"Worst of Housing Crisis Is Behind Us"

John Berry has a relatively optimistic outlook:

Worst of Housing Crisis Is Behind Us -- Really, by John M. Berry, Commentary, Bloomberg: The intense pain caused by the bursting of the housing bubble is beginning to ease. Really.

That may be hard to believe, given the rapid increase in mortgage foreclosures, big year-over-year declines in home prices and housing starts, and continuing writedowns in the value of mortgage-backed securities.

Yet a close look at the recent flow of housing data provides convincing evidence that the worst of the decline is over. Investors who are fleeing financial-institution stocks -- including those of Fannie Mae and Freddie Mac -- ought to think twice about the housing outlook.

Take sales of existing homes, which account for about 85 percent of all U.S. housing sales. They peaked at an annual rate of 7.25 million in the fall of 2005 and fell to 4.89 million in January. In May, it was 4.99 million.

The recent figures aren't a guarantee that such sales won't decline a bit more in coming months. Still, their relative stability probably indicates that home prices have dropped enough to encourage buyers to re-enter the market. And there's no reason to think the huge drop in sales since 2005 will be repeated.

Sales of new homes, like those of existing homes, have also moved sideways in the last couple of months. They might fall again, though probably not by very much. ...

In other words, the worst is behind us. ...

Comments

[Lafayette]

Article: The recent figures aren't a guarantee that such sales won't decline a bit more in coming months. Still, their relative stability probably indicates that home prices have dropped enough to encourage buyers to re-enter the market.

Perhaps, yes, it's a good sign.

Nonetheless, just as one goose does not make a flock, one data point does not constitute a trend.

This article is wishful thinking. Mind you, I'm hoping its argument IS indicative of a bottoming out.

[hari]

This is an optimistic perspective - not necessarily reflecting warnings from BB and other's including Rubini team of GRE papers on hi fi sector.

[Fed Lackey]

The Fed and it's co-conspirators may engage in wishful thinking all they want. Meanwhile a former Fed president dares to speak the truth - that Fannie and Freddie are insolvent. The taxpayer has to pay.

All the apologists for the Fed (this site is full of them) have to take responsibility for the reckless experiments and bailouts that have led to this. The worst is over indeed! Hiding losses on the Fed balance sheet does not a recovery make. Keep saying to yourselves we're in the ninth inning. As someone said, we're still singing the national anthem.

[NLS]

Yeah right. The "days on market" data tells a different story. And with the coming increase in foreclosures we'll see some shitty times ahead.

Renter for Life.

[NLS]

Kinda sucks that rent prices are going to increase too.

[save_the_rustbelt]

Wildly optimistic and not correct.

[Robinia]

Does John Berry really not know that housing sales rise in the Spring over January numbers as a part of ordinary seasonal variation every year? Talk about grasping at straws!

[ken melvin]

Foreclosures are hot.

[dd]

Berry says: "Investors who are fleeing financial-institution stocks -- including those of Fannie Mae and Freddie Mac -- ought to think twice about the housing outlook."

"Fannie, Freddie `Insolvent' After Losses, Poole Says"
http://www.bloomberg.com/apps/news?pid=20601087&sid=as4DEc5UFopA

[a]

"save_the_rustbelt says...
Wildly optimistic and not correct."

Damn right!

[robertdfeinman]

NY Times columnist Floyd Norris thinks otherwise:

Whistling Past the Graveyard

[baileyman]

Seasonality?

[StumpJump]

"sales of existing homes...fell to 4.89 million in January. In May, it was 4.99 million. "

Well, obviously you have to use seasonally adjusted numbers right? An increase of only 100,000 from Jan. to May actually seems pretty pathetic. And sales in May 2007 were 5.93 million. So how is a 16% year over year decrease good news exactly?

[Alex Tolley]

Housing sales haven't yet been seriously distressed by a recession yet. If we get a recession, I would expect a second leg down in sales. Tightening global credit could put further stress on the US, raising interest rates and impacting home sales. maybe we can avoid all this, but I doubt the odds are that good.

[kthomas]

Very optimisitc. He must have a house on the market, lingering as such.

[Ben Stein the Hack]

Agree with Alex Tolley. This is a floor made out of straw, and we'll almost certainly see it collapse as the weight of economic concerns start to hit.

This also ignores the fact that in addition to subprime 2/28 and 3/27 ARMs, (which should all reset by 2009) there is increasing reason to worry about the 5 and 7 prime and jumbo ARMs taken out by middle class folks at the height of the market.

[ddt]

oldest mistake in the book

SEASONALITY

use year-over-year not month to month!

is it any surprise that sales in the summer are higher than sales in january? they are every year. think about it. also, see Dean Baker

[gaius marius]

i don't blame berry for attempting to spin the positive -- i just wish he'd look at the record before so closely correlating prices with sales.

in every previous housing slump on record, sales bottomed 8-12 quarters ahead of prices. that's largely because prices are a function of inventory, not sales.

i rather agree with him on sales -- if they haven't bottomed, if this is a seasonal aberration, they are probably close to bottom levels. how far can they fall, really? the series won't go to zero.

but that won't at all relieve the pressure on banking. YoY price declines are still accelerating, for gods sake! and they will very likely continue to be steeply down until the excessive leverage is drained from the system.

[Bruce Wilder]

So many people seem to react to all events with characteristic and habitual rote attitudes, it is difficult, sometimes, to see how we manage to adapt at all.

Even in the best of times, there are inevitable perma-bears, who warn, warn, warn. When things are at a clearly unsustainable peak, there will always be someone to explain how this time is different, and to write, "Dow 36,000", or similar nonsense. And, on the great slide downward, long before the bottom is in sight, there will be people shouting that the crisis has passed, a turn for the better has occurred.

What is wrong with these people?

Months ago, I spent an afternoon reading the financial blogs, and did some pencil-and-paper guesstimating, which allowed me to estimate that housing value losses would be on the order of $5-6 trillion dollars, and mortgage losses to investors and banks would, therefore, be around $1.2 trillion.

Anyone armed with those two figures -- and my calculations were really just a distillation of the informed consensus, as I read it from Calculated Risk -- could have figured out that Freddie Mac was insolvent and Fannie Mae was in deep trouble.

So, what took so long?

One of the reasons I have always been extremely skeptical of the extreme forms of the so-called efficient market hypothesis, is that markets seem to, often, take considerable real time to adjust to the emergence of plain facts.

I can understand why it has taken a while for the ground to erode under Lehman's feet. The affairs of an IB are complex and mysterious, and clever masters of the universe have been known to pull things out in the next reel. But, Fannie and Freddie exist in a fish bowl, they are committed irrevocably to their business and cannot be "rescued" privately.

To say that there were any hidden contingenies once the housing markets began to decline seems to defy all sense.

[Lafayette]

Classic Cycle

SJ: So how is a 16% year over year decrease good news exactly?

It could have been double that amount?

The first sign of an imminent recovery is that the decline decelerates. Then the number hits a nadir. Then it recuperates slowly, slowly. That is the Classic Cycle.

If the housing number shows NO FURTHER DECLINE next month, seasonally corrected or not, that will be Good Enough News. If it shows an increase within the next quarter, that will be GREAT NEWS.

BIG little if ...

[Alex Tolley]

BW: "Fannie and Freddie exist in a fish bowl"

Nevertheless, Fannie & Freddie managed to cook their respective books for years and then only got a slap on the wrist.

http://www.washingtonpost.com/wp-dyn/content/article/2006/05/23/AR2006052300184.html

http://www.huffingtonpost.com/2007/09/28/freddie-mac-coughs-up-50_n_66272.html

[Alex Tolley]

closing italic tag.

[Lafayette]

Methinks

BW: Anyone armed with those two figures ... could have figured out that Freddie Mac was insolvent and Fannie Mae was in deep trouble.

Numbers need perspective. Absolute figures are great for provoking astonishment, but little else.

What is a 1.2 trillion dollar decline in value in an economy of more than ten times that amount. It's a bit less than a 10% blip. It is certainly no reason to run around like Chicken Little.

Fannie Mae and Freddie Mac are guaranteed by the Federal Government. This was intended in their creation. No PotUS will allow them to fail, in the traditional sense.

So, does insolvency mean they are bankrupt? No. Does it mean they will go to the Fed for more cash reserves? Quite possibly.

Perspective is everything in analysis. Methinks.

[Icarus]

Housing prices will, and should come down more. These prices in the US are still wildly over-valued.

Any housing relief which prevents prices from decreasing is un-wise, as it actually hurts more people than it helps.

Those who bought real estate at inflated prices must suffer the financial and non-financial consequences. Those that held off, knowing such a purchase to be imprudent, should be rewarded.

The market is cruel, but, we need it to move towards the rational.

[Barkley Rosser]

Sure Fannie Mae and Freddie Mac are in deep doo doo. But this week's crash reflects something else that is not so smart and is a lot more general than them, the general demand that financial institutions must constantly be revaluing their assets according to current market values. What for?

This demand can aggravate procyclically systemic problems and this has been criticized sharply by some reports done for the EU, with much of this coming out of the flawed Basel II changes in accounting. The upshot of this is that when financial entities revalue according to the current market and the current market is going down, they then can be forced to sell assets in order to bolster their capital positions. This of course simply aggravates the downward push and does nothing to help the system.

In short, it is far from obvious that the FASB should be imposing this accounting rule on Fannie Mae and Freddie Mac, especially given their quasi-governmental status as backdrops for the whole housing finance system. Looks more like shooting oneself in the foot this stupidly imposed revaluing. Don't do it. Leave them alone.

[squeezed]

The NAR has been caught red handed fudging data in NJ. The NAR also does not remove trustee sales from their data sets. Given that foreclosures now make up the majority of sales in some bubble markets its obvious that this post was hopelessly naive.

IMO, we have yet to see the bottom in housing!

[TulipsAllOverAgain]

Not much more can be said about Seasonality. But, WOW, this guy sure is an idiot!

Could you present a smidgen more data please?

[rufus]

Berry: “That may be hard to believe, given the rapid increase in mortgage foreclosures, big year-over-year declines in home prices and housing starts, and continuing writedowns in the value of mortgage-backed securities.”

I’m all for boosting consumer/investor confidence when possible, but there is a multitude of mortgage and equity loans that have been relatively immune from the downturn thus far, and their rates are not due to reset till later this year.

[marmico]

The NAR data is SAAR (seasonally adjusted, annual rate). So John Berry is correct in the observation that sales of existing homes have bottomed. However, Berry didn't consider what Lawrence Yun, the chief economist of NAR, observed in the June 26, 2008 NAR press release:

We estimate about one-third of current sales are short sales or REO sales

[Clyde]

Berry has been consistently over-optimistic throughout the crisis (i.e. wrong). He is living in the new world (no recessions, Greenspan is a god) and has forgotten the old world (supply & demand, business ethics, fairness). And why not, he is a lot more prosperous today. I have given up on him, something is askew.

[S]

As someone who earns a pretty darn decent wage, but can not afford to buy a house (without resorting to 2004-2008 era financing gimmicks), I'm always mystified that propping up prices is seen as a "good thing", and that a massive, long overdue correction in asset pricing after a bubble is a "bad thing".

We're all in this canoe together, and I for one sure do not want it to sink. However, I owe nothing to someone who overconsumed, overleveraged, and to the banks/investors that made this possible.

Protection against bankruptcy and some foreclosures sounds great. Industry reform and regulation sounds great. A 15-30% nationwide correction in housing prices, however, is necessary (I'll take a cancellation of the mortgage interest deduction, too, but that can wait.)

Just how is this market supposed to become sound again if first time buyers (as well as median income buyers) can not enter? One would think increased housing affordability would be a "good thing." These people are just talking their book.

[Patricia Shannon]

Icky is sympathetic to the have-nots when he is one of them. He must not be able to afford a house, or he would be defending high house prices and saying everybody except the top 1% should live under bridges.