing: Analysts within the industry have historically been tilted to blind optimism, and those outside persist in fruitless application of financial-market models to a market that obeys different rules.
Thus we hear that all will be OK when prices stop falling, and prices will stabilize when inventory has been sold off, aided by newly affordable prices and pent-up demand far exceeding diminished new construction. That "market clearing" equation works for stocks and bonds, but not housing -- not in a widespread market failure.
Stable home prices will not repair housing (or the economy), or even stop foreclosures. Bet a bundle on GM stock, lose it all, then cry and start over. Buy a house with prudent down payment and qualification in a market later falling 25 percent, 30 percent, 40 percent -- you've not only lost your investment but are still looking up at a mortgage balance far in excess of new market value.
Nobody knows how many "Bubble Zone" households are marooned in negative equity that they cannot conceivably repay. Zillow has begun a multimonth study to try to pin down the number, likely to be in the 10- to 20-million household range. Maybe more.
In Las Vegas, where prices have fallen 50 percent from the 2006 peak, analysts think that 80 percent of all mortgaged households are underwater. I asked a broker friend there an all-time stupid question: What will these people do? He said, "Walk." ...CONTINUED
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Submitted by Chris Whittaker on June 26, 2009 - 12:36pm.
Lou nailed it again. I think the words "blind optimist" are perfect. None of us want to be negative in our business or around our family or friends, but being blindly optimistic doesn't do much good either. The truth will set us free, it may take a while to work through it, but just randomly throwing large sums of money at a problem never is the solution and I fear we'll run out (or devalue whats left) before an actual solution is in place which would help solve the serious issues at their core.
Chris Whittaker
Keller Williams Realty Las Vegas
chriswhittaker@kw.com
www.SellLasVegasOnline.com
Submitted by William Metzker on June 26, 2009 - 2:23pm.
I want an RSS feed from Lou's site to mine. It's great to know I'm not alone in my more pessimistic views.
It would be really, really helpful if lenders, the Fed and Treasury agreed to three more course of action. (1) Speed up the short sale process, (2)Augment the Making Homes Affordable Program by increasing its limit to at least 125% LTV, and (3)Allow principal foregiveness to the same extent that short sales write down the loans.
Submitted by Jon Astaris on June 26, 2009 - 2:24pm.
"Someone in authority will notice..."
They already have. At some point in this danse macabre, some consigliere watching from the sidelines had an epiphany: HOLY S**T! The mountain is moving! It's coming to Mohammed!
He was referring to the mountain of foreclosures that will sink the banks and what's left of the private economy into the loving arms of the nanny state.
Barnes accurately describes the contrast between the ludicrous, constant "Recovery is Near" song of the Propaganda Ministry, on one hand, and the millions of inevitable foreclosures about to happen, on the other.
Barnes is wrong in his conclusion that no authority has noticed yet. They have, and they are doing exactly what all governments have done and will always do in similar moments. This is a huge plum in the lap of the state, the sudden chance to grab an enormous amount of power at zero cost and purely by accident.
The government had many opportunities to "heal" the patient but did little more than apply band aids to a gash and employed its shameless propaganda machine to lull us into a sense of all's fine and dandy. When this is over, millions of homes will have one owner: The federal government.
The concept that (bank) credit is the main ingredient of a modern functioning economy is not correct either. Seller-carried financing, bartering, small local and mutual banks would fill the need with far less of the market manipulation, corruption, speculation and parasitism that reside at the very heart of our financial system. And which is the main cause of our current troubles.
Submitted by John Rakoci on June 26, 2009 - 2:40pm.
"Today's credit panic is every bit as destructive as the idiocy of 2002-06. Someone in authority will notice, and then we'll heal." It certainly will not be the fiscal incompetence in The White House where policy is to throw money that does not exist at everything. The amount of waste could be put to good use.
Submitted by Sean OToole on June 26, 2009 - 8:43pm.
"There is only one way for prices to rise: Credit availability must return to the sound standards of the 1990s and long before."
Actually thanks to Fannie & Freddie purchases, credit is already far more available, and at far lower rates, than in the 90's and before.
Still hard for me to see how we solve years of too much credit and over indebtedness with more credit. Seems to me we won't see real improvement in housing or the economy until we wipe out the $4 Trillion in excess mortgage debt we ran up from 2000-2007.
Sean O'Toole
Founder / CEO
ForeclosureRadar.com
ForeclosureTruth.com
Submitted by Barbara Reynolds on June 27, 2009 - 7:28am.
I read every article you write..you are always intersting, always accurate and I love the very speicific data that you provide to substantiate your thinking.