Friday, March 7, 2008

1 Trillion dollars needed to stop the house price slide

March 7 (Bloomberg) -- The $11 trillion U.S. home-mortgage market
needs about $1 trillion in new investment to halt a slide in prices that began
last year, according to analysts at Friedman, Billings, Ramsey & Co.
``There is an imbalance between housing debt and the capital base and the
quick way to return to equilibrium is for asset prices to adjust downward,'' the
Arlington, Virginia-based analysts led by Paul J. Miller Jr.
wrote in a report today.

Mortgage-asset prices are tumbling partly because investors are borrowing
less, as banks rein in both how much they lend and how much they borrow for
their own investments, the analysts wrote. Carlyle Capital Corp.,
Carlyle Group's mortgage-bond fund, is among investors saying bond-secured
lending is tightening."

My take:

Well Paul pretty much describes why house prices are falling in one quote. Many people ask why are house prices falling? The only way they can keep rising is for more money or debt to be available. As you can see in order for the ponzi like housing game to stabilize, we need an additional ONE TRILLION dollars in order to stop the slide. If you want housing to go up another 20% this year then add twenty percent to that 1 Trillion dollar number.

So one of either two things happen. Either banks lend out an additional 1 trillion dollars in order for prices to stabilize(yeah right) or they stop lending as much and houses drop in value. So if you are a bank and you have just loss billions of dollars in subprime lending what choice do you make??

Citibank gave you the answer yesterday. they announced they are cutting their lending by $45 billion which is basically a 50% reduction from the 90 billion they allocated towards this business in the past. Expect most institutions to do the same. Citibank was one of the largest lenders in the country and is the 5th largest bank in the US.

Merrill Lynch(MER) announced yesterday they were closing their subprime business unit and getting completely out of subprime lending and layed off the 650 people in the business unit. This is another example of Wall St. redcuing their exposure to the housing bubble.

So you can't expect the trillion dollars to come from the banks. In fact, a more frightening conclusion is they might decide to lend out less money then they did before. What happens to prices if the banks decide to lend 1 trillion LESS then the trillion needed to only STABILIZE prices in order to stay solvent after getting hit with massive writedowns. This is what Citibank has decided to do. Others will follow, especially the banks in Florida and California who most likely did many subprime loans as housing because unaffordable in these areas.

So now this could be a 2 trillion dollar problem.

In a nutshell the money simply isn't available to lend from the banks to keep housing stabilized. If anything its decreasing by a significant amount. The ONLY solution to all of this is a massive drop in prices unless everyone starts paying for houses in cash. I'll say it again. NOW IS NOT THE TIME TO BUY.

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