Perspective on Housing's Decline. Impact on Consumer?

The decline in the housing market continues to be severe. Credit derivative instruments backed by mortgages, commonly called Structured Investment Vehicles (SIV) still can not be accurately priced. "Shoes" continue to drop. Today Fannie Mac took a $2B write-down and the stock took a 30% haircut. This is curious because Fannie Mac and Fannie Mae do not own sub-prime securities. I need to further investigate this to better understand the source of the write-downs by these government chartered entities.

I continue to believe that the biggest problem with the sub-prime slime is a lack of understanding of what exactly is contained in these SIV's. This exacerbates the illiquid nature of these instruments, making them impossible to sell and very difficult to "mark to market".

Nevertheless, at the end of the day, it seems likely that the mortgage mess and credit liquidity issues will work themselves out. But it is certainly going to take much longer than anyone thought it would.

Housing is 5% of the economy. A large number but not so large that it can bring down everything else. The Federal Reserve can not cut interest rates enough to save the housing sector. Its demise is inevitable. But the surge in exports facilitated by the falling dollar has almost exactly offset the decline in the housing sector as a percent of GDP. And Fed cuts can stimulate other parts of the economy such as capital investment.

The truth is that the losses taken in these large write-downs may or may not turn out to be ultimately realized. The financial firms are taking their best guess at what the losses may be, but the losses could end up being less once the credit markets truly get moving again and a more accurate "mark to market" can be ascertained. One "tell" that the losses may be overstated is the rapid growth in distress funds that are raising huge sums of capital to buy up these depressed securities. Money is also pouring into hedge funds, with similar implications.

78% of Americans think the economy is getting worse. Whether this is true or not is open to debate. But this is the consumer sentiment. As in another recent post I conveyed my view that jobs and income are more important to consumerism than sentiment. The bottom line is that if people have disposable income they spend it. Gallup data shows that there is not a strong correlation between consumer sentiment and spending.