Where we're going from here - the bullish argument

Here's my outline for where the market goes from here, why we won't see the -50% case that most of the bears are calling for. The stock market psychology has undergone a major shift in the past 4 weeks, with players looking to buy dips rather than sell rallies. I expect we'll hold these levels through earnings season, and we'll rally off of a 2nd set of non-armaggedon economic statistics. The... [more]

Here's my outline for where the market goes from here, why we won't see the -50% case that most of the bears are calling for. The stock market psychology has undergone a major shift in the past 4 weeks, with players looking to buy dips rather than sell rallies. I expect we'll hold these levels through earnings season, and we'll rally off of a 2nd set of non-armaggedon economic statistics. The easing of mk to mkt rules will free up the ability of the healthy banks to lend, which they will once we get past the release of the stress test results. This will have a salubrious effect on jumbo mtge rates, and I expect to see both a narrowing of the jumbo/conforming spread and a general increase in the availability of these loans - this will have a strong positive influence on the NYC housing market. Housing in the ground-zero areas of the bubble (California, AZ, Nevada and Florida), are clearly bottoming. With stabilization in these prices, the market will be able to reasonable value the toxic mortgages that got us into this mess to begin with. This confidence around valuations, and the various gov't programs that are providing liquidity to purchase these assets, will provide the funds to get these assets trading again. This will lead to banks, shareholders and employees feeling confident in bank's balance sheets, earnings ability, and bonus amounts. These factors (feelings that the worst is behind us, availability of credit, confidence in bonuses - albeit at much reduced levels from recent years), will trigger the shoppers to become buyers, with prices bottoming out in the summer around 12-15% below current levels (I define current levels not the ridiculous asks, but the actual prices where properties are trading now - which seems to be about 20-25% off peak prices). Those 12-15% declines, along with lower mtge rates, will bring after-tax out of pocket costs to own very close to, or slightly below, rents. As activity picks up, some of the sideline sellers will put their properties on the market, so inventory levels will not decline substantially. However, as the year goes on, and wall street continues to put out decent earnings, people will feel more confident of their bonuses and employment security in general, so while they may not become buyers, they will take properties off the market going into the late fall. By this time next year, as bonuses have been paid out, and employment losses have stopped, we'll start to see a move back up in prices. With the economy recovering, interest rates moving back up, rents stabilizing or starting to increase, and inventory declining, we'll see a spurt in home-buying activity as people rush to lock in low mtge rates. I expect to see prices move back up to where they are now, and we'll settle in to a more 'normal' market, with 2-5% increases over the next few years. For the record, I am using median prices on existing co-ops as my measuring stick, because I think that provides the broadest measure of Manhattan housing prices. Bears, fire away! [less]