The Housing Market is a lumbering giant with the capacity to lift 10,000 pounds but unfortunately today the giant is carrying a load of 10,001 pounds.  The Giant has a strong will to survive and even prosper but the weight of the load is just too heavy to bare.  What am I referring to?  Deflation spurred on by very high unemployment and the excessive supply of housing.  Once the Deflationary Dragon gets out of the cage he doesn’t go back in easily. I am not an economist but I do know that deflation has delivered a crushing blow to just about everybody and everything over the past year.  The pain has been historic.  I do believe Ben Bernanke with his expertise of the Great Depression is the best team lead to address the Dragon’s ultimate demise but for now it is going to take a lot of time.

 

Today the markets rallied because the Case-Shiller Housing Index came out and showed two consecutive monthly improvements.  Everybody went wild as though the housing crisis is over.  This scares me but also makes me feel good because my stocks keep going up.  Can somebody come over and look in my viewfinder for a day.  Some days I feel like a life boat captain on the Titanic. 

 

The housing crisis is nowhere near over and deflation is still ravaging the prices.  Robert Shiller even came out and warned everyone that even though his name was on the index that it wouldn’t take much for the housing market to make another break to the downside.  You can find Robert Shiller on CNBC from time to time.  You have to love this guy.  He has the street cred and he tells you the truth whether you want to hear it or not.  The best part is that he will tell you that a 1000 pound bolder is going to drop right on your head without raising his voice or getting overly excited.  Of course nobody listens and then he says play the tapes and don’t say I didn’t tell you so.  We are here again so plan on housing prices continuing to decline.

 

The only way we are going to find our way out of this situation is to be realistic.  To make my point I would like to revisit the housing run up in the late 80’s the sputtered in 1989.  It took 5.5 years for the markets to stop going down and finally flatten out.  It was 94 and a half before it was over.  Now the speculative run this time around was enormous as compared to the run in the late 80’s.  This time it almost completely wiped out our financial system.  How long do you think it is going to take for market stability?  It is going to take time and we are going to need some inflation to counter the deflation in my opinion.  The one gentleman I admire but definitely would not want to be with the task of walking this tight rope is Ben Bernanke.  I hope he fixes it before we all have to learn Chinese.

 

Let’s reflect on a recent Barron’s article from two weeks ago.   A major Walls Street firm having researched the supply and demand trends in all the major market came to the following conclusion.  The approximate 14+ million people that were defined as immediately affected were approximately 24% underwater on their homes.  The research expectation was that the same people in two years would be approximately 48% underwater on their homes.  I don’t know how in-depth their research was but on the surface it really makes sense.  We are talking about approximately one third of the 40 million people that bought in the last stage of the housing run up.  Many of these people are facing default and need to find a solution.  The pressure on the housing prices is nothing more than deflation pressing down on the whole market.  The best means of a solution for the most affected people would be a Real Estate Short Sale.  This is the only way they will be able to get out from under this enormous debt burden without going completely broke.  It’s a personal choice, broke and too lazy to research a short sale, or a winner that got out from under a lot of debt and provided their lender a solution.

 

Another point that I like to make to clients to put the housing market in perspective is to take a stock like General Electric and use it as an example.  We all know that markets trade on emotion.  The stock market is much more liquid than the housing market so emotions can be reflected much more quickly.  In contrast a persons personal pain on a home can be put off and we can experience denial if we so chose for a period of time.  About a year ago General Electric stock was around 32 after coming down from approx. the 42 level.  GE was a triple A rated company and an American financial and industrial conglomerate.  What was not to like about GE?  Everything!  We all expected GE to come down to a level of fair value.  We each had a level in our heads and we thought the mighty GE was safe.  Wrong!  It came all the way down to 6 and we all prayed for mercy.  My point here is the markets go way above fair value on human emotion and fear and they go way below in the same manner when they reverse.  This happened with GE that now resides at around 14.  I am asking you what is going to happen with the housing market.  There are already homes that can be bought at a level perceived to be below the cost of construction.  Where does it go from here? 

 

In the words of the late Sir John Templeton in 2005 as the real estate speculation craze raged on, he said “wait until it drops 90% and then buy buy buy”.  Everybody thought he was a fool.  He was certainly no fool in hindsight.   

 

The Deflationary Dragon is still raking havoc.  If you need a roof over your head I say it’s ok to buy a house you like.  Affordability is very attractive.  However, if you are stuck in a situation with denial to the left and foreclosure to the right I am telling you to carve out a path right up the middle and solve your problem with a Short Sale. 

 

We are still offering anyone in the 50 states access to our Free Trial. Take two hours to investigate the Short Sale at www.thenegotiatedsolution.com as a means of avoiding outright default and Foreclosure. We offer a Full Service that will handle the entire process from selling the property to the closing.   Its not easy but it’s the best free market option you have where you can win. We have many happy clients. 

 

Blogging from the front line of the housing crisis.

 

Ghunter