glennwhiteside (93.51)

BW: Where Housing Will Be in 2012

June 26, 2009 – Comments (3) | RELATED TICKERS: TLT , TIP , SRS

My thoughts on this 6/18/09 Business Week article...

I don't have much faith in S&P and Moody's analysts at the moment.  If
you recall, they are the ones who rated the legacy mortgage-backed
securities as AAA which have been mostly downgraded to junk by now.

Even taking their predictions at face value, they're claiming that in
2012 house prices will return to where they were 4Q2008.  If you look
at the following chart (click to enlarge) you'll see that 4Q2008 is roughly 25% off the
peak of the bubble.



And yet 4Q2008 is still deep in bubble territory.  In other words, S&P
and Moody's analysts expect housing prices to return to levels that
veer sharply off the 120 year trendline and stay there indefinitely.

I'm not buying it, and it's not just because of some amateur technical
analysis.  Reflating the bubble will not work because the U.S. isn't
going to find enough buyers for our debt.  The Fed can't buy all of it
without creating unacceptable levels of inflation.  China's and
Russia's central banks have stated outright that they will not replace
their maturing long-term U.S. bonds with more of the same, and that
they're moving to shorter-duration dollar-denominated debt (and
they're also not shy about stating their interest in buying debt from
each other and forming an alternate to the dollar as reserve
currency).  This also means that interest rates will inevitably rise,
putting downward pressure on house prices.  It is a pretty
straightforward supply/demand scenario.

Meanwhile the burden of servicing the massive amounts of new debt will
be a drag on U.S. GDP for years to come (maybe decades).

One point from the article I agree with is that all real estate is
local.  Seattle's bubble occurred later than most of the nation's, and
it wasn't as big as the bubbles in Southern California or Miami or Las
Vegas or Phoenix, but there was a bubble here (I live in Seattle and
yes I bought a house during the upward parabolic move).  The economy
here seems to be pretty sound and I think we're in better shape than
many other parts of the country.  I'm hoping these positive factors
will make up for some of the bubble effect but they won't bring back
the irrational exuberance needed to return the housing market to
levels where I can break even, let alone make a profit.

Thanks for trying to make me feel better BW, but you're going to have to try harder.