Resolution Trust Corporation II - the unavoidable Sequel

How to fix the US Commercial Real Estate Mess:

The US need a Resolution Trust Corporation similar to the one put in place during the Saving and Loans Crisis. The RTC was established in 1989 until mid 1995 and closed or otherwise resolved 747 thrifts with total assets of 394 billion USD.

http://en.wikipedia.org/wiki/Resolution_Trust_Corporation

"The Resolution Trust Corporation pioneered the use of so-called “equity partnerships” to help liquidate real estate and financial assets which it inherited from insolvent thrift institutions. While a number of different structures were used, all of the equity partnerships involved a private sector partner acquiring a partial interest in a pool of assets, controlling the management and sale of the assets in the pool, and making distributions to the RTC reflective of the RTC’s retained interest."

Between 1986 and 1991, the number of new homes constructed per year dropped from 1.8 million to 1 million, which was at the time the lowest rate since World War II.

Where are we now? In a worse situation than anytime between 1986 and 1991.



The hole is much deeper. We have beaten the record since the Saving and Loans crisis. Desperate times need decisive action and setting up a new RTC would definitely be the right move in the right direction.

We have a lot to learn from the Saving and Loans crisis:

http://en.wikipedia.org/wiki/Savings_and_Loan_Crisis#Imprudent_real_estate_lending

"Between 1980 and 1994 more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed or received FDIC financial assistance."

How many banks failure have we had so far this year? 129 banks went under and the year is not over yet.

In 2009, 140 banks failed.

Because the situation is worse than during the Savings and Loan Crisis, where 1600 closed down or received help, you can expect more bank failures in this ongoing crisis.

http://bankpred.blogspot.com/

"If you look at the most recent FDIC statistics on problem banks, you would see that there were 829 problem banks at the end of the last quarter."



Don't believe the situation is improving in the CMBS space:



This is what the banks are in fact doing with their damaged Commercial Real Estate Exposure:



B notes are comparable to Sub debt where the coupon payment is deferred (similar to Upper Tier 2 financial paper).

But it isn't only happening in the Commercial Real Estate space. Many large banks have recently suspended foreclosures, kicking the can down the road:

http://online.wsj.com/article/SB10001424052748704657304575539963605720860.html

"As of August, there were more than 4.4 million home loans that were either in the foreclosure process or 90 days past due, according to mortgage research firm LPS Analytics. Since 2006, about 6.4 million homes have been lost through the foreclosure process."

According to the article, it is due to documentation issues...I don't believe it is the real reason.

"Bank of America services 14 million mortgages, or one out of every five in the U.S., and its loan-servicing portfolio exceeds $2.1 trillion in size. Of its mortgages, 10 million came from its 2008 acquisition of troubled California lender Countrywide Financial Corp. More than 80% of its delinquent loans were acquired through Countrywide."

Given that 1 out of 4 US Household is already in negative equity, you can do the math.

The Mortgage mess:



In addition to the rising delinquencies in Mortgages, the Unsecured Home Equity Loans exposures of large US banks have not been resolved (the HELOC time bomb).



http://www.housingwatch.com/2010/04/13/the-heloc-bust-next-problem-for-big-banks/

"In an interview with Bloomberg, CreditSights' senior bank analyst Baylor Lancaster said: "While a lot of people are looking for dramatic improvement in the short term, one area that still has to be worked through in a material way is home equity." The writedowns from HELOCs are not likely to show up in earnings reports until later this year, Lancaster said."

"Together with Citigroup the banks hold about 42 percent of the $1.1 trillion in second-home liens. Unlike first mortgages, they are typically not bundled and sold off to investors but kept on the banks' books. The biggest home-equity lender in the U.S. is Bank of America, holding some $138 billion in such loans. Wells Fargo has about $123.8 billion of home-equity loans."

In addition to these unresolved issues:

"Fannie and Freddie are "actively exercising their right to put back to the original lenders a considerable amount of the troubled mortgages in their portfolios," write analysts Tom Abruzzo and Christopher Wolfe. The agencies have a right to require lenders to buyback delinquent mortgages, if it is determined the mortgage loan did not meet GSE investor underwriting or eligibility standards."

http://www.housingwire.com/2010/08/19/fitch-big-four-banks-face-180bn-in-buybacks-from-fannie-and-freddie?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+housingwire/uOVI+(HousingWire)

"Under a moderate loss scenario, in which the banks buyback 35% of delinquent loans and recover 55% of the money, Fitch expects losses around $27bn."

http://www.benzinga.com/10/09/485561/%E2%80%9Cthe-giant-elephant-in-the-room%E2%80%9D

"“Home equity is the giant elephant in the room and everybody knows it,” said Anthony Sanders, a finance professor and director of the Center for Real Estate Entrepreneurship at George Mason University."

"“If 25% of mortgages are underwater, [the second liens on those homes] should be classified as nonperforming loans, which would require a 50% reserve,” said Rebel Cole, a finance and real estate professor at DePaul University in Chicago and a former Federal Reserve Board economist."

"The four institutions now hold at least $423 billion of home equity loans, including $151 billion of loans to borrowers who are either underwater or close to it, according to data provided to the House Financial Services Committee in April."

You need to watch very closely the delinquency rate for second liens loans.

"Banks are required by regulators to charge off loans after 180 days of nonperformance, according to the Fed and the Office of the Comptroller of the Currency, which supervises large banks that service 65% of all mortgages.

A bank does not have to classify a home equity loan if the value of the property has dropped, said Bryan Hubbard, an OCC spokesman.

But Cole and others argue that banks ought to reassess the underlying credit quality of loans and account for problem credits if the collateral has changed. “Regulators have the power to force the banks to reserve against these loans, but choose not to do so,” he said."

"Gerald Hanweck Sr., a finance professor at George Mason and a former visiting scholar at the Federal Deposit Insurance Corp., agreed that banks are loath to take losses on performing loans even if the value of the home has dropped 30% or more and a default is likely."

"“The banks have been accounting for [home equity loans] at par and the reason is that supervisors won't force the writedowns,” Hanweck said. “If the loan is performing, that's their fallback, but the underlying value of the property is still less and is insufficient to support the valuation.”

But forcing writedowns would have negative consequences for capital positions, which banks have spent the last few years rebuilding and will have to further buttress in coming years under the new Basel III standards."

Allowing banks to repay TARP money early was not a smart move:

"Lenders Balk at Buying Back $11 Billion in Bad Loans from Fannie Mae and Freddie Mac"

http://www.realestatechannel.com/us-markets/residential-real-estate-1/real-estate-news-fannie-mae-freddie-mac-edward-j-demarco-federal-housing-finance-agency-bad-home-loans-loan-default-rates-home-foreclosures-fhfa-3266.php

"Banks that sold bad mortgages to Fannie Mae and Freddie Mac promised to buy the loans back, according to their regulator. But many of the nation's largest institutions aren't living up to their end of that commitment, reports DSNews.com."

http://www.thestreet.com/story/10865656/1/mortgage-buybacks-hit-profit-not-capital.html

"Miller's assumptions for a "base case" scenario show that Bank of America stands to lose $9.1 billion, or 34 cents per share, on both Fannie-Freddie and private-label buyback demands. JPMorgan Chase stands to lose $8.7 billion, or 27 cents per share; Citigroup stands to lose $3 billion, or 5 cents per share; Wells Fargo $2 billion, with no per-share loss estimate provided; SunTrust $1.05 billion, or 31 cents per share; Morgan Stanley $948 million, or 44 cents per share; and other lenders less than $500 million."

Setting up a new RTC would alleviate the burden face by banks. Until all the toxic assests have been dealt with, the crippled financial sector will not function properly. The banks are hoarding cash due to these issues and cannot participate in a sustained recovery through lending and enabling investment. It will take a very long time to clean up all the mess. By not appropriately dealing with these toxic assets issues today via a new RTC means it will take a much longer period for the economy to heal. We will see more bank failures in the process.

Hemingway: Kicking a can down the road illustrated...

The end of the American Dream, the call for trade barriers and the rise in populism...

Flying an American flag upside down is not necessarily meant as political protest. The practice has its origin in a military distress signal; displaying a flag in this manner is "a signal of dire distress in instances of extreme danger to life or property".









Tyler Darden in the blog Zero Hedge, published a recent post (19th of September)courtesy of Gordon T. Long of Tipping Points. It goes through the structural and demand problems the US faces and the collapse of standard of living we are witnessing.
http://www.zerohedge.com/article/guest-post-preserve-and-protect-jaws-death



"In rent we trust"...the American dream in home ownership has been whacked. Declines in home prices have made it no more expensive to buy than rent in about half of larger markets around the US.
http://online.wsj.com/article/SB126282425648418817.html

"Thanks to falling home prices and record low mortgage rates, it now costs less to own than it has in the past decade on a mortgage-payment-to-rent basis."

http://patrick.net/housing/crash.html

"Because house prices will keep falling in most places. Prices are still dangerously high compared to incomes and rents. Banks say a safe mortgage is a maximum of 3 times the buyer's annual income with 20% downpayment. Landlords say a safe price is a maximum of 15 times the house's annual rent. Yet on the coasts, both those safety rules are still being violated. Buyers are still borrowing 6 times their income and putting only 3% down, and sellers are still asking 30 times annual rent, even after recent price declines. Renting is a cash business that proves what people can really pay based on their salary, not how much they can borrow."

"House prices do not even have to fall to cause big losses. The cost of selling a house is 6% because of the realtor lobby's corruption of US legislators. On a $300,000 house, that's $18,000 lost even if prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less."

Another interesting fact:

"There are 70 million Americans born between 1945-1960. One-third have zero retirement savings. The oldest are 64. The only money they have is equity in a house, so they must sell. This will add yet another flood of houses to the market, driving prices down even more."

Even young graduates have become disillusioned, will they be able to therefore repay their student loans?



"Student loan amount has exceeded the total credit card debts for the first time in the American history.":
The total outstanding student loan is worth 850 billion USD and the most worrying factor is that some students do not even know on how much they owe and to whom...





Negative equity have also made it difficult for their parents to recoup the educational expenses through a home equity loan...



The house is no longer an ATM in the US, the consequences of high unemployment and deleveraging is that the use of credit cards is falling very fast, and so will comsumption ultimately...





Falling houses prices, high unemployment, and negative equity have a big impact on US labor mobility:





The latest record of Gold, which to me doesn't come as a surprise, is a testimony of the policies followed by the US which is debasing their currency and therefore lowering the standard of living of the population in the process.

Because the Chinese are not letting the Yuan raise fast enough, the US authorities are now crying foul play. Their threats could have very nasty consequences, if China and the US enter a trade war.

http://www.reuters.com/article/idUSTRE68E3UF20100915

"Sander Levin, chairman of the House of Representatives Ways and Means Committee, said he would wait to hear Treasury Secretary Timothy Geithner's testimony on Thursday before he decides whether to move forward on the bill."

"The bill might violate World Trade Organization rules, draw legal retaliation against U.S. businesses and shut down trade in inputs from China that U.S. industry needs, said Camp, who represents the troubled industrial state of Michigan."

"Levin said he wants to enlist other countries to pressure China to raise the value of the yuan but he also endorsed the use of duties against Beijing's currency practices."

Another "bright" politician who has studied history and the consequences of Smoot–Hawley Tariff Act of 1930...Levin is just following the voice of Paul Krugman. I prevously posted why Paul Krugman is dangerously wrong.I concluded in the post: "It is up to the US to resolve their trade imbalances by being more competitive and to increase the amount of goods and services they export...should the US target as well Japan and Germany with higher tariffs?"

Should all the countries with trade surpluses be targeted?



The US are trying to do what they did to Japan from 1985. In 1985 the Plaza Accord was signed between Japan and the US where Japan agreed to let its yen currency appreciate against the dollar. Unfortunately for you Mr Geithner, the Chinese are not stupid and will not bow like the Japanese did and they have studied what happened to Japan, unlike American politicians...

Just the facts:

http://english.peopledaily.com.cn/200309/25/eng20030925_124911.shtml

"We all know that the rapid growth of Japanese economy after the WWII was to a large extent driven by its fast expanding foreign trade based largely on the low exchange rate of yen. Therefore, the sharp yen revaluation enforced by the "Plaza Agreement" hit badly and directly the country's foreign trade, throwing readily Japan's economy, which depended heavily on foreign resources, into a "yen revaluation depression", (that is, depression brought about by the yen revaluation). In 1986, Japan saw its total export volume shrank by 15.4 percent, real GDP growth dropped by 1 percentage point; the industrial and mining production index decreased by 0.2 percentage point and the unemployment rate broke the highest record after the war.

To shake off the depression the Japanese government and banks adopted a series of stern policies and measures. One of them was the unprecedented "financial relaxation" policy, in which Japanese banks cut interest rate for five successive times and finally fixed it at the extremely low level of 2.5 percent. Under the prevailing financial liberalization and reduced capital demand for entity economy, the large amounts of abundant funds instigated by the extremely-low interest rate swarmed to stock and real estate markets, resulting in sharp expansion of economic bubbles with stock and land prices to soar up at the core. By the end of 1989 the Nikkei average stock price had climbed to 389,000 yen, expanding two times in four years! While during 1998 alone the land price around Japan's three major metropolitans rose by 43.8 percent, the Tokyo Rim rising even by 65.3 percent.

In early 1990s, the economic bubbles created by the yen revaluation suddenly blew up, plunging the nation into an unprecedented recession, from which the country has been trying to struggle out till today. During the recession lasting longer than a decade, almost all the important economic indexes registered the worst post-war record. By then Japan had completely lost its long-term advantageous position held in the after-war pattern of western economic growth, especially that over the US. To some degree we should say, after years of efforts as set out at the "Plaza Agreement", America finally has defeated its biggest rival in the field of international trade."

The US are asking China to play Kamikaze economic policies "à la Japan".

This is the game being played by the US...So is it foul play or fool play? I will let you make your own judgement.

About the rise of populism, no surprise there:

It is gathering pace everywhere, the trend is your friend... The rise of populism is highly correlated with recession periods and severe unemployment throughout history, have a look at my previous post:

http://macronomy.blogspot.com/2010/07/i-promise-to-pay-bearer-on-demand.html

Tea Party in the US, far-right in Sweden, etc.

Populism on the rise in the Nordic region
http://euobserver.com/9/30797

The Left under siege in Europe
http://www.theaustralian.com.au/news/features/the-left-under-siege-in-europe/story-e6frg6z6-1225926399084

"Globalization is a reality. And this makes most leaders today realize that populist illusions can't be sustained before they collapse into stagnation and leave their political supporters deeply disillusioned. You can't inflate away your troubles or allow mountains of debt to build up if, as a country, you have to make your living in a globally competitive environment... Building prosperity requires caution and patience. It requires time. Populism is a short cut that doesn't work."

Fernando Henrique Cardoso, former President of the Federative Republic of Brazil for two terms from January 1, 1995 to January 1, 2003.

The Hurt Locker

Definition: noun. a period of immense, inescapable physical or emotional pain.



The Hurt Locker and the problem of the liquidity trap.

Paul Krugman's definition of the liquidity trap, the Keynesian view:

[a] liquidity trap may be defined as a situation in which conventional monetary policies have become impotent, because nominal interest rates are at or near zero: injecting monetary base into the economy has no effect, because base and bonds are viewed by the private sector as perfect substitutes. By this definition, a liquidity trap could occur in a flexible price, full-employment economy; and although any reasonable model of the United States in the 1930s or Japan in the 1990s must invoke some form of price stickiness, one can think of the unemployment and output slump that occurs under such circumstances as what happens when an economy is trying to have deflation — a deflationary tendency that monetary expansion is powerless to prevent.[29]


Excellent comment this week by R. Glenn Hubbard, dean of the Columbia Business School and former Chairman of the Council of Economic Advisers under President George W. Bush, and Peter Navarro, a professor of economics at the Merage School of Business at the University of California-Irvine:

http://blogs.reuters.com/great-debate/2010/09/10/desperate-times-do-not-always-call-for-desperate-measures/

"The fundamental flaw in Washington’s stimulus logic is the incorrect assumption that America’s current economic woes began with the 2007 recession. In fact, the roots of our slow-growth problem date back at least a full decade.

From 1946 to 1999, GDP grew annually at 3.2 percent, but since then, we’ve only averaged about 2.5%. On a cumulative basis, this seemingly small difference adds up to about 10 million jobs we failed to create.

What these statistics add up to is not a short term cyclical downturn, but rather longer-term trouble driven by four major structural imbalances in America’s GDP “growth driver equation.”


Overconsumption:

From 1946 to 1999, consumption averaged 64 percent of GDP but over the last decade, that share jumped to 70 percent. This increase was fueled not by rising wages, but rather by a housing bubble and a mortgage refinancing wave that turned American homes into ATM machines. This overconsumption has been mirrored in a low saving rate and a second major structural imbalance – underinvestment.

Underinvestment:

Business investment in research and development, technological innovation, and the new productive capacity required for the job creation process has been the single most important missing ingredient in our economic recovery – and for renewed long-term prosperity. Yet the current administration seeks only to raise the regulatory and tax burdens of business.

Chronic trade deficits:

These have been equally destructive. During the 2000s, our current account deficit more than doubled and likely reduced our annual GDP growth rate by a half a percent or more.

Excessive government spending:

This spending has provided some short-term stimulus. However, an overfed Uncle Sam represents the ultimate seed of destruction through upward pressure on taxes and interest rates and a stark future of sharp cuts in defense, education, and infrastructure spending."

"Over the long — and short — term, in implementing any stimulus, we should favor tax cuts to stimulate business investment as the best way to stimulate job creation. Reducing the fiscal burden of entitlement programs is also essential to restoring prosperity."

Federal Government Debt: Total Public Debt



In relation to the raging inflation/deflation debate, Bill Gross at PIMCO has decided to put a wager on it. A 8.1 billion USD wager...quite meaningful (notional value of derivatives position tied to the Consumer Price Index).
They bought inflation floors in size...

"Inflation floors, structured as options on the consumer price index for all urban consumers, are similar to insurance. The buyer of the contract pays a premium at the outset in return for the right to receive a payment after 10 years should the CPI decline during this period."

The bet is that the USA will not be like Japan and are not on a verge of entering a similar lost decade as Japan did.

As I previously discussed in relation to the heated deflation/inflation debate, we are going through a deleveraging period, which meant deflation in some asset prices (real estate, etc.) but inflation in other items, such as food items (up 16% since 2009). In a previous post I argued you could have both deflation and inflation at the same time as currency values are being debased. The latest new record of Gold is of no suprise and the trend is up and up, given we can expect a second round of QE in November in the US.

The rise in food prices are strong inflationary forces at play which is probably creating a lot of headaches for the Bank of England given its inflation target of 2%. You can therefore expect the UK to rise interest rates sooner than expected which will coud increase the risk for a double-dip recession due to the current constraints in household balance sheets. I hope Mervyn King still has plenty of ink in his pen, as he will definitely have more letters to write to the chancellor in the coming months...


http://noir.bloomberg.com/apps/news?pid=20601087&sid=aqqEDrWMDO3w&pos=3

“We think the possibility that the U.S. goes 10 years with stagnant or falling prices is remote,” Mihir Worah, the head of Pimco’s real return portfolio management team, said in an e- mailed response to questions. “The options were priced at rich levels to the underlying” risk, added Worah, whose funds invest in Treasury inflation protected securities."

"Pimco Chief Executive Officer Mohamed El-Erian said last month the chance of deflation in the U.S. is around 25 percent."

Deflation then inflation is still the ongoing theme, which might lead us to Stagflation 70s style.

The latest inflation figure in the UK is of no surprise: August's consumer price inflation came in at 3.1 %. QE is working just fine...I kept saying the results of QE would be more inflation down the line, in April, in March...



http://www.telegraph.co.uk/finance/economics/8003750/UK-inflation-is-uncomfortably-high-says-Bank-of-England-rate-setter-David-Miles.html

"Inflation has been above the central bank's 2pc target since December 2009 although policymakers have argued that it is largely down to one-off factors and should subside over time."

Can the policymakers please specify the time frame? They won't...

High UK inflation no conspiracy:
By James Mackintosh

http://www.ft.com/cms/s/0/81dacaae-c038-11df-b77d-00144feab49a.html?ftcamp=rss



Jacques Rueff, a great French economist clearly saw the strategy behind Keynes General Theory of Employment which is currently being used in the UK with QE:

http://www.moneyweek.com/news-and-charts/economics/homage-to-jacques-rueff-88380.aspx

"Keynes came up with a subterfuge. The central bank should cause price inflation during a slump, he proposed. Rising prices for 'things' meant that salaries - in real terms - would go down. That was the greasy scam behind Keynes' General Theory of Employment, Interest and Money: inflation robbed the working class of their wages without them realizing it. The poor schmucks even thank the politicians for picking their pockets: "salary cuts without tears," Rueff called them."

Bill Bonner also adds in his hommage to Jacques Rueff the following:

"Rueff died in 1978. Had he lived, he probably would have been as surprised as we have been by the stamina of the monetary horses. Except for a brief rest while Paul Volcker was managing the stables, they have run from bubble to bubble... delivering more liquidity wherever it would do the most damage. All the while, inflation continued to cut the price of labour. Between 1974 and 1984, real wages fell as much as 30%. Then, more moderate levels of inflation held them down for the next 24 years.

But Rueff’s insight comes with a warning. The faith-based, dollar-dependent monetary system is like a loaded pistol in front of a depressed man. It is too easy for the US to end its financial troubles, Rueff pointed out, just by printing more dollars. Eventually, this “exorbitant privilege” will be “suicidal” for Western economies, he predicted."

Bill Bonner concludes:
"Paul Volcker put the pistol in the drawer. Ben Bernanke has found it. And Jacques Rueff must look on in amusement to see what happens next."

http://www.thedailybell.com/1114/Britain-to-See-Inflation-Risk.html

"Until the 1970s, classic Keynesian economists seem to have believed that it was impossible to have a stagnant economy along with an aggressive monetary stimulus program. In slumps, central banks should print money, and more money, to stimulate via government spending and bank lending. Of course, while such Keynesian solutions may not stimulate the economy much (not with real jobs anyway), they do lead to inflation, and then price inflation, especially in severe slumps. Hence, stagflation..."

http://www.marketoracle.co.uk/Article21501.html

"Krugman's monetary solution to a liquidity trap is sustained inflation, where the central bank reverses fears of future deflation by instead causing an increase in the price level through massive monetary pumping (Krugman estimates this to be in the area of $10 trillion, borrowing the figure from a prior study conducted by Goldman Sachs)."

Housing in the US is still in the hurt locker:

More pain to come unfortunately. There is a huge shadow inventory that needs to be worked through. Banks reposession runs unabated. Housing starts at rock bottom still.

http://www.cnbc.com/id/39175282

"RealtyTrac, an online foreclosure sale site, will release its monthly numbers on Thursday, but sources there confirm the number of repossessions will come in just shy of 100,000 for the month.
That is the highest since the site began tracking in 2005. July's repossession number was the second highest on record. The last highest was 93,777 in May of 2010."

U.S. Home Prices Face Three-Year Drop as Supply Gains:

http://noir.bloomberg.com/apps/news?pid=20601109&sid=aPjDFWbLAdd8&pos=10

“Whether it’s the sidelined, shadow or current inventory, the issue is there’s more supply than demand,” said Oliver Chang, a U.S. housing strategist with Morgan Stanley in San Francisco. “Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2 percent a year.”

Gains Versus Inflation

"If the market doesn’t fall to its natural bottom, price gains in the next five to 10 years won’t keep pace with inflation as the difference is made up “on the backend,” said Barry Ritholtz, chief executive officer of FusionIQ, a New York research company. Price increases that fail to at least match inflation are the same as reductions in value, Ritholtz said."

"The Obama administration’s effort to help mortgage holders, the Home Affordable Modification Program, or HAMP, is another source of future inventory as owners with new loan terms re- default, Ritholtz said. About half of the modifications done in 2009 were behind in payments by the first quarter of 2010, according to the Treasury Department."

‘Day of Reckoning’

“The belief has been: if we stimulate sales with a tax credit and delay foreclosures with modifications, the market would stabilize,” said Ritholtz, author of “Bailout Nation.” “We’re just putting off the day of reckoning and drawing out the pain by not letting the housing market hit its bottom.”

Insanity: doing the same thing over and over again and expecting different results. Albert Einstein.

Just the facts on housing in the US:

"Owners of about 11 million homes, or 23 percent of households with a mortgage, owed more than their property was worth as of June 30, according to CoreLogic. Another 2.4 million borrowers had less than 5 percent equity in their houses and probably would lose money on a sale after paying broker fees and closing costs, CoreLogic said Aug 25."

Deep sea fishing: Housing starts still at rock bottom



From the excellent Calculated Risk blog:

http://www.calculatedriskblog.com/2010/09/two-key-housing-problems.html

"The excess supply is keeping pressure on residential investment, and therefore on employment and economic growth. As new households are formed, the excess supply will be absorbed - but this is happening very slowly."

"It takes jobs to create households, and usually housing is the key driver for employment growth in the early stages of a recovery. So this is a trap: the excess supply means weak employment growth, leading to few new households, so the excess supply is absorbed slowly - putting off more robust employment growth.







The excess supply is also pushing down house prices (prices are just starting to fall again). Lower prices will eventually help clear the market, however lower prices will push more homeowners into negative equity."

"Negative equity frequently leads to distressed sales (short sales or foreclosures), and losses for lenders."

It will take a long time to clear the mess in US housing. A long, painful process to clear the excesses of the housing bubble.