Blogs For Victory

If it doesn’t recover, then the economy doesn’t recover – and its not about to recover:

…the next phase of the housing crisis is about to begin according to new analysis by hedge fund owner and value-investing guru Whitney Tilson. Since home prices peaked in 2006, the Case-Shiller Home Price Index has fallen 34%. This, of course, was driven by a huge spike in defaults and delinquencies among subprime borrowers as interest rates and payments reset.

In a recent update to his housing overview from last December, Tilson says the next phase will be driven by prime and Alt-A borrowers who owe more than their house is now worth. The catalyst will be ongoing job loss, falling wages, and rising interest rates. Add to this a huge wave of Alt-A loan resets over the next five years. The result: Home prices will fall another 10%, possibly more.

What’s worse is that according to new research, the likelihood of a borrower making a “strategic” decision to default — in effect, mailing the keys back to the bank and walking away — increase greatly depending on how deeply underwater they are and whether people they know have done the same. This means there is a very real possibility that home prices declines reaccelerate as hope is lost and it becomes socially acceptable to give up on your mortgage.

It does seem that at least some banks are wising up about foreclosures – for instance, I have a friend who is staggeringly behind on his mortgage, but there’s been no move on the part of the lender to even start the foreclosure process. It makes sense – why would a lender already saddled with a large number of foreclosed properties want to add another to the pile of houses which cannot be sold? Better, at least for the moment, to allow someone to live free – and at least maintain the property – than to foreclose on it. So, while a huge spike of foreclosures is still likely as the year winds down, there’s not as much of it as one might have feared. On the other hand, if someone owes $396,000 on his house and he notes that the larger house across the street just went for $167,000 and, in addition, he’s seen a much nicer, larger house with a pool offered for $166,000, just what is keeping him in his current home, supposing he can get financing (such as, through his as-yet unused VA Loan benefit?).

Well, that guy is currently in negotiation with his lender to try and “cram down” the mortgage amount to get the house to a price where it can be rented out to cover the mortgage, then he’s going to find himself swell, new digs and hope that he doesn’t get laid off, ’cause that would really screw the economic pooch…but, one can’t worry about hypothetical situations; sufficient unto the day are the problems thereof. But what of the guy who has recently lost his job, or had a pay cut, or who is still working but his wife got laid off? What is the point of keeping a house your massively upside down on with no prospect even in ten years of getting back to your old value? And what of the guy who is in fine economic shape but just can’t see himself paying off a 300k mortgage over 30 years in order to end up, at best, with a loss given the interest he paid? Time to walk – and I’ll bet that millions of Americans will do just that, thus driving home prices into further decline.

As I said pre-Spendulus, we’re broke – as a nation, we went on a spending binge financed by fiat money and now the bill has come due. At least half the dollar wealth of the United States is fictional – it never existed. We played a gigantic confidence game on ourselves – bought in to the largest ponzi scheme ever imagined. We have to clear the decks, assess what our real wealth is, return to hard currency and start to rebuild. This means, of course, that we’d have to put off massive, new government programs at least for a while and thus this doesn’t commend itself to Obama, et al.

And so, we’re going to pretend we’re not broke and its all just a temporary slump which we can fiscal stimulus our way out of and then the ponzi scheme can go on forever. Trouble, this will – indeed, already has – run up against the fact that people aren’t actually stupid. No one sitting on a house which has lost 50% or more of its value is going to sit around the living room staring at his Obama commemorative plates chanting “hopeychange” in the expectation that the wizard will pull equity out of his hat. No, it doesn’t work that way – people act with amazing celerity to economic circumstances. The best example I’ve ever come across of this is from the early days of Lenin’s regime in Russia – the decree went out dictating what the peasants would be paid for their crops…through a bureaucratic slip up, onions weren’t included in the decree, and all of a sudden Russia was awash in onions.

As I’ve also said before, economics isn’t alchemy – it isn’t an esoteric thing which only a few geniuses can figure out. Its something which just happens because people have to make a living, some how. You don’t have to have a plan for it – you just have to ensure that no one is defrauding others and that the medium of exchange is fixed. Do that, and people will just go about their business – creating wealth and consuming same. The longer we go along our current path, the worse it will get and the longer it will take to dig out of it. We were already over the cliff when Obama took office, and now he proposes to tie lead weights to us on our way down. We can be smart, or we can be fools – Obama advises folly.