The Sure Double Dip in Housing

It’s not often we clearly see an iceberg through the windshield filled with our foggy future, but Meredith Whitney says she has seen one when she said, “The housing market surely will double dip.

When we hear such comments there are two things that we need to think about before we accept or reject what they have said.

The first is, “How credible is the source and what bias might they have?

The second is, “How did they come to their conclusion and do we agree or disagree with their method and findings?

In this case, Ms. Whitney’s resume is solid in both education and professional experience. She was named “Power Player of 2008” by CNBC beating out Warren Buffett, Ben Bernanke, and everyone else.

More importantly she runs her own firm which means her bias is to being correct as it will reflect directly on her. In other words, she might not be right, but she’s not trying to pull the wool over our eyes or mislead us in any way. If she says it, she believes it. (This is way less prevalent that you might like to think).

I also love the fact she married a professional wrestler. To me, this means that this is a strong person that makes her own decisions and isn’t looking for approval from outsiders. And she has what we all should be looking for: independent thoughts.

So if we don’t dismiss her comments out of hand, then we need to understand why she thinks this way and see if we agree.

Her reason is that the housing market has been supported by government programs, such as loan modifications and buying of Mortgage Backed Securities (MBS), and as those programs are coming to an end, a lot of supply will hit the market.

Basically, it’s more supply, less demand, prices fall, in this case, AGAIN.

Is that true? Well, yes the Fed has said quite clearly they are ending the mortgage support. If they do, will others pick up the slack? Probably not as there isn’t any profit in it for them to modify loans unless the government is forcing them or sponsoring it. So this is pretty clear analysis to me.

Does that sound logical and right? Yea, probably does.

But can we find hard evidence to confirm our suspicion that she’s really on to something?

In a previous post, I addressed wall of mortgage resets coming. That clearly showed evidence that a ton more mortgages are going to get hit with large resets, which will mean defaults for many or most of them. This will happen in the next year or two.

Read this again, then think consider that Ms. Whitney is an expert in this and has built her reputation on being right.

What can you learn from this?

It’s likely that there will be another housing downturn, plan accordingly.

More importantly, there are at minimum two things to think through when you hear someone make a prediction in such clear language.

One is who they are, why they are saying it (bias) and make a judgment call about their credibility.

Two is how did they come to their conclusion and can you find evidence to confirm or reject it. Evidence counts, hoping they are right or wrong doesn’t.

Remember: Hope is not an investment strategy.

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