Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
China Hang Seng Stocks Index Collapses and Commodities - 24th May 19
Costco Corp. (COST): Finding Opportunity in Five Minutes or Less - 24th May 19
How Free Bets Have Impacted the Online Casino Industry - 24th May 19
This Ultimate Formula Will Help You Avoid Dividend Cutting Stocks - 24th May 19
Benefits of a Lottery Online Account - 24th May 19
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Fixing the U.S. Housing Market and House Prices

Housing-Market / US Housing Oct 07, 2008 - 07:25 AM GMT

By: Andrew_Butter

Housing-Market Best Financial Markets Analysis ArticleAt this rate they won't bottom 'till 2010 and there is 15% to go. I think I need to get my hearing checked, but I thought I heard "Hank" say that his bailout plan won't start to work until house prices recover.


At this rate house prices in USA have another 15% to fall from where they are now and they won't regain their 2006 level until 2015.

Like going deaf there is an inevitability about house prices. My model in "The Value of Housing in USA and UK" had a 98% R-Squared on 100 years of data. There is an inevitability about a trend line like that, like old-age.

Now that the full extent of the damage inflicted by the loan sharks starts to become clear, and now that it is also clear that the people who held the coats while the crooks dug USA into an early grave have no intention of fixing the core of the problem, it's possible to make a prediction.

There are only two variables:

Nominal GDP Growth

I don't do GDP predictions, so I'm just eyeballing. But from where I'm standing it looks like the economy is stalling, thanks in part to the decision to keep interest rates high on the grounds that inflation was measured at 3%.

In fact as Mike Sheldon pointed out, if inflation had been calculated the way they did it up to 1987, with what looks like a 12% to 15% drop in house prices in 2008, "real" inflation was probably negative. But no matter, believe what you like, this whole mess is all about seemingly intelligent people believing fairy-stories.

Now there is no credit apart from bail-outs to banks and they are not lending to the economy as a whole. The contagion has spread to the rest of the world, unemployment is going up. The reality is that it is harder to start an engine after it has stalled, this one looks like it stalled.

So going for the purposes of the model, how about using a nominal GDP growth over the next three years of 3% worst case and 5% best case?

Long-Term Interest rates

At this rate the 10 Year Treasury could average 3.5% for the next three years before going up to say 4% in 2012, again I'm just eyeballing. If someone has a better idea, well I can run the numbers again.

Running the numbers

Running those numbers for my 100 years of data trend line you get:


So that's the plan then Hank?

Bail out all your cronies on Wall Street and go back to sleep?

There is another way

Like I said here-and-there in the last five articles I wrote on Market Oracle, there is another way:

1.  Measure CPI like they did up to 1987 and make interest rate decisions based on that and the priorities of the economy. Not the misleading "politicized" measure that was in a large part the root cause of this mess, and not based on house prices.

2. Use the $700 billion to facilitate 85% LTV mortgages on current pricing (on average), and if house prices drop another 15%, do that for 100% mortgages.

How you do it is up to you, one way would be to buy NEW mortgage backed securities, but this time make sure the valuations are done properly.

Sound's crazy, but as of now house prices on average are on the 100-year equilibrium line, if they drop 15% they will be (by then) 20% to 25% below the equilibrium line.

So taking a long term view, that's not imprudent. Sure charge for it, make money, it's not mortgage rates that are paralyzing the housing market, it's getting a mortgage.

The root of the problem right now is that there is no market for mortgage backed securities. It will take time for that market to recover, and there needs to be regulatory changes, that takes time. Use the money to buy time, what the market needs is new mortgages, not a bail-out of old ones.

3.  Put up a price list for mortgage backed securities that values them using International Valuation Standards (i.e. do a proper income capitalization valuation on each one). Even if that means saying to the banks, show me what you want to sell, let me do a due diligence, and I'll make you an offer.

In other words forget-about mandating Mark to Market, just value assets in a prudent and rational way, optimally in line with IVS - strictly applied.

The current plan to do an auction will simply be an exercise in crony capitalism.

4.  Mandate that all the information required to work out value using IVS is transparently and completely supplied, ON THE BOX. What buyers and sellers need to know now is what the value really is and they need to be able to work out what it is, themselves.

There is a market for those instruments, just buyers can't get enough reliable information to be able to price them. My clients would buy them at a non-fire sale price, just there is no data to do a valuation.

Make the provision of clean information on threat of death. Heck you get a death sentence in USA if you are black and you can't afford to hire a lawyer. Ripping off a couple of hundred billion and bringing America to it's knees, should carry the same penalty, even Bin Ladin didn't manage to inflict that much damage.

5.  Buy from anyone, no strings. The priority is to re-start the market. Leave the punishing of the Mafiosi to the FBI, the Justice Department, Homeland Security (they are terrorists after all), and the market.

That's the problem with the US regulatory system. They are always trying to hit two birds with one stone. The banking regulations are a case in point; their focus appears to be more about The War on Drugs (lost that one), and The War on Terror (hardly winning that one).

Banking regulations should be about protecting the banking system, period.

6.  If you want to help foreclosures buy the properties at fire sale and rent them back to their previous owners at say 4% on the price you paid, with an option to re-purchase after the market turns.

7.  When the housing market starts to recover mandate maximum LTV ratios for mortgages that are explicitly or implicitly guaranteed, base this number on the difference between house prices and the equilibrium line.

Or better still; mandate that the valuation for the purpose of a mortgage should not include any speculation, like the EU regulations.

That's the way to stop boom-bust in the housing market. Do that now and prices won't fall more than another 5% tops.

And Hank you got one thing dead right, this crisis will not be contained until house prices recover. Pity you didn't read the letter that I wrote to you explaining that in July.

And by the way "Hank", I'm still waiting for a reply, at least the courtesy of a thank-you note.

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

Copyright © 2008 Andrew Butter

Andrew Butter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules