Housing Price Report for December

Our North American Housing Price Index registered a 6.46% drop from November, which likely would have been much deeper if we had not seen a sharp uptick on the top of the housing market. The drop from May - when we started the Index - is now 15.86%, representing a massive fall in the North American housing markets, and likely correlated by a similar drop in the valuation of bank mortgage portfolios. On an annualised basis the Index suggests the market is down 27.18%, a truly staggering loss.

That 27.18% drop strongly suggests the stimulus effect of the US Government's tax credit has worn off. Record low rates for conventional mortgages seem to be little help as few applicants qualify for the new, stringent requirements. All in all, we declare that the housing crash appears to have resumed.

Given the huge shadow inventory of foreclosed houses, the impending wave of Alt-A defaults, high unemployment, and falling income across the board, there is essentially no hope the housing market will find 'a bottom' any time in the foreseeable future. Additionally, the 8.9% rise in housing starts reported by Forbes will only add to the pain of existing housing stock, as new - and difficult to move - houses come into the market and further drive down already distressed property.

We expect the bottom, when it comes, will be shockingly low. We boldly predict a real price decline somewhere in the neighbourhood of 90% on average, peak to trough. In some places, such as Las Vegas, we expect a decline of 100% as the whole urban field there becomes indefensible. Attractive urban centres will fare the best, but it will be grim consolation.

Price declines may be obfuscated by inflation, if that should arrive. Given the devastation banking elites would suffer in a true deflation, we suspect the 'powers-that-be' will attempt to engineer a burst of high inflation to save the banks. On the other hand, such efforts may be unsuccessful, as it would be exceedingly difficult to discern the optimum amount of money-printing. As powerful as banking elites are, they may be sacrificed on the altar of the Almighty Dollar.

Housing Price Report for November

Our result for the first six months of our North American Housing Price Index is a drop of 10.45%. This is a very serious drop, and has implication for more than just the house owners who need the value of their houses to say up. It also means that, on average: the housing collateral on bank balance sheets is impaired by around 10%; any and all securities of bundled mortgages have seen their value reduced by 10%; any house owners relying on the value of their house to keep up appearances have seen their appearances reduced by 10%.

Prices are showing some sign of improvement in the USA, which is to be expected thanks to the Federal Government's herculean efforts to prop up the industry.The 10% US Federal income tax credit has been extended, and all things being equal, this will tend to keep prices in the USA 10% higher than they otherwise would be. We'll be watching for a sudden fall when the program ends, if ever.

Interestingly enough, though, we are seeing some weakness in the Canadian housing market. This strikes us as rather odd, as the credit available to Canadian Citizens is still growing at a respectable clip. Additionally, the Federal Government has a very direct hand in guaranteeing mortgages in Canada, whereas the U.S. Federal Government only proves a wishy-washy guarantee to bail out banks.

Frankly, it seems that the animal spirits are friskier in the United States than Canada, undoubtedly supported by the U.S. Federal Government's housing tax credit. It is also possible U.S. Citizenry is a bit more credulous of the 'recession is over' propaganda than are the Canadians; it's time for Americans to do their patriotic duty and spend, spend, spend!

A Clunker of an Economic Policy

Yesterday, the world was greeted by a much-trumpeted USA GDP report showing 'growth' has returned. Admittedly, the 'growth' was primarily the result of Federal Government stimulus, mainly in the form of the first time house-buyer credit, and the 'cash-for-clunkers' plan. These two giveaways really only pulled consumption forward as opposed to creating new demand. The collapse in auto sales after its programme ended proves the point.

More disturbingly, having the economy increasingly dependent on debt-funded, government stimulus is not a sound policy. Let us illustrate by analogy. Suppose Mr. Miller was down on his luck. Mr. Baker next door has a brilliant idea: "I have an unused credit line down at the Bank. Suppose I max it out and use the funds to buy flour from Mr. Miller. I need to buy flour anyhow. I'll just stock up and then gradually use it up." Mr. Miller is, naturally, delighted when the order for a tonne of flour comes in. He even needs to hire an assistant, Jack, and now Mr. Miller can order that new mill stone he'd been hankering after. GDP is now growing again!

Only here's the fly in the ointment: as Mr. Baker starts buying less flour as he draws down his stock, Mr. Miller's sales are lower than ever! Jack gets laid off and ends up moving into his parents' basement. Jack's former landlord is unable to find a new tenant and starts baking his own bread to economise. Mr Miller also reluctantly cancels the order for the new mill stone. Mr. Mason, faced with no prospects of further business, sells his home and joins a monastery. Mr. Baker is faced with falling sales, and now a hefty interest payment on that line of credit. GDP is falling again, and even worse than before!

A debt-binge set up the world economy for the 2007 Depression. The attempt to keep the debt party going will end in tears. Mark our words! [cue spooky music]