Monday, April 09, 2012


The housing bust is over

I correctly called the end of the initial credit crisis in 2008 and banking crisis in 2009 although I did not see that this would immediately lead to the huge stock market rally that began in March 2009. (I tend to be a little early on these calls, from months to a couple of years. For this reason I only say be aware of market patterns that look like housing bottoms; signs of which I've seen in housing.) This call is of similar importance. Look for signs that housing prices have bottomed and treasury bond prices are peaking.

There has been an agreement that will increase the number of foreclosures thereby removing people who are not current on their mortgages.

The $25 billion settlement with banks over foreclosure abuses may result in a wave of home seizures, inflicting short-term pain on delinquent U.S. borrowers while making a long-term housing recovery more likely.

I believe this will be good for the housing market in the long run. My reasoning is:

-People squatting in properties they can't afford keeps those properties from being sold to people who can afford them. It is a drain on bank capital. If stronger, i.e., wealthier, homeowners buy these homes then they will be taking their capital out of savings to spend on those homes. Deflation is a problem because it creates an incentive for people to hold onto their capital waiting for further price drops.
-Those people squatting will be forced to take money out of savings and pay rent. Again, more money moving out of savings into the economy will counter deflation.
-Allowing the depreciating assets to be exposed to the market and traded at the market will begin the process of clearing the market of excess inventory. This is a necessary step to ending deflation.

I am not saying the price drops are over and we are very vulnerable to exogenous (external) market shocks. (Yes Europe, I am talking about you.) But I have noticed a couple of markets in which housing inventories have begun to fall very quickly. I am not going to talk about this because I looking to buy in one of these markets and I rather not discuss my reasoning before I get on board. (That would be the equivalent of someone touting a stock before he owns it.)

Ironically, this is very bad news for the bond market. As homes get bought banks will be extending credit to worthy borrowers. Capital will be allocated out of fixed income and the demand for more mortgages will drive up interest rates. I expect over the next few years to see capital start to move from fixed income, especially, and stocks into real estate. This will be a slow but increasing trend over the next decade.

You have been warned.



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