US housing is on its way down - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 2 June 2011
US housing is on its way down A  A  A

Baltimore, Maryland

It is still unclear which way the market is going. If only they made it easier for us!

But yesterday, the Dow took a 279 point hit. Oil lost $2, closing at $100. Gold rose $6.

---------------------------------------------- Don't Miss! ----------------------------------------------

He's the Oracle of Omaha.

He's the world's most successful investor.

Your guess is right.

The Warren Buffett Quiz. Click Here to participate. It's Free!


And look at this, the yield on the 10-year note sank below 3%. Go figure. Inflation is at 5%...and people still lend the feds money for ten years at only 3%.

Why? Are they stupid? Are they crazy? Maybe. But interest rates go down in a correction. And we're in one.

Now, it's official. Everybody knows. There is no recovery. QE 2 is a failure. And housing is in a double-dip. The feedback loops are all turning vicious, and nasty. The Great Correction is beginning to bite harder. The rich don't feel the pain...and the poor are used to it. But the middle classes suffer; they've had it too easy for too long.

Mobs are out on the streets of Barcelona and Athens. Will they soon be out in Atlanta and Baltimore?

Maybe. They've got as much reason as anyone. How many Americans lack decent jobs? How many are underwater? How many are on food stamps?

But who will lead the revolution?

Remember those people who were tempted into buying a house with an $8,000 tax credit? Alas, another government program backfires. Many buyers also used the handy services of FHA financing, with just a 3.5% down payment. Housing is now below its 2009 low. So what happened to those new homeowners? They're underwater!

Thanks a lot, feds!

The best report on the housing market we've seen so far comes from the "Campbell Real Estate Timing Letter." Robert Campbell cites three studies - from Clear Capital, Zillow, and Case-Shiller. The numbers are a little different in each one. But the conclusion is unmistakable and unanimous:

Housing is going down. And with it goes America's middle class.

First, Mr. Campbell draws our attention to the connection between bank-owned house sales and house prices. In a nutshell, the more houses sold by the banks...the lower prices go. So you have to ask yourself a question: will the number of bank-owned properties on the market go up or down?

He does not make us wait long for the answer. Loan delinquencies are falling. But they are still nearly double the 1995-2005 average. And there are more than 2 million houses in the foreclosure pipeline already - that is, more than 90 days overdue on their mortgage payments. Add those 2 million (most of which will end up as bank-owned sales) to the 2.2 million already in inventory and you have the makings of a glut.

"The data...points to the simple fact that the foreclosure pipeline is bloated..." he says, with as many as 7 million properties hitting the bank re-sale or short sale market in the months ahead.

What will this do to house prices?

They will go down.

Then, what will happen?

Then, the feedback begins to circle around...biting down hard on middle class derrieres.

First, those who are already underwater sink deeper. Many, who have been holding onto to the flotsam and jetsam of the housing disaster, give up. They turn into renters.

Then, as housing prices go down, as many as 4 million more homeowners go under the waves too.

The single factor that influences foreclosures most is negative equity - more even than losing a job. Once submerged, some owners have no choice; they run out of air. Others make a business decision: it is better to let go of the heavy house weight...they reason....and swim for safety.

Interestingly, even many owners who are still ABOVE water will move to higher ground. As prices go down, they will put their houses on the market, trying to rescue the little bit of equity they have left. This, combined with the seizures, foreclosures and 'walk aways' will greatly increase the inventory of 'for sale' properties. You know what happens next. More sales lead to further price declines, provoking more defaults and walk-aways, and generally making the entire middle class writhe in pain and disgust.

Shiller thinks housing will fall back to its 110-year mean. This would require another 5% to 10% drop in prices, which would leave as many as 20 million homeowners underwater.

In Atlanta, 55% of homeowners with mortgages are already underwater, according to Zillow. In Phoenix, the figure is 68%. Imagine how many would be underwater if prices fell another 10%...or more.

But don't stop there. Use your imagination. If housing over-shot on the way up...won't it over-shoot on the way down? Housing prices in Japan dropped 80% -- and they're still near the bottom. So far, in the USA, housing is only down to 2002 levels. It has much further to go - probably another 20% or 30%, at least....taking prices back to levels last seen when Monica Lewinsky was still welcome in the White House.

More news:

And more thoughts...

*** Here's a thought. This double dip in housing occurs even while:

  1. interest rates are as low as they've been in three generations
  2. the Fed is pumping about $100 billion a month into the financial system
  3. the federal government is running a deficit of nearly $150 billion a month
How could the financial situation be more favorable? And what will happen when mortgage rates rise? teeth are getting sharp.
*** In the interest of full disclosure, we should add to yesterday's comments with an admission: we have a grudge against the SEC. Our company was once the target of an attack by the agency. The feds charged us neither with stock manipulation nor trading on insider information. Instead, they pointed an accusing finger in our direction and charged us with a novel faux pas. (It was the first time in history, we believe). The SEC charged us with NOT having inside information. Our analyst talked with a company representative. He published the company man's remark, along with a recommendation to buy the stock. Then, the insider denied that he had said it! The SEC said we had claimed to have inside information and didn't really have it.

Normally, the matter would have stopped there. Reporters make mistakes. Under pressure, sources regret and retract their statements, especially with the SEC breathing down their necks. Editors distort. People lie. That's life in the financial press.

A Maryland court, hearing these facts, ruled in our favor. But the SEC made a federal case out of it! They pursued this trivial 'he said/she said' case - at a cost of millions of dollars to the agency and to us - at the very time Bernard Madoff was making off with billions. Even Harvard Law School and the New York Times came in on our side - taking no position on who said what, they recognized that the agency had over-stepped its bounds and that the First Amendment was in jeopardy. Alas, that didn't stop the SEC. They kept at it until they won the case. Then, the Supreme Court refused to re-examine it. Though our company was found innocent, our analyst had to pay a fine.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "US housing is on its way down". Click here!

3 Responses to "US housing is on its way down"


Jun 3, 2011

Appreciate your thoughts, At the same time be clear in your purpose ! Constructive thoughts ???
How useful is your article for the common peoples in India ?
We don't know much about America or Japan.
Housing prices in Bangalore are going up every day.
Adding to the problem, Govt. itself is all set to take the prices up. Middle class peoples can't think of owning a house.



Jun 2, 2011

Hi Bill,

While there's absolutely no doubting your thought
process, you have to become a bit more positive. To this date, I don't remember reading a single optimistic article of yours. It's full of pessimism and negative thoughts. I Sincerely hope you read this and a couple of more comments I have posted under 'The 5 minute wrap up'.



Jun 2, 2011

!!Respected Bill Bonner ( B B ),
As an ordinary common man with no titles in economics I offer my crisp observations as below:

There is an adage that ""Even if a man sitting below a palmyra tree and drinks milk(original one from the cow's/buffaloe's udder) the onllokers will say that he is drinking Toddy"(a product they take out from the top ( the tender shoots of the palm's fruit ??)

Your innocent analyst's position is almost similar to the man drinking milk(the original variety)but who is purported to be consuming the milk from the palm tree ??

I hasten to conclude BB Ji

Equitymaster requests your view! Post a comment on "US housing is on its way down". Click here!

Recent Articles:
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Which Gods Will Bring Down the US Empire?
August 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?
Will They Haul Off Trump's Statue, Too?
August 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
Farm Loan Waivers: Why Bad Economics Makes for Good Politics
August 14, 2017
It is because the negative effects of the waivers aren't clearly visible.