Thursday, June 2, 2011

Case-Shiller — Housing now in double-dip

The Institutional Risk Analyst comments:
As we told CNBC's Dianna Olick yesterday, "If we do not see a meaningful recovery in home prices by the end of the year, we may need to contemplate impairment charges on first liens owned by banks and wholesale write-downs of second lien exposures. This implies solvency issues for BAC, WFC, JPM and C, and big losses for the US government and private investors. We need to focus on ways to bring new, non-bank financing to conforming and non-conforming mortgage market right now or we face catastrophe by this Fall. By ignoring the housing crisis, the Obama Administration is fulfilling Iriving Fisher's 1933 warning about debt-deflation. Obama can forget the election in 2012 if housing prices do not recover."

1 comment:

Clonal said...

I have one thing to add to this -- The bubble, the crash, and the associated Ponzi schemes occur because of a lack of fiscal policy. Be it the Feds, the state, or the municipality. One just has to look at the performance of real estate in Pittsburgh, where there was NO housing bubble, and the state of North Dakota, where the GFC had little impact compared to other states.

See Why Pittsburgh real estate never crashes: the tax reform that stabilised a city’s economy

Pittsburgh and Cleveland have adopted diametrically opposed strategies, with dramatically different results. In Pittsburgh, foreclosure rates are low despite the downturn, home prices are climbing slightly and construction rates are increasing. Cleveland, meanwhile, is struggling to stem a complete collapse of its housing market. The difference lies in the fact that Pittsburgh has had a site-value tax, which steadies the market, and Cleveland has not.

130 miles apart, Pittsburgh and Cleveland are similar cities in many ways. Pittsburgh lies at the junction of three major rivers and Cleveland on a natural harbour on Lake Erie. These navigable waters connected them to coal and iron ore mines and made them industrial hubs but the decline of steelmaking and related industries has left them as the two largest “rust belt” cities. At the beginning of the last century, Cleveland was the nation’s fifth largest city and Pittsburgh was eighth, and Cleveland was the third largest corporate headquarters (behind New York and Chicago) until it fell in rank to Pittsburgh. Both have seen their populations decline with migrations to the suburbs and to the south and west of the United States. Both now have fewer than half the residents they had during their peak years.

Cleveland has never fully recovered from the collapse of “big steel,” while Pittsburgh rebounded easily. This was because Ohio never gave Cleveland the option of having a land tax similar to that in Pittsburgh, and as a result, it relied less on real estate taxes for raising revenue. Its lack of a land tax means that its property prices tend to be higher than in Pittsburgh and purchasers consequently have to borrow more.