Tuesday, October 16, 2007

No Kidding, Secretary Paulson

Secretary Paulson's remarks from the WSJ:

The ongoing housing correction is not ending as quickly as it might have appeared late last year.

And it now looks like it will continue to adversely impact our economy, our capital markets, and many homeowners for some time yet. Even so, I believe we have a healthy, diversified economy that will continue to grow.


OK -- a little self back-patting right now. I've been talking about housing being "nowhere near a bottom" for about a year now. Why, you may ask? Simple: the absolute number of existing homes for sale on the market is still at incredibly high levels. Excess supply = lower price and lack of demand. Secondly, there is the mortgage implosion that started at the end of last year. Then we had a second wave this summer. And there are still a ton of bad debts out there in the system right now. And things are going so swimmingly well in the mortgage market right now that the major banks are thinking of coughing up $80-$100 billion for a liquidity fund.

Of the approximately 50 million outstanding mortgages in the U.S. today, approximately 10 million are subprime loans. Many have cited the statistic that 2 million of those subprime mortgages will reset to higher rates in the next 18 months. That statistic is true, relevant, and troubling, but it is not the complete picture of the risk going forward. Many of those borrowers will be able to afford their new mortgage payment or they will be able to refinance into another more affordable mortgage. Yet, the problem today is not limited to subprime mortgages as the number of homeowners having trouble making payments on prime mortgages is also increasing. And finally, the wide geographic variation in home price trends adds to the complexity of sizing this problem with any certainty.


You'll excuse me if I find this phrase troubling "happy talk": Many of those borrowers will be able to afford their new mortgage payment or they will be able to refinance into another more affordable mortgage. The Secretary is well-aware of the credit crunch going on right now -- which has been going on since the end of last year and which the recent news indicates is nowhere near over.

Now that I'm done ranting, Paulsen has a very unenviable job. He has to bolster confidence in the economy. That's part of his job description. But at the same time, at some point that issue becomes less important than telling people that there are some serious problems out there.