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Thursday, September 10, 2009

Residential Housing to Drop Another 25%: Whitney

The banking analyst Meredith Whitney appeared on CNBC this morning (9/10) and predicted that residential housing could drop another 25% from current levels on the basis that banks did not issue mortgages during 2005-07 assuming that we would have 10% unemployment.     Remember that for many years, "unemployment" (measured as "U-3" by the Department of Labor) was in the 4%-5% range.  

In other words, the banks underestimated the risk of default on their mortgages.   Actually, the risk would seem to be much higher - and thus seriously underestimated - on all outstanding mortgages, since unemployment cuts across all segments of the homeowner universe.   The only difference in the mortgage age is that an older mortgage is presumed (if there's no HELOC on the same property) to have been paid down more, so that the borrower has more equity in the property and can sell more readily if necessary.   Borrowers without equity often cannot sell their properties without paying the balance (the difference between the mortgage balance and the net sale price) or their lenders agreeing to a short sale, and if that doesn't happen, foreclosure is likely.   Hence the recent rise in foreclosure rates.

But wait, aren't we coming out of a recession?

Technically, maybe.   Think about how a recession is defined.   A recession means that economic output is shrinking, relative to earlier periods; a non-recession (i.e. a period of very low growth) means precisely that, a period of barely increased economic output measured against an earlier period.   If you are going to use late 2008-early 2009 as your measuring stick, then its not hard to have increased output.   In fact, to have barely increased output screams that conditions are still bad.    As if many of you didn't already know that.

By the way, what happens when the government loses its ability to keep interest rates down?   What will happen to prices when a 30-year mortgage goes from 5% today to 8%?  Or 10%?  

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