There's this, too: As a shrewd investor observed to us, with inflation beginning to bite whatever the official protestations to the contrary, and Bernanke & Co. striving to keep a tight lid on yields, equities seem all the more attractive, if only because the alternatives are so darn uninviting.
Moreover, for the moment, at least, the economy, however gradually and spottily, is getting better. Corporate earnings in particular have been flourishing, although with the upswing in commodities and consumer income lagging, margin erosion can't be far behind. And despite the improved tone, as the accompanying chart offers graphic testimony, there's still one huge gapping hole in the economy: housing.
The chart is the handwork of Yale economist Robert Shiller, and it plots an index (fittingly called the Case-Shiller Index) that depicts the trends of house values over the past 120 years. It has been updated for Barry Ritholtz's Big Picture blog by Steve Barry. So much for its provenance. More to the point, it provides a beautiful snapshot of the biggest housing bubble in history, which peaked in July 2008 and has been deflating at a murderous rate ever since.
And despite the occasional glint of better tidings, the outlook remains unwholesomely grim and prices continue their mournful descent. Not the least of the reasons for housing's dour prospects is that so many home owners are underwater. Just in case you're lucky enough not to have shared that sorry condition, "underwater" in this context simply means the value of their homes is less than they paid for them, and not infrequently these days a whole lot less.
The estimate by CoreLogic is that 11.1 million people with mortgages, or 23% of the total, are in that decidedly uncomfortable position. Zillow, a Seattle-based service, reckons that 27% may be closer to the mark.
Nor do such numbers, disquieting as they are, tell the whole sad story. For as Mark Hanson, a savvy professional observer of the real-estate scene points out, they fail to include what he calls effective negative equity. Effective negative equity, he explains, begins at the point at which the homeowner can't sell his house and buy another because he has to pay a real-estate broker 6% of the sale proceeds and then plunk down 10%-20%, depending on the type of loan needed.
There are in the neighborhood of 3.5 million previously owned homes on the market. And there are something approaching two million homes that are in foreclosure or whose owners have fallen behind in mortgage payments. The bad news is that the banks are back in the foreclosure mode after a relatively immobile interlude, and that means, by one knowledgeable estimate, that the shadow inventory of homes destined to hit the market may be as high as eight million.
The pause in bank and servicer foreclosures was inspired by a regulatory crackdown and lawsuits that followed revelations of sloppy bookkeeping, robot-signing of foreclosure notices and errant, inadequately trained personnel, those collective serious flaws that came to be known as Foreclosuregate.
As Mark Hanson points out, banks and servicers are back with a vengeance and cutting asking prices sharply "to blow out distressed inventory." Other price depressants he cites include unfavorable demographics, soaring energy costs and a broken mortgage market.
How low can home prices fall? The consensus is somewhere between 5% and 10%. But as the chart suggests, that may prove conservative given all that room on the downside before the bubble has completely burst.
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