Wednesday, February 28, 2007


Nouriel Roubini on the housing market:

So whenever you hear the spin about the sub-prime meltdown not being such a big deal as “sub-prime mortgages” are only 6% of the housing market beware of such misleading spins. Properly measured sub-prime and near sub-prime and effectively sub-prime (because of creative accounting) mortgages accounted for almost 50% of all originations last year. So the mountain of “garbage” and “trash” that has been piling up in this sub-prime carnage includes a good half of new mortgages created in recent times. And the meltdown of these mortgages – both those that are formally sub-prime and those that are effectively sub-prime – will create a massive credit crunch in short order. At the end of the day “garbage” is garbage, whatever you name it. What is labeled as “Prime Garbage” stinks as much as the “Subprime Garbage”. And if it walks, ducks and quacks like garbage it passes the smell test of being garbage. Some of that garbage may rot more or faster than the rest but the overall state of the mortgage and housing market is the worst in decades.

Also, note that with new home sales down 16.4% in January ( the biggest drop since 1994 as reported today) and housing starts down another 14% in January alone, both the demand and the supply side of the housing market are in literal free fall and collapse. The only things that are mushrooming in the housing market are cancellations (in the 30 to 40% range for major home builders) and the stock of unsold new and old homes that is at historically unprecedented highs. All this means home prices headed sharply south in the months ahead. As I argued last summer (see here and here and here) this is the worst housing recession in the last five decades. In a long paper with Christian Menegatti that I will publish next week I will flesh out in much detail the arguments on why the housing recession is nowhere close to bottoming out and why the housing recession will get much worse before it reaches any bottom.