Where are house prices going?

Looking at Shiller’s NYT chart, which ends in 2006, one can see that a simple reversion to trend - back to 110 on the chart - would yield approximately a 45% drop in real prices. I think that’s a best-case situation, but let’s assume it happens over four-year period during which time inflation should be about 10% (at 2.5% or thereabouts per year). Then, in nominal terms, we end up with a 35% drop in prices.

If, as I do, one expects a very severe global recession or depression as a result of the collapsing Minsky credit bubble, then a decline to the depressed levels of about 25% below trend is not unreasonable. Furthermore, I would assume zero inflation over the four-year period due to the intense deflationary pressures from the bubble collapse. For an example, see post-1991 Japan, although I expect worse than that. On these assumptions, one ends up with a nominal decline somewhere in the 60-65% range. Impossible? Unbelievable? Maybe, but that just takes prices back to 1998 (using the Case/Shiller index). Hardly ancient history.

Bank of America today announced the end of stated income loans. Today is the last day. Combine this with the effects of higher rates on jumbo loans, and contemplate the results from a qualification point of view. This chart uses a fixed-interest rate of 6.50% for 30-year loans under $417,000, and 7.375% for 30-year loans over $417,000. For those down payments under 20%, PMI was added, and the equations also considered $1,000 per month for consumer debts - meaning car payments, student loans, credit cards, and any other debts on the buyers’ credit reports.

Bear in mind that the California median family income is about $62,000 while you are contemplating. This now has to be real, documented income - yes, it is “only” B of A but if they’re doing it the industry is doing it, for all practical purposes. According to DQNews, the median price paid for a single-family residence in California in July 2007 was $478,000.

Countrywide Financial CEO Angelo Mozilo said in an interview on CNBC there is still a tremendous liquidity problem and that he thinks the housing slump will lead us into a recession.

And whose fault is that, Angelo? Doesn’t the leading mortgage lender have some minor responsibility for leading the deterioration in lending standards that, in part, got us here? A fallen angel, I would say. Don’t recognize Mozilo. Now Lucifer I know, but that’s Greenspan of course because he thought he was God, and I know Samael and Azazel, but Mozilo? I guess the records are incomplete.

But anyway, I wouldn’t argue with the man. Tomorrow we get theoretical new home sales. Theoretical, because the government does not bother to account for cancellations which are running 35-45% of new sales as reported by the builders. Details, you know, besides, who likes bad news? The government certainly doesn’t.

Brokerage Houses Are Optimistic on the Recovery of Stocks

Brokers in Meeting Predict Recovery

“A reassuring message to the stock market community went out last night over the country-wide network of private wires operated by brokerage houses. This was the result of a tacit agreement reached yesterday afternoon at a special meeting of the partners of about thirty-five of the largest wire houses of the New York Stock Exchange, at which the stock market situation was canvassed thoroughly…

…Much of the selling of the last few days, the brokers felt, was induced by hysteria. The views of all of the brokers present were heard, and none knew of anything disturbing to the general market situation…”

– The New York Times, October 25, 1929

Yes, it really did say “country-wide”. Talk about an echo in here. One refers, of course, to the market boost generated by Bank of America’s investment of $2 billion in a clearly desperate Countrywide Mortgage. I say clearly desperate because the pricing was well below market and it was preferred, not common.

One is amazed and impressed that all the folks who failed to see the problems coming are now able to declare, with conviction, that they are all behind us.

I must say (and I suppose I already did, once or twice) that the willingness to ignore the issues in the credit markets and assume that all will be well with the economy astonishes me.

The mortgage business, other than conforming loans, is more or less at a standstill. It will take a month or two to show up in the headline statistics, but early data is already becoming available. Picking on San Diego for the simple reason that that’s where the data are, Jim the Realtor reports that the indicator of market health he uses, the ratio of active listings to pending sales, is rising rapidly as sales come to a grinding halt. Calculated Risk shows that foreclosures are about to swamp regular sales activity.

Nationally, Reuters reports on the job losses in the mortgage industry as lenders and brokers shut down and disappear. The Mortgage Lender Implode-O-Meter now stands at 130. Bloomberg reports that the commercial paper marketplace has “seized up” for real estate and mortgage investment companies. I could go on, but the message is clear. It’s too late for real estate. Those high house prices? They’re history. A lot of people will be fine. But the loan window is closed for all except the folks with good credit, down payment or equity, and documented ability to pay.

The proceeds of an explosion of loans has fueled the economy for the last few years. The tank is empty. Just like that. Momentum and credit cards will carry the consumer a little way. But not far. Look out below.