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

Not since Okies rode the rails to anywhere else have we faced so many households with savings wiped out, credit ruined, and shut from future home purchase. Assertions of improving or stabilizing inventory do not consider these millions of homes not on the market — the owners unable to move even to take a better job. Or any job.

The pent-up-demand concept fails on other grounds. In hard times household formation slows and even runs negative, people doubling-up, kids coming home. We won’t get good data for years, but the immigration portion of population growth is slowing with the economy: Illegals from 1 million annually could drop to net flat.

The supply side also fails: as Americans stretch the lives of their autos, same for our houses — and we can economically stretch the life of a house a hell of a lot longer than a car.

New sales data shows a housing freeze spreading to decent-economy zones. The pattern is the same in all: the bottom half of markets by price are OK, even auction conditions for resold foreclosures; the top half … dead. In "no-bubble" Seattle, a sparkling global-linked tech economy: Year-to-date unit sales are off 34 percent, with dollar volume off 43 percent.

Foreclosures cannot abate nor can households regain footing until prices begin to rise. Stability won’t do it. "Increased affordability" is a bad joke, as loan-qualifying restrictions more than offset price and rate decline — and there lies the way out!

There is only one way for prices to rise: Credit availability must return to the sound standards of the 1990s and long before. 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.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.


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