Interview with John M. From “Housing Doom”

As part of our continuing series, today we bring you an interview with John M. of Housing Doom, who despite not yet having achieved macroeconomic enlightenment, was one of the first bloggers to spot the housing bubble, and comment on the impossibility of getting “something for nothing.” Enjoy!

Mortgage Calculator: Given the title of your blog, is it fair to say that you believe the housing market hasn’t yet bottomed?

My timing skills are notoriously bad, but I’d say the bottom is about a year away.”Housing Doom” was actually the compelling domain name researched by our anonymous “Admin,” one of several invisible but essential volunteer support staffers without which the blog couldn’t possibly happen.

Mortgage Calculator: You reported recently that “strategic defaults” are on the rise, and comprise a larger portion of overall defaults. Do you think this suggests that even though home prices are stabilizing, foreclosures will continue to increase?

It’s possible.  This is tangled up in the story of “recourse mortgages” that was recently discussed by AEI’s invaluable banking analysts.  A while ago I produced a transcript of one of their seminars where they talked about this in depth.

I’d like to note that the first widely heard voice to “just walk away” was Jim Cramer in late July 2007.  Debi and Admin performed a valuable service by preserving the videos for posterity.

Mortgage Calculator: Given the complete absence of lending standards in FHA standards when making conventional loans, as well as the rising pool of underwater reverse mortgages, it seems this class of loans represents the next “subprime” fiasco. Do you concur?

Doom’s friends over at Implode-O-Meter are covering this topic in depth.  Today, I noticed a wire-service story claiming that subprime was back up to pre-crisis levels, but now almost entirely backed by the government.

Mortgage Calculator: You have reported diligently on the market for Mortgage Backed Securities (MBS), presumably because of its direct connection to mortgage rates. Given the current dynamics of this market, where do
you think rates are headed, considering also the Fed’s plan to slow (and eventually halt) purchases of MBS?

It’s much worse than you know. GSE Agency Debt actually represents the unconsolidated cost of the Vietnam War, and Fannie’s privatization in 1968 was likely the largest off-balance-sheet deal ever done.  During the 2003-07 bubble, the swelling agencies purchases by foreign central banks financed Afghanistan & Iraq, while post-conservatorship the GSEs’ books are being swelled to help pay for the stimulus.  The crack in the beam in this economic House of Usher is the convergence of the “effective guarantee” on agencies to the full-faith-and-credit guarantee on treasuries.  Should Agency Debt ever cease to be junior, OMB will have to double the size of America’s National Debt, with catastrophic consequences.  The fate of the US housing market is trivial in comparison.

Mortgage Calculator: Your posting on “How the Relentless Promotion of Positive Thinking has Undermined America” was interesting, especially since it seems that despite the housing crisis, this “positive thinking” is making a
comeback. That being said, what do you think it will take for people to accept the notion that home prices don’t appreciate much faster than the rate of inflation, over a long-term period of time?

Positive Thinking has been a root value of America since long before that famous remark about happiness posted on 7/4 1776, and its philosophical promotion goes back at least to Emerson.  In a sense, I’ve been studying this issue for more than 5 decades.  That’s somewhat separate from house prices, though.  People will wake up on “house prices always go up” when the government stops propping them up…

Mortgage Calculator: On a related note, do you generally believe that renting is more economical (and more sensible!) than buying, even when the ratio of rent to home prices is more in line with long-term averages?

Local! Local! Local!  I’ve been perfectly happy owning properties on the same street for over 30 years.  Everyone’s situation is different.

Mortgage Calculator: How would you reconcile government and seller incentives and low interest rates with the possibility that home prices could fall further, when advising someone thinking about buying their first home? Would you advise them to buy, wait for a while, or wait forever?

*** WE ARE NOT FINANCIAL ADVISORS *** Please professionally consult an expert on that one.  It is a fact of life that nearly every trained expert in these areas is constrained by professional ethics, etc. from commenting in a public forum, which is why interested amateurs like us have been trying to fill the gap the last few years.  However, our participation only goes as far as sharing our common-sense thoughts and, hopefully, posting links to the works of wiser heads than ours.  And with that thought, I’ll turn it over to your readers and their own thoughts and researches.  May they generously share their findings with you like Doom’s many readers have with us.