Gorilla's Blog

House prices? Going down another 20% says housing analyst Gary Shiller!

Lots of charts say:

1) A massive oversupply of houses.

2) Nobody’s doing mortgages other than FHA, Fannie, and Freddie.

3) Unemployment is a huge drag on housing, as there is less household formation and more “doubling up”.

4) House prices are still roughly 40% above historical averages.

5) With no likelihood of a housing recovery anytime soon, the US economy will continue to stagger along.

Gorilla says: “A 10-15% drop isn’t enough for this messy bucket!!!”

No, didn’t think so!

Hidden in the report is this telling sentence: The inventory of homes on the market is up about 50% compared with last year at this time, and there are millions of potential homes for sale waiting on the sideline for markets to improve.

Sooner or later, extend and pretend will end, and it will end in tears for the US economy, the banks forced to recognize losses, and the homeowners who remain underwater.

Gorilla says: “Another 10-15% to go!”

A record number of foreclosures in August, and no end in sight!

With mass unemployment, and no serious effort to address it by Washington, house prices will need to decline at least another 10-20% before a bottom is reached.

Fortunately, our leaders are no longer trying idiotic backdoor banking subsidy schemes like HAMP and buyer credits.

But they could be trying (for the third time) to allow bankruptcy judges to reduce the principal owed by those homeowners who are still able to make payments.

Bottom line: it will take at least a decade before home prices go up.

Gorilla says: “Extend and pretend is all that’s left until supply and demand reach equilibrium!”

The great economic activity of 2000-2006 is not the great economic activity of 2006 and beyond!!!

Existing home sales are down big time to a 15-year low, but this doesn’t tell us much about the economy except what we already know: housing is moribund.

New home sales and durable goods orders will give a better indication of what we already know: the economy is in danger of falling into a deflationary, double dip recession.

Nothing much being done, the Fed seems hopelessly out of touch and the politicians are only worried about the election.

Gorilla says: “It’s the deepwater horizon for America once again!!!”

Barney Frank wants to abolish Fannie and Freddie, but doesn’t have much to say about what happens to all those underwater mortgages, now that the US government backs 90 percent of the housing market…

It’s a classic politician’s dodge: promise radical change without thinking through the consequences of your proposals.

Fannie and Freddie didn’t create the housing bubble, Alan Greenspan deserves the credit for that.

The vast majority of bad loans were made by the private sector, which operated on the assumption that house prices could only go up.

The regulatory agencies, in particular the Fed, did absolutely nothing to prick the bubble.

The US government rewarded this moral hazard by bailing out the banks and other financial institutions that made these dreadful decisions.

If you really want to reform the housing market, while no longer encouraging home ownership as an end unto itself, there are lots of ways to go, none of which have the slightest chance of passing in the US Congress:

1) Eliminate the home mortgage interest deduction: this mainly benefits the wealthiest taxpayers and has the effect of keeping house prices at least 25% higher than they should be.

2) Allow bankruptcy judges to reduce principal owed: this will eliminate extend and pretend, while forcing the banks to start recognizing and dealing with losses.

3) Cap the amount of second mortgages at 40% of homeowner’s equity.

4) Institute a 10% minimum down payment across the board and cap house payments at a maximum of 30% of income: potential homeowners need to demonstrate that they can afford their homes.

5) Institute a 10% minimum stake for those who securitize mortgages: the banks and mortgage servicers need to demonstrate that they have as much “skin in the game” as the customers they’re lending to and/or defrauding.

These would change the housing market as we know it by making houses much more affordable and potential homeowners much more able to afford their houses.

Gorilla says: “When everyone knows the government won’t bail them out, there might be a chance for economics to work!”