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 June

As promised, we are returning with our North American Housing Price Index. We do not claim that this is completely representative of North America as a whole, only that it is honest and not massaged to put a spin on things.

Our first result was a bit of a shocker, even to us: A drop of 9.65% in one month! So, whatever you might be hearing about 'green shoots' - it's not happening in residential real estate.

We noticed the pull downwards was from a lot of distressed properties (i.e. foreclosures) being brought to market. Since there seems to be no end in sight for the foreclosure flood, this trend will likely continue.

Tune in next month for our update.

What the Average American Knows that We Don't

Consumer confidence as measured by the University of Michigan rose for the fourth month in a row in May. Historically, a marked rise in this measure signals the end of economic contraction. Perhaps happy days are here again indeed and the Frugal Scotsman and his loyal assistant - yours truly - will have to find other ways to occupy our time instead of reporting on a Depression that never quite materialised.

Perhaps Mr. and Mrs. Average, seeing the big banks pass their 'stress tests' with flying colours, know that the worst of the credit crisis is in the past. Never mind that bankruptcies in May are up 37 percent from last year, or foreclosures up 18 percent.

Perhaps our high school-educated economists sense immanent job recovery in spite of the chain of record continuing unemployment claims.

We really do wonder where they are getting their information. As far as we can tell, the economic scene is pretty horrid with little hope of anything better than further crashing ahead. But somehow the masses are optimistic. Why? How?

As best as we can reckon it, the recovery story runs something like this: Sure, the economy is contracting - but not as fast as it was at the end of 2008. So, since the contraction is decelerating, pretty soon the contraction will stop and turn into growth.

Perhaps this story will come true. Time will tell, of course. The key thing to watch for is if contraction rates continue moderating, or if the compounding of bankruptcy, delinquency, foreclosure, unemployment, and so forth will re-accelerate the collapse in production.

If the masses are right (and we certainly wouldn't mind if the are - we could use some prosperity ourselves!), then all will be well. If they are misjudging the situation, then the letdown, disillusionment, anger and psychological depression will be extreme. To us though, the recovery story looks like the Bargaining Stage of the grieving process.

12 Percent Behind = Banking System is Toast

The US Mortgage Bankers Association reported a record 12 percent of the Nation's homeowners with mortgages are delinquent or in foreclosure. The article referenced does not give dollar amounts, but we will.

According to the Federal Reserve Bank, at year-end 2008, mortgages on 1-4 family units were 11 trillion dollars. Thus 12% times 11 trillion = 1 trillion, 320 billion.

Problem number one: delinquent mortgages aren't really worth any where near their nominal balances. A lot of them will go into foreclosure.

Problem number two: foreclosed houses aren't worth very much. Sometimes they become a liability to the bank.

Problem number three: there is a terrific glut of housing on the market right now. Throwing millions of foreclosed houses onto the market is like, well, putting gasoline on a fire. House prices will crash, and crash hard. Falling prices will create the bad sort of positive feedback in which more homeowners will 'walk away' before their financial position gets even worse.

Problem number four: commercial mortgages, credit cards, consumer loans, and business loans will be no help to banks. They are likely to perform as badly as home mortgages, or worse.

The real world is giving the US banking system a 'stress test' far worse than the coddlers in Washington could ever dream of. Most banks will fail, and resolving the failures through the FDIC will be a lot for that agency to digest. Even now, it is moving through the worst of the worst somewhat slowly as its resources permit. The sluggishness with which it is moving allows the financial rot to worsen and actually increases the ultimate cost to the taxpayer. (By the way, the slow pace of liquidations is a repeat of the lack of proper bank supervision which led up to the S&L fiasco some years back).

We expect the rot to get worse and worse until some sort of 'banking holiday' is declared to perform mass triage on the system. The sooner the reorganisation happens the better for everyone, but we expect that to be put off for a couple of years yet.

More about Las Vegas

Foreclosures are up just about everywhere, we suppose, but nowhere more than ... you guessed it - Las Vegas, Nevada. Quite recently The Frugal Scotsman discussed Las Vegas as a bellweather of foreclosure catastrophe. In the post, he surmised basically everyone in Las Vegas with a mortgage is 'underwater' - owing more than their property is worth.

Well, we discovered in this CNNMoney.com article that fully one in fifty-six households in Las Vegas suffered foreclosure process last month alone. Unfortunately, the article does not define household precisely. If it did, we would know if that meant households in general - owners and renters alike - or if it meant households that are owners. If it is the former, since about half of households own with a mortgage, the rate would be approximately one in thirty households with a mortgage...in one month!

At that rate, should it continue, it would take but a few years to achieve complete Real Estate Gotterdammerung - wipe out for every mortgage holder: either walking away, or having a date with some deputies. We do not see this being particularly unlikely.

Even if the article were using a non-standard definition of household to mean homeowner, it would be still approximately one in forty homeowners with mortgages facing losing their houses.

Like the apocryphal lemmings going over the cliff, participants in the Great Las Vegas Housing Bubble seem to have experienced herd behaviour at its worst and are paying the price. Las Vegas is the worst in the USA for now, but only because it represents the non plus ultra of how bad things can get.

We have no doubt that many other cities, and indeed even whole regions, will suffer similar fates. As much as one-third of householders will be removing to rentals, friends, relatives, shelters, or the streets (depending on their resources) in the space of a few years. But this is only a portion of what is shaping up to be the greatest economic calamity in the nation's history. Mass unemployment, underemployment and widespread ruin are developing concurrently.

Denial

It is human nature to avoid stress, if possible. One healthily perceives ordinary happenings not as potentially dangerous and cause for alarm. To be locked into a vigilant viewpoint is incapacitating. When the time is right, however, it is critical to recognise signs of actual danger and respond appropriately.

Stock markets are crashing, there are mass foreclosures, bank failures, and mass layoffs. A whole nation – Iceland – goes from affluence to a basket-case in a matter of weeks. This is not a drill, ladies and gentlemen. And how are the professional firefighters – the Treasury Departments, the Central Banks – managing the crisis? They are, frankly, running around like chickens with their heads cut off. If a multi-building fire was raging in your city and its fire department was acting like Mr. Paulson, would you have much confidence in its ability to contain the fire?

The mainstream media aren't helping the situation. They couch discussion of the economy in terms such as “being at the brink of a recession,” or “there is risk of a deep recession.” It is time to stop pretending that the current situation is merely a problem of lack of confidence.

Chances are you have suffered some financial setbacks already, or know people who have. You wonder if things in general are going to get worse before they get better, and if so, how bad will things get. The answer is that things are going to get a lot, lot worse. The problem is, in a nutshell, that the world's economy has been built on an unsound basis. If you build a house on a weak foundation, it will come tumbling down. The unsoundness of the economic system is complex and reflective of unsound parts of culture. It will not be a simple matter to begin again, aright. There will be false starts and future depressions.

Here are a few components of the unsound basis: the illusion that wealth comes from money, or in today's credit-addled world, from access to money; the illusion that human beings may increase their numbers endlessly, and claim ever larger shares of the earth's resources; the illusion that the earth's resources are in any way, shape, or form unlimited; the illusion that shielding persons or organisations from negative consequences of their actions is a good. Future posts will discuss each of these points and others.

If you disagree with these points, we would like you to make your case. Please post comments and future posts will address them.