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Tuesday, March 25, 2008

Bottoming Out Too Soon?

The Dow was up 187 yesterday, mostly on news that (existing) home sales went up by 3% in February, and that JP Morgan Chase was looking to up it's Bear Stearns offer from $2 to $10 per share. That in turn lead to a rise in the dollar, and a fall in oil prices, all good things for the economy.

The Bear Stearns news was a psychological boost for investors. If JP Morgan was upping the offer to $10 per share to appease Stearns investors, there had to be an "on paper" reason for it. Let's call the reason sanity. When actual money driven accountants started looking at all that paper Stearns was holding that said "mortgage secured debt" they ran the numbers and found out what's been said for months, the subprime meltdown is only a small fraction of the mortgage industry. A lot of that paper is worth more money that the news would have the emotion driven investors and politicians believing.

The housing number was actually mixed, while sales were up for the first time in 6 months, prices were down. But, as most everyone knows when those occur together you've probably found the bottom of a market.

National Association of Realtors regional figures show that the Northeast seems to be coming out of the slump, with sales up 11% and prices up slightly, while the West coast remains a drag on the overall picture. It's not totally surprising, since the west was where the ridiculous run up in prices began. The South would have done well if not for Florida, another hotbed of speculative buying.

For some folks, finding light at the end of the subprime tunnel isn't good news. If you have another month of homes sales increases, even slight, without Congressional intervention, it will show that the market is capable of correcting itself. That doesn't work well for the folks on the campaign trail telling us more government regulation is the solution to the problem.

It will be harder for Hillary Clinton to sell her fix for the housing crisis, which Barack Obama says looks suspiciously like one he laid out last year, but with more money. It will be harder for the doomsayers to beat up John McCain for not having a plan for the government to fix the problem, if it's fixing itself.

She's also supporting the Barney Frank proposal (written about here) with a few added features, like the feds actually buying foreclosed houses (not held by FHA/VA type loans), and then holding them until the market improves. Something she claims would be "revenue neutral". Since the average price for foreclosed homes is discounted at sale by about 19%, the revenue neutral idea doesn't hold much water.

If month to month foreclosures continue to fall (as they did in February) and houses continue to sell, suddenly a lot of the pessimism in the general public will start to fade. Add to that the fact that if home sales increase again in March the Fed will be less likely to cut interest rates, which will again help the dollar. Suddenly all of the gloomy numbers look better (not great, but better), and selling despair becomes a tougher job.

It must be tough being a politician who hopes that good news doesn't continue, only for self gain.

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