2011: A Recovery In Housing?

One of my favorite reads of the day is Dr. Housing Bubble. While he mainly focuses on real estate in general, he occasionally also comments on the economy.

Since the real estate crash has had such a negative impact on the lives of many investors, is there really a recovery in the cards next year? For one viewpoint, here are some highlights from “The long road to a housing recovery:”

The housing market has very little chance of maintaining a sustainable recovery until it clears out the immense amount of shadow inventory. This inventory cannot move without solid employment growth. The water cannot flow freely until we unclog the filth plugging the drain.

Banks have done a poor job in every respect including fostering an open market clearing function for real estate. Banks are almost like rent seeking slumlords that have added very little value to our economy and steal from their taxpayer host. In the past, banks would make a sizeable portion of their income putting together deals on growing and expanding companies and institutions. They were dealmakers and had the important role of allocating capital to the best industries in the economy.

That is no longer the case. Just to put this into context, Goldman Sachs this year in one of their quarters made 63 percent of their profits trading. In other words banks are too busy churning volume on the stock market casino to concern themselves with the massive backlog of real estate or figuring out which industry will create jobs.

In the end, the housing market won’t improve until we clear out this enormous backlog. What is the ultimate goal about propping up home prices? Wouldn’t it be better for the overall nation to dedicate less disposable income to housing and shift this spending on to other goods?

There is much more to this article including charts and graphs; if this subject interests you, click on the above link.

For sure, without any major improvement in the employment area, real estate will not recover. After all, last time I checked, people do need an income in order to make their mortgage payments.

At the same time, the enormous backlog and shadow inventory will need to be cleared as well, before some pricing power can be restored.

To my way of thinking, attempting to prop up real estate prices with the creation of artificial demand via stimulus programs is doomed to fail, as we’ve seen in the past, and as a result has merely postponed the inevitable.

Prices need to fall to a level where genuine demand picks up; in other words, a point needs to be reached where homes become affordable again based on median incomes for a given area. Where that level will be, is anyone’s guess at this time, but I believe that we will not get there next year.

Of course, reaching that lower price point will inflict an enormous amount of financial pain on the banking sector as these accumulating and accelerating loan losses will need to be realized—eventually.

On other hand, as recent history has shown, the likelihood is great that the taxpayer will be on standby again to bail out whoever needs to be bailed out. I can only hope that next time around, other options will be considered.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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