By Edward Leone Jr. DMD MBA RFC
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The news is full of speculation on national debt remedy measures and what they may affect. I will not comment since what ever develops in Washington is not likely to be a long-term fix. The impact on bond prices and interest rates is yet to be realized.
According to writing by Roben Farzad in the July 11th issue of Bloomberg Businessweek, the housing market is still in big trouble. We have a typical bubble dynamic happening here with a steep decline in prices and sales activity lasting 3 years now with perhaps a slight recovery coming and then an extended period of stagnation according to Doug Ramsey of the Leuthold Group, an investment firm in Minneapolis. There is an estimated 1.6 million more homes than demand will accommodate with 3 of every 10 homes on sale being sold at a loss. Home owners’ equity is down by 1/3rd since 2005 and 1/2 of what it was in 1950 according to Scott Simon of Pimco. He says that the loose lending practices of past years has caused 5 million renters to become home owners temporarily. He predicts that 6 to 7 million more foreclosures are on the horizon. This industry could certainly be a sustaining drag on economic recovery. Paul Sperry writes a great book “The Great American Bank Robbery” which gives in site into government policies which contributed to the cause of the mess in which we find ourselves with mortgage debt. He states that the Clinton Administration’s elevation of regulation associated with the Community Reinvestment Act along with aggressive HUD affordable housing goals and the utility of Fannie Mae and Freddie Mac as an implied guarantor of mortgage loans under this program contributed to a decline in under writing criteria for sub prime mortgage loans. Aggressive enforcement of CRA by the Department of Justice during this period along with the practice of securitized these loans and selling them to investors in order to reduce the risk to mortgage lenders magnified the problem and spread the negative effects of sub prime lending practices globally. I have a high level of frustration over the failure of rating agencies to see the risk in these securities and rate them properly. Investors count on these ratings in making investment decisions as it regards the required risk premium. There has clearly been a major break down in business, regulatory and financial systems contributing to this dilemma. It is clear that the remedy will be painful for many.
For the Record:
DJIA 12,143.24
NASDAQ 2,756.38
S&P 500 1,292.28
Suggested Reading:
“Financial Modeling” by Simon Benninga
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