Is the Housing “Bust” real?

We’re hearing a good bit of noise surrounding the end of the super-boom in housing and the high default rates in the “subprime” mortgage sector, but what does it all mean? Over at Tech Central Station, Desmond Lachman thinks it is a big deal:

In maintaining their rosy economic outlook, most Wall Street analysts choose to ignore Fed Chairman Ben Bernanke’s recent reminder that a protracted decline in home prices could have a material impact on consumer spending. According to Mr. Bernanke’s congressional testimony last week, the Federal Reserve estimates that household consumption could be negatively impacted by as much as 9 cents for every dollar that home prices decline on a sustained basis. And considering that housing wealth, which is the main source of household wealth, presently amounts to 150 percent of GDP, and that household consumption still accounts for around 70 percent of GDP, the prospect of a protracted period of declining home prices is not something one wants to cavalierly brush aside.

Contrary to what many on Wall Street would have us believe, the prospect of a protracted period of declining home prices now seems to be anything but a remote possibility. Indeed, with home prices already falling and with increased inventories of unsold homes rapidly mounting, it is difficult to see how home prices do not start falling at an accelerating rate over the next few months in order to clear a saturated market. This would seem to be all the more so the case as a tightening in mortgage lending standards and as the resetting of adjustable rate mortgages further crimp housing demand at the very same time that a marked increase in home foreclosures leads to more houses returning to an already glutted market.

Perhaps an even greater overlooked risk to the US economy than slowing consumer expenditure is the prospect of a full blown “credit crunch” in the financial sector that would seriously curtail bank lending to the economy as a whole. Sadly, this prospect too now seems to becoming an ever increasing likelihood. In his congressional testimony last week, Chairman Ben Bernanke owned up to the very real possibility that the financial sector’s losses from sub-prime mortgage lending could very well reach as much as US$100 billion.

Read the whole article at the link above. While I respect Desmond Lachman’s analysis, the idea that the total “losses” on subprime mortgages could total $100 billion is rather hyberbolic.

These are home mortgages we are speaking about. The mortgage company has the HOUSE and the land upon which it sits as collateral, and they WILL take it if they have to foreclose. The legal proceedings do have some cost to them, of course, but this is usually more than offset by the difference between the market value of the property and the amount of the defaulted debt. The only way they could “lose” so much money is if the properties were fraudulently overvalued at the time the loans were made. While this undoubtedly happens in some circumstances, it would have to be quite widespread to run up such losses.

Neither does the high default rate necessarily ruin the housing market.

These homes are nearly all in the “starter home” category, and usually in less desirable neighborhoods. The surplus Desmond fears is illusory, because lower end properties can be rented if not sold, and everyone must live somewhere; meanwhile, the upwardly mobile still want to trade up.

If some lenders and hedge funds overextended themselves imprudently in the hope of a big payday, why should we feel the need as taxpayers to cover their losses any more than we would cover the guy who lost his shirt at blackjack in the casino? This is what the market does: the incompetent’s assets will be bought by the efficient at a steep discount, but they will bring a greater return on those assets and more will benefit than will suffer.

Our central banks – represented by the FRB – as well as the European Central Bank, have stepped up to cover the possible shortfalls caused by fear and speculation.

The worst possible scenario is one where the US government perceives a “crisis” and undertakes to “help” us out of it. Let the market reward the winners and punish the losers, for thusly we will inspire winners and discourage losers, and the taxpayer might for one moment hold onto “the bread which he has earned,” as Jefferson put it.

We are only experiencing a “downturn in housing” because of the irrationally exuberant rise in prices over the previous few years. Over the longer term, housing is rising no less than its average appreciation.

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