Tuesday, January 8, 2008

The U.S. Housing Market, “Another Fine Mess” – Laurel & Hardy

Remember David Lereah? The chief economist for the National Association of Realtors from 2001 to 2007 earned the nickname “Baghdad Bob” for his consistently optimistic projections for residential real estate, even publishing 2 books about why prices would continue higher (2005) and why the market won’t crash (2006). Great work, Dave, and kudos to the American mainstream media (“MSM”) for using this MoRon as a source to help bury the American public alive with debt.

Mr. Lereah got to the top in his profession by telling people what they wanted to hear. Perhaps I need to take a lesson from this jerk. Daniel Yergin, too, but I digress…

The Federal Reserve Bank has but one client: The U.S. Banking system.

The U.S. Banking system is entirely dependent upon one market: The U.S. mortgage market (residential and commercial).

(If A = B, and B = C: Then A = C)


The median family income must exceed the mortgage requirement of the median family home (however you define it) in order to amortize the loan.

The market rent for commercial space must be sufficient to amortize the carrying costs and debt service of land costs and improvements or the property is on the fast track to foreclosure.

Any rational analysis of housing and incomes would lead to the conclusion that many markets, totaling tens of MILLIONS of homes, must decline in market price by 50% in order to bring median income and median home price into equilibrium, or that NOMINAL median income must rise at least 100%(!), or some combination of the 2. This is where the Fed comes in. IF: the Fed can inflate the money supply; and, IF that increase liquidity can be directed toward real estate, the U.S. MIGHT be able to avert a significant banking/housing/economic disaster. Even IF the Fed is successful in inflating the money supply (devaluing the U.S. $ further) it seems reasonable to conclude that not ALL of that new supply would flow into Real Estate (after all this is not a command economy). Some, if not all might find its way into other asset classes. It appears this is happening as we speak with Gold and Oil prices rising by over 1/3 since the summer credit crisis began and the world’s central banks began their liquidity injections.

You see, it does not matter that the average home in America has 30% or 40% equity - as I have heard it argued that it would take a HUGE decline in home values before the equity in U.S. banks, about $1.1 trillion, is wiped out because of this cushion. The U.S. mortgage market is in excess of $11 trillion, with 2/3 of that for 1 to 4 family homes, or $7.3 trillion, the preponderance of this is in the HIGH price homes (not the number of homes but the number of DOLLARS) and these markets are taking the biggest hit. South Florida, California, and other coastal zones that were hot in the boom will be taking 30%, 40%, and sometime 50% hits to home values. It is not a big reach to say that it is entirely possible that all $1.1 trillion of “equity” of the U.S. banking industry might be a thing of the past.

Remember, I am speaking in NOMINAL dollars. If the Fed is able to inflate the money supply and funnel these dollars into the Real Estate market disaster might be averted. Then again, it might not be averted either.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

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