Housing’s House of Cards

This article provides a good assessment of the current situation with a focus on the dynamics underlying the house of cards – the housing market. The author focuses on the brutal reality that we are in for a long cycle of downward pressure on housing prices and this will have broad implications for the rest of the economy.

Housing Minsky Moment: 3 Factors. Prime Contagion, Record Foreclosures, and Publicity.

The piece I think he fails to address is that the entire system is driven by the credit securitization market and that the key to predicting the future trajectory/recovery of the markets will be determining how much the system can digest the elimination of leverage as mortgages underlying CDO’s continue to default. To the extent the diversification story is real, and default risk was somehow priced in at a somewhat realistic (although obviously underpriced) level, perhaps this cycle will be shorter than those in the past as resecuritization and out-of-court restructurings by alternative asset managers (aka hedge funds) lead the way.

Although it is scary to see headlines like this:
Financial crisis just one ‘Bear-like’ event away: Economist
and articles like this: Subprime coming home to roost?, the reality is that there are a bunch of very smart, very driven investors out there who will do everything they can to find a way to extract value out of the system.

One challenge that the housing market in particular will face, is that as individual homeowners feel the pain of the unwinding that has already begun at the ground level of the economy, they will complain to regulators, who will in turn look to point fingers. Lawsuits have already been filed, likely for good reason, by the NAACP and others against subprime lenders, and as mentioned here in another post, CFC and others have stopped selling 2/28 ARMs.

While regulatory oversight is likely needed to some degree and likely could have prevented the excesses of this cycle, as the market looks to correct closing the faucet on exotic securities en masse would be devastating. Hopefully, this will not be the result, and if regulators react as slowly as usual, perhaps it can be avoided.

The short answer is: nobody knows what tomorrow brings. So I will stay as Bullish as I can…and acknowledge my Paranoia.

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