Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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