Tuesday, August 24, 2010

Housing Stinks

The news that spooked the markets today was  existing home sales plunging 27% in July which of course "surprised most economists." If I read or hear another phrase that economists flubbed another easy ground ball, I'm going to pull an Elvis and shoot the TV with my .45. This graph will be familiar to anyone following the housing market and is of course Bob Schiller's famous  plot of housing prices adjusted for inflation over the past 120 years.(click to sharpen and enlarge). As you see housing prices are reverting to the mean...FAST!For 110 years housing prices yielded about 1% above inflation and in one horrific decade they exploded  upward about 90% and are now in freefall as the graph portrays. This rise was coincident with the repeal of  the Depression era Glass-Steagall Act separating investment banks from traditional banks, the development of derivatives,securitization of mortgages, crooked lending practices and abundant credit offered to anyone with a pulse. This  was the last gasp of  a  60 year housebuilding and buying binge called by James Kunstler as the "greatest misallocation of resources in the history of the world."
And now it's over. Housing as an investment has been dealt a death blow, probably for a generation. This fall has put the taxpayer on the hook for over $5 trillion in obligations related to Fannie and Freddy, a bizarre hybrid of the worst features of crony capitalism and  bungling government bureaucrats who now along with the FHA own over 90% of a mortgage market  riding down the backside of Schiller's graph. As prices drop, losses mount at Fred's Fannie and it aint over till it's over. And it ain't over.  Over 40% of homeowners are bereft of equity or underwater on their mortgages.One in 7 is facing foreclosure. Supply of existing houses is at 12 months. Nothing that our bungling politicians are doing has had any effect except propping up the unpropable, the unsustainable and the unworkable  with a dreary succession of failed and foolish schemes purportedly to help the home buyer but secretly propping up the failed insolvent banks with money while spouting platitudes,
lies, and promises. Larry Summers a few months back said the economy was reaching "escape velocity." Barak a week or so said "The economy is on track." Are these guys delusional , incompetent or just pathological liars? What seems to be self evident is that this  deflationary depression is deepening as the malignant web of leverage continues to unwind as debts vaporize , jobs disappear and moronic politicians posture and finger point.

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