Eight Notes on Residential Real Estate

For those wanting a road map of where I am likely to post over the next few days, tonight is mortgages and real estate, tomorrow is speculation, and Friday should involve longer dated topics. For those that commented on the blog redesign, I want to say that I appreciated your comments, particularly the critical ones. In the next two months, I’ll be doing a minor redesign to fix some of the flaws that I introduced in the process. I’m not perfectly happy with the result, and it can be improved. Trivia: I co-edited the best high school yearbook in the nation back in 1979, so I do have some eye for design. It’s more of a question of the computer implementation.

Onto real estate:

1) After a bubble bursts, it’s amazing the details that come out on the ethical lapses that transpired. With Countrywide, people were steered into loans that were worse than what they might have qualified for there or elsewhere. Now, they should have shopped around; I always do that on mortgage loans. That Countrywide is still facing problems after the Bank of America infusion might not be too surprising; companies that cut corners with their customers are more likely to be aggressive in their accounting practices. After the post-bailout bounce, the convertible preferred that Countrywide got is now under the $18 strike price.

CFC price chart

2) Can the mortgage crisis swallow a town?  Yes.  I know this personally, as some friends of mine on the Eastern Shore of Maryland are finding out right now.  They are not in one of the best areas, and demand has dropped off a cliff.  Entire neighborhoods near them are in bad shape, making everything else less salable.  They need to sell their home for medical reasons, and they can’t do it without taking a loss, which would impoverish them.

3) The internals of the housing market are now such that no one is arguing over the troubles faced.  Consider:

4) But won’t the President and Congress bail out strapped homeowners?  Tough task.  Current proposals are just dust on the scales, and doing anything big would be a budget-buster.  I agree with Accrued Interest; a bailout is bad policy.  I suspect one will happen anyway.  Washington, DC specializes in bad policy, if it wins votes.

5)  After a bubble bursts the second order effects can be quite significant.  Consider:

6) Now, I wonder if Merrill Lynch will have any significant hits from subprime.  I would expect it, but who can tell for sure?

7)  Was it such a good idea for the US government to promote home ownership so vigorously?  I have generally said no, and Caroline Baum questions the wisdom of the policy as well.

8) Finally, we keep them in a bubble to make sure that their theories on how the economy works do not get contaminated by data.  I’m partly kidding here, but the Fed is very optimistic that any spillover from residential real estate to the general economy will be light.  I think the effect will be moderate; it will definitely hurt, but not destroy the US economy.

Tickers mentioned: BAC CFC GS MER