The Housing Market and a W Shaped Recession

Another green shoot. Home prices reported by the Case-Shiller home price indexes, rose in July in 18 of the 20 metropolitan areas covered. Its been reporting declines for 16 consecutive months. The good news is that the pace of declines continues to slow. Their ten-city index peaked in 2006 and has declined 33.5% similarly, 20-city MSA has declined 32.5%.

Confirming Trends
These are stock market investments based on the Case Schiller index. I checked how they were doing and they do confirm investors general opinion of a recovering real estate market Note how the Up (UMM) shares are doing well. These market tools are investments in their own right, but they are also trend confirming tools. Since their inception in June, UMM has is up 35%, while DMM is down nearly 25%, reflecting investor expectations for the housing in the near future, that home prices will continue to rise as we begin to work our way out of this great recession Looking at the Dow REIT index, you see similar strong moves to the upside. Markets often get ahead of themselves, but they are expressing a strong confirmation that people are beginning to look past the bust and are betting on the future.

Recovery Alphabet
V shaped Recovery: A strong downtrend followed by a strong up snap back. Historically, the deeper the recession the stronger the recovery.
L Shaped Recovery: Most economists think that this recovery will be more like an L shaped recovery. A strong downtrend followed by a flat line - patient on life support.
U shaped recovery: A soft landing.
W shaped recovery: A downtrend followed by what looks like a recovery, only to go back into decline either because Govt stimulus was pulled too soon or because there is more bad news in the pipeline before the final uptrend.

Too Early?
Yes. The markets enthusiasm is emotional, we raised the flag because we avoided a great depression, and we are clearly on the upswing. But the banks are in no position to finance a strong recovery. And the consumer (70% of our economy) is in no shape to come to the rescue either. In 2001, it was 18 months before we saw positive job growth and that means more foreclosures and more office vacancies.

Office buildings and shopping centers are coming up for refi between now and 2012. The banks are looking at more loans, perhaps a trillion dollars, that are underwater and may never fully recover. In the residential markets the option ARMs or liar loans will reset at the same time.

My own take...we are in the early stages of an L shaped recovery. But the housing sector recovery will depend on the continuation of stimulus packages. If the tax credit is not extended and the mortgage purchase program is pulled too soon we may find ourselves taking another leg down. This economy is very much in the hands of policy makers. Bernanke was a student of the great depression and has noted that Federal programs were pulled too soon and bad policy exacerbated what might have been a bad recession into a unmitigated disaster. We need to internalize that lesson. On a positive note, the Economist made the observation that the one thing America does brilliantly...it fixes itself

Thanks for Reading
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