The Affordable Mortgage Depression

Excerpt from Bloomberg Editorial: "Buffett's $7M Sacrifice Is Only a Start"

2011-08-25T18:57:29Z

Jonathan Weil editorial dated 8/24/11. Link.

The following excerpt succinctly articulates our economic reality, reiterates this venue's perspective since 2008, and features an excellent use of the word "legerdemain".

...

Today the fundamental problem for consumers, banks and governments alike is too much debt. The process of deleveraging is painful. There is no way of getting around this. Yet ever since the current financial crisis started in 2008, the U.S. government has responded by doing all it can to avoid the inevitable reckoning. European leaders have done the same.

Stop Trying

We have tried bailouts, drawing applause from Buffett, whose company owns a 6.67 percent stake in Wells Fargo & Co. (WFC) We have tried federal stimulus spending, which yielded little more than a sugar high. We have tried propping up the stock market and home prices with record-low interest rates from the Federal Reserve, hurting savers as well as retirees and anyone else living on a fixed income.

We have tried covering up banks’ losses, through loose accounting and get-out-of-jail-free cards for bankers who lie about their companies’ finances. The costs have been immense, both to long-term investor confidence and the rule of law. And none of it has worked, except in the transitory sense.

Bank stocks are crashing again, partly because investors don’t trust the balance sheets of Bank of America Corp. (BAC) and Citigroup Inc. (C), to name a couple. While we have managed to keep the financial system limping along, the government refuses to accept that for the economy to get appreciably better it probably will have to get worse first.

To the Rescue

Tomorrow in Jackson Hole, Wyoming, the world will be watching Fed Chairman Ben Bernanke to see if he will ride to the markets’ rescue with a third round of quantitative easing -- printing more money to boost asset prices. At some point, we all must recognize there’s only so much government can and should do to ease our loss of wealth, or to entice investors into risky assets whose returns may well depend on further interventions.

There used to be this quaint notion of a business cycle, where it was widely accepted that good times and bad times came and went, and that the role of government was to ensure that neither got out of hand. For too long we have operated on the premise that bad times are something to be prevented or postponed no matter the cost -- to the point where the choice now becomes framed as one between economic calamity and buying time.

The American people can handle a bad economy, even an awful one. Most don’t have a lot of money to start with. What is unbearable is the current policy of running to aid the world’s biggest, most disaster-prone financial institutions every time they get into trouble, with only afterthoughts paid to what this means for ordinary citizens.

You want shared sacrifice? Let’s start with market regulators forcing the largest banks to fess up to their pent-up losses and come clean with their books, so we can get their red ink behind us as quickly as possible and create a new baseline for sustainable growth. While reckonings are expensive, the cost of forestalling them through legerdemain is always far greater. No doubt this would cost Buffett a lot more than $7 million.

Excerpt from TheAMD.com editorial dated 11/6/08.

Government manipulation of interest rates with the intentional or unintentional effect of materially influencing asset prices is a bad idea.

It was government intervention designed to realize a social agenda that principally contributed to the current problem of overvalued houses. Proposing further government intervention with the goal of supporting prices at an arbitrary level can not and will not work. The only solution to our present predicament is to allow the markets to clear. We must let housing prices reach an equilibrium relative to the supply, demand, credit availability and more conservative mortgage characteristics of the post-bubble economy, as well as the new risk premium perceptions and performance expectations of potential buyers. Much of the housing gains seen since the late 1990s, when sub-prime and affordability mortgages began to distort the market, will be reversed.

There are steps that the government can take to facilitate the stabilization of the housing market and limit collateral damage to both the credit markets and the broader economy. Any action which would attempt or have the effect to prop up housing prices at an artificial value, though, is counterproductive. Such initiatives will only lengthen, deepen and increase the damage caused by the inevitable march to a sustainable equilibrium. The Japanese have provided us with a useful case study on this subject. Don’t stand in the way of the markets clearing. Any government action should be undertaken with a design to facilitate this clearing process and an understanding that substantial economic pain is unavoidable.

CBO Projections Show Little Improvement in Unemployment Rate Through 2013; Stimulus Spending Ineffective

2011-08-25T01:35:08Z

Today the Congressional Budget Office released its expectations for the Unemployment Rate going forward. The CBO projects unemployment to fall by less than 1% over the next two and a half years, to approximately 8.2% at the end of 2013. This estimate is bleak and represents a stark contrast to claims that the Stimulus Spending Bill would reduce unemployment to 5.0% by the same date.

CBO projections are estimates made using a chart and disclosed figures for year-end 2011 and 2012. Link to chart.

Crack in Sidewalk, Thought to Be from Earthquake, Gives Obama Another Excuse for Missing Economic Recovery

2011-08-24T03:22:17Z

The President is fond of pointing out that he inherited a weak economy. That his economic policies and legislative initiatives have made a bad economy worse seems to be irrelevant.

The Commander in Chief is equally enthusiastic when it comes to blaming global disasters and market volatility for the lack of a U.S. economic recovery.

Deposed dictators, expensive oil, earthquakes, tsunamis, nuclear disasters, perpetual European crises, congressional deadlock, greedy businesses hoarding cash, the under-taxed rich and stupid Americans who aren’t consuming/borrowing enough are all holding back the Stimulus-led rebound.

Ignored as causes of the ongoing malaise are the strangling influences of an oil drilling ban, thousands of new Federal regulations, a looming national Health Care burden, ever-growing Frank-Dodd restrictions, the threat of Card Check, the possibility that Carbon will be classified as a pollutant, the loss of America’s AAA credit rating, a Stimulus Spending hangover, massive deficits, a crippling debt burden, and constant talk of tax increases. The impact of the President’s policies has apparently been marginalized by Mother Nature, greedy speculators and TEA Party members hell bent on destroying the universe by reducing the size of Government.

Today the tragic earthquake centered in Virginia is the latest cause of our ongoing economic ineptitude. It is irrelevant that very little damage resulted. Bernanke may revel briefly in the consumption bump as panicky people hoard bottled water, pampers and Slim Jims. But in the end, the earthquake will make for too good an excuse not to be used. Mother Nature simply isn’t cooperating, and until she does how can anyone hold the President accountable for his actions?

As if one disaster wasn’t enough, the looming threat of rain from Hurricane Irene should add fuel to an increasingly viable explanation for why the economy refuses to recover.

God hates America’s economy and She is punishing us for electing George W. Bush.

...

After several hours of hunting, reporters found and photographed this sidewalk crack in Virginia (which may or may not have been caused by the earthquake). Until this devastation is fixed by a new National Infrastructure Bank, at a cost of a few hundred billion dollars, it is hard to imagine an economic recovery catalyzing anywhere near this particular piece of asphalt.

Should tropical thunderstorm Irene produce any perceptible rain, this venue will attempt to track down and post a picture of the recovery dampening precipitation.

It Only Took $107 Billion of Federal Reserve Loans to Save Morgan Stanley

2011-08-23T01:21:16Z

According to Bloomberg the Fed extended total loans of $107.3 Billion to Morgan Stanley in October of 2008 to save it from bankruptcy. This was a component of $1.2 Trillion in credit extended across Wall Street to prevent a global financial collapse following the demise of Lehman Brothers.

Link to article: Morgan Stanley at Brink of Collapse Got $107B from Fed

One wonders how much money it would have taken to salvage Lehman and prevent the resulting cascade of panic? But the Fed decided that Lehman Brothers was not "Too Big to Fail" and did not represent a systemic risk.

Today's article jogged my memory back to an email sent to a Manhattan resident on October 10, 2008 indicating my belief that the demise of Morgan Stanley was imminent. I feel better knowing that the evaluation of MS' prospects was only wrong as a result of the largest emergency loan ever extended to a single company in human history.

Email text from 10/10/08 included below:

"Did you read my response to the WSJ article? The fundamental problem we face is real estate is overvalued. Falling prices, which can't be stopped, will crush consumer spending, undermine confidence, lock up lending, etc.... until we hit equilibrium. Normally that would take years. Hopefully this weeks fireworks will force a 30% drop in the next 12 months. It will be horrible but we can bounce back. Otherwise it will take years. People were focused on the credit markets. Now they are focused on the stock market. By Xmas they will be focused on consumer spending. Next year it will be business failures and unemployment.

I don't think Morgan Stanley survives the weekend. And I think Goldman Sachs will be Nationalized.

None of the 36 bailouts to date have done anything other than make things much worse.

All I can tell you is avoid debt, hoard cash and 5 years from now the world will belong to smart people, who didn't buy internet stocks and spec condos. But until then it is going to suck..

Starting to think about moving to Hawaii or Thailand to ride this thing out for the next several years.

Hope you are well otherwise.

BTW, I think manhattan real estate is going to decline by more than 50% in the next several years. Start saving."

Housing Prices, Already at Post-Stimulus Lows, Are Poised to Fall for 9 Consecutive Months

2011-08-22T17:26:29Z

As reported, existing home sales decreased by 3.5% in July to an annual rate of 4.67 million, the weakest pace since November 2010.

Summer is the home buying season, and is typically characterized by high transaction activity and price appreciation relative to the rest of the year.

Beginning in August of 2010 housing prices fell rapidly for 8 consecutive months declining by 4.4% (Case Shiller Seasonally Adjusted 20 City Price Index). This year it appears that the long seasonal slump will begin a month early as July’s weak transaction level will likely translate into price declines.

In May 2011 (the last month for which Case Shiller data is available) the national price index was near a post-Stimulus low at 141.0. Off of this low, prices are now poised to fall for up to 9 consecutive months until the Spring thaw yields an uptick in demand.

The Federal Government has postponed a resolution to the Housing Depression by propping up asset prices and preventing the market from clearing. Concocted demand has created an incremental two year’s worth of home transactions which are sinking rapidly underwater. Instead of stabilizing the housing market, buyers who paid overvalued prices, courtesy of Federal subsidies, will contribute a new source of foreclosures to the backload of distressed properties resulting from the Housing Bubble, further extending The Affordable Mortgage Depression.

Consumer Confidence Falls to New Low Last Enjoyed During the Carter Administration

2011-08-12T20:37:11Z

Data charted is Thomson Reuters and University of Michigan historical consumer confidence survey.

Federal Reserve Acknowledges that The Affordable Mortgage Depression Will Persist Into 2013. Maintains Ineffective Interest Rate Policy.

2011-08-10T17:46:12Z

Since 2006 The Affordable Mortgage Depression thesis has described an economy which would be under deflationary pressure, from the structural aftermath of the Housing Bubble, through 2013. This perspective has been described in detail via blog since 2008.

Conversely the Federal Reserve/Bernanke argued in:

2005 that housing prices would not fall nationally
2006 that housing prices would continue to rise
2007 that mortgage defaults would be limited, would not spread beyond subprime, and would not spill over into the rest of the economy or the financial system.
2008 that there would be no economic recession
2009 that the economy had bottomed out and was beginning to recover

Links to articles featuring specific quotes:
The Federal Reserve, FDIC and Bank Regulators Ignored Repeated Warnings of a Housing Crash Going Back to 2005
The Failure of Ben Bernanke. Part II: "Ignorance is Bliss"

While it is encouraging that the Fed has finally recognized that this persistent downturn will not be resolved until 2013, Bernanke continues to rely on policies which never had any chance of resolving the downturn, and have been proven to be ineffective over the past four years.

Excerpt from The Failure of Ben Bernanke. Part III: “Misidentifying the Cause, Misdiagnosing the Cure and Doing More Harm than Good”

“The Fed Chief’s strategy for solving the crises was to lower interest rates, in an uncoordinated fashion, quickly and consistently in an effort to inject liquidity into the financial system. As reported by the New York Times, Bernanke’s interest rate cuts “were intended to counteract the tight credit market and spur growth”.

But at its core the Housing Collapse and expanding Depression was never about liquidity nor was it caused by the Credit Crisis. Decreased liquidity manifest itself as a result of the forces battering the economy, but the Credit Crisis was a symptom of the economic downturn, not the cause. The Credit Markets simply recognized reality before Ben Bernanke did.

Interest rates have no bearing on solvency concerns triggered by overvalued assets and excessive leverage. To this end interest rate cuts were completely ineffective in stemming or curing the problems afflicting the economy. The Federal Reserve quickly exhausted its primary stimulus tool as overnight interest rates approached zero percent. Bernanke failed to achieve a stated goal that was never in fact realizable.”

The Fed lowered its target rate to 0% in December of 2008 when the unemployment rate was 7.4%. After two and a half years of this extraordinary monetary policy, which discourages savings, distorts investment decisions and creates global asset bubbles, the unemployment rate is 9.1%. Defined unemployment would be materially higher had millions of dejected Americans not left the workforce.

If in fact the Fed maintains the current Overnight Target Rate at 0% through mid 2013, this errant policy will have been in effect for four and a half years. Yet, frighteningly this unprecedented, long-lived and ineffective period of 0% interest rates will have been implemented to combat a crisis that Bernanke believed would not occur, and will have no bearing on the length of the downturn.

...

Article entitled “Since 2006 There Have Only Been Two Routes to an Economic Recovery; Neither of Which Has Been Attempted” to follow.

Bank of America's Woes Discussed in November of 2008

2011-08-09T16:26:06Z

Everything an investor needed to know about Bank of America's ongoing troubles was available in 2008 following a tragically misguided acquisition bender.

Is Bank of America in Trouble? - 11/7/08

Four Logically Inconsistent Reactions to the Credit Downgrade

2011-08-09T01:30:12Z

1) S&P communicated publicly for months that if Congress did not reduce the projected deficit by at least $4 trillion, then the United States’ credit rating would be downgraded. The debt reduction plan fell short of this stated goal, so AAA was reduced to AA+.

Today, Democrats are blaming the TEA Party and Republicans for the credit downgrade, yet both of these organizations advocated deficit reduction plans of at least $4 trillion. While it is true that S&P did cite political gridlock as a factor for the downgrade, the rating change would have occurred regardless of political climate due solely to the inappropriate rate of debt expansion.

2) I do not recall politicians questioning the legitimacy of S&P in the past when the organization downgraded other countries and companies around the world. To complain now, after the fact, that S&P’s professional conclusions are unwarranted is pathetic.

3) I am no fan of the rating agencies. I believe that they acted like prostitutes during the Housing Bubble and were professionally negligent. It is entirely possible that they lack the capacity to adequately rate companies and countries. In fact, today Democrats questioned the rating agencies’ legitimacy by challenging S&P’s conclusion. But if the Democrats are right, and the rating agencies are incompetent, then why aren’t they also questioning the ratings advocated by Moody’s and Fitch? Is it not possible that among the 3 failed institutions, that Moody’s and Fitch are the ones getting it wrong?

4) Democrats appeared on TV today and attempted to characterize the rating change as “The TEA Party Downgrade”. Apparently TEA Party members who have been complaining about out-of-control, deficit-financed spending for the past 3 years are responsible for the downgrade, but the Democrats who were solely responsible for $800 billion in wasted Stimulus Spending and $2 trillion annual budget deficits are not.

…

Since Obama’s election federal tax rates have not been reduced. Changed tax rates are not responsible for record deficits. What did change was the Obama Administration and a Democratic controlled Congress choosing to launch a deficit-financed spending binge.

Those deficits have added enough debt to our balance sheet that the US is no longer worthy of a triple A rating. The solution to this manufactured problem is not higher taxes, which would further restrain a hobbled economy, but to reduce the massive spending implemented by the Obama Administration.

History Repeating Itself

2011-08-07T16:12:17Z

"Now, gentlemen, we have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong, as far as I am concerned, somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started. And an enormous debt to boot!" Henry Morgenthau, Jr. - May 9, 1939

It Took Two Centuries for the United States to Earn Its "Risk Free" Credit Rating. It Took the Obama Administration Two and a Half Years to Destroy That Rating.

2011-08-06T01:47:42Z

...imagine what the President could do for the country in eight years.

The July 2011 Unemployment Report: “Rats Flee Sinking Ship! Government Observes That Rat Population Has Declined!”

2011-08-05T17:55:29Z

The BLS’ inadequate Unemployment Rate declined to 9.1% in July. What is important is why?

In two months the number of Americans “Not in the Labor Force” has increased by 823 thousand. In July alone the exodus amounted to 374 thousand people relative to June. During the past 15 months "Not in the Labor Force" has risen by 3.6 million. This is an economy in meltdown, but it does make the Unemployment Rate look more benign.

In two months the Labor Force Participation Rate has declined from 64.2% to 63.9%. Since Obama took the helm of our “Economic Recovery”, participation has declined by 1.8%.

If the Participation Rate were the same as it was in January 2009, and 4.2 million Americans reentered the Civilian Labor Force, the Unemployment Rate would be 11.5%. Thank goodness so many patriotic Americans have quit looking for a job.

The only good news in this Employment Report is that State and Local Government’s continue to layoff unaffordable employees (Something that was inevitable, but delayed by two years by misguided Stimulus Spending).

“State and local government entities will be required to cut back spending precipitously”
Excerpt from The Case for a Depression – 11/3/2008

There Is No Economic Recovery

2011-08-03T16:44:26Z

Recessions are arbitrarily defined by an academic/political organization that ignores economic fundamentals and pro forma reality. The primary metric used to define a recession’s length is whether GDP is growing or shrinking. Since GDP growth may be manufactured through deficit spending, the National Bureau of Economic Research’s definition is meaningless.

Case in point: While The Great Depression lasted a decade (1929-1939) the NBER declared the recession to be over in March of 1933. When Stimulus Spending (The New Deal) failed the academics were forced to declare a second recession in 1937. (Detailed Analysis – 8/11/2010)

The Affordable Mortgage Depression, which began in 2006, is being perpetuated by excess supply of overvalued houses and defaults which will persist through 2013 at minimum.

$800 billion of Stimulus Spending, $2 Trillion annual budget deficits, and extraordinary efforts by the Federal Reserve gerrymandered positive GDP growth, but economic fundamentals have remained negative and on a pro forma basis the economy never emerged from recession.

During the first six month of 2011, GDP grew at an annualized rate of 0.9%. This marginally positive economic expansion is the result of a Neo-Keynesian spending binge. Back out contributions from the Stimulus Bill, approximately $800 billion in deficit spending (half of the 2011 budget) and the Federal Reserve’s QEII, and GDP contracted materially on a pro forma basis.

Any fool can temporarily create the facade of prosperity by running up credit card debt. Only a politician or academic would call deficit-financed GDP growth “a recovery”.

The NBER declared the recession to be over in June 2009. 14 months ago the Obama Administration announced the “Summer of Recovery”.

Today housing prices remain overvalued (due to Government interference) and under pressure. Foreclosures, distressed sales and high inventories are unresolved. Layoffs remain elevated, and announced jobs cuts are increasing. Unemployment is high and rising.

Economic distortions have evaporated exposing the economic forces which are unchanged in 5 years. The only net effect of an extra $5 trillion in debt is that we are farther away from an end to The Affordable Mortgage Depression than if the Government had spent nothing fixing the economy.

Excerpt from “The Stimulus Bill, Like All Government Interference To Date, Will Fail” – 2/10/2009

“The Stimulus Bill will not work because it can not work. Anyone who truly understands what is transpiring in the economy will recognize that this is the largest, single instance of waste in the history of the World.

Spending huge sums of money that we don’t have, burdening our economy with the liability of having to service and repay another trillion dollars of debt, all to create a few government dependent jobs which produce no real economic value will do nothing to alleviate any of the economy’s problems. What it will do is distort the economy further, obscure what is really transpiring, slow down the economy’s inevitable reset, deepen the economic crisis and threaten the US Government’s solvency and credit rating.”

19 articles categorized under “There Is No Economic Recovery” dating from 7/29/2009 to 9/22/2010

23 articles categorized under “The Stimulus Spending Fraud” dating from 11/3/2008 to 9/6/2010

Homeowner's Equity: How Low Can It Go?

2011-06-17T18:11:53Z

How leveraged does an asset class have to be before it is only suitable for Accredited Investors?

Why the Housing Depression Can Not End Before 2014: Four Updated Charts

2011-06-15T21:38:00Z

Two years ago the following four statistics were charted to demonstrate that a housing market recovery was unlikely before 2014. These graphs were updated 12 months ago and again today in the analysis below.

A Graphical Illustration Why the Downturn Will Persist Through 2013 - 5/11/2009

"Why Housing Will Not Fully Stabilize and Recover Before 2014" or "You Would Have to Be Fool to Buy a House Now" - 5/5/2010

The graphs are primarily supply-side, and ignore other important reasons why a recovery is unlikely including: psychology, perception of risk, credit availability, increasing housing leverage, the absence of affordable mortgage characteristics, looming ARM resets, inevitable foreclosures, high rates of distressed sales, and the reality that housing prices remain overvalued based on historical metrics.

What is interesting about the annual updates is that in each supply-side case, the likelihood of the housing market stabilizing by 2014 has decreased.


The number of Vacant Housing Units has not declined over the past two years. As such, the steepness of the slope required to reach stability by 2014 continues to increase. The number of Vacant Units needs to fall by approximately 1.8 million a year through 2013 to reduce excess supply and reach a level consistent with price stability.


While the percentage of Housing Units Vacant has improved modestly, figures remain elevated relative to pre-bubble levels and Units would have to fall by 1.3 million a year to normalize by 2014.

For Sale Only Units have fallen from the peak, but made little progress over the past 12 months. The figure remains almost 600 thousand above the level consistent with price stability.  Units For Sale need to fall dramatically over the next 3 years for housing to stabilize in 2014.


It is interesting that Homeownership is the one housing statistic that has continued to revert towards pre-bubble levels despite command-economy, housing price manipulation. While high prices have kept buyers at bay, overlevered and underwater "owners" have continued to lose their houses as rapidly as they acquired them during the boom. As long as the Government doesn't provide homeowners with anymore "help", it is possible that the Homeownership Rate might be the first market characteristic to reach pre-bubble levels and reduce downward pressure on prices.

Propping up housing prices with Stimulus programs, foreclosure mitigation efforts and subsidized mortgage rates has been a disaster. Not only have the efforts failed to stabilize prices, they have prevented the market from clearing and supply-side pressures from rationalizing. It appears (as argued since 2008) that Obama/Bernanke have extended the housing depression by years to no productive end.

Updated Chart: Stimulus Spending Unemployment Projections Versus Reality

2011-06-13T16:36:21Z

The Stimulus Bill, Like All Government Interference To Date, Will Fail - 2/10/2009

The Stimulus Spending Delusion - 5/8/2009

Homeownership Losses Will Continue Through 2014

2011-06-11T18:41:21Z

It is interesting that massive housing subsidies from the Stimulus Bill and Federal Reserve policies succeeded in temporarily propping-up overvalued prices, but have failed to stem the collapse of artificial homeownership.

Housing will not stabilize or begin a sustainable recovery until engineered homeownership gains have reverted to pre-bubble levels. Homeownership losses are likely to continue through 2014.

Updated Case-Shiller Market-Specific Analysis for March 2011

2011-06-10T15:53:00Z

Updated Chart: Housing Prices Remain Wildly Overvalued Due to 27 Months of Subsidization

2011-06-09T22:51:00Z

Case Shiller Index Analysis - January 2011

2011-04-03T17:16:00Z

The two year long Stimulus/Federal Reserve price distortion has been exhausted. Price declines have resumed, which otherwise would have continued uninterrupted since the Spring of 2009. Leveraged equity losses are rapidly eroding consumer balance sheets. The 10 City Price Index still has to decline by another 30% to get to its pre-bubble valuation (on an inflation-adjusted basis). 7 of 19 markets analyzed have already fallen below January 1997 price levels (due to market conditions), which bodes poorly for the likes of New York, San Diego, Los Angeles and Boston. Only Washington, D.C. (Ancient Rome) bucks the trend, as taxpayer financed record spending and deficits maintain the illusion of property price stability.

Housing Armageddon Arrives Just in Time for the Holidays

2010-10-25T17:47:00Z

Source: Clear Capital (www.clearcapital.com)

The Clear Capital Home Data Index (HDI) shows that national home prices have declined
5.9% in just two months and are now at the same level as in mid April 2010, two weeks prior to the
expiration of the federal homebuyer tax credit. This significant drop in prices, in advance of the
typical winter housing market slowdown, paints an ominous picture that will show up in other
home data indices in the coming months.

Most home buyers who received the federal housing tax credit will soon be underwater on their mortgages. Happy holidays!

The Housing Bubble: A Modern Greek Tragedy

2010-09-25T02:10:00Z

The New York Times observed on August 22nd that homeownership may no longer be the wealth creating engine that elevated and enriched America's middle class for generations while enhancing both economic growth and consumption.

"Housing Fades as a Means to Build Wealth, Analysts Say"

Tragedy from Hubris

The NYT's belated conclusion is fascinating because it completes the modern Greek Tragedy that was the Housing Bubble.

The origin of housing's ascension was a well-intentioned, coordinated, public policy initiative formulated in 1994. (See NHS article)

The strategy was based on the Government's observation that homeownership was a powerful mechanism for building wealth and elevating middle-class families economically. Beyond the benefits which accrued to individual owners, society as a whole seemed to be enriched by rising homeownership. Employment, consumption, business formation, tax receipts, crime rates and GDP all seem to improve at the neighborhood and national level as more Americans owned their home.

Below is the excerpted rationale justifying the creation of The National Homeownership Strategy codified in 1994:

Why Homeownership?

Most scholars, public policy makers, industry analysts, and civic and community leaders agree that supporting homeownership is good for America, and will produce four fundamental benefits:

1. Homeownership is a commitment to personal financial security. Through homeownership a family acquires a place to live and raise children and invests in an asset that can grow in value and provide the capital needed to start a small business, finance college tuition, and generate financial security for retirement.

2. Homeownership is a commitment to strengthening families and good citizenship. Homeownership enables people to have greater control and exercise more responsibility over their living environment.

3. Homeownership is a commitment to community. Homeownership helps stabilize neighborhoods and strengthen communities. It creates important local and individual incentives for maintaining and improving private property and public spaces.

4. Homeownership is a commitment to economic growth. Homeownership helps generate jobs and stimulate economic growth. The design, construction, and rehabilitation of homes employs local labor and uses a vast array of American-made products and services. Homebuilding has often led the economic recovery form national recessions due to its strong job multiplier effect and because increased housing starts and home sales represent renewed economic confidence.

...

Homeownership creates economic prosperity for families and communities and acts as a dynamic generator of economic growth. Every new home creates 2.1 jobs directly related to construction, and many more jobs through increased demand for household goods and services.

Because homebuilding and homeownership contribute to national prosperity, the expansion of homeownership in this Nation has been supported for many years by public-private partnerships. From the Homestead Act in 1862 to the GI Bill of Rights in 1944, key Federal Government innovations such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) home loan guaranty program... Fannie Mae, Ginnie Mae, Freddie Mac, and others have mobilized private capital to enable the average working family to buy a home with little or no down payment.

An American Tragedy

The hubris upon which the Housing Market was constructed was the assumption that benefits which had accrued to homeowners for generations would continue if mortgage underwriting requirements were loosened by Government edict so as to allow millions of the underprivileged to access the Golden Goose of homeownership.

The Government's rigid understanding of homeownership defied the dynamic nature of markets and the immutable laws of economics.   By changing market conditions, increasing demand, triggering a rapid and accelerating rise in prices, and embracing so-called innovative, affordable mortgage characteristics, well intentioned politicians seeking to realize a social agenda fundamentally distorted the housing market.

Today, according to the NYT, the wealth creating Golden Goose is dead. Benefits that accrued to homeowners for generations, which the Government attempted to bestow on 8 million additional families, have evaporated. The economic synergies that were supposed to flow from higher homeownership and create national prosperity have instead transformed into a self-perpetuating nightmare worthy of any Greek Tragedy.

Hubris created The Affordable Mortgage Depression, and equally misplaced confidence in housing market subsidies and foreclosure mitigation efforts will perpetuate this American Economic Tragedy for years to come.

The Arbitrarily Defined "Technical Recession" Is Over. But the Depression Marches On as Consumer Credit Continues Its Steepest Decline Since World War II

2010-09-22T19:34:00Z

Given how rarely Consumer Credit contracts in U.S. history, and its central importance to our highly-leveraged, consumption-based economy, personal credit trends are a useful gauge of a Depression's momentum.

Economic production data, like Gross Domestic Product, may be unsustainably manipulated via deficit-financed, Government spending. It is the observation of this forum that, given the arbitrary definition of a "technical recession" employed by the National Bureau of Economic Research, the U.S. need never again experience one simply by engineering GDP growth every other quarter. Perpetual pretend prosperity brought to you through the magic of debt accumulation!

This sort of intellectually vacant, accounting tomfoolery is currently under scrutiny amongst public companies that have engaged in "window dressing" to obscure their actual financial condition. But the same kind of financial shenanigans (deficit-financed GDP gains) is used by the NBER to definitively quantify a recession's duration regardless of more important trends such as unemployment, credit and undistorted economic activity.

The following charts illustrate current Consumer Credit trends in a historical context.

Politicians Have Delayed a Resolution to the Housing Crisis by Two Years and Manufactured a New Source of Economic Damage

2010-09-21T17:03:00Z

The economy's core problem is the same today in 2010 as it was in 2005. Housing prices remain wildly overvalued relative to the fundamental market-forces which determine them.

The unforgiveable tragedy of the past two years is that prices would have continued to migrate towards sustainable levels had the Government not manipulated demand.

Not only have we lost valuable time during which the market would have been resolving the economy's problem, but we have made our dire situation even worse by financing 7+ million Government-subsidized mortgages on overvalued houses.

This forum has observed that there is no reason why the average house should be worth more today than it was prior to the Housing Bubble (adjusting for inflation). In fact, most economic fundamentals which determine housing prices are worse than in 1997 (with the exception of mortgage rates) making a credible case that valuations should fall below pre-bubble levels.

Presently unemployment, perception of risk, price trends, credit availability, subprime availability, demand for housing, inventory for sale, distressed transactions in the market and affordable mortgage availability are worse than in the mid-1990s.

Current mortgage rates are at record lows, but only because they are being directly and indirectly subsidized by the Government. If the private sector were underwriting mortgages based on risk, financing rates would be above pre-bubble levels.

The concept that prices should fall below January 1997 levels has been validated in individual markets nation-wide. The Case-Shiller Housing Price Indexes for Atlanta, Charlotte, Cleveland, Detroit, Las Vegas and Phoenix have all reverted below inflation-adjusted 1997 values.

The following charts show three versions of the Case-Shiller 10-City Price Index. They include:

The Pre-bubble price index value adjusted for inflation
Actual Case-Shiller index performance since the Housing Price Bubble began
A theoretical index trend line (post March 2009) assuming that stimulus spending, monetary and fiscal policy were not used to prop up housing prices

The theoretical trend line is nothing more than a guess at what might have transpired during the past two years. But it is intuitively appealing given:

The multi-year pace of price declines (following a consistent 9 year trend during the Bubble)
The continued erosion of economic fundamentals (such as employment)
The reality that prices today would still be above inflation adjusted, pre-bubble valuations even had they been allowed to continue their collapse

Recent home purchases have occurred at valuations potentially 20%+ above market-determined levels. Given that housing prices will fall towards sustainable values, the Government has manufactured an incremental source of wealth destruction and foreclosures.

The Federal Government has spent trillions of dollars over the past 24 months making the economic Depression longer-lived and more damaging.

The Interesting Case for an October Stock Market Correction. Part 1: Introduction and a 15 Month Correlation With 1936 and 1937

2010-09-20T16:38:00Z

Introduction to Series and Chart Below

In 1937 the economy slumped into The Roosevelt Recession as the fading impact of stimulus spending, incremental costs of new social programs and higher taxes took their inevitable toll. The stock market crashed in August of 1937 falling more than 30%.

I am not a technical analyst, nor do I generally place much faith in the science. But I do believe that credit cycles are repetitive. Furthermore, I observe that the Government's 2-year response to the current downturn has been similarly destructive as New Deal initiatives during The Great Depression.

We presently face an environment where fading stimulus is causing bloated economic data to deflate, newly approved social programs represent an unaffordable burden and higher taxes are looming. It is 1937 again and the Government seems intent on manufacturing another technical recession.

Thus far the stock market seems oblivious to what I have considered to be inevitable since misguided stimulus began to be implemented. With the ominous month of October looming there are a variety of fascinating reasons why a market correction could occur.

As such I present "The Interesting Case for an October Stock Market Correction".

I am not a market timer. There are a near infinite number of dynamic forces which trigger a market correction. No one can accurately predict sizeable, broad market movements with specificity. Those that do and are correct are lucky.

I do believe, though, that with a fundamental understanding of dynamic economic forces, one can predict broad market movements over reasonable periods of time. This is what I have attempted to do since 2005 with success. An October correction would be consistent with The Affordable Mortgage Depression framework of economic understanding.

I do note for the sake of full disclosure that when hazarding more precise predictions, I have consistently overestimated the speed with which the public has come to appreciate the impactful economic events of the past 5 years.

Most recently, I believed that a widespread loss of economic confidence might occur as early as the 1Q of 2010. Instead, upward trending spending, Census hiring and peaking housing stimulus subverted reality from the public consciousness until recent months.

A 15 Month Correlation With 1936 and 1937

A July 9th article by Donald Luskin observed stock market similarities between 1937 and the present. Given economic conditions which are eerily reminiscent of those which existed prior to FDR's Recession, the comparison is noteworthy.

Link to WSJ article "Why This Isn't Like 1938 - At Least Not Yet"

The chart below represents the percentage performance of the DJIA relative to its period high-water mark. The graphic includes 17 months of data from May 1936 - October 1937 and 15 months of data from July 2009 - the present (midday 9/20/10). With the exception of June 2010, the performance correlation between the DJIA in '37 & '38 and the last 15 months is striking.

Should the 15 month correlation continue, a stock market correction would commence on approximately October 1st.

Part II in the series to follow.

Link to "Your Fat Paycheck Keeps Neighbors Unemployed" by Kevin Hassett

2010-09-07T20:23:00Z

Unintuitive certainty in these medieval times of economic illiteracy.

"Your Fat Paycheck Keeps Neighbors Unemployed" Kevin Hassett

"Economics teaches that full employment would be reached if wages adjust downward, to a level that better reflects current circumstances. At lower wages, employers would desire more workers. Labor markets generate persistent unemployment only if wages are sticky, failing to fall as demand declines.

A number of reasons help explain why wages don’t and won’t drop, beginning with federal and state minimum-wage laws.

Second, because union contracts generally cover multiple years, adjusting wages in response to economic circumstances would require a return to the bargaining table, which rarely happens."

The article stands in stark contrast to another in an endless string of misguided pablum; not surprisingly featured in the New York Times.

"How to End the Great Recession" by Robert Reich.

This witch burning piece of political propaganda and revisionist history is constructed on absurdly twisted logic, and is supportive of the 1930s public policy response which proliferated The Great Depression.

In summary the article:

Misidentifies a lack of consumer purchasing power as the driver of the recession (and pines for the days of HELOC driven consumption)

Blames the crisis on decades of technological progress (A popular concept during the Dark Ages)

Cites the free flow of capital and migration of manufacturing to low-cost destinations as undermining American incomes (In defiance of any Econ 101 textbook)

Mr. Reich ignores that life in America has been getting better not worse for decades (except during the last several years). Mr. Reich apparently pines for the days 15 years ago where no one had cell phones, the internet was a 52kb nightmare, and flat screen TVs didn't exist.

Mr. Reich observes that $2.3 trillion in home equity was extracted from 2002 through 2007, but he attributes it to Americans being forced to borrow in order to cope with their lack of income growth. How pray tell does a 5 year long bender during which Americans bought motorcycles, boats, cars, vacations, destination weddings, Las Vegas jaunts, granite kitchen tops, etc... count as borrowing just to cope?

He condemns the rich for spending so little money (saving) and investing their savings where they can get the best return (abroad). Since when is saving or earning a return on investment bad? Furthermore, the rich would be more disposed to invest in the U.S. if we didn't have the world's second highest corporate tax rate and a political administration focused on restraining economic growth.

Reich then hails New Deal initiatives which perpetuated The Great Depression for a decade as the right response to our current economic downturn. The minimum wage is keeping unemployment high as are two years of unemployment benefits (I met a guy last week who is an aspiring writer and unemployed only because of such never ending benefits).

In reality we are 2 years into a "New, New Deal". Higher minimum wage, extended unemployment insurance, stimulus spending, massive deficits, cash-for-clunkers, health care reform, regulatory reform, check in the mail, etc... FDR would be proud.

Labor Day 2010: A Merciful End to the "Summer of Recovery"

2010-09-07T00:01:00Z

For months the nation's economic outlook has steadily worsened. The housing market collapsed this summer. Unemployment and underemployment are unchanged from levels 12 months ago despite massive spending purported to manufacture steady labor improvement following September 2009. Unemployment was supposed to have fallen for 11 consecutive months under the Stimulus Bill, instead it has fallen only 4 times during the past year.

Today Barack Obama unveiled a new $50 billion stimulus program to create jobs by rebuilding the nation's infrastructure.

If Americans are dimwitted enough to allow a new round of deficit-financed, Government spending under the guise of "stimulus" they truly deserve the Japanese-style lost decade under construction over the past two years.

Economic Death by a Thousand Cuts

Stimulus checks in the mail, TARP, HAMP, HOPE, the Stimulus Spending Bill, $2 trillion annual budget deficits, housing tax credits, Cash-for-Clunkers, quantitative easing, open market purchases of mortgage securities, the nationalization of the mortgage industry, bailouts, foreclosure mitigation, 2 years of unemployment benefits, Emergency Education Stimulus, FHA/Fannie/Freddie low down payment mortgages, etc...

Each was described as being the right program to fix the economy's ailments. None had a chance of resolving the downturn. These programs were born from of lack of economic understanding or pursued for political expediency not efficacy.

Stimulus Round XVII

How is it possible that the newly proposed $50 billion in infrastructure rebuilding did not make it into the $862 billion of "shovel-ready" projects authorized in February 2009? Today there are still hundreds of billions of dollars left to be spent under the Stimulus Bill which will be wasted. If infrastructure rebuilding is a good idea, why not simply reallocate the yet-to-be spent money from projects which are having no beneficial effect?

Medieval Economic Understanding

The President of the United States does not understand the source of sustainable job creation. Private sector businesses only hire people when they can do so profitably based on market conditions undistorted by temporary Government stimulus spending or tax rebates. The more profitable it is to operate private businesses the more jobs are created. Barack has spent 19 months strangling profitable businesses with increased taxes, higher operating costs and more regulatory burdens.

The President's proposed solution, "creating or saving" unaffordable, unnecessary and unsustainable Government jobs at the cost of skyrocketing public debt, is a surefire means by which to restrain hiring and economic growth for years to come.

Dismal Reality

Today 25.7 million Americans celebrated Labor Day unemployed or underemployed. The President's response to their suffering was more of the policies which created The Great Depression, have plagued the Japanese economy for 20 years, and are intensifying The Affordable Mortgage Depression.

Given the President's commitment to counter-productive economic initiatives, it is difficult to imagine that Labor Day 2011 will be appreciably better. Should looming tax hikes be implemented, things may be materially worse. I hope that by then the nation's underemployed will have lost their tolerance for deficit-financed, Government waste marketed as economic salve. Such a realization would at least stop the political class from worsening the catastrophe. But sadly Labor Day 2013 will find far too many Americans unnecessarily unemployed due to incompetent, housing social policy and a misguided response to the economic calamity which it spawned.

The Dumbest Things I Read Last Week...

2010-09-03T17:30:00Z

I wish I could say that the following were the dumbest things I read last month, but the longer this Depression lingers the more lost experts and pundits appear to become.

Excerpt from "BOE's Bean Says More Stimulus May Be Needed to Sustain Economic Recovery" on Bloomberg.com. Link

Bank of England Deputy Governor Charles Bean said more monetary stimulus may be required to sustain the recovery as the aftermath of the recession continues to hamper the economy.

"The deleveraging process is incomplete, the recovery remains fragile and a considerable margin of spare capacity is yet to be worked off,” Bean said in a speech at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming today. “Further policy action may yet be necessary to keep the recovery on track,” but “normal times will surely return in due course.”

There is no fundamental economic recovery to be sustained. Monetary stimulus has done nothing to resolve the economy's problems, while it has created a new set of impediments to a rebound.

If Charles Bean or anyone else doubts this reality consider the following. During the second quarter GDP expanded by 1.6%. The second quarter also marked:

Peak stimulus spending
The zenith of Census hiring
The acme of housing stimulus
Record low mortgage rates resulting from the Government's guarantee of 95% of home loans issued
The continuation of historic monetary stimulus

Without the most aggressive fiscal and monetary policy in U.S. history, what would the GDP figure have been during the 2Q? It is likely that Gross Domestic Product would have declined without record deficits, unsustainable hiring, and distortive housing policies.

Furthermore, the notion that "the deleveraging process is incomplete" is absurd. The Government is accumulating debt far more quickly than individuals are able to personally deleverage. Yet individuals are responsible for servicing and repaying the Federal debt. In addition, declining house prices and low down payment mortgages are increasing leverage within the housing market. In large swaths of the economy the deleveraging process has yet to begin.

The following is an excerpt from a well-intentioned Bloomberg article entitled "Retiree Ponzi Scheme Is $16 Trillion Short" by Laurence Kotlikoff

The author may have meant to say something else, but rarely have I read a proposed concept so detached from reality as the following:

"Social Security’s objective -- forcing people to save for retirement -- is legit. Otherwise millions of us would seek handouts in our old age."

Forcing people to save for retirement was never the objective of Social Security and the program has accomplished the diametric opposite.

Social Security is the antithesis of savings. Not one dollar contributed to the program in 70 years may be considered to have been saved. Social Security is a tax. The tax receipts are used to fund the Government's general operations. One of those expenses is servicing Social Security's optional and unfunded pension payments.

There is no ownership of purported "savings", nor does there exist a legal claim to receive Social Security benefits even if one has spent a lifetime paying the tax. Worst of all, no capital is accumulated while "saving" via Social Security taxes. The money is spent. It is not available to finance new businesses. It is not allocated to projects or companies capable of generating attractive risk-adjusted returns.

Actual savings are replaced with the expectation of receiving unfunded pension payments in the future financed by more taxes paid by people who have yet to be born.

Real savings are vitally important because they finance capital formation which in turn fuels growth, the creation of wealth and prosperity. China's future is bright partially because its citizens save money which may be invested. Social Security squanders potential savings, starves a capital hungry economy and places an undue financial burden on future generations. In many respects Social Security is the origin of "The Death of Savings in America" (future article).

Higher taxes, more Government spending, less savings and rapidly growing unfunded pension liabilities. This is Social Security's legacy.

Pending Home Sales Rebound to Third Lowest Level on Record

2010-09-03T00:28:00Z

It is hard to believe what passes for good news during this "Summer of Recovery". The stock market rallied today partially on the National Association of Realtors' announcement that its Pending Home Sales Index rose during July.

While an increase is preferable to a decrease, especially if it results from undistorted demand, the figure must be put into proper perspective.

July's figure is the third lowest on record

It represents the third straight month where pending home sales were below the level which pre-dated implementation of the Stimulus Spending Bill and Obama's housing stimulus initiatives

The data indicates that the housing market is presently in its worst condition since the bubble collapsed

These record lows are occurring during the annual home buying season

Demand this weak, especially in an environment defined by high numbers of distressed transactions, is consistent with falling prices

Housing prices are likely to fall for the remainder of the year and into 2011 as seasonality restrains any rebound in demand

New Home Sales Lowest on Record

2010-08-26T16:09:00Z

According to the U.S. Census Bureau new home sales fell to an annualized run-rate of 276 thousand in July, the lowest level on record.

I don't want to exaggerate the importance of the figure since it is primarily a function of the number of homes being built, which in turn is a reflection of the economy's dire state.

A Few Observations

While records only go back to 1963, it is likely that the last time so few new homes were sold the country was either in The Great Depression or fighting World War II. This is noteworthy given that the country's population during the 1930's was less than 130 million. Today the U.S. has more than 310 million people.

In January 1995 (when the Housing Bubble began) homes were selling at an annualized pace of 626 thousand

In January 2009 (the month before the Stimulus Spending Bill was passed) new home sales were the equivalent of 339 thousand a year. For three consecutive months new home sales have been well below pre housing stimulus levels.

The number of housing units for sale has been shrinking monthly for years (which partially explains the low number of transactions). What is interesting is that despite the falling number of units on the market, inventory for sale remains elevated at 9.1 months.

I reiterate my observation that Obama's housing stimulus efforts have worsened market conditions, failed to resolve the fundamental problems of overvalued and overleveraged housing, and extended the housing crisis potentially by years.

Excerpt - 10/2/08 - Link

"There are steps that the government can take to facilitate the stabilization of the housing market and limit collateral damage to both the credit markets and the broader economy. Any action which would attempt or have the effect to prop up housing prices at an artificial value, though, is counterproductive. Such initiatives will only lengthen, deepen and increase the damage caused by the inevitable march to a sustainable equilibrium. The Japanese have provided us with a useful case study on this subject. Don’t stand in the way of the markets clearing. Any government action should be undertaken with a design to facilitate this clearing process and an understanding that substantial economic pain is unavoidable."

Excerpts - 2/10/09 - The Stimulus Bill, Like All Government Interference To Date, Will Fail

"The Stimulus Bill will not work because it can not work. Anyone who truly understands what is transpiring in the economy will recognize that this is the largest, single instance of waste in the history of the World."

...

"Things will get worse. This is inevitable. No government initiative designed to distort economic activity, prop up prices or encourage a return to unsustainability amongst consumers will work."