Buffet on Rating Agencies and Predictability

Did anyone credibly predict the housing bubble and bust?  Moody's, in which Berkshire Hathaway holds a major stake, certainly didn't. Some like Case/Shiller became famous for accurately claiming there was a bubble, but accurately predicting it's bust?  And likely to predict the next one should it occur? Personally, I'm not so sure..  

However, real estate is no more about easy money than any other investment, so the quick runup in itself was certainly a warning sign.  Here, via CNN/Money, is a brief video of what Warren Buffett thinks about the real estate bubble's predictability via rating agencies, Fannie & Freddie, and the rest of us.  His most relevant comments on real estate are near the end of the clip. Sorry, there's an ad for Citi at the beginning. - David

He Called the Bust; Now He Sees a Rally for California

Here's a forecast you don't see every day, published in the Finanial Times: Paulson sees California homes rally. 

Whether you believe his specific numbers or not, it's interesting to consider the reasoning of one of the few hedge fund managers who correctly called (and profited from ) the housing bust.  20% increase vs.last year?  Sounds good to me! - David

Meltdown Post Mortem Ad Nauseum

The Fed continues to be grilled over whether it caused the mortgage meltdown via low interest rates, or allowed it via lax bank supervision.  Here's the latest:  Fed Transcripts Stoke Debate on Rates - NYTimes.com. 

So what's the answer?  They allowed it via lax bank supervision.  Those insisting the Fed caused the mortgage meltdown via encouraging low short-term interest rates don't understand (or don't want the public to understand) basic macroeconomics, and like to imply that the Fed has more influence on mortgage rates than it does.

Untruth of the Day: Treasury Official Says Housing Goals Not to Blame for Fannie, Freddie Failures - WSJ

An Asst. Treasury Secty has proclaimed to the Mortgage Bankers Association that Fannie Mae and Freddy Mac didn't fail because the government mandated they relax lending standards in order to meet affordable housing goals. Nope, they failed because Fannie and Freddie relaxed lending standards in order to generate more loans and make more money!

Treasury Official Says Housing Goals Not to Blame for Fannie, Freddie Failures - WSJ

Methinks the Asst. Treas. Secty doth protest too much. Fannie, Freddy, and lenders in general

What Buffett Thinks about Housing

Want to know what Warren Buffett predicts for the US housing market?  Then you need to look at paragraphs 4-7 on Page 12 (Page 14 of the pdf) of the 2009 Annual Report of Berkshire Hathaway Inc.  Since Berkshire Hathaway owns several real estate interests, Buffett weighs in on the housing market in his Chairman's letter. - David

ROI: When It's OK to Walk Away From Your Home - WSJ.com

Do you agree with this statement?  "Walking away from debts is as American as apple pie."  How about this one? "The economy is fundamentally amoral."

To me, the first statement is offensive, the second represents a real quandary in a system based upon honesty and fair dealing, and both define the dark side of the moral dilemma

FT.com - Cleaning up toxic mortgage assets a slow task

Nearly all new mortgage lending is coming through government-sponsored entities (GSE's) like Freddie Mac and Fannie Mae.  These entities cap the level of individual mortgages, such that the low end of the market is supported.  But what about the higher end - - homes requiring larger "jumbo" mortgages?  That money comes from private investors, and those sources dried up when the mortgage crisis hit.  Why haven't private sources re-entered the marketplace?  Because they haven't figured out what to do with their existing portfolios yet!  One factor in particular is the struggle from the holders of first and second mortgages.  As this Financial Times article explains, second mortgage holders are no longer willing to allow first mortgage holders to exercise their "first in line" rghts when it comes to loan modifications and collections, slowing the process for all. - David

Home Builders Starting to Look Up - WSJ.com

"14 publicly traded home builders have written off an aggregate $33.65 billion since the first quarter of 2006 through the end of 2009's third quarter."

Home Builders Starting to Look Up - WSJ.com

The quotation at top, from the article above, is important. It defines the span of the housing downturn, beginning earlier

An early warning system for asset bubbles - McKinsey & Company

McKinsey & Co. is working on something really valuable: a predictive model for overheated asset markets (bubbles) like the one we're recovering from now. Key quote from the article, which first appeared in the Financial Times:

"The answer lies not in the level of debt alone, but in the sustainability of debt."

McKinsey & Company - An early warning system for asset bubbles

The right predictive models could be enormously helpful. We probably wouldn't have believed them during the recent real estate run-up, but I'll bet we pay attention going forward. - David

It's Not About Ben! - The Housing Meltdown Explained (by David White)

Fed Chariman Ben Bernanke recently inferred that the Fed's policy of low interest rates was not a major factor in the mortgage meltdown. That's right and wrong, and he's taking some heat for it. Let's sort it out:

He's RIGHT because low rates targeted by the Fed and endorsed by the originators (lenders) and backers (Freddy, Fannie, AIG, etc.) of those mortgages certainly improved the affordability of housing and homebuilding, a strong positive, contributing to the housing boom and a great deal of desirable new construction. Prudent capital investment by the private sector is a good thing, and it is encouraged by low costs of borrowing.

Fed Chief Edges Closer to Using Rates to Pop Bubbles - WSJ.com

The Fed Chief is opening the door to interest rate boosts.

Fed Chief Edges Closer to Using Rates to Pop Bubbles - WSJ.com

My advice: Beware of Federal policymakers who think that higher rates/prices are the way to stimulate a weak economy.  This is way simpler than Econ 101, but not for the Feds, who doggishly cling to failed economic policy emphasizing government intervention as the solution to economic ills.  [Note: It is true that judicious regulation, which was lacking in the runup of the housing bubble, is a valid role of government, but not economic intervention.  It's a tool they like to use because they are so self-focused!]  - David

"Underwater and Not Walking Away" - Paper by Prof. Brent T. White

Recently published study by University of Arizona Professor Brent T. White (no relation) on reasons homeowners underwater on their equity often choose not to "walk away."  One reason: concern over personal shame.  Better reason: It's their home, not just an investment!  And of course, most quality real estate will appreciate over time.  If this is your situation, an important read. - David

Click here for abstract and to download.

Citation: White, Brent T., Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis (December 7, 2009). Arizona Legal Studies Discussion Paper No 09-35.

The Housing Bubble: A Worldwide Phenomenon

The major adjustment we've experienced in real estate values isn't at all limited to the United States. The attached, from McKinsey & Co., shows this how home prices have fared in major international economies:

McKinsey Chart Focus

Why? International economies are irreversibly linked by trade, investment, and expectations. Our actions have worldwide implications! - David