Saturday, December 5, 2009

Rich Toscano gets it exactly right..

I thought Rich Toscano's article "Forecasting the Real Estate Non-Market" was an excellent read as far as anyone trying to predict anything going in the market longer than a couple of months out. I highly recommend reading the whole article but will quote the most important part here:
The government has gone to amazing levels of effort to prop up the housing market. I described some of these fiscal and monetary undertakings in detail recently, so I won't cover them again here. But the long and short of it is that huge amounts of money are being borrowed or simply created out of thin air and shunted directly into the housing market through multiple channels. Even as demand is thus boosted, supply is being constrained by foreclosure moratoria and opaque and arbitrary financial industry bailouts.

The net effect is that government intervention is exerting an enormous influence on the housing market. So one can't just look at fundamentals as in the good old days. Instead, one is forced to practice a sort of real estate
Kremlinology in an attempt to figure out how fiscal and monetary policy will affect, or cease to affect, the market.

Just to throw out a few examples on the legislative side: will the home buyer tax credit be extended again? Will Congress find other ways to encourage/bribe people to buy homes? Will moratoria be lifted or lightened? Will there be another round of financial bailouts?

And on the monetary front: will Ben Bernanke, Fed chair and printer of over $1 trillion in support of the mortgage market, be re-appointed? Will the Fed continue to artificially boost demand for mortgage-backed securities and agency bonds by buying them hand over fist, or will they stop early next year as they have suggested? When will the Fed tighten policy or begin raising rates?

I thought Kremlinology was a perfect term in regards to the market and trying to figure out what is going on. There are people in power who believe they can define reality through the printing press and are now putting that theory into practice. There are people in power who believe they have to do everything in the world to encourage home ownership despite the housing bubble proving why that is a really bad idea. The confluence of these two groups makes it impossible to apply any sort of rational logic to the market. If the market isn't what they want it to be they will attempt to bend it to their will. Heck, I was reading an article today that Sheila Bair is saying any bank taking over another bank with FDIC help will have to be required to cut principal on mortgages of the acquiring banks distressed portfolio even though it will ultimately cost the FDIC fund more money. How can you possibly predict anything based on the whims of those in power?

Housing fundamentals no longer apply because of the amazing distortion being applied to the market. It is impossible to predict anything based on fundamentals when you have people in the Fed and Administration wanting something other than the fundamentals suggest. I can see a couple months out with reasonable accuracy based on the data I have available to me but anything past that is a crap shoot because there is no telling what the powers that be will do.

While I understand why economists are against the "Audit the Fed" bill going through the House right now I can definitely understand where the anger is coming from which generated the bill. The Fed aided and abetted the biggest credit bubble in history which is causing trillions of dollars in damage to the world economy, you have to expect some reaction. The first rule should be to do no harm and the Fed definitely failed in that regard. For people like me who were hoping to buy a house and not choose between financial armageddon or owning a home and chose not to participate in the bubble the actions of the last few years leave me with a bitter taste in my mouth (the cherry on top is getting to pay for it too!). I'm close to being "done" with real estate, my passion and focus are moving on to other things. I'll just be a life long renter, no sense of throwing a bunch of money away just to paint the walls (btw, I paint the walls of my rental, *gasp*).

4 comments:

Noz said...

Sorry I haven't followed your last few posts but didn't you just bite the bullet and get a place? Or did that fall through?

Effective Demand said...

I bid on a very inexpensive place but we couldn't come to terms.

TomK said...

Hey ED

You sound like I did back in I think early '05. At the time I knew we were in a bubble and thought it was about to burst until the banks cam up with Option Arms and prices began to take off again. I knew the bubble would burst even bigger then before but they just extended the time. I have been holding my wife off for years and its frustrating we did everything right but you nailed it with this comment :
For people like me who were hoping to buy a house and not choose between financial armageddon or owning a home and chose not to participate in the bubble the actions of the last few years leave me with a bitter taste in my mouth (the cherry on top is getting to pay for it too!)

However, I dont think things are done, nor do I think this economy is on any solid footing and I think the next big crash is coming and this on will be worse because our govt is in a weaker position then last time. I think prices will overcorrect they always do in bubbles and in the end they will this time to, he makes a good point about inflation making up the difference, but how can we ever get that kind of inflation going with such a morbid economy?

Go Kings

Effective Demand said...

"but how can we ever get that kind of inflation going with such a morbid economy"

They just printed money to buy $1.25 trillion in MBS, $300 billion in treasuries and $200 billion in agency debt. They can create inflation with a flick of the switch they just have to figure out what is the right transfer mechanism into the economy. So far they focused on credit creation at the end of the largest credit bubble in human history. God help us if they ever start buying up debt and reworking the terms to alleviate the debt load, that is the real deflationary force at work that isn't helped much by new credit creation (thus the QE being relatively ineffective).

Go Kings! I can't remember the last season I actually enjoyed watching them lol, this is the first in a long time. A little modicum of goaltending is going a long way.