Says Stockman:

This is ultimately, at the end of the day, a bailout for JP Morgan and Wells Fargo. They’re the big writers of second mortgages and home equity lines. Those – and there’s two or three or four hundred billion dollars in the top three or four banks – are in great jeopardy in the case of of homeowners who have mortgages, that are primary mortgages, that are way under water on primary mortgages and are likely to default or throw in the keys at some point down the road.

Good point…

I don’t know about you, but I can’t tell the politics from the statistics when trying to make sense of  last Friday’s monthly jobs report and, at this point, I don’t care anymore.

As for the housing market, none other than Bill McBride at the wildly popular Calculated Risk blog weighed in on the subject yesterday declaring The Housing Bottom Is Here, a view that you find out at the end of the article isn’t quite as strongly held as you might think from just reading the title.

Bill notes there are two housing markets – new home construction and existing home sales – and, while the former has clearly made a bottom, the latter is likely to do so next month, though he qualifies that prediction with words like “I think that house prices are close to a bottom” and there being “a reasonable chance that the bottom is here”.

Now, caveats notwithstanding, this is still a big deal since Calculated Risk isn’t just an ordinary offering out there in the blogosphere. This particular blog happened to be calling the US housing market a bubble back when few had an inkling of the trouble to come and, for that reason alone, his is an opinion worth listening to.

It was back in late-2004 and early-2005 that a few people in Southern California – one of the many “ground zeros” for the late, great housing bubble – started writing about the remarkable rise in home prices and how it could not be sustained.

Yours truly was one of them and I’ve learned much from Bill over the years.

I recall reading commentary by Bill and Mish over at Silicon Valley insider as they set about creating what are two of the most influential financial blogs in the country today, so, it’s not as if any of us are “Johnny-come-latelies”.

Another of the original housing bubble bloggers was Rich Toscano at Piggington.com and, as long as we’ve begun to gather data points, it’s worth noting that Rich is in the process of buying a home in the San Diego area, something he characterized as Jumping the Shark.

Recall that San Diego was ahead of the crowd, housing-bubble-wise, over last decade and, today, it’s certainly no Las Vegas, where home prices just keep falling month after month, year after year.

According to the latest data from Case-Shiller, San Diego home prices are four or five percent above their recession lows in early 2009, and, when factoring in the Federal Reserve’s freakishly low interest rates and the reality that, to most people, it’s not the house price, but the monthly payment that is most important, a home purchased there at this time would seem to make good sense.

Of course, my wife and I purchased a home here in Montana just over a year ago, so, actions normally speaking louder than words, you have a pretty good idea about how we feel about property prices in this part of the country.

And if you go a few hundred miles or so east of here to where the shale energy boom is underway in North Dakota, you’d think it’s 2005 again.

In the Bay area, there’s Patrick Killelea of Patrick.net fame who has yet to fall in line with some of the other capitulating 2005-era housing bubble bloggers and, given his proximity to what appears to be another inflating Silicon Valley tech bubble, I wouldn’t expect him to do so anytime soon.

It’s funny to think back to about 12 years ago when I was working in Southern California and was visited by co-workers from Northern California who told tall tales of run-of-the-mill 1,000 square foot homes selling for a half million dollars.

Little did we know that large portions of the rest of the country would experience that same phenomenon just a few years later. As it turns out, Northern California seems to get a new bubble every five years or so, something that makes it particularly hard to call a housing market bottom there due to the spill-over effect of these non-housing bubble bubbles.

I don’t know – conditions are different depending on where you are and, in most cases, national home price trends have little meaning for an individual contemplating a home purchase.

Surely, with a couple years of home price history now in the books, housing bubble spotter Dean Baker was right to buy a house near Washington D.C. a few years back since the market there seemed to make a bottom just as the freshly printed and borrowed money started gushing from the nation’s capital.

One thing is certain, I’d much rather be writing about whether the housing market has hit bottom than whether the labor market has turned a corner as the November elections draw nearer because that discussion has become way too toxic for my tastes.

On the one hand, you have to feel for homeowners who have continued to make their mortgage payments despite the declining value of their home, but can’t refinance at today’s freakishly low rates. But, on the other hand, you have to scratch your head about the government intervening to create new loans for more than theses homes are worth.

Those worrying about the latter shouldn’t be too concerned, however, as not much is likely to happen in Congress during this increasingly heated election year.

As shown to the right using the mid-1990s Los Angeles housing market as an example of what might happen to national home prices in the years ahead, housing market bottoms are long drawn out affairs.

We happened to be living in Southern California at the time and had the good fortune to buy a house there in 1995, though, we were just looking for a place to live, not thinking of it as an investment.

I remember the price actually declined by another five percent or so in the year after we bought it and it wasn’t until five or six years later that we began to hear about rising home prices, a bit surprised to learn that the value of our place had increased by  $100,000 or more.

But, for the first few years, you were better off not even thinking about home values.

Using the broad Los Angeles price index as an example, even if you had bought at the absolute bottom in February 1996, you’d have had less than a one percent gain a year later.

The index spent a full four years within five percent of the February 1996 low!

Anyone thinking that a housing market bottom in 2012 means that home prices will be higher next year or the year after that will probably be disappointed.

Moreover, given the size of the recent boom and the likelihood of the bust being of similar magnitude, I wouldn’t be surprised if home prices don’t post a substantive advance for the rest of the decade.

Note that the November index values for Detroit, Atlanta, Las Vegas, and Cleveland wouldn’t show  up on the chart above as they have all fallen below the 100 mark, the latter three areas having done so over the last year or so while Detroit made the plunge back in early-2008, now sitting at a stunning 70.66 after falling another 2.4 percent.

Interestingly, after hosting one of the more spectacular bubbles last decade, Miami’s housing market is now within a point of the 20-city index.

On a seasonally adjusted basis, home prices were down only 0.7 percent with three cities seeing gains and David M. Blitzer, Chairman of the Index Committee at S&P Indices, was not hopeful when he noted the following:

Despite continued low interest rates and better real GDP growth in the fourth quarter, home prices continue to fall …  The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand.

It looks like policy makers in Washington might want to accelerate plans for the next attempt at rescuing the housing market, that is, before prices fall too much further.

Based on what I’ve been reading about an extension of the Fed’s freakishly low interest rate guarantee, we’re probably looking at the situation to right.

This is not going to make savers happy, but, if you like to borrow money, you’re likely to get lower rates for a while longer.

Come to think of it, those low-rate credit card offers could be arriving in our mailboxes for the rest of the decade.

Anyway, I’m hoping that someone asks Bernanke about the 2006 FOMC meeting transcripts and how the nation’s brightest economists could have been guffawing all year long when they maybe should have been looking at the rapidly inflating housing bubble that would burst a year or two later.

See The Fed’s Housing Bubble Laughter from the other day for the particulars about this.

After the financial crisis of 2008, the Queen of England asked economists, “Why did no one see the credit crunch coming?” Three years later, a group of Harvard under­graduate students walked out of introductory economics and wrote, “Today, we are walking out of your class, ­Economics 101, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, the University, and our greater society.”

What has happened? Rebellion from both above and below suggests that economists, who were recently at the core of power and social leadership in our society, are no longer trusted. Not long ago, the principal theories of economics appeared to be the secular religion of society. Today, economics is a discipline in disrepute.
…
First, economists should resist overstating what they actually know.
…
Second, economists have to recognize the shortcomings of high-powered mathematical models, which are not substitutes for vigilant observation. Nobel laureate Kenneth Arrow saw this danger years ago when he exclaimed, “The math takes on a life of its own because the mathematics pushed toward a tendency to prove theories of mathematical, rather than scientific, interest.”

Financial-market models, for instance, tend to be constructed with building blocks that assume stable and anchored expectations. But the long history of financial crises over the past 200 years belies that notion.

And that is why few economists saw the financial crisis coming – because they had their noses buried in models that failed to properly reflect what was happening in the real world.

I’ll never forget former Fed Chief Alan Greenspan’s remarks before Congress in 2004 or 2005 when he said there was virtually no stress in the banking system when, at the time, the real action was in the now-defunct  “shadow banking” system.

Apparently, Fed economists didn’t see the need to model that.

During normal times, economists’ models of how the world works seem to function reasonably well, but when a multi-decade orgy of money and credit creation came to a head a few years back, they were completely unaware of how badly some people were acting and how contagious this was.

The central bank meets this week and is expected to revamp how they communicate their thinking about monetary policy to the world, but, maybe they should spend more time figuring out how to better observe what’s going on in the world – looking beyond the charts, tables, and models that they had their noses buried in back in 2006, oblivious to the looming crisis in housing and credit markets.

It was all there to see for anyone willing to make a modest effort to get out into the real world and look around.

Wild-eyed buyers lined up for blocks to buy new condos and mortgage brokers with barely a high school education were raking in hundreds of thousands of dollars a year in commissions by peddling all kinds of “exotic” mortgages to borrowers who, in many cases, didn’t really understand what they were signing.

As we’ve come to find out, there was a good deal of fraud involved here by both lenders and borrowers as few seemed to care about how their individual actions might affect others in the fullness of time.

You might say that a good asset bubble brings out the psychopath in many of us.

Everyone was swept up in a financial bubble of the largest magnitude and, with only a few exceptions, economists were content to look at their models – models that ignored the “shadow banking system” and failed to reflect how a rapidly inflating asset bubble was affecting behavior – while predicting clear sailing ahead and patting each other on the back for having done such a good job.

The worst of the psychopaths were on Wall Street and those tales of excess came to light in the years that followed.

A pattern of disregard for others was at the core of what Wall Street did with mortgage backed securities and related derivatives, a point that became clear as internal emails were released in the years that followed. Investment banks made boatloads of money – both in selling securities and then betting against them – and this behavior became standard operating procedure for some firms.

One could argue that the 20-something mortgage brokers really didn’t understand the bigger picture, but that can’t be said for those peddling mortgage products on Wall Street.

They have no such excuse.

These were some of the nation’s best educated and brightest minds and they took their cues from top management, yet they exhibited all the characteristics of the fellow to the right – shallow emotions, the lack of a conscience, selfishness, and lack of remorse.

Meanwhile, economists, particularly those at the central bank, were blissfully unaware that anyone was doing anything wrong in the financial system and that it could all come tumbling down around them in just another year or two.

Former Fed Chief Alan Greenspan famously “found a flaw” in his theory of how the world works and that flaw was, basically, that the world is loaded with psychopaths, particularly on Wall Street.

But, psychopaths don’t exist within economists’ models.

In fact, I’m not sure if your run-of-the-mill economist acknowledges the existence of psychopaths in the financial system at all.

While trying not to paint with too broad a brush here (oh, what the hell), economists are an insular lot prone to group think and that much should be clear from the 2006 Fed transcripts. Some would say the dismal set is naive about how the world really works and not much interested in learning (in many cases a result of being scarred by bullying in grade school) and that they’ll continue to just keep trying to fit their square peg models into a world full of round holes.

Maybe they should pay a little bit more attention to what’s happening in the real world rather than relying on their models where only “rational actors” exist.

Either that, or they should get out of the business of stewarding the economy.

Here’s what Frederick Mishkin, a Federal Reserve Board governor who later played a starring role in the movie Inside Job, had to say about the risks from the housing market in that same December 2006 meeting:

“I don’t see any indications that we will have big spillovers to other sectors from weak housing and motor vehicles.

In that sense, there’s a slight concern about a little weakness, but the right word is I guess a ’smidgen,’ not a whole lot.“

At that last meeting of the year, the major concern expressed was about inflation. Several FOMC members expressed concern that the unemployment rate at the time (4.5%) was too low to keep inflation in check. They hoped that slower growth in 2007 would raise the unemployment rate to a level consistent with stable inflation. They certainly got their wish about a growth slowdown, although they did have to wait until 2008 to feel its full effect.

If you haven’t already clicked on the link to the Inside Job excerpt in the quoted text, you can do so here. I don’t know about you, but, I just never get tired of watching that clip.