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Five Things You Need to Know: Real Estate Isn't Dead, It's Just Different


That's actually a good thing. But it's a different good thing. And some of us will need some time to adjust to this new reality.


Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Real Estate Isn't Dead, It's Just Different

Two important things happened last night that are deeply interconnected. One, during an interview on CNN, Treasury Secretary Henry Paulson suggested U.S. lawmakers had better pass his rescue plan for Fannie Mae (FNM) and Freddie Mac (FRE) or, he intimated, face embarrassing and ultimately confidence shattering personal probes. Two, although indicating he didn't want to "speculate about a second stimulus package," he speculated that a second stimulus package would be necessary since the first one had very clearly stimulated consumer spending.

The reason these two things are deeply interconnected is very simple: Fannie Mae and Freddie Mac are going to be nationalized (and there is nothing anyone can do about it), but that act - as capitulatory as it may seem - is in and of itself not enough to resurrect the housing market or stave off the ongoing economic decline. Like a gnat hitting a buffalo, it's just not enough to move the thing.

The emergence from a state of denial back into reality is a brittle, almost blinding experience. You keep smacking yourself in the face expecting to wake up from waking up. Instead, what happens is you get a headache and your face stings red and prickly.

The dream is that we shake this thing off, pump some money into Fannie and Freddie, then wait it out like grifters on the lam for things to calm down. Once the heat is off things can get back to normal. Except they can't. Look, the grift has been exposed. The con is up.

Right now Freddie Mac is cooking up a way to raise $5.5 billion, probably by selling stock to the government. But record delinquencies are ongoing. The latest shell game being played by banks is to simply reclassify what constitutes a delinquentloan. That way the numbers look better and people don't notice as much how they remain inadequately capitalized for the real rate of defaults. Even so-called workout loans are defaulting at an unimaginable pace.

Right now there are entire segments of the housing market that have no mortgage provider servicing them. Creditors are demanding larger down payments. There is simply less credit available. And also less demand.

Viewed through the distorted lens of the first half of this decade, it is nearly impossible to imagine that this is the case. But the thing that must be grasped is that it's not that real estate isn't coming back... period... as some dangerous lunatics have exclaimed on TV and in print, it's that the weirdness of the real estate market of 2000-2005 isn't coming back. That's actually a good thing. But it's a different good thing. And some of us will need some time to adjust to this new reality.

2. "Bear Raid" Appears in Major Newspaper Headline for First Time in 75 Years

Below is a headline that I estimate has not run in a major newspaper in at least 75 years:

Richard Whitney, President of the New York Stock Exchange, was summoned to appear in Washington D.C. in 1932 to answer charges that "professional bears had had anything to do with the decline in market prices."

Bear Hunt - Time, April 25, 1932

3. A Nation of Savers We Are Not

By now everyone is probably aware of the low personal savings rate in this country. But a New York Times Sunday cover story yesterday - Given a Shovel, Americans Dig Deeper Into Debt - provided a little more perspective.

Today households save an average of $392 per year. That's the least since 1934.

Here is a link to a nice interactive chart from the NYT showing the personal savings rate and accumulated debt at various points throughout history.

4. Disposable Economics: The End of an Era

"I had a paradigm shift," Steve Pizzini, a financial analyst, told USA Today in a piece titled, Economy Forces Consumer Evolution. "I spent the money on a nice car. But to me, it's not worth it. I don't think I will go that route again." Indeed. It's just not worth it anymore. No one can really articulate very well why it doesn't much seem worth it anymore, but everyone feels it and is acting accordingly to this dramatic shift in social mood.

"We are looking at stuff that reminds me of the 1970s," Patricia Edwards of investment manager Wentworth Hauser and Violich told the USA Today in the same story. "Americans have seen a huge amount of their balance sheet evaporate. The effects will be more lingering."

Finally, Marian Salzman, chief marketing officer for public relations agency Porter Novelli, told the newspaper therer is a "Depression mentality" that's making people "rethink their optimism in the economy."

Those who misunderstand social mood wish we could just stop this "depression mentality" and make it go away, perhaps avoid the seeming self-fulfilling prophecy of doom. What they misunderstand is that social mood motivates social change, not the other way around.

5. Our Darkening Social Mood Gets the Perfect Icon: Batman, the Dark Night

Speaking of social mood...

As social mood continues to transition from peak optimism to an increasingly negative state, why wouldn't we see a new anti-hero smash all box office records? Batman: The Dark Night, Warner Brothers' (TWX) sequel to the first instalment in a revamped and darker Batman series sold $155.3 million in tickets opening weekend, a new record for the biggest three-day box office take.

The original Batman, as this darker version is billed, finds its origin at the very tail end of the Great Depression... naturally. The character first appeared in Detective Comics in May 1939.

On a side note, another popular film these days has its origins in the Great Depression. Kit Kittredge: American Girl is based on a book by Valerie Tripp: Meet Kit: An American Girl 1934.

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