-- Posted Tuesday, 20 May 2008 | Digg This Article
| Source: GoldSeek.com
Rick's Picks
Tuesday, May 20, 2008
"Phenomenally accurate forecasts"
Is the end of the housing bust in sight? A prominent money manager known for his maverick views thinks so, but not without reservations. Charles Peabody, of Portales Partners, was one of the presenters at the meeting we attended in New York last week of the Committee for Monetary Research and Education. He says that "Four Horsemen" have been working hard to pull the economy out of the mire of a housing/credit bust. The horsemen are the Federal Reserve Board, Congress, the SEC and/or FASB, and the Treasury Department. Three of the horsemen have fully materialized, he says, and it is only a matter of time before the fourth, Treasury, succeeds at the crucial objective of stabilizing the dollar. Once this has been achieved, says Peabody, several positive things will happen: 1) the housing market will stabilize (albeit at depressed levels); 2 we will pull ourselves out of the recession; 3) widening spreads in fixed-income markets will reverse; and 4) a rally in financial stocks will develop.
For Peabody's bullish scenario to play out, housing prices must first find a bottom. He says this is imminent because housing affordability is slowly shifting in favor of buyers. We think this is where his bullish argument fails, though, for two reasons. First of all, even though real estate prices have been falling for more than 20 months, that doesn't necessarily make homes more affordable. In fact, lending standards have tightened so dramatically as to all but negate the would-be stimulus of lower prices. Whereas buyers could once take possession of homes without a downpayment or verification of income, now, to qualify for a mortgage loan, they must meet far more stringent income guidelines and come up with a downpayment of at least 20%. These new hurdles are formidable and have probably more than offset the effect of lower prices.
Bullish Psychology Dead
But there is another factor working even more powerfully against statistical affordability, and it is mainly psychological. We would argue that the single most important catalyst of the housing boom, and of widespread, albeit misplaced, notions of "affordability," was the near-certitude that home prices would continue to rise. After all, what does a home buyers care about how much he pays for a property, or the interest rates he pays to his mortgage lender, as long as he confidently expects the home to keep rising in value? This was by far the most powerful force driving the housing boom, and it was all the more powerful because, on average, homes in most regions of the country were gaining value much faster than the incomes of those who were buying them. But the psychology of home buyers has turned decisively bearish, and relatively few are inclined to buy more home than they can afford. We think buyers will grow even more conservative in the months ahead as the recession deepens. Bulls who think a firming in home prices will help put the economy back on track are therefore putting the cart before the horse.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers' initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Tuesday, 20 May 2008 | Digg This Article | Source: GoldSeek.com
