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Old 02-27-2010, 12:49 PM
314 posts, read 447,962 times
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Originally Posted by trickymost View Post
Your logic makes sense, but you have to keep in mind the games which the government is playing right now to prevent this from happening. Forget about the impact and down the road costs. They are working fervently to keep prices from free-falling.

Fannie is getting more $ to cover loan losses, the FHA should as well.

To address your points individually...

1. As long as market to market accounting is not implemented, banks will hold properties and let them on the market slowly. They do not have any financial or accounting reason to get them off their books, so this isn't an issue (and how they can book record bonuses/profits).

2. Could be an issue, but I figure we'll get volatility. My concern is what happens next month - I expect a rate shock. But look across the pond. Anytime we're looking to be in trouble, it becomes a bigger problem elsewhere (Dubai, PIGS) and there is a flight to safety. Plus if equities have a big fall in May-June this year as I expect, money will flow right back into bonds. It should hold rates down for a while, but eventually this bond bubble will burst - and it will be a bigger bursting than the .com or housing or derivatives bubbles were.

3. Hasn't prevented any problems with fudging of data or fooling markets, so even though you'd think this would be a cause for concern, for now it isn't.

4. Some people are still doing well. The big concern is not the few properties on the market, it's the existing homeowners. There are folks who have money to buy and can qualify for a jumbo.

5. See #1. Nobody (Fed, Fannie, Treasury, FHA, banks) has to account for these.

6. People don't walk away overnight. They just one day stop paying. And one of two things happens - banks work with them on a modification, or they squat for a while. See #5 and #1. Banks don't mind letting you squat for a while. If you're in a recourse state, they'll go after you eventually if you stop paying. And they'd rather buy time to build capital, pray for housing to recover, or wait for a new set of bailouts from the government.

7. Inventory won't grow unless there's an armageddon scenario. Many people will stop spending and fight to stay in their homes. Others will see the writing on the wall and will stay put, perhaps forgetting about that new job or selling of that home. Some will be able to afford their homes once new programs introduced by FNM and FRE (at the behest of the administration). Others will become landlords. And the banks will never release all their inventory on the market at once. Someone can correct me if I'm wrong, but I believe during the later years of the great depression, inventories of homes was very low. Same for other more severe recessions since then.

Make no mistake - the game now is to mimic Japan in the 90s. Accept low GDP growth for years at the expense of cushioning the country from a sharp and painful economic collapse. Strategically devalue the currency and hope inflation eats into some of the debt. Pray stimulus programs do just enough to prevent armageddon and reduce household housing costs so they can stay in their homes.

Your concerns become more relevant, IMO, looking out a bit further, say past 2012:

1. Assume one or more major banking institutions fail (BofA, Citi, Wells Fargo). Who will take their place lending?

2. What happens when the boomers retire en masse and nobody is moving up the property ladder because prices are stagnant?

3. What is the cumulative effect of chronically high unemployment?

4. What will be the long term impact of higher interest rates?

5. What will be the impact of higher taxes (income, property, VAT, sales tax, misc. fees) and lower services?

That's when the picture becomes more bleak and the only real question is whether we get a deflationary collapse or an inflationary collapse. I'm of the mind it's the former. But, historically, there's not been a deflationary collapse of a developed country which is a net-debtor nation, so it's hard to rule out severe hyper inflation as well.

I guess the bottom line question is, does it really matter? Either way, the high end of the housing market will eventually have the problem you correctly identified.
Thank you for your reply. Always good to hear someone else's point of view.
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