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Generational Dynamics Web Log for 22-Feb-08
Merrill Lynch: Home prices to fall by 25% through 2009.

Web Log - February, 2008

Merrill Lynch: Home prices to fall by 25% through 2009.

According to a statement read on CNBC on Friday morning, Merrill Lynch is downgrading mortgage-finance firms Fannie Mae and Freddie Mac, because "The weakening macro trends add legitimacy to fears that these two companies are going to witness additional financial stress because they're highly leveraged."

What's interesting about this is that the the WSJ report simply says that Merrill Lynch "is taking a bearish view," without mentioning the 25% figure. I guess they didn't want to frighten people.

So I slogged through the Merrill Lynch site to find the actual report. It compares the current housing downturn to the 1991 housing downturn. Here's what it says (HPD = housing price declines, CME = Chicago Mercantile Exchange):

Housing market overhang will fuel added pressure

"The ML Economics team forecasts that home prices will decline roughly 25% through 2009 nationally, above the current market expectations of about 20%. To put this in perspective, the peak-to-trough HPD in the Case-Shiller Composite Index was -8.3% in the early 1990ís. A handful of large markets experienced double digit declines during this period, including Los Angeles (-27%), San Diego (-17%), Boston (-17%), New York (-15%) and San Francisco (-12%), which we think could be bested as prices revert to historical support levels on HH income. Thus, the de-leveraging process could lead to a more protracted downturn for housing beyond current expectations.

The housing market remains oversupplied, with 9.6 months supply of new homes, the highest level since January 1991 and 9.6 months of existing homes, only slightly below the record high of 10.7 months established in October 2007. We think the combination of sharp price declines and a contraction in supply will be necessary to correct the supply-demand imbalance. CME composite real estate futures contracts currently reflect assumptions of a peak-to-trough decline of about 19%, with the trough expected in late 2008, suggesting significant additional downside from current expectations.

Accelerating HPD and tighter guidelines will likely intensify the deterioration in credit trends, with delinquencies and foreclosures, already at high levels, rising significantly for the foreseeable future, in our view. Reduced borrower equity from continued weakness in the housing market and stricter credit standards will inhibit the ability of marginal borrowers to escape from their onerous mortgage debt."

This really is devastating news to those who have been praying for a quick recovery, and it means that the "subprime virus" is going to continue spreading and affecting everything. It's also totally consistent with the recent recent remarks of Meredith Whitney, and with other analysts who have been predicting a mere 20% housing price decline.

One financial type came onto CNBC a few minutes later, and said, almost hysterically, "That's not going to happen."

Why? he was asked.

"Because that would mean that the total value of housing in the US would go from $20 trillion to $15 trillion, and nobody's going to let that happen." Perhaps he thinks that the Hand of God will reach down and reflate the bubble.

From the point of view of Generational Dynamics, the housing price decline should be quite a bit larger than 25%, as we enter a new 1930s style Great Depression. (22-Feb-08) Permanent Link
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