Friday, December 14, 2007

This Just In-Home Prices Have to Fall!

The big snowstorm passed last night. I have to give a tip of the hat to the Massachusetts Highway Department. The heavy snow ended up here around 9pm, and by 6am this morning when I left for work the main highways were in excellent condition. Great job guys! The side roads in Cambridge were another matter entirely! You can't have it all!

This Just In-Home Prices Have to Fall!
The end of the week was very interesting. After a FED rate cut on Tuesday, and an announced plan of lending money through novel channels by central banks the world over on Wednesday, the calls for "more liquidity' were answered in full. I would say somewhere around late Thursday and into today there was a new murmur running through the media and markets. The revelation? The deep insight? the dawning of a new era? All this and more? you bet.

The concept that Home Prices are Too High and Must Come Down is finally being recognized as a certainty. Sound familiar? It should, as I summed up the core of the problem a few posts ago using that exact language. Up until now, all the SIV bailout plans, FED rate cuts, and rate reset freeze plans all were operating under the mistaken assumption that home prices would stay somewhere near where they are now. Perhaps a 10% correction at most. A key feature of all the plans was the idea that maybe a year was needed for things to resume their rocket path towards the heavens.

Calculated Risk has great posts on this changing situation in the following posts:
http://calculatedrisk.blogspot.com/2007/12/more-2008-housing-forecasts.html
http://calculatedrisk.blogspot.com/2007/12/krugman-after-moneys-gone.html
Complete with this wonderful graph:

One look at this graph really tells you all you need to know. It took time for the bubble to grow, and it will take time for it to deflate. The move by Citi to take some SIV's onto their balance sheet can be viewed as a move to start the process of loss management.

What does this all mean? I can think of a few right away:
  • Continued extreme pressure on home prices as buyers will be in NO rush
  • A return to almost traditional lending requirements
  • Massive bank losses
  • Psychology change about homes

We have discussed the particulars of all this already. The take home point is that slowly but surely the truth that things got way out of hand in housing is coming to the mainstream line of thought. This will put enormous pressure on banks and lenders to stop the game of "hide the losses until the losses are recovered" and move towards the needed unwinding of the mortgage mess.

This does not mean things are going to get better any time soon. This does not mean the growing acknowledgement of the home price issue will take root. It just means that the solution has been in the very least glimpsed. How the reaction to this reality unfolds is the fun part.

Sorry for the short post, but I am home late. I also wanted to make sure I get some Rock Blogging in to start the Friday night festivities!

Ozzy Osbourne with "Bark at the Moon". Bad video, but great song. Great baseline, rhythm changes and great guitar work highlight the piece:

Queen did all the music for the great movie 'The Highlander". I found a great video montage of all the sword fights set to the song "Gimme the Prize". Too cool:

A newer band you may never have heard is Must. This song is called "Freechild" and the speed changes and vocals are top notch:

Have a good night.

1 comment:

watchtower said...

Jim wrote a piece concerning the "inflation/deflation" dilemma over at The Great Depression 2006 website that I thought was interesting.
http://tinyurl.com/267wxu