This is the title of an Opinion article in today's WSJ; here is the link. It certainly is an interesting article!

Ray 

Ray,

The author manages a hedge fund. Isn't it possible that the article is self-serving? I didn't notice many hedge fund managers being elevated to saintly status lately. Neither have I noticed much validation of cause and effect; if there is any to begin with. One theory that's been touted has been the maneuvers of hedge fund managers.

Sy

Sy,

Certainly it is possible but I would doubt he would be purposely deceptive in an article published on the WSJ OPINION page! In any case, it is his argument that is important, more than this personal position. But each can interpret the article however they want.

Ray 

"I would doubt he would be purposely deceptive in an article published on the WSJ OPINION page! "

Why not when there's millions to be gained through deception? Even the presidential candidates make deceptive statements in public.

Sy

True but they are politicians! Everyone expects them to tel one set of lies to one audience and another to a second and around and around it goes!

Ray 

A person doesn't have to be deceptive to be wrong.

Traxis partners may have made a bet.  It's an opinion piece, not a compelling analysis.  I'd  love to see if Traxis has walked its talk, but funds like Traxis are anything but transparent.

On the other hand, the S & P Case-Shiller Index or Realtytrac, which are entirely transparent and use real-time numbers, offer a far more different picture than the Opinion piece.

Just in case anyone has forgotten, foreclosure rates are up, banks are not lending even to many creditworthy customers, and now home equity loans are being called in even for creditworthy clients.  Worse yet, the credit crisis has spread to auto loans and student loans.

It's a crisis and it ain't over.  Bob U. 

He was interviewed on CNBC this morning with two of the female CNBC staff both of whom are astute. The criticism one made is he ignored the problem with obtaining a mortgage. His response was that the issue was what the 90% of people with performing mortgages would do in the near future. They have good credit and can get mortgages and they can now buy homes at relatively cheap prices in affordability terms, which is certainly true. He based this argument in turn on the early signs of a recovery in sale of new homes and forecast this would spread to existing home resales.

I would not be so sure in arguing he is wrong. And ee shall see. It is brash prediction but I like his logic.

Ray 

If the gentleman is talking about folks with cash, then I quite agree that opportunities abound.

However, we live in a time where lots of folks have mistaken good credit for immediate liquidity (i.e., cash).

Everything I've read, Ray, indicates that banks or lenders in general are demanding more cash up front and lots of folks with good credit don't have the cash.  That's the issue.

This is a point so many people missed while the residential housing market was flying: a house is not a liquid asset, all the more so for those who did cash-out refis, many of whom are now upside down (house worth less than loan amount).  Bob U.

All I know is what I read and what I heard. He was talking of the 90% of home owners with performing mortgages and who he argued had good credit. Presumably they also have solid equity in their home. Some would undoubtedly have cash. Don't know any more. Again, it is the logic that appeals to me. He could be right; he certainly is right about most people having performing mortgages.

Ray 

Hi Ray,

Here's Fannie Mae's view of the housing market hot off the press.  http://biz.yahoo.com/ap/080506/economy.html     Bob U. 

I just sold a piece of property, so this is a first-hand observation. Trying to get a mortgage right now is very difficult. Yes, the credit has been tightened up substantially. You have to have a high credit score (or equivalent if utilizing manual underwriting in lieu of a credit score) to be able to purchase a piece of property or have all cash. Most buyers now have, at best, only a 5% down payment, whereas 20% is the normally recommended amount. So, buyers are not saving the appropriate down payment, plus credit is tight. Add these two points together, and you get the popping of the real estate bubble, which is now spreading to other credit markets like auto loans, student loans, and credit cards (Bob U is correct.). Not to mention the US average of zero savings rate. We're still getting conflicting information in the media, so you just have to pick one or the other opinion as to whether the housing crisis is over or not.

Dan

P.S. - I hope no one minds this Boglehead posting here in a very interesting discussion. ;)

Hi Dan,

This site  welcomes everyone and all points of view and has done so from the git-go.

In fact, I'm delighted to see that we are gathering more new contributors, though I don't judge the quality of any site by the number of postings.

I neglected to tell Ray (to support some of his view) that in my neighborhood two houses priced in the range of $300,000 - $500,000 sold within two weeks recently.    One more at the higher end of the price range has remained unsold for two weeks, but our surrounding community has lots of building going on and is supported by a large, stable, major university community with excellent public schools.  Our residential real estate values have remained stable.

I'm on two city commissions and there's about a $1 billion of commercial development going on.  I'm sure there are other stories like this on an even larger scale going on in much larger communities.  Bob U. 

"buyers are not saving the appropriate down payment, plus credit is tight. Add these two points together, and you get the popping of the real estate bubble, which is now spreading to other credit markets like auto loans, student loans, and credit cards"

Dan,

I must be doing something right then, because one of my credit card companies gave me the use of the equivalent of 25% of my rather large mortgage at 0% for a one-time fee of just $75. This will last for 6 months. Another card gave me the equivalent of 6% of my mortgage at 3.99% till paid off, no fee. Maybe it's time to take advantage of a bargain out there :-) (It doesn't really feel like it where I live. Everything seems stable.)

Sy

Same offers have come to me on a weekly basis for months (0% for a year) with minimal transaction fee and multiple blank checks attached and I immediately tear them up.

Yes, you're doing something right, Sy.  You have just the kind of credit history that's desired, but these offers are targeted to the very people who don't need the help.  That's the sad part because it simply aggravates the current credit-tightening situation.

This is one of the reasons I don't believe the housing crisis is over for a whole lot of folks.  Bob U. 

There was another housing discussion on CNBC a few minutes ago with three CNBC staff, an economist and the Director of the Office of Federal Housing Enterprise Oversight. The latter is obviously quite knowledgeable about housing in the US.

There was some discussion of yesterday's WSJ Opinionn article and the OFHEO Director said two things of interest. One is that the housing affordability comments in the Journal article are correct. Second is that the expansion of the Federal Agencies into backing mortgage is going to expand greatly and the access to mortgages is improving in most but not all (read CA) states. A third comment was reference to the proposed Barney Frank bill which increasingly seems to be getting good press. In short there is evidence to support yesterday's article. Sorry to dampen all the cynicism! :-) 

Obviously the above is my take on the discussion but please note I am not knowledgeable on housing and mortgages.

 Ray

PS the economic news this morning - productivity and labor costs was good. 

You can read a summary of it and its status at this link. Here are the first five paragraphs of the article.

The House on Wednesday will begin debate on a housing package that would let the government back loans for homeowners at risk of foreclosure - a move many Republicans have opposed.

The centerpiece of the package is a proposal to let the Federal Housing Administration (FHA) insure up to $300 billion in new loans over four years if lenders agree to reduce the mortgage principal.

To qualify, the lender would have to cut the debt to no more than 85% of a home's appraised value. If the FHA-refinanced loans went into default, the FHA would pay the lender the remaining principal owed.

The bill is sponsored by House Financial Services Chairman Barney Frank, D-Mass.

While 1.4 million loans are likely to be eligible for such a program, the Congressional Budget Office estimates such a measure would end up insuring 500,000 borrowers and estimates doing so could cost $2.7 billion over 5 years.

 Ray

Ray,

I think you are confusing cynicism with skepticism.

I am not in the least cynical about Barney Frank's motives or Senator Chris Dodd's (who is the co-author of the proposed bill), but I'm deeply skeptical.

In that vein, here's a skeptical response to the proposed legislation.  http://www.heritage.org/Research/Economy/wm1918.cfm

Bob U. 

My cynicism comment comes from Sy's original comment on the article. As for the Barney bill, I am sure it has flaws as do most bills. But it is likely to pass and be signed by the President in a form close to what will exit Congress. Its effectiveness will be judged afterwards.

Ray 

Ray,

"What has worked to date is Hope Now, a voluntary, private-sector plan that allows homeowners who have the ability to pay a lower-cost loan to refinance their mortgages. Hope Now has assisted almost 1.4 million homeowners without major government intervention. Rather than pressing for massive new programs, legislators should allow one with proven results to do its work."

The end of the linked article by Bob U. suggests this solution rather than having the public (taxpayers) bail out the suckers who can't manage an investment in their homes, and the lenders who prey on them. (I'm assuming that the program is really offered, and not full of loopholes that make it too difficult for the average person to participate.)

Sy

FL, NV, CA are experiencing severe housing price declines. In FL prices have dropped over 30% in the last 2 years. In my FL town, foreclosures are a daily event in the newspapers.  Unemployment is at all time high. 1/3 of all new condos have unit owners not  paying their monthly maintence and  the properties are being neglected. My daughter just rented a 2 bedroom condo on the water with a private dock that the landlord was asking $2,500 per month. She is paying $1,000. So if some money manager wants to claim that this crisis is over, I would tell him to visit FL, Ca and NV and see the depression that we are experiencing. 

The author of the article is well aware of the situation in the three states as is most every one else who has any knowledge of the problem. It is bad but not that bad here in AZ but local/state situations in a few states does not make a national problem. In any case the article is making projections of the future and only time will show if he is right or wrong. Certainly the problem in these three states will continue for a longer time than in the rest of the nation. No one would deny that.

Ray 

This is a very interesting discussion.

 I think, tho', we need to be careful with our metaphors. We speak of bubbles as "bursting." The air, by contrast, of this "bubble" is being slowly let out. (To be sure, some markets have had more dramatic price declines: e.g., Las Vegas, parts of California, and so on.) Many homeowners (something of a misnomer, given their indebtedness) are waiting for adjustable rate mortages to reset. Some will obviously be unable to afford their payments, once their terms change. That will lead, in some cases, again, to more foreclosures, and foreclosures depress real estate markets--period. Even when access to capital is adequate--and it isn't for many now--it can take significant amounts of time for foreclosed properties to work their way out of the system.

Sorry about another metaphor, but a) President Bush will fall on a sword--even during an election year--rather than sign Frank's legislation and b) the best we can hope for, as the "bubble" lets out air, is that doesn't depress too suddenly, too dramatically, too loudly.

 Larry T.

Larry,

Don't be too sure of what the President will or will not sign. On one of the two financial cable programs a short while ago there was mention that there might be an agreement on a compromise Barney Frank bill tonight. But of course you still may be proven right.

Ray 

Ray,

Despite my own silly metaphor, I agree with you about President Bush. This is an election year--you know, strange bedfellows and all. (Yet another dead metaphor!) Still, I think the housing declines that we're seeing are likely to continue into next year (and, perhaps, beyond). I'm not an economist and cannot speak to the question of whether it's better to have housing declines happen slowly or almost all at once (so the market can "clear itself"). What I do sense, however, is that Bernanke, the president, congress, the street seem to be resisting the "all-at-onceness," which is why I think the bubble's air is being released slowly. Add high gas prices, a battered/overextended consumer, expensive credit and you have . . . no likely recovery in the near-term.

Larry

I think there is room for legitimate debate on whether enough steps have now been taken by Federal authorities to truly stem the housing crisis.  For the record, I remain skeptical and come down on the side of those here who think the crisis is not over.

In my opinion, however, we will be able to better judge when the economic crisis is actually over by watching the price action of the TREA, which I believe is a fairly good barometer of the health of the economy.  So far this year, the account has had its worst four months performance in its history, including a rare negative month, and its performance in May continues to be very weak (up only 3 cents in value).  It seems to me that the performance of the account should be improving if the economy is really on the road to recovery.

Jared

I would beg to differ with Jared's comment that "the TREA, which I believe is a fairly good barometer of the health of the economy." Markets frequently are out of tune with the economy and the commercial Real Estate market probably is one that lags the Main Street economy; it is not a very flexible or liquid market. I expect to see the US economy to improve before the commercial real estate markets and thus I expect equity to improve before real estate does, which is why I sold out most of my REA and have been slowly and carefully buying back into equity. This is my game plan for the immediate future.

Ray 

Ray,

The commercial real estate market certainly lags the residential real estate market, and perhaps you are correct that it also lags the main street economy.  But if you look at the TREA's historical record, however, you find that after 9/11, the TREA began to noticeably improve its performance during the February/March, 2003 time period.  This is exactly the same time frame that the stock market made its double bottom after its long decline from the year 2000.  So, in this case, if there was a lag, it was a fairly brief one.

I like your plan of slowly buying back into equities.  I've thought of doing something similar, but I suspect I may be more conservative than you, so I am still waiting before I make any further moves.

Jared

If you are still interested in the Federal "bail out" for mortgages (and related topics) you can find the article with the subject title at this link.

It may or may not happen today; if not today, it may be dead.

Ray