July 5, 2009

Why its not time to take the Housing Casserole out of the oven just yet

The US economy is,was, and will be dependant on real estate values. Given the historically low level of savings rates in the United States, combined with high personal debt levels, much of the US consumer's wealth lies in their home equity.

The Case Shiller Housing chart (depicted nicely here), would appear to map nicely with US economic activity and wealth in general. At the current level of 155, houses are still ~ 25% more expensive than the peaks of all previous housing booms. Given the higher rates of leverage (less "money down") on homes today compared to past periods, it would stand to reason that their is still lots of wealth destruction ahead of us in the housing market.

Provided that home "owners" are willing to sit on negative equity, and more importantly are ABLE to sit on negative equity, a further decline in the Case Shiller index could have a minimal impact on the banking system that wrote all those home loans. More likely, MBS investors may find themselves with less assets than they are counting on.

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