Wednesday, September 2, 2009

'Drunken Sailors' Drive Housing Upturn

From today's "Breakfast with Dave" (David Rosenberg of Gluskin Sheff)


No wonder we are seeing a housing recovery, and it’s not just about the $8,000 tax credit for first-time buyers. How does the White House possibly allow this extra goodie to expire in November? The FHA is picking up where subprime lenders left off: the agency has seen its mortgage business jump 70% in the past year (!) and its market share in just three years has gone from 3.0% to 23% — it is allowing borrowers to finance up to 96.5% of homes priced all the way up to $729,750. Guess what, the default rate has risen to nearly 7% from 5½% a year ago. And, it is the taxpayer that is going to be picking up this tab ... again! So, the policy formula here is that after excessive leverage got us into this mess, is to encouraging even more debt and come to think of it, Cash-for-Clunkers did the exact same thing — enticing people who were probably quite content with their jalopy to take on more than $10 billion of new debt. Amazing. It’s like giving another bottle of scotch to the drunken sailor, but hey — we can’t have the economy weak going into a mid-term election year now, can we?

Is it any wonder that Dr. Rosenberg left Merrill Lynch after its acquisition by BofA to return to his native Canada?

This may be the mother of all low-quality economic recoveries. But you can't fool all the people all the time. Gold is jumping again today while the stock market wanders around and, in that strange pattern, a bid continues to strengthen Treasury prices. That this jump in gold is quiet rather than on the headlines is a positive for the prospects that it will continue.

Copyright (C) Long Lake LLC 2009

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