CR, excellent post. I can't myself see where we can get the growth necessary for the "short and mild" recession a lot of Street economists seem to believe in. Their touching faith comes without any factual basis I can find.

The thing is, I think we could have a relatively short but sharp recession, or we can have a long, milder recession. But short AND mild?

The debt overhang alone probably guarantees us an extended period of slow growth. The high housing inventory is obviously a problem. Since growth overseas is slowing, the weaker dollar will not have as great an impact on manufacturing as the Fed hopes.

It seems to me that we have quite a bit of structural weakness to work off.

AOTC,

I guess you missed
Prices in 19 of 22 Major Housing Markets Fell During January(.pdf)

They're even American cities.

CR,

It might be my imagination, but it seems like inventory here in Los Gatos (Silicon Valley) is declining in just the past few weeks. This is an impression only, from the neighborhoods that I watch.

It makes me wonder if the news of a Conforming Loan Limit increase might be have the unintended consequence of putting the market into a deep-freeze. I can see well-informed buyers AND sellers in the high end market waiting until big, cheap loans are available from Fannie and Freddie.

If, a few months down the road, it turns out that the loans are not as cheap or easy to get, that might be a nasty surprise for the market!

The more prices fall, the more likely realtors are not going to waste much time on unrealistic sellers.

That means places that are stressed will have continued increased in for-sale inventory, even as this inventory is a higher and higher percentage of shortsales, bank-owned etc.

The more established neighborhoods will likely be must-sells and will probably be priced right sooner (since many have the equity to play with and can lower the price when the realtors get real with what it will sell for) and will also probably sell quicker since people want established neighborhoods with low risk of a forclosing neighbor and aren't buying as an investment but as a place to actually live and raise a family.

Therefore some neighborhoods will have fewer homes for sale...others will have nothing but bank-owned signs.

Of topic, but see a very amusing walk-away story at Big Picture.

Tanta wanted proof! Here's her proof!

Homeowners: Can't pay? Just walk away

Troubled borrowers are walking away from their homes - Feb. 6, 2008

WAAHHOOOO ! ! ! !

One owner has done it to date. Of course he didnt leave his last name so it could be a fabrication...

Misean, the aplomb goes to CR and Tanta for the great resource.

CR,
I know you aren't comfortable with the demographic argument because past changes in average household size aren't strongly correlated with housing downturns but I really think you are ignoring the elephant in the corner:
1996 2.65 persons per dwelling unit
2006 2.32 and 129m dwelling units
Returning to the 1996 occupancy we have right there 16.1m potential DU surplus. Even a 10% retracement doubles your estimate.

"Aheadofthecurve writes:
California population =36,457,549 and I'd say that 80 % of the posts here pertain to California. The housing market in California is not representative of huge swaths of the US."

Well, I hate to be the bearer of more stats, but...

California is #3 for land mass (amongst states), is #5 for largest economies in the world, and #1 for human population.

That all adds up to California being a pretty bring deal when it comes to huge swaths, and all.

RE: California.

I don't know what all the fuss is about. It's perfectly dry on the stern of the Titanic - only the bow is under water.

Ditto for the US v World economies.

Rob,

I'm pretty sure that the trend in persons per household varies dramatically with region. Pulling from memory, the very long term trend (over the past 20-30 years) has been downward, but many of the urban areas in California which have severe (and artificial, governmentally imposed)persistent housing shortages have had an upward trend in persons/dwelling unit. I remember reading that in some SoCal cities averaged something like 4-5 people/dwelling unit

I've yet to see any evidence whatsoever that any market anywhere in the US has escaped and/or not participated in the housing bubble. Perhaps those places that didn't have Ditech or Countrywide financing available? PMI 103% insurance wasn't offered? California equity locusts never discovered? Unaffected by Greenspan's 1% stimulus?

Perhaps someone can prove that 10 years of flat prices wasn't actually a bubble inflating what would otherwise be falling home values. Anybody who claims some places are different might as well call themselves Greg Swann and claim it is because of all the professional athletes retiring there.

"About 1/4 of all housing units are in bubble areas."

A question that perhaps CR could answer is what percentage of the gross housing stock valuations are in bubble areas?

AOTC:

I think that you're right up to a point. The housing bubble was an order of magnitude more severe in what Paul Krugman called the "zoned zone." That is the areas in which the price of a house mostly consists of the value of the land (or strictly speaking the value of the right to build on that land). However, I strongly suspect that the availability of very easy credit over the last few years has led to significant over-valuation in the less expensive markets as well.

That table is interesting because the average household size not only fell, but fell every year except for a few years in the 1950's. This suggests that one of the strongest desires that people have is to have a smaller household and that only the post-war baby boom was able to temporarily stabilize household size. Given the strength of people's desire for small households, it would take an unprecedented level of economic distress (or burst of fertility) to reverse such a long-standing trend.

Meanwhile, back at the bond auction...

Auction-Bond Failures Spread to Student Loan Securities
By Michael Quint and Martin Z. Braun

Feb. 11 (Bloomberg) -- College Loan Corp., a San Diego- based lender, said some bonds it issued with rates determined through periodic auctions failed to attract enough bids.

The company wouldn't say which specific issues failed or identify the banks that managed the auctions.

Demand for bonds in the $360 billion auction-rate securities market is waning on investor concern that dealers who collect fees for managing the bidding on the bonds won't commit their own capital to prevent failures. Reduced appetite for auction-rate debt in the municipal market also reflects expectations that the credit strength of insurers backing the securities may deteriorate.

``It is unfortunate that certain auctions did not clear,'' said John Falb, chief financial officer at College Loan in an e- mailed statement. Falb said investors couldn't have been concerned about the quality of the College Loan Corp. bonds, which are backed by government-guaranteed student loans.

Auction bonds have interest rates that are determined by bidding that typically occurs every seven, 28 or 35 days. When there aren't enough buyers, as has occurred in recent months on some securities, the auction fails and bondholders who wanted to sell are left holding the securities. Rates at failed auctions are set at a level spelled out in bond documents.

Fitch Ratings in a Dec. 19 report said some issuers of student-loan backed securities ``have been faced with the possibility of failed auctions.'' Ratings on the debt may be cut as rising rates at auctions shrink the gap between what the student loan companies pay on their bonds and what they collect on the student loans they hold, Fitch said.

[snip]

OT but maybe interesting?
Auction-Bond Failures Spread to Student Loan Debt (Update2) - Bloomberg.com

Auction-Bond Failures Spread to Student Loan Debt (Update1)

By Michael Quint and Martin Z. Braun

Feb. 11 (Bloomberg) -- College Loan Corp., a San Diego- based lender, said some bonds it issued with rates determined through periodic auctions failed to attract enough bids.

The company wouldn't say which specific issues failed or identify the banks that managed the auctions.

Demand for bonds in the $360 billion auction-rate securities market is waning on investor concern that dealers who collect fees for managing the bidding on the bonds won't commit their own capital to prevent failures. Reduced appetite for auction-rate debt in the municipal market also reflects expectations that the credit strength of insurers backing the securities may deteriorate.

Winston,
Do a second derivative on that trend. It is asymptotic and should never have gotten to 2.32 in 2006. I'm not talking about going back to the 2.65 of 1996 just returning to that old curve by 2012. Of course stuff happens. in this case the likely solution will be generous legal immigration to millions provided there are certain geographic settlement agreements. Cynic that i am this will involve moving to Buffalo for six weeks before joining your cousins in Tempe or Bakersfield. The immigration will continue but the location restrictions will never be enforced.

Rob,

I just curve-fit the data using a few different approaches (the ones built into excel because I'm lazy). Based on the 1947-2002 data, I would expect a value in 2008 that is above 2.4 and below 2.6, so we may well see an unprecedented increase in household size.

I remember when Cramer said subprime is a hangnail. Below is a link. Does anyone have the video. It's right up there with his "They no nothing!" rant.

Cramer plays down sub-prime risks - BloggingStocks

People need to keep it simple around here. There were approximately 4M too many new home sold from 2001 to 2008. It is easily extrapolated from a long-term new homes sales chart taking in account the cyclical nature of housing. All these other calculations just confuse the point and/or increases the level of calculation error. In my opinion, CR should consider looking beyond the existing inventory numbers to get to the ultimate number of the oversupply. This oversupply also includes new homes that were sold to flippers with no occupancy plans, to "investment" second and third home buyers, and to unqualified buyers. Just watch it unfold.

2/11/2008 6:09:02 PM Assured Guaranty Ltd. (AGO) on Monday reported a net loss for the fourth quarter compared to profit last year, hurt by an after-tax unrealized mark-to-market loss on derivatives.

The company posted a net loss of $260.1 million or $3.77 per share, compared to net income of $42.4 million or $0.58 per share in the prior year quarter.

Assured Guaranty incurred an after-tax unrealized mark-to-market loss on derivatives of $297.5 million or $4.31 per share for the latest quarter, which included a loss of $302.9 million on financial guaranties written in credit default swap or CDS contract form and a $5.4 million after-tax unrealized gain on Assured Guaranty's committed capital securities, which are required to be measured at fair value.

Little late to the game here, but I'm in Santa Monica after taking 101 south from the Bay Area for the first time in seven or eight years.

Geez, empty houses everywhere. Houses being built everywhere. All the little cities from Paso Robles all the way to Santa Maria have grown into one big urban strip, and apparently pretty recently.

I'm just wondering what all the people who were supposed to live in all those houses and shop in all those new malls were supposed to do for a living out there on the central coast. Some of the nicer ones could have been vacation homes, but a lot of the developments were just -- dogboxes.

Saw a Signature development right by the freeway that had just about given up -- they had "houses for rent" signs up right along with the "houses for sale sign.

Damned strange to see block after block of tightly-packed homes on tiny yards right up against the freeway -- despite all that open land all around.

Amen Brother Winston.