Thursday, August 14, 2008
Housing, we are not there yet
Amid horrible foreclosure data in the press this morning (and warning that the states legislation is fudging numbers by delaying foreclosure procedures), easy macro-analysis sheds some light on what is to come. Consider the "reverting to mean" that is going on above. Consider that the bell curve started in 2001, so is a very recent event, a bubble really, nothing but a bubble.
If the bubble stabilizes at +1 standard deviation, this is good news. We got 5% downside on the housing market on top of 15% so far so about $160B further damage on the banking system. Well below the FED shock absorbers. All good, we are close to bottom.
If the bubble reverts to mean, we got another 15% to go, to get back to 2001 levels. That is $1T of banking damage. At the FED shock absorbers. Bad but we might make it.
If the bubble overshoots on the way down, at -1 SD, then all bets are off. We are talking about $2T and there is nothing the FED can do. It is game over. In my opinion this scenario is a function of credit, if credit evaporates (M4) then we may be looking at an overshoot.
When a bubble can kill the system, the system deserves to die? In any case, we are not there yet, I am ignoring calls of housing bottom, it is the least plausible scenario.