Welcome to the Wealth Daily Weekend Edition — our insights from the week in investing and links to our most-read Wealth Daily and sister publication articles.
Humpty Dumpty didn't fall...
He was pushed.
Nowhere was that more apparent than in the mortgage industry, where lie after lie helped create a flood of foreclosures and illusory home prices.
That was the seamy underbelly of the housing boom. It was a land of winks and nods.
Borrowers lied, fibbed, and fudged their way to ill-gotten gains. And all along the road, willing loan officers coached them, looked the other way, and often engaged in shenanigans of their own.
Sure it was wrong; but if that was how a deal got done, then what was the problem?
With a gigantic push from all of the big banks and investment houses, the new mortgage paradigm perched upon a treacherous edge. Its mantra was simple: Close deals or die.
But the truth is that belief bred fraud on a massive scale, and in the end, it has cost each and every one us.
Because let's face it, every single step of this entire mess began with a call placed to a mortgage banker.
But the banks didn't care. In the end all they cared about were the profits. If some consumers were hurt in the process... so be it.
It was a brave new world and it only had one rule — to do whatever it takes.
But as we later learned, it was a world built upon lies and it could not hold. Beginning in 2006, it all came crashing down — just like any banker worth his salt knew it would.
An accident? Not even in the most remote sense of the word.
Since then, all of the king's horses and all of the king's men have been desperate to put it all back together again. And to date, each and every one of them has failed.
2011 housing market forecast
Not only has housing not been fixed; it is about to go even lower into the new year. Just when you thought the real estate market was showing signs of a recovery, reality rears its ugly head.
According to this week's release of the Case-Shiller Home Price Index, prices have started to slip again — pointing to a double dip in the housing market. On a national scale, home prices dropped 1.5% in September, prompted in part by a lack of government incentives otherwise known as “free money.”
That's a trend Case-Shiller expects to continue, since earlier this month, the group forecast a further 7.1% drop in home prices into the second quarter of 2011.
Those are figures roughly in line with what Moody's economist Mark Zandi said six weeks ago. He's forecasting another 8% drop in home prices through the third quarter of 2011, which will put the total peak-to-trough decline at 34%. (And that's roughly in line with what I predicted in this article in August 2006, five years in advance.)
The good news is, "There'll be no vicious, self-reinforcing spiral down," according to Zandi. But, he added, "More home price declines are coming."
Even after that, Zandi admits that in 2012, he sees “very little price growth.”
So the great fall promises to continue — all despite record low interest rates — which, when you think about it, is a problem in and of itself.
Even a small increase in rates — to say, the 6% range — would invariably put even more pressure on home prices, since a 1% increase in the interest rate diminishes a buyer's purchasing power by roughly 8%.
Inevitably, those realities will be reflected in home prices much in the same manner lower rates boosted home prices on the way down. Only this time, it will work in reverse.
That leaves the housing bulls wishing, hoping, and praying for QE2 today, tomorrow, and forever... Otherwise, rates will rise.
And I don't have to tell you what would happen to rates if the bond bubble finally bursts. It's more than I want to contemplate — especially on a weekend.
The pitfalls of supply and demand
In the meantime, the housing market is simply stuck within the iron-clad laws of supply and demand.
And as you can see from these charts via Mortgage News Daily, it is a market that still heavily favors the buyers — not the sellers.
Because the truth is, Mr. Market just simply doesn't care what a buyer paid for a house, what they owe on it, or what the appraiser told them it was worth six months ago...
All he wants to know is what someone will pay for it now.
It's how the value of everything is determined — even the roof over your head with the granite countertops.
It's not hopes and dreams that determine the value of your home; it's a market of buyers, and right now there just aren't a lot of them... And when this happens, prices fall.
Home sales are down by about 25% from last year, which itself was record setting to the down side.
So like it or not, Humpty Dumpty won't be put back together anytime soon. Expect 8-10% declines in 2011. That's the bad news.
The good news is the housing market will finally bottom by early 2012.
In the meantime, there are always equities where our editors have been killing it lately. Below you'll find a few of the best investment ideas from the pages of this week's top-read Wealth Daily and Energy & Capital.
Have a great weekend.
Your bargain-hunting analyst,
Editor, Wealth Daily
By the way, we launched another free service earlier this month called the Wealth Wire. It’s an easy-to-read look all of the must-see financial news compiled everyday by our editors. To learn more about the Wealth Wire, click here.
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