"Pig in the Python"

Bullish Call on Housing Market

The lead story in the current issue of Barron's offers a provocative -- and surprisingly bullish -- take on what's ahead for the U.S. housing market ("Bottom's Up: This Real Estate Rout May be Short-Lived"; Barron's, July 14, 2008). According to the author, Jonathan Laing, the key statistic is "the ebbing tide of new delinquencies, [which] strongly hints that the worst may soon be over for the housing market . . . the pig, in other words, is well along the python's alimentary canal."

The article has two central premises: 1) that the truly frothy period of the erstwhile housing boom, when mere greed became fraud and lending practices were the most promiscuous, was confined to the last 18 months or so -- basically 2005-2006; and 2) that the foreclosures to date have already burned off much of the flotsam and jetsam of that period.

Brush Fire?

According to Laing, lending practices prior to then were much stronger. Fewer home borrowers had poor credit, put little or nothing down, and got aggressive mortgages laden with gimmicks and booby traps (teaser rates, re-setting payments, negative amortization). Of course, pre-2005 home buyers also had a much better entry point, price-wise, and therefore are presumably much further from the edge in a downturn, equity-wise.

To pick a different metaphor (mine), Laing basically argues that the housing and credit crisis is like a very hot and fast-moving brush fire. Now that it's consumed all the tinder -- the late stage, marginal buyers (and lenders) that fueled it -- it's about to burn itself out.

Let's hope he's right. It will depend on how combustible the rest of the landscape is (Fannie Mae? Freddie Mac?); how capable the firefighters are (Fed Chairman Ben Bernanke, Treasury Secretary Henry Paulson, et al); and whether the "weather" (broader economic conditions) fans the flames or helps put them out -- in other words, luck.

P.S.: Want yet another metaphor? In the words of Warren Buffett, Berkshire Hathaway's chairman (and Edina Realty's majority owner), "you don't know who's been swimming naked until the tide goes out."