1) Home prices and sales are seasonally strong in April, May and June due to tax refunds and the spring selling season.

2) A temporary reduction in the inventory of foreclosed homes. Team Obama’s Homeowner Affordability and Stabilization Plan has stemmed the tide of foreclosures. But even if it is hugely successful, Tilson and Tongue estimate that it might only save 20% of homeowners who would otherwise lose their homes.

Not only is the US housing still unstable, it is also setting up for three more waves of mortgages meltdown. According to Tongue and Tilson, the first wave of the mortgage crisis happened in late 2006, when speculators began to default on mortgages and borrowers began to commit (or became the victim of) fraud. The second wave happened in early 2007 when borrowers began to default due to mortgage resets. 

Despite the severity of these two waves of default, Tongue and Tilson reckon losses are “mostly ahead of us.” This is how they describe the next three waves of mortgage defaults: 

Wave #3: Prime loans (most of which are owned or guaranteed by the GSEs) defaulting due to job loss and home price declines (i.e., underwater homeowners). Timing: started to surge in early 2008 to the present.         

Wave #4: Jumbo prime, second lien and HELOCs (most of which are on banks’ books) defaulting due to job loss and home price declines/ underwater homeowners. Timing: started to surge in early 2008 to the present.         

Wave #5: Losses among loans outside of the housing sector, the largest of which will be in the $3.5 trillion area of commercial real estate. Timing: started to surge in early 2008 to the present. 

Tilson and Tongue are hedge fund managers with “skin in the game,” and they have no interest in promoting Washington’s green shoots agenda – two reasons why we listen when they speak.

They also correctly predicted in early 2008 that the housing crisis would get so bad that it would require large-scale federal government intervention – a call precious few in Washington or the mainstream press got right. 

In summary, Tilson and Tongue say we are only “in the middle innings of an enormous wave of defaults, foreclosures and auctions.”  

If they’re right, it means more pain ahead for banks and the muting of green shoots optimism as waves three, four and five of the housing crash impact the wider economy.

Initial construction of new homes in the U.S. fell to the lowest level on record last month, the Commerce Department announced early today. Housing starts in April fell 12.8%, to an annual rate of 458,000, the worst since at least 1959, when the government started keeping track. Applications for building permits fell to a record low as well.

Here’s what we don’t get: The market hates this. Futures were aiming for another day in the black early this morning, and then reversed seconds after the numbers were announced.

But we see the housing starts number as an encouraging development. In the worst housing crisis of our lifetimes – with a 9.8-month supply of existing homes on the market and a record 342,000 homes in foreclosure in April alone – who in their right mind is starting construction on a new house?

If the biggest hurdles in ending the housing crisis are price discovery and clearing supply, and if true recovery is a curtailment of home price expectations and a return to living within our means… why are record low housing starts a bad thing?

At this stage, isn’t the best possible housing start number… 0?

Source: Encouraged by Plummeting Housing Starts

According to the latest S&P/Case-Shiller Home Price Index, U.S. home prices fell an annualized 18.6% in February, compared with February 2008 – and a 0.4% improvement on the 19% drop in January.

Some have speculated that this news means we’ve hit the bottom and the market will now begin to trend upwards again.

Not so fast. Those folks must either be eternal optimists or very shortsighted. A 0.4% improvement is one of those “you have to start somewhere” pieces of good news, not a reason to celebrate.

The truth is, average home prices are still down 30.7% from the mid-2006 peak and are running at levels last seen in Q3 2003. We’re still a very long way from a solid housing market. And given that the S&P/Case-Shiller index reports figures from the 20 largest U.S. cities, there’s no doubt that we need to see more than just one month’s worth of evidence before forming many conclusions here.

Here’s what we can say, though…

Three Housing Market Headwinds

If you’re wondering whether this housing news is the first sign of some long-awaited stability for the housing market, or just an anomaly, consider this…

While nine of 20 cities in the index showed a price improvement in February and at least provided a glimmer of hope, remember that a prolonged decline often means the market requires a longer period of consolidation before it breaks higher over the long-term. Moreover, the market is fighting a fierce, triple-pronged headwind…

• Unemployment: With U.S. companies continuing to lay off workers in a desperate cost-cutting bid, this is hardly the kind of fertile environment that will kickstart enough home sales to cut into the bloated excess supply, drive prices higher, and improve the market. Unemployed Americans won’t even be thinking about buying new houses, never mind the struggle they’d face to get a decent loan or mortgage rate. As the job market goes, so goes the housing market.
• Confidence: The current economic and real estate climate has eroded confidence among would-be homebuyers. According to the Conference Board, the number of people who said they plan to buy a home in the next six months sank to a 26-year low in March.
• Excess Supply Of Housing: With America in the grips of a recession, jumping into a beleaguered housing market is low on Americans’ priority list. Existing home sales dropped by 3% from February to March and the U.S. Census Bureau said this week that the number of vacant homes hit a record 19.1 million in the first quarter. Plus, mortgage defaults and foreclosure rates are rising.

So expect to see home prices drift along rather aimlessly for now, while the punch-drunk market drags itself back together.

The Housing Market’s Silver Lining

Now for the housing market’s silver lining…

• First, although the U.S. still has way more houses for sale than demand calls for, the inventory of new homes for sale is currently 311,000 (10.7 months of supply) – the lowest number since 2001.
• Second, with the average 30-year fixed mortgage rate still holding steady at around 4.8%, it represents an attractive entry point for buyers. However, with the Fed having spent many of its bullets to drive the rate down already, it might not dip much lower. If Ben Bernanke and his fellow bankers make this point, it could tempt would-be homebuyers into the market, for fear of missing out on lower rates if they don’t.
• And finally, there are some pockets of strength across the U.S. – in some of the hardest-hit areas, too. For example, Business Week reports that home sales on Florida’s Gulf Coast, Inland Empire in Los Angeles, and the Las Vegas area jumped around 80% in February, compared with February 2008.

Moreover, the number of available homes in California tumbled from 15.3 months worth a year ago to 6.5 months in February is a good sign in terms of clearing the market and driving up prices. However, this may be the result of speculators or first-time buyers, who don’t put a home on the market in return. The sell-then-buy equation remains very tricky and a lengthy process in many areas.

One measure that California has passed in order to boost its market is a $10,000 tax credit to anyone who buys a newly built home.

Finding The Light At The End Of America’s Long Real Estate Tunnel

As Robert Shiller, economics professor and co-creator of the Case-Shiller index, states, “The market is still doing badly. But there’s always light at the end of the tunnel.”

In other words, while depressed prices, record low mortgage rates, and government incentives worth $8,000 in tax credits for first-time buyers may spark some buying, the current recession, high unemployment, and tight lending conditions mean we’re probably still a long way from the end of that tunnel.

However, when recovery does eventually take hold, it may be perennially popular areas that have suffered the most during the bust – like California, Florida, and Nevada – that will lead the way higher.

Source: The U.S. Housing Market: Is it Time to Start Buying Real Estate?

Treasury Secretary Geithner, we hereby dub thee “Turbo Timmy.”

As a number of you have informed me, the “turbo” moniker – as in, “doesn’t know how to use Turbo Tax” – has been around for a while now. With my many sources and ears on the street, I’m surprised I hadn’t heard it prior. (Or maybe it just went in one ear and out the other.)

Other honorable mentions in the SecTreas nickname contest include:

• “Tycoon Tim” (for serving his rich masters)
• “Torpedo Tim” (for threatening to sink the economy)
• “Little Timmy Geithner” (after a hapless cartoon character with wish-granting fairy godparents)
• “Lollypop Guild” Geithner (after the obscure Wizard of Oz character)
• Tim “The Beaver” Geithner (because his earnest, goofy manner has a “Leave It to Beaver” feel)

And then there was the following reader submission, which defies all description:

How about “All in, Tim” or IRONMAM “I Ran Over Nouriel Making Another Mistake” Or maybe tim, I can’t stop sucking Hank Paulsons A[**], Geithner. Tim, hey I got an idea Geithner. How about Tim the dollar killer? Gangster Tim? The 6 trillion dollar man? Tug boat tim? (No reason, it just rolls off the tongue) or maybe because he is printing boatloads of money? Tim the terrible? 2 face Tim? I don’t know, what do you think?

Tony

Tony, I think you gave me the best laugh I’ve had all week.

No Laughing Matter

It’s good to start off this piece with a little humor, because the storm clouds are about to roll in.

I’ve looked over the details of the new Geithner “rescue plan” announced earlier this week. I’ve read everything I can get my hands on and plowed through the proverbial “stack o’ stuff” pertaining to the topic. And after a fair bit of reading and thinking, here is what I have come to conclude:

• As it has been presented, there is no way this so-called “rescue plan” can work.
• If the Geithner rescue plan is implemented honestly, it is almost certainly doomed to failure.
• If the plan is an elaborate ruse, however – that is to say, a sneaky scam… a con job designed to fool the public into seeing what isn’t there and believing what isn’t true – then it just might actually work.

This whole deal is more twisted and distorted than a room full of funhouse mirrors, so it will take some effort to explain my thinking. It’s important, though, so stick with me here.

First off: To understand why the Geithner plan can’t work as advertised, we have to understand the nature of the problem that Turbo Timmy is trying to solve. To that end, I will use an analogy that you should easily be able to grasp.

Meet Franky Flipper

We have all heard how the crux of the problem relates to “toxic assets” buried deep in bank balance sheets. But what does that mean exactly?

To get a mental picture, let’s rewind to the heady days of the housing bubble. Remember when “flipping” was all the rage? There was even a popular show called “Flip This House” on A&E. (I just did a quick Google search, and apparently the show is still going. Amazing!)

The basic idea behind flipping a house works like this:

• Franky Flipper buys a house for a low down payment – say, $10K down on a $150,000 property.
• Franky cleans up the joint and sells it at a markup – say $180,000 ($30K more than he paid for it).
• In this example, Franky’s total investment is $10,000 down, plus effort and materials spent fixing up the house. (We’ll leave out interest payments to keep it simple.)
• If we assume Franky spent $5,000 on time and materials – cleaning the place up himself – his total investment is about $15K (fix-up cost plus down payment). So if he sells the house for $30,000 more than he paid for it, that represents a quick 100% profit – $15K in, $30K out. Franky doubled his upfront investment, thanks to the power of leverage.

You can see why the “flipping” concept looked so attractive against the backdrop of a relentlessly rising housing market. Ordinary joes could do this without a lot of time, effort or money. (Many ordinary joes did.)

But it got out of hand when Franky Flipper started reasoning like this: “If low down payments are good, then ZERO down payments must be better!”

When the down payment drops all the way to zero, the theoretical return on investment shoots through the roof. And if there are no fix-up and repair costs – as is the case when flipping brand-new properties as opposed to old ones – the theoretical return approaches infinity.

Franky Gets Wiped Out

You remember what happened next in the great housing saga… the Franky Flippers of the world went nuts, and nobody tried to rein them in. (Hell, the media and the government all but egged them on. But that’s another kettle of fish…)

At the height of the bubble, there were any number of stories – you saw them – of uber-aggressive flippers leveraging a portfolio of 10 or 15 different properties, all purchased with no money down, against a single stream of income amounting to $50,000 or less. Everyone just went crazy. You had school teachers, bus drivers and traffic cops all playing the cookie-cutter suburbia version of Donald Trump.

Going back to our friend Franky Flipper… let’s say that Franky has $300,000 in the bank. He’s doing pretty decently for himself – and he also has a hotshot sales job – but $300K is all the cash he has for now.

Franky also has a $3 million portfolio of 10 homes – average purchase price $300K each – all purchased on generous lending terms with no money down. (Rather than fixer-uppers, these are all new homes or soon-to-be constructed homes bought on “spec.”)

You’re with me so far, right? You can see how a relatively average joe like Franky could go out there and buy 10 new houses at the height of the housing bubble, courtesy of stupid lenders and the zero down phenomenon, figuring he will sell all those houses at a profit and make a mint?

The plot thickens… for whatever reason, Franky loses his job at the luxury auto dealership. Lexus sales are down and he hasn’t been hitting his quota, let’s say – too much stress taking him off his game – so he’s out.

Without the cash flow from his job to make his monthly mortgage nut, Franky has to sell all 10 houses – $3 million worth of real estate – before he can get square and put his life back on track.

But here’s the kicker: Because Frankie has a $3 million leveraged portfolio and only $300,000 in cash, it only takes a 10% decline in real estate values to wipe him out.

Franky paid an average $300K for each of those 10 houses. So if the average price falls by just 10%, $30K times 10 equals $300K equals all the cash Franky has left. Any real estate decline beyond 10% leaves him insolvent (effectively bankrupt).

You see how that works? If you buy an asset (like a house) with lots of leverage relative to your capital base, and that levered asset falls by even a modest price percentage, it can be enough to wipe you out. This is true for everyone. It doesn’t matter if you’re Donald Trump or Joe Blow or Gigantic MegaCorp. Leverage is leverage, and it’s a double-edged sword for all.

Drinking Their Own Kool-Aid

So why did I just walk you through all that? After all, it isn’t the real estate flippers who are getting bailed out here – it’s the big dumb banks with their dumb toxic assets.

Here is why we went through it: Because the big banks in trouble now are in the exact same situation as Franky Flipper.

Whether it’s 3 million, 3 billion or 3 trillion dollars we’re talking about, the math is still the same. Whether it’s a straight-up mortgage note on a house or a more exotic form of “mortgage-backed security,” the leverage issue is the same.

It’s pretty ironic, really. Those of us with good sense had a cynical belly laugh at the madness of the flippers when the stories started hitting the wires. “You mean there’s a guy in Vegas who bought 14 houses on a $35K income? What a maroon!”

And you would think the bankers, of all people – the clean and sober belt-and-suspenders types who did the lending – would be smarter than the jokers they lent to. If real estate speculators were hot-to-trot gamblers, then the banks were supposed to be more like “the house,” i.e. the casino.

(No well-run casino would ever give its clientele enough rope to hang the house, by the way. That’s why the high roller tables always have posted limits. To refer to banks as “casinos” then is to actually give casinos a bad name.)

At any rate, there was no sobriety to be found anywhere. The big banks went just as crazy as Franky. After a time, the bankers drank their own Kool-Aid and started believing all that crap being shoveled out to the punters about how home prices never go down and any home-related risk is a good risk.

And so the banks decided to load up on super-risky mortgage-backed assets themselves, leveraging up their own books to the moon,with all the zero-down exuberance of a Franky Flipper… and they did it in mega-size fashion. We’re talking multi-trillion large here.

And now the banks are screwed, and staring down the barrel of insolvency (”bankruptcy” to schleps like Franky) because the value of their overleveraged loan portfolios (to the tune of trillions) has tanked, and that’s how we got to where we are with this whole “rescue plan” business.

Turbo Timmy’s Tough Problem

We can take the analogy further, so let’s do it.

Say that Franky Flipper is a good friend of yours – he got you a great deal on your Lexus, maybe – and you just happen to be a government official.

For whatever reason, you have decided that Franky Flipper must be saved. The situation looks bad, but you are a loyal pal, and you don’t want Franky to go bust under any circumstances if you can possibly save him.

So in your capacity as a government muckety-muck, how do you save your friend?

In an honest world, there would just be no way to save Franky. His liquid assets ($300,000) are only a tenth of his liabilities ($3 million worth of mortgage notes), and the value of his illiquid assets (the homes he owns) has gone into the crapper along with the real estate market.

Barring a miracle, Franky is toast. Apart from a windfall cash infusion out of the blue – the death of a rich uncle maybe – there is no way to make the math work. There’s just no way to save Franky’s bacon… and the same is true for the banks as they exist today.

See, the toxic garbage sitting on banks’ books right about now looks as attractive to potential buyers as a half-finished mega-mansion with a bulldozer out front, tucked way in the back of a deserted cul-de-sac, in the middle of some nameless, empty, ghost-town subdivision 30 miles due east of Tumbleweed, Arizona. You wanna live there? You wanna invest there? I don’t think so. Does anyone else in their right mind? I don’t think so.

With me so far? Analogy holding up? Let’s keep going…

Geithner’s brilliant solution – the thrust of the “rescue plan” that juiced Wall Street this week – is to bring private investors into the toxic asset mix, in a “public-private partnership” between Wall Street and the government… and then, via that public-private partnership, to buy up all the bad assets from the banks (with a huge helping of taxpayer-funded leverage).

Just imagine Turbo Timmy saying the following (as a giant light bulb goes off over his head):

“Hey! Here’s how we can solve Franky Flipper’s problem. We’ll just get other real estate investors to buy the 10 houses off him… and we’ll convince those other investors to do it by offering them sweetheart deals on leveraged loans and limiting their total risk to a small down payment only. Franky sells off his housing portfolio, the private investors get a deal, and everyone is happy. Hooray!”

Now… do you see why this plan can’t possibly work? Here it is in plain English:

• Franky is so leveraged, even a 10% haircut on the value of his portfolio is enough to wipe him out. (Remember, he only has $300K cash against $3MM worth of mortgage notes.)
• No real estate investor in his right mind would buy Franky’s houses at just 10% off. To keep their investment protected, they would need more like 30% off… or 40%… or maybe even 50%.
• Therefore, there is no way both parties’ interests can be satisfied.
• For Franky to get a price he can live with – one that doesn’t wipe him out – the new investors have to pay far too much. For the investors to get a price that they can live with – one that makes sense to them as investors – the bid price has to fall far too much, making Franky toast.

That’s why all this shiny happy stuff about a public-private partnership is total baloney. The banks are just as bad off as Franky Flipper. If the toxic assets in question were sold at anything approximating their true value, the banks would be wiped out.

Shockingly, the word is that players like Citi still have huge piles of assets on their books marked close to “bubble valuations” like 90 or 95 cents on the dollar. That’s nowhere close to the real value. It’s like Franky Flipper pretending that the half-built spec house 30 miles outside Tumbleweed – a house more likely to be torn down for scrap than to ever see someone living in it – is still worth 90% of what he paid for it.

And again, the much-touted “private investors” being invited into Turbo Timmy’s plan have no reason to pay anything but fair prices (i.e. extremely low prices) to the banks for these assets, because private investors are not stupid as a general rule and will want to protect themselves against risk of loss.

So, in a nutshell, the whole private-public partnership thing is Mission Impossible. The natural interests on both sides – of the banks and the putative investors – are way, way, waaay too far apart.

And that means Turbo Timmy’s brilliant rescue plan is DOA… dead on arrival.

Unless, of course, the whole rescue plan is just a complicated scam… a con, a shell game, an elaborate ruse designed to hoodwink the public.

More to come….

Source: Turbo Timmy’s Sneaky Scam (Part One)

This from Investor’s Daily Edge:

A little over a week ago, in my Monday column, I correctly predicted that the December Housing Starts and Building Permits reports would miss the mark by a wide margin. I even correctly picked the actual number. This past Monday, my prediction was that the December Existing Home Sales report would also likely disappoint. I wasn’t such a good fortune teller the second time around.

The December Existing Home Sales report actually surprised to the upside, posting a gain of 6.5 percent versus November. This equates to roughly 290,000 units.

It turns out that I just underestimated how bad the housing market is. These sales aren’t from eager buyers who got priced out of the market during the run up over the last few years. The buyers are vultures, swooping in and cleaning the carcass. Over 45 percent of the sales were “distressed” according to the report.

That is bad news for the market. It is just the beginning of a viscous cycle.

Foreclosures continue to drive down prices in all markets. As a result, more and more homeowners see their equity vanishing. Many more find themselves underwater. This leads many to simply throw in the towel and let their own home go into foreclosure, feeding the cycle.

Another item to consider is whether or not all the bank-owned foreclosures are even back on the market yet. There is growing evidence that banks are holding back properties from being re-listed to avoid flooding the market, which would result in prices being driven down below what they hope to get for the repossessed homes. This means there could be an additional backlog of properties that we aren’t even aware of yet. This will delay any recovery.

Finally, a major question that needs to be answered is how many people actually qualify to buy a home? Fannie and Freddie are said to be toughening up on standards, and banks are just flat out not lending. That means short of a huge down payment or an all-cash purchase, buying any home, foreclosure or not is going to be difficult. And the housing market needs buyers to move the inventory.

With all this gloom in the market, it is going to take quite some time for a recovery. That leaves you plenty of time to profit from the slide in the housing market. One way is shorting the iShares Real Estate Index (NYSE:IYR), another is shorting the Vanguard REIT ETF (NYSE:VNQ). Both have already seen a significant down leg, but with the housing market the way it is, there is still plenty of room to the down side.

A more speculative play could be the UltraShort Real Estate ProShares (NYSE:SRS). This ETF moves inverse to real estate, so it goes up as the market goes down. A quick look at the chart shows a huge spike in November and a drop since then. It is now trading at two-year lows, so you could view it as a more speculative play on the continuing decline of the housing market.

Source: There Is Still Money To Be Made In The Housing Market

This from today’s Daily Reckoning:

The boom in construction has been over for nearly two years…

The boom in the financial sector ended about 12 months ago…

The boom in the aviation industry died when oil went over $100…

The boom in commodities was killed when oil went under $100…

The boom in retail seems to have come to a halt more recently. This will be the first quarter in many years with declining consumer spending… The boom in consumer borrowing seems to have come to an end, too…

Yes, dear reader, what MUST happen, DOES happen. But it usually happens when you don’t expect it… or in a way that surprises you. The big surprise has been the violence of the correction when it finally got going.

“Day of Reckoning,” the Telegraph called it.

But we should be happy. Not only is the mainstream media picking up our themes, now both sides of our Trade of the Decade are working. Yesterday, the Dow went down another 189 points. Gold went up $29.

But instead of joy and satisfaction, we feel a sense of dread. It’s all very well to have a few kruggerands and gold louies stashed somewhere… but you can never have enough of them to brighten up a darkened world.

As an insurance policy against a financial catastrophe, gold still works – perhaps better than anything. But who wants his house to burn down so he can collect the fire insurance?

[Editor’s note: You can download your free report “Buying Gold Coins for Financial Profit & Protection” here.]

Guess how much Americans have lost so far from the stock market decline? Almost $5 trillion. Stocks are down about 33% from their ’07 peak – resulting in the destruction of wealth on an unprecedented scale.

Add to that the loss of wealth in the domestic property market, and you can’t help but wonder… how do people keep going? The Wall Street Journal reports that one in six homeowners is “under water” – with more mortgage than house.

“About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody’s Economy.com.”

And house prices are still going down.

Yes, that is something that MUST happen too – house prices have to go do to the point where people can buy them. The average house must be affordable to the average homeowner. And since incomes haven’t gone up in the last 8 years, we can presume that housing prices shouldn’t have gone up either.

So, we ask… how much more do houses have to fall before they are back to where they were 8 years ago… or merely to the multiple of income that buyers can afford? The answer… according to the numbers we’ve seen…is about 20%.

That suggests that we are only about half way through this housing decline. It further suggests that when it is over one out of every three homeowners could be in serious trouble. He may not be under water, but he will definitely be up to his neck.

And now it gets worse.

Because practically every businessman in America is waking up this morning thinking about how he can cut costs. His sales are going down. What choice does he have? He has to cut his payroll. And so, he begins making a list… which employees are essential to his business… which are not. Overtime is cut. Part-time workers are scaled back. Full time workers are let go. He knows the woman in the mailroom is a waste of money, but she’s nice to look at. The fellow running the advertising is an idiot, but he can’t stop advertising, can he? And how ‘bout that driver…he seems to disappear for half the day; he’s never where he’s supposed to be… yes, he’ll be fired immediately…

And then, the world’s lights grow dimmer.

Source: The Boom Years Are Over

Foreclosure predictions, of course, have a nasty habit of turning out wrong.

According to AP, although the foreclosure rate in the US began to accelerate in 2006, “people lost their homes at the highest rate on record in the first three months of this year, and late payments soared to a new high, too – an alarming sign that the housing crisis and its damage to the national economy may only get worse.”

And The New York Times reports that one in eleven American homeowners is now facing foreclosure or is overdue on mortgage repayments.

William Patalon III examines the rising foreclosure rate in today’s Money Morning:

The Mortgage Bankers Association (MBA) announced yesterday that both the percentage of loans in foreclosures, as well as the number of foreclosure starts, climbed to levels not seen since 1979, MarketWatch reported.

For one- to four-unit properties, 2.47% of all mortgages outstanding were in foreclosure, up from 2.04% in the fourth quarter, according to the MBA’s latest National Delinquency Survey. At the end of first quarter 2007, only 1.28% of such homes were in foreclosure.

DailyWealth editor Steve Sjuggerud isn’t perturbed, however, by gloomy foreclosure predictions…

Don’t believe all the gloom and doom you read… The U.S. housing bust may be just about over. We should be darn close to the bottom… possibly within one year of it.You probably don’t believe me. That’s okay. I’m used to being the contrarian –- it’s a position I prefer to be in actually. But bear with me, and at least hear me out…

Today, I’ll share with you two simple facts that explain where we are now in housing and why we could be close to the bottom. Let’s get right to it…

1) Houses are affordable again.

You may be flabbergasted to hear this… But U.S. houses are affordable again.

Since last summer, the change has been extraordinary. The typical mortgage payment on the typical home in America now is 20% cheaper than it was less than a year ago. Let me explain:

Last July, the median U.S. home would have cost you about $230,000. And you’d have paid about 7% in interest on your mortgage. So that’s a $1,200 monthly mortgage payment on that house (assuming a 20% down payment).

Today, the median home price is $200,000 – a $30,000 difference from last summer. And mortgage rates are down to 6%.

Between the lower price and the lower mortgage rate, you’d be paying less than $1,000 a month on your mortgage now – for the same house that would have cost you $1,200 last summer!

Most people shop for homes based on their mortgage payment… They ask, “How much can I afford each month?” And then they look for homes that will give them a payment they can afford.

So the big question is: Can the typical household afford the typical mortgage payments on a typical home? Last summer, the answer was no. But now, the answer is yes. Take a look:

Already? Yes! Houses are affordable again…

You may be surprised to hear it, but thanks to lower mortgage rates and lower home prices, homes are affordable… They’re just as affordable now as they were right before they boomed in the 2000s.

2) We’ve paid our dues, pricewise.

You may also be surprised to learn home prices in general don’t go up that much…

The median U.S. home price has only risen at about 1.5% per year since the 1970s, after you subtract inflation. That’s not much of a gain. (Even that 1.5% price gain is overstated… Homes have gotten much larger since the 1970s.)

The annual increase in price has been consistent… Whenever prices run significantly above that trend, like in 1978 or 1987, they run significantly below that trend three to four years later.

Have we paid our dues yet?

Cycles happen. You can see it easily in this chart. You can also see in 2005, prices ran farther above trend than any time in history. And now, in 2008, prices have fallen farther below trend than any time in history.

Could we see another year or two below trend? Of course. But I expect that we’re in the process of finishing “paying our dues.” We’ll return to the trend.

In sum… you may be surprised to hear it… but

1)	U.S. homes are once again affordable.
2)	We’ve just about “paid our dues” pricewise.

Don’t get caught up in the gloom and doom. Stick with the simple facts.

These indicators are pretty simple. They show how the worst of the housing bust could be behind us already.

The report predicts that UK house prices will crash by 10% by 2010 and that, with consumer spending slowing, the Bank of England will eventually need to cut interest rates by three-quarters of a percentage point to 4.25% next year.

Ben Traynor in The Daily Reckoning explains how a house price crash in the UK will affect the country’s economy…

It never rains, it pours. Hot on the heels of the Bradford and Bingley saga, we wake up today to the news that mortgage lending has hit a record low.

Just 58,000 loans were made last month. That compares with 64,000 in March and 113,000 in April 2007. House prices will keep falling. But they’ll take their time — the market is drying up, with many would-be sellers pulling out of deals rather than dropping their prices.

It’s like a massive staring contest between buyers and sellers. Who will blink first? My money’s on the sellers — once they realise prices aren’t recovering any time soon, they’ll bite the bullet and drop them. Just a little bit… Then a little bit more…

So what’s the upshot for the housing market? A ‘soft landing’ or a short, sharp shock? And what about the economy?

Let’s start with housing. Fundamentally, houses are too expensive. But it’s hard to say how far and how fast they’re going to fall.

It all comes down to affordability. In theory, it should be easy to calculate the ‘correct’ level for house prices. How much do people earn, and what multiple of that can they affordably borrow? Run the numbers, and you get an idea of where house prices ‘should’ be.

But here’s where it gets tricky. We can get wage data pretty easily. But many would-be buyers have other capital to draw on. First-time buyers regularly rely on borrowing from parents, for example.

And besides, many current homeowners have demonstrated they’re all too willing to buy at a price considerably above what they can afford. Who’s to say the rest have learned from their mistakes?

Both of these factors make it hard to say exactly how far house prices need to fall to be ‘affordable’. But the good news, from our perspective, is that it doesn’t really matter. We’re confident we know which way they’re going, and that tells us a lot when it comes to where we should (and shouldn’t) invest.

Let’s move onto the wider economy. If house prices are coming down slowly, does that mean a ‘soft landing’ for the economy too? And is this preferable to a short, sharp shock?

Again, I think it’s going to take its sweet time sorting itself out. And here’s the kicker — the longer it takes, the greater the likelihood of a recession. I’ll explain why in just a second.

First, I want to answer the question of which we should be rooting for — the gentle decline or the brutal shock. My terminology is deliberately chosen to reflect the way I suspect the Government will view it.

The argument against a short shock can be summarised in one word — hysteresis. Hysteresis is the economic phenomenon of path dependency. A shock, so the argument goes, sets in train a series of events that can become self-sustaining.

An example would be long-term mass unemployment. If a large number of people are put out of work in one go, not all of them will find alternative employment quickly. Those that don’t will become deskilled, demotivated and will find it harder to get back into work. The shock, therefore, delivers its own persistent structural problem.

I think this argument has a lot of merit. But I still believe facing the inevitable, and quickly, is the preferable course of action. It all comes down to our irascible, temperamental friend Sentiment.

The longer this uncertainty drags on, the more entrenched negative sentiment will become. This will make a recession not only more likely, but more difficult to get out of.

Sadly I reckon this is exactly the scenario we’re facing. A long, drawn out recession. A few false dawns, with everyone, their confidence battered, scurrying for cover again at the first wobble.

The investment lesson is clear. Avoid companies with a high level of exposure to the British consumer. This would include most banks and retailers.

Put your money with firms whose profits aren’t wholly dependent on the spending habits of Mr and Mrs UK.

Because Mr and Mrs UK are about to go into hibernation…

Part of Wachovia’s problem — apart from its residential-mortgage woes — is the $23.9 billion in outstanding debt it holds in relation to commercial-property projects at the end of the first quarter, according to The Wall Street Journal.

“Teaser rates of just 1% interest, left almost one-in-ten subprime borrowers unable to meet their monthly mortgage bills,” says Adrian Ash in The Daily Reckoning UK. “So the profits assumed by ‘resetting’ those rates to 7% and above two years down the line were never going to show up.

“As in not ever. Any bank day-dreaming otherwise deserves euthanasia, let alone bankruptcy.

What they’re getting instead, however, is a fresh dose of money from the Fed. The US central bank is actively creating a market in mortgage bonds, accepting these illiquid assets as collateral against loans of highly liquid US Treasury bonds.

Will the money thus released to the banks find its way back into US house prices? Whatever happens on your street in 2008, subprime lending as a financial product is dead – if not for good, then at least for now. Issuance of residential mortgage-backed bonds collapsed by 95% during the first three months of this year, according to data from SIFMA, the securities association. The futures market expects a further 25% drop in US house prices, notes Janet Yellen of the Fed, based off the price for Case-Shiller index contracts.

It’s as if the entire workforce at Goldman Sachs Group Inc. and Morgan Stanley vanished in less than a year.

From Tokyo to London to New York, financial companies announced plans to shed more than 83,000 jobs since last July as revenue and compensation pools evaporated, according to figures compiled by Bloomberg. The dismissals range from 90 jobs, or 0.1 percent of the total, at London-based HBOS Plc to about 9,160 jobs, or 66 percent of the workforce, at New York-based Bear Stearns Cos., which is being acquired by JPMorgan Chase & Co.

Bankers only have themselves to blame for their predicament, says William Patalon III in Money Morning.

“The banking system’s ‘originate-to-distribute’ model changed the rules of the game. No longer did banks make loans that were based on very careful risk-of-loss analyses. Under the new system, banks make loans – such as subprime mortgages – which are then ’securitized’, or packaged together, into debt instruments that the trading operations of banks, investment banks or institutional investors might then purchase, believing it was a way of achieving higher returns.

“Initially, this led to higher profits. Which induced banks to boost lending so that they could boost securitizations. But here’s the problem. First, since the banks were no longer going to keep the loans, they relaxed lending standards. In fact, they actually had to since, second, they wanted to boost those volumes. When the underlying loans unraveled as the subprime-mortgage crisis spiraled deeper and deeper out of control, companies such as The Bear Stearns Cos. Inc. (BSC) took losses that just kept growing. Bear Stearns is now being taken over by JPMorgan Chase & Co. (JPM), with the help of the U.S. Federal Reserve.”

The wider jobs picture in the US isn’t much better, and Andrew Gordon in Investor’s Daily Edge sees as lot more pain ahead for the US economy.

“The truth is, employment isn’t holding up well,” says Andrew. “And prices aren’t being held down too well.”

“What seasonality giveth, it will taketh away… come June. These very important inflation and job numbers will not merely slip. They could very well drop drastically. Wall Street won’t like that. If crude prices remain well above $100 by then (as I think they will), it will be damning evidence that the Fed couldn’t, after all, finesse its way out of the twin threats of no growth and rising inflation.

“This is my contrarian take. While most economists and brokerages have been predicting a 2nd-half comeback for the economy, I believe it’s going to begin a major leg down. Depression/recession, crisis, runaway inflation, a new bear market, and Fed impotence will be Wall Street’s new battle cries. It won’t be pretty.”