Where’s The Bottom?

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

With credit beginning to show signs of thawing and the Fed taking unprecedented action in helping to fight falling home prices and an unstoppable rise in foreclosures, experts and regular consumers alike have been looking (and hoping) for a bottom to show up somewhere along the line. So far, it doesn’t appear we’ve seen it. Housing permits and starts have continued to hit record lows, and they fell more than 15% last month. Starts haven’t done much better, either. If Housing permits are used as a short term indicator to gauge what will happen in the housing market in the near future, then things are looking pretty bad. As real estate analyst Mike Larson from the Weiss Group bluntly put it: “We still have too many homes for sale on the market.”

With that in mind, perhaps it’s important to get all of this unsold inventory out of the system before we think about building new ones. Over the past few years home ownership has increased exponentially, but it’s now evident that the level of ownership we once had was unsustainable, fueled by easy credit and exotic securities that made homes initially affordable to a consumer but soon ballooned into payments that could no longer be met. Such securities were then wrapped up, neatly packaged, and sold off to some poor bastard who didn’t know any better or who was making so much money that they didn’t care. Either way, the medicine may taste bad now, but will it be good for us eventually? I suppose that depends on what you consider an acceptable level of pain. The so-called de-leveraging of the markets and the collapse of easy credit has left some rather serious damage in it’s wake.

Many homeowners have been left by the wayside, forced to walk away from homes whose payments they can no longer afford. The rapid drop off in value of subprime mortgage securities rampaged through the financial industry and brought down behemoth companies, some of whom were forced to declare bankruptcy while others were eaten by competitors or taken back by the government. The list of companies who are cutting back their hiring or laying off employees to prepare for the future is growing by the day.

Through it all, consumers, the government, and the private sector are looking for two things: blame and solutions. Consumers, for their part, don’t want to see more people lose their homes, but are reluctant to commit taxpayer dollars in helping those who were so greedy that they bit off more than they could chew. The government, having succeeded so far in averting an all out collapse of the credit markets but unable to stop the rise in foreclosures and the economic downturn despite throwing in just about everything except the kitchen sink, is looking for alternative ways to stabilize the housing market and brace the economy. Yet the bottom may ultimately be decided by the markets, after we unwind years of splurging on credit and impossible mortgages, and it’s entirely possible that there’s nothing the government or the private sector can do to keep that from happening.