The Only U.S. Housing Market Investment (SRS)

Try and find one analyst, reporter, blogger, or economist that has a positive view on the U.S. Housing Market.  When all signs point to one conclusion, even the housing optimists have to take into consideration the general consensus, which leads me to the ProShares UltraShort Real Estate (ETF) (NYSE:SRS).

There was a brief moment in time last month when I thought the worst was behind us, but you can't argue with the negative U.S. Housing data that keeps pouring in on a weekly if not daily basis. Just do a Google News Search on 'Housing Market' and read a few headlines, its not much fun.

It's bad, really bad.  

I want the housing crisis to end, we all do, I hate watching my property value decline by the hour, checking it on Zillow.com.  But we all have to be reasonable and if that trend is going to continue, it serves at a respectable point to make an investment on a bearish trend that appears to be unstoppable for the next year or two.

As Todd Sullivan pointed out yesterday: Still in Denial About Housing?

How can it not get worse. We still have almost a trillion dollars of Alt-A loan coming due in 2009-2010. These folks are already 20% or more underwater in their loan and could not afford the normal payments to begin with. Once the teaser rate is gone and the loans reset, they are done.

Other than a rescue plan that dwarfs anything already done, things in housing can't do anything but get worse. One does have to wonder why Centex (CTX) and Toll Brothers (TOL) are still building new homes

Economists Kenneth Rogoff of Harvard and Carmen Reinhart of the University of Maryland have a particularly grim view of the economic outlook.

As the Wall Street Journal points out, Rogoff and Reinhard's bottom line:

If history is any guide, the housing market might not bottom until 2010, a stock market rebound isn’t in sight, the unemployment rate could exceed 11% and government debt is about to soar.

Rogoff and Reinhard's put together a paper on the subject that is refreshing because it’s straightforward — it isn’t overloaded with Greek formulas and questionable regressions. Instead, they look at what happened to 22 economies ranging from Indonesia in 1997 to the U.S. in 1929 after a major crisis. (Most of the countries are from the past quarter century, though strangely, they lump in Norway from 1899.)

They find that unemployment rises by 7 percentage points on average after a severe financial crisis and doesn’t peak until four years after the crisis. The jobless right bottomed at 4.4% last year. If history is a guide, it could rise above 11% by 2011.

They find that housing downturns last six years — meaning a recovery is still about three years away. Moreover, stock-price declines last three and a half years and total 55%. That would put the Dow Jones Industrial Average below 6500 before this is done. Moreover, government debt reaches 86% of gross domestic product –- or $12 trillion. This last data point on government debt is particularly sobering. Despite all of the hope that policy makers are putting on fiscal stimulus, it’s not like it hasn’t been tried before.

Of course, this paper comes with all kinds of caveats. The U.S. is different in many ways from the emerging markets that suffered from crises in the past decade. For one, the U.S. borrows in its own currency, so it is not likely to suffer the kind of currency shock that they faced. And policy makers have learned from actions that others have taken in the past. The Fed, for instance, has been much more aggressive about attacking this problem than the central bank was in the Great Depression.

But as the professors argue, “one would be wise not to push too far the conceit that we are smarter than our predecessors.” — Jon Hilsenrath

If you missed this 60 Minutes story featuring Whitney Tilson last month, then you have to watch it, even if you already did, watch it again, just for that graph they throw in there with the timing of the Alt-A and Option ARMs hitting the market in 2010 and beyond, its brutal: