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This blog is in response to a discussion on LinkedIn.

The unfortunate answer is no, we have not yet bottomed out. But there is a second unasked question, when will the housing market and the residential mortgage industry recover?

Regarding the first question. Agree with you in that the economy is so bad that the media and the economist are putting on a bright face.

If you look at the Composite-10 CSXR Home Price Index as a guide there appears to be some more downside to home prices.


But if you look at the 1-yr moving average in the growth or change in this index we see that growth peaked in June 2004, and was in decline but positive until August 2007 when it turned negative. (The 1-yr MA is a lagged index.)


The important point to note is that the negative growth bottomed out in May 2009, however, it still remains in negative territory. The extrapolation would suggest that growth would turn positive around February – April 2010 time frame. That is residential home prices will bottom out in 1Q 2010.

To answer the 2nd unasked question, when will the residential mortgage industry recover? This is more complex. The FRED data would suggest that between April 1993 to October 2004, Nonrevolving Credit was a driver of home price appreciation, with an average lag of about 2.5 years (>2.5 yrs in the earlier years and<2.5 yrs in the later years).

It is interesting to note that this was also about the time securitization of mortages was introduced.

But from October 2004, the relationship is inverted, with Home Prices driving Nonrevolving Credit, and the lag appears to be arounf 2.5 years. So add that lag to the 1Q 2010 forecast bottom we get a residential mortgage industry that at the very earliest, recovers in 3Q 2012. Sorry, the bad news is no residential mortgages no real estate jobs.

Given a 2.5 year lag it is a good thing that the Obama Administration is “pushing heavily” otherwise the lag could be much longer and we will definitely be looking at a 1930s type depression. This is not a political statement (my opinions have always be apolitical) but a need to face the gravity of the situation.

Regarding 53% modified loans go back to foreclosure. The number used to be much higher, and the very simple reason for this was the so called “modification” actually led to a higher monthly payments! Add to that a substantial unemployment situation.

Sometimes I just don’t understand the banks, which would they prefer (1) lose a few % in interest for a few years or (2) take a 50% cut in principal value today? This problem is not going to go away anytime soon, and everyone needs to be patient. Given these two options, foreclosure moratorium is the only viable solution for the banks if their customer doesn’t walk away. The banks need to try very much harder to keep homeowners in their homes if they are to forestall writting down their asset values, which will in turn depresses home prices further.

The more distressed properties you have the less likely people will buy because they can wait for further distress. There are properties (in Illinois?) where banks are giving the “vacant & disgruntal owner” properties away for free because it is more expensive to bring them up to code to sell them.

So what do we do between now and 3Q 2012? Reduce our risk. Contact me, Ben Solomon,, for a free phone review on what QuantumRisk can do for your company.

Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.