Let's skip the happy talk emanating from numerous quarters as a result of the recent stock market rally. Investors seem to think that because the Fed has stated that they're on the alert, and expect a Federal Funds rate cut at the September meeting, that we'll be able to ride out the recent turbulence in the market.
These people are standing on the beach waiting for the tidal wave to roll in.
I'll keep this brief and just extract the key forward-looking elements from the link above:
House prices are down 3.2% in the past year, the biggest decline ever recorded in the 20-year history of the Case-Shiller home price index. See full story. A year ago, home prices were rising at a 7.5% pace nationally.
While 20 years is not a really significant time window, consider that the last time a major real estate drop of this magnitude happened may have been the Great Depression, when assets of all types in this country suffered a catastrophic drop. It took a world war for the United States to grow its way out of it. Since the war, real estate asset prices have either grown roughy at the rate of inflation, or over the last 20 years or so, undergone a couple of major asset booms.
At the Federal Reserve meeting in Jackson Hole, Wyo., Robert Shiller, chief economist at MacroMarkets LLC, said 50% declines in home prices in some regions were entirely possible.
Particularly, I'd submit, California. Plenty of red-staters can mock California all they want, but as California goes, so goes the rest of the country:
Decreases in pending home sales were seen in all four major regions of the U.S., according to NAR. In July, pending sales fell 13.1% in the Midwest, 6.6% in the South, 20.8% in the West and 12.2% in the Northeast.
This set of numbers for July predates the turbulence in the credit markets that hit in August.
The subprime wave hasn't crested. As both Bonddad and myself have noted, the subprime wave crests in March-April of 2008 and doesn't really recede until over a year from now.
Frankly, I don't think the Fed can do a whole lot here. I don't think anyone can do much about this.
They're all hovering like a fly, waiting for the windshield on the freeway.