Guest Post: Will John Paulson Be Wrong This Time?
Submitted by The Burning Platform
John Paulson Will Be Wrong This Time
We have arrived at critical juncture in the ongoing financial
crisis. Have the government actions of the last year successfully
spurred the animal spirits of Americans, resulting in a self-sustaining
The Obama administration and most of the mainstream media would
answer yes. GDP has been positive for the last four quarters. Consumer
spending has increased in five consecutive months. Corporate profits
have been relatively strong. The country has stopped losing jobs. The
missing piece has been a housing recovery.
No need to worry. Famous or infamous (depending on your point of
view) $15 billion man John Paulson has assured the world that house
prices will rise 8% to 10% in 2011. His basis for this forecast is that
California prices have rebounded 8% to 10% in the last year, and this
recovery will spread to the rest of the nation.
Maybe Paulson has teamed up with his buddies at Goldman Sachs to
develop a product that guarantees a housing recovery. I tend to not
believe anything that comes out of the mouth of anyone associated with
Wall Street, but let’s assess the facts and see if they point to an
impressive housing recovery in 2011.
The man who has been right on housing for the last ten years has
been Yale Professor Robert Shiller. His analysis of U.S. housing prices
from 1890 until present, which he first published in 2005,
unequivocally proved that we were in the midst of the greatest housing
bubble in history. At the same time, David Lereah, the chief economist
(shill) for the National Association of Realtors, was pronouncing it
was the best time to buy. He published his masterpiece of market tops, Are You Missing the Real Estate Boom? at
the 2005 housing peak. He called a bottom in January 2007, and the NAR
has continued to tell Americans it is the best time to buy for the last
five years as prices have dropped 36% nationally.
Dr. Shiller continues to be the voice of reason when it comes to the
housing market. He is doubtful that the recent “recovery” will continue:
- “Recent polls show that economic forecasters are largely
bullish about the housing market for the next year or two. But one
wonders about the basis for such a positive forecast. Momentum may be
on the forecasts’ side. But until there is evidence that the
fundamental thinking about housing has shifted in an optimistic
direction, we cannot trust that momentum to continue.”
Whom do you believe? The paid mouthpiece for the National
Association of Realtors, the Wall Street shill, or an impartial
economics professor who has done rigorous analysis using 120 years of
Government Manipulation and Failure
The Obama administration has taken unprecedented actions using
taxpayer money to keep housing from reaching its natural equilibrium
level. The Keynesians who inhabit the White House decided that a
first-time home buyer credit of $8,000 would boost home sales and have
a multiplier effect by spurring home furnishing sales. It is obvious
these people have not spent much time in the real world. No one decides
to purchase a home because of a tax credit. They may accelerate a home
purchase in order to take advantage of free money, but an incremental
purchase will not be generated.
The tax credit was set to expire in November 2009, and the bean
counters at CBO projected it would cost taxpayers $8 billion. The NAR
estimated that 1.9 million first-time home buyers took advantage of the
government handout, resulting in 350,000 additional sales over that
time frame. Therefore, the total cost to the taxpayer was $15 billion,
and each additional home sale cost you $43,000. Dean Baker of the
Center for Economic and Policy Research called the credit “a
questionable redistributive policy” from renters to home buyers, but
said that he used it himself when he bought a house. He wrote on his
blog: “Thank you very much, suckers!”
Congress deemed a 100% over-budget program that dispensed $8,000 to
people for doing something they were going to do anyway such a raging
success, they extended it and expanded it to all home sales. The new
and improved program extended the $8,000 credit for first-time home
buyers and added a $6,500 credit for any home purchase. It was
restricted to “poor” folks who made less than $225,000. The credits run
out on April 30, 2010. The mainstream media was positively ecstatic
over the home sales “surge” in March. They will be astonished again
next month as these handouts have pushed forward demand from later in
Economists have estimated phase two of this program will cost
taxpayers $100,000 for each additional home sold. The following chart
unmistakably shows a surge in home sales from the government giveaways
and then a plunge immediately thereafter.
The Home Affordable Modification Program (HAMP) makes the home tax
credit program look like an astonishing success. The Obamanistas took
$75 billion of taxpayer funds and have been distributing it to millions
of reckless homeowners in order to keep them in homes they can’t
afford. The administration sold this plan as keeping 4 million people
in their homes. A veteran in the mortgage industry recently noted that
a HAMP application he reviewed showed that these poor people needed a
reduction in their $1,880 mortgage payment while incurring the
following expenses in the prior month:
- Visits to the tanning salon
- Visits to the nail spa
- Purchases at a gourmet produce market
- Various liquor store purchases
- A DirecTV bill that must involve some serious premium programming or pay-per-view events
- And over $1,700 in retail purchases, including: Best Buy, Baby Gap,
Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac
Sun, Urban Behavior, Sears, Staples, and Footlocker.
The conception behind this plan was that these homeowners were just
down on their luck and needed a little help. The facts have proven
otherwise. Despite threats and tremendous pressure from the
administration on the banks, the program has been a miserable failure.
After one year, only 228,000 permanent loan modifications have been
completed. Modifications made by banks in 2008 have re-defaulted at a
rate of 60%. If this program results in 500,000 modifications, the cost
to taxpayers per modification will be $150,000.
The truth is that millions of irrationally exuberant people bought
houses they couldn’t afford, using “creative” mortgage products, and
then borrowed against the inflated value of these houses so they could
live the good life. They rolled craps and now need to accept the
consequences. These worthless government programs have cost taxpayers
$100 billion and just postponed the ultimate bottom for housing.
Law of Supply and Demand
The Federal Reserve also did their part in the last year. They
printed enough dollars to load their balance sheet with $1.25 trillion
of mortgage-backed securities of highly questionable value. These
purchases, which artificially reduced mortgage rates by at least 0.5%,
concluded on March 31, 2010. Mortgage rates have already risen 0.25% in
Considering the pile of tax dollars thrown at the housing market in
the last year by our leaders, you would think new home sales would be
above the level sold in 1963. New home sales in 1963 reached 600,000
when the U.S. population was 189 million. Today, new home sales are
trending at 400,000 and the population is 310 million. At the peak in
2005, the total of existing and new home sales reached 9.2 million,
with inventory for sale of 2.8 million homes. Total home sales are now
trending at 5.4 million, a 40% decrease, while inventory for sale is
3.7 million, a 30% increase.
According to the Census Bureau, the real median price of homes in
the U.S. peaked at $261,000 in the first quarter of 2006. The median
price bottomed at $168,000 in the first quarter of 2009, a 36% drop.
After throwing $100 billion at the problem and artificially depressing
mortgage rates, the government has achieved an increase in prices to
$173,000, a 3% surge. Based on this data, the market appears to have
stabilized. An eight-month supply of inventory with prices up slightly
sounds like a fledgling recovery. Nothing could be farther from the
Foreclose This House
Believers in the fledgling recovery are ignoring some key facts.
There are already 11 million homeowners underwater on their mortgages.
As of March, banks had an inventory of about 1.1 million foreclosed
homes, up 20% from a year earlier. Another 4.8 million mortgage holders
were at least 60 days behind on their payments or in the foreclosure
process. This “shadow inventory” was up 30% from a year earlier.
At the current rate of sales, it would take banks nine years to
clear this inventory. They are likely to increase the rate of sales as
inventory continues to pile up. This will compel prices to go lower.
Prices would fall even if a tsunami of Option ARM and Alt-A resets
weren’t hurtling down the track – but they are. Beginning in June, a
surge in resets will begin and not subside until late 2012. These liar
loans were riddled with fraud, and the vast majority of these
mortgagees will default after the reset. A surge in foreclosures is
just over the horizon.
Reversion to the mean cannot be circumvented. It
can be delayed, but it will not be denied. The combination of expiring
tax credits, the failure of HAMP, the conclusion of the Fed buying
dodgy MBS, the growing shadow inventory of foreclosures, Option ARM and
Alt-A resets, and rising interest rates will result in a further fall
in home prices of at least 20% in the next two years. Mr. John Paulson
will be wrong this time. Maybe we could even arrange a bet. If I’m
right, I get to take my clan to one of his 19 mansions for a weekend of
fun among the ruling elite. If he is right, he gets to spend a weekend
at my underwater condo in Wildwood among the real people.
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