The $4 Trillion Dollar Housing Bubble

Wall St. keeps asking itself: When is this credit crisis ever going to end? Some of the top credit analysts are predicting the credit crisis may last another two years. When it ends, $4 trillion in lost capital will have evaporated.

Here are the highlights from Reuters:

"Reuters
Home price drop means $4 trillion in lost capital

Wednesday June 11, 3:03 pm ET By Walden Siew

NEW YORK (Reuters) - No one knows when the credit crisis will end.

But when it does, U.S home prices may have lost a third of their value, high-yield bond valuations will hit levels close to those seen during the last recession, and what may amount to $1 trillion of Wall Street losses may translate into almost $4 trillion of lost access to capital.

That's the view of top credit analysts, who say a U.S. housing decline, sparked last year by subprime mortgage debt defaults, will likely last another two years as a wider group of consumers, including prime borrowers, feel the pinch from a tightening of credit.

Peter Acciavatti, a credit analyst and managing director at JP Morgan Securities Inc, said in an interview that Wall Street write-downs and losses totaling at least $325 billion so far may ultimately mean $3.9 trillion in tighter credit conditions.

Moreover, home prices may fall as much as 30 percent from their peak in 2006 and not hit bottom until 2010, with greater drops still in subprime mortgage debt markets, he told Reuters.

"The housing correction is in a down phase," Acciavatti said during a high-yield bond conference in New York. "We're now going through a phase of deleveraging and the pulling out of easy money."

A senior Fitch Ratings analyst forecast more defaults and delinquencies for U.S. home mortgages, and said the highest default rates are coming from recent mortgages originating in the last few years.

"There are a lot more mortgage defaults to come," said Glenn Costello, a Fitch Ratings managing director. "We see an ongoing high level of default."


My Take:

Its looking like 2010 is when you are going to find the best deals on buying a house. Whats crazy to me is as this credit crunch deepens, the recovery keeps getting pushed out. When this all started, 2008 was supposed to be the start of the recovery, then it was 2009, now 2010. Do I hear 2011? I feel like I am at an auction when I read about when the recovery begins.

$4 trillion dollars is an unbelievable loss isn't it? Anyone who bought from 2005-2007 will slowly start to realize that they made the biggest financial mistake of their life. The days of easy money are gone, and the defaults are going to keep rising in everything from subprime to prime loans.

Anyone that bought during this time may have to wait several decades to ever see their home be worth what they paid for it. Many will continue to "walk away" as a result of this realization until the BK laws make it more difficult to do so. As you can see, we are nowhere near the end of this crisis.


Interest rates rise on strong consumer sales

It looks like for the month, the stimulus checks worked pretty well. You need to pitch these numbers when you look at the health of the consumer. This is a short term fix for a long term problem.

The article below explains that there is a down side to this consumer strength. It gives the Feds the ammo it needs to raise rates. I will explain later.

Here is the bond news from Bloomberg:

"une 12 (Bloomberg) -- Treasuries fell, pushing the yield on the benchmark 10-year note to the highest level this year, after a report showed U.S. retail sales rose in May, bolstering the case for the Federal Reserve to raise interest rates.

Bonds fell for the third time in four days as the larger- than-forecast jump in retail sales added to expectations the Fed will boost rates as early as next month. Federal Reserve Bank of Philadelphia President Charles Plosser told CNBC today that it's ``certainly clear that rates will have to rise.''

``It's the retail sales data and the comments by Philadelphia Fed President Plosser that's taking the reins,'' said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley's individual-investor clients.

The yield on the benchmark 10-year note increased 11 basis points to 4.18 percent as of 8:49 a.m. in New York, according to bond broker BGCantor Market Data. The 3.875 percent security due May 2018 declined 28/32, or $8.75 per $1,000 face amount, to 97 1/2. A basis point is 0.01 percentage point.

"Futures on the Chicago Board of Trade show odds of 92 percent the Fed will raise the target rate for overnight lending between banks by at least a quarter- percentage point to 2.25 percent. Last week the chance was 30 percent."

My Take:

The problem with any good news right now is the Fed is chomping at the bit to raise rates because they see inflation soaring out of control. Any signs of strength in the consumer or the economy gives the Fed the ammo it needs to raise rates.

They will raise rates followed by a statement saying that the economy is showing some strength and the concerns of inflation need to be addressed. These strong numbers are actually bad news long term in my opinion because it means higher rates.

The bond market immediately reacted as the 10 year note yield rose to the highest rate this year. Look for a nice bump on mortgage rates in the next few days. They also put the odds of a rate increase at 92% versus only 30% last week.

Meanwhile, the reality is the economy got a short term drug fix by the stimulus checks and the economy is still very weak. By the end of the summer when these checks are spent, we will be facing the same problems but with higher interest rates.

Sounds like a recipe for disaster doesn't it? Higher rates will put more pressure on the banks that are in the middle of a credit crisis, raise interest rates on mortgage loans killing housing, and shrinks the amount of money that can be borrowed by the consumer.

Bottom Line:

This is going to end ugly. I see no way out for the Fed. We are getting a nice bounce in stocks today because we were way oversold and the consumer data was strong.

I don't think this move has legs. Expect fear to be back next week. CNBC is reporting that Lehman may be forced to sell itself. The IB's have very few ways to make money right now. This lack of ability to make profit combined with a crappy balance sheet means Lehman has to make a move or its going to bite the dust.

Stay tuned!