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Sometimes the “Smart Money” Isn’t So Smart
By JLP | December 10, 2007
Here’s an interesting tidbit from one of the cover stories ($) in today’s Wall Street Journal:
Over the past decade, Wall Street built a market for more than $2 trillion in securities sold globally and backed by loans to U.S. homeowners on two long-accepted beliefs and one newer one. The prevailing logic: The value of the American home would never fall nationwide, and people would almost always make their mortgage payments. The more recent twist: Packaging mortgage loans and turning them into securities would make the global economy more resilient if anything went wrong.
In a matter of months, though, much of the promise of the new financial architecture — together with its underlying assumptions — has proven to be a mirage. As house prices fall and homeowners default on mortgages at troubling rates, the pain has spread far and wide. An examination of the resulting crisis shows that it is comparable to some of the biggest financial disasters of the past half-century.
Oops! I guess their assumptions were wrong!
So, when can we expect things to turn around?
Well, according to this report from Fox Business News, the National Association of Realtors is expecting a slight rise in the number of home sales next year:
The revised monthly forecast from the National Association of Realtors, which followed nine straight months of downward revisions, calls for U.S. existing home sales to fall 12.5% this year to 5.67 million — the lowest level since 2002. Last month, the association predicted 5.66 million existing homes would be sold this year.
The Realtors’ group also forecast sales will rise slightly in 2008 to 5.7 million, up from last month’s prediction of 5.69 million.
It’s important to note that 9 out of 10 realtors believe in Santa Claus!
Seriously, I don’t see how they can believe that things are going to turn around next year. In fact, if you read the article, you’ll see that lots of economists disagree with the realtors and expect prices to fall through next year and possibly longer. Who’s right?
Topics: Credit, Housing Market, Mortgages | 12 Comments »
December 10th, 2007 at 3:06 pm
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December 10th, 2007 at 3:06 pm
You might find this interesting: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/12/09/IN5BTNJ2V.DTL
December 10th, 2007 at 3:49 pm
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December 10th, 2007 at 4:06 pm
Id trust an economist. Realtors benefit if they can get people to believe home values will get higher again.
I wonder how many of the homes purchased are from new home owners, I think that is a far more accurate way in determining the market then total sales.
December 10th, 2007 at 4:21 pm
Things could turn around next year, in five years, or tomorrow. I don’t see why I would trust ‘the economists’ any more than the realtors. That being said, I wouldn’t bet my money on either of them.
December 10th, 2007 at 8:58 pm
[...] Sometimes the “Smart Money” Isn’t So SmartBy JLPThe more recent twist: Packaging mortgage loans and turning them into securities would make the global economy more resilient if anything went wrong. In a matter of months, though, much of the promise of the new financial architecture …AllFinancialMatters – http://allfinancialmatters.com [...]
December 10th, 2007 at 9:45 pm
[...] Read the rest of this great post here [...]
December 10th, 2007 at 9:46 pm
[...] Read the rest of this great post here [...]
December 11th, 2007 at 1:11 am
[...] Sometimes the “Smart Money” Isn’t So SmartBy JLPThe more recent twist: Packaging mortgage loans and turning them into securities would make the global economy more resilient if anything went wrong. In a matter of months, though, much of the promise of the new financial architecture …AllFinancialMatters – http://allfinancialmatters.com [...]
December 11th, 2007 at 7:15 am
I wonder what effect it will have on those securities. It looks to me like there is a lot more risk in them than was realised (I guess that means they were overpriced?), but I can’t figure out what impact that will have.
December 11th, 2007 at 12:03 pm
Most of the Realtors I know have been saying the market will turn around “any time now.” They have to believe that, or else apply to Sears for a job selling refrigerators.
However, one Realtor of my acquaintance, a guy with an MBA and a couple of successful small businesses behind him who came out of early retirement to sell & invest in residential properties, says that in our area (Phoenix, AZ) we have more than two years’ worth of inventory on the market. More is accruing as we scribble, between young workers who have been transferred and need to sell, boomers who want to retire and downsize, and the many holders of now-unaffordable ARMS used to purchase houses at inflated prices.
Assuming (without holding our collective breath) that the government does something to bring the present fiasco under control and it takes effect in a year, it will take another three years to clear the back inventory (bare minimum) and another two years for the market to return to normal. That would give a best-case scenario of six years to recovery.
Personally, I’m figuring on ten.
December 11th, 2007 at 11:32 pm
“It’s important to note that 9 out of 10 realtors believe in Santa Claus!”
Love this sentence.
I am also figuring a couple of years or more. Just based on the experience of the 90s. Is the situation right now really better than in say 1990? The prices are still too high, IMHO; not all ARMs converted yet, not all “teaser” rate periods ended (did they?); the cost of renting is still significantly smaller than the cost of buying comparable property at least around here.
At least around here in Westchester there is still room for prices to come down: I just cannot take one bedroom condos for 300K seriously. Even 400K in a new tiny complex they built in my town a year or so ago and cannot sell. Isn’t that a surprise: they wanted 640K for a two bedroom townhouse and 420K for a one bedroom. I walked by last year and they had the open house; couldn’t resist to look at it for remodeling ideas. I hated the layout. I mentioned to the realtor that there are better and cheaper complexes in town and he said “but this is new”. True, and they are located in 5 minutes walking distance to our MetroNorth train station – good for NYC commuters. Still, this is a ridiculous price. As far as I know they only managed to sell a couple of some 15 units. The realtor called me after my visit and left a note that they reduced the price on a townhouse to 620K. As if this would help. I like my place better anyway.
We haven’t even been hit by foreclosures that much yet. Not as much as California. Maybe there is something special about NYC proximity, but it didn’t help during the 90s.