We have arrived at critical juncture in the ongoing financial crisis. Have the government actions of the last year successfully spurred the animal spirits of Americans, resulting in a self-sustaining recovery?

The Obama administration and most of the mainstream media would answer yes. GDP has been positive for the last four quarters. Consumer spending has increased in five consecutive months. Corporate profits have been relatively strong. The country has stopped losing jobs. The missing piece has been a housing recovery.

No need to worry. Famous or infamous (depending on your point of view) $15 billion man John Paulson has assured the world that house prices will rise 8% to 10% in 2011. His basis for this forecast is that California prices have rebounded 8% to 10% in the last year, and this recovery will spread to the rest of the nation.

Maybe Paulson has teamed up with his buddies at Goldman Sachs to develop a product that guarantees a housing recovery. I tend to not believe anything that comes out of the mouth of anyone associated with Wall Street, but let’s assess the facts and see if they point to an impressive housing recovery in 2011.

The man who has been right on housing for the last ten years has been Yale Professor Robert Shiller. His analysis of U.S. housing prices from 1890 until present, which he first published in 2005, unequivocally proved that we were in the midst of the greatest housing bubble in history. At the same time, David Lereah, the chief economist (shill) for the National Association of Realtors, was pronouncing it was the best time to buy. He published his masterpiece of market tops, Are You Missing the Real Estate Boom? at the 2005 housing peak. He called a bottom in January 2007, and the NAR has continued to tell Americans it is the best time to buy for the last five years as prices have dropped 36% nationally.

Dr. Shiller continues to be the voice of reason when it comes to the housing market. He is doubtful that the recent “recovery” will continue:

    “Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast. Momentum may be on the forecasts’ side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue.”

Whom do you believe? The paid mouthpiece for the National Association of Realtors, the Wall Street shill, or an impartial economics professor who has done rigorous analysis using 120 years of housing data?

Government Manipulation and Failure

The Obama administration has taken unprecedented actions using taxpayer money to keep housing from reaching its natural equilibrium level. The Keynesians who inhabit the White House decided that a first-time home buyer credit of $8,000 would boost home sales and have a multiplier effect by spurring home furnishing sales. It is obvious these people have not spent much time in the real world. No one decides to purchase a home because of a tax credit. They may accelerate a home purchase in order to take advantage of free money, but an incremental purchase will not be generated.

The tax credit was set to expire in November 2009, and the bean counters at CBO projected it would cost taxpayers $8 billion. The NAR estimated that 1.9 million first-time home buyers took advantage of the government handout, resulting in 350,000 additional sales over that time frame. Therefore, the total cost to the taxpayer was $15 billion, and each additional home sale cost you $43,000. Dean Baker of the Center for Economic and Policy Research called the credit “a questionable redistributive policy” from renters to home buyers, but said that he used it himself when he bought a house. He wrote on his blog: “Thank you very much, suckers!”

Congress deemed a 100% over-budget program that dispensed $8,000 to people for doing something they were going to do anyway such a raging success, they extended it and expanded it to all home sales. The new and improved program extended the $8,000 credit for first-time home buyers and added a $6,500 credit for any home purchase. It was restricted to “poor” folks who made less than $225,000. The credits run out on April 30, 2010. The mainstream media was positively ecstatic over the home sales “surge” in March. They will be astonished again next month as these handouts have pushed forward demand from later in the year.

Economists have estimated phase two of this program will cost taxpayers $100,000 for each additional home sold. The following chart unmistakably shows a surge in home sales from the government giveaways and then a plunge immediately thereafter.     

The Home Affordable Modification Program (HAMP) makes the home tax credit program look like an astonishing success. The Obamanistas took $75 billion of taxpayer funds and have been distributing it to millions of reckless homeowners in order to keep them in homes they can’t afford. The administration sold this plan as keeping 4 million people in their homes. A veteran in the mortgage industry recently noted that a HAMP application he reviewed showed that these poor people needed a reduction in their $1,880 mortgage payment while incurring the following expenses in the prior month:

  • Visits to the tanning salon
  • Visits to the nail spa
  • Purchases at a gourmet produce market
  • Various liquor store purchases
  • A DirecTV bill that must involve some serious premium programming or pay-per-view events
  • And over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Behavior, Sears, Staples, and Footlocker.

The conception behind this plan was that these homeowners were just down on their luck and needed a little help. The facts have proven otherwise. Despite threats and tremendous pressure from the administration on the banks, the program has been a miserable failure. After one year, only 228,000 permanent loan modifications have been completed. Modifications made by banks in 2008 have re-defaulted at a rate of 60%. If this program results in 500,000 modifications, the cost to taxpayers per modification will be $150,000.   

The truth is that millions of irrationally exuberant people bought houses they couldn’t afford, using “creative” mortgage products, and then borrowed against the inflated value of these houses so they could live the good life. They rolled craps and now need to accept the consequences. These worthless government programs have cost taxpayers $100 billion and just postponed the ultimate bottom for housing.  

Law of Supply and Demand

The Federal Reserve also did their part in the last year. They printed enough dollars to load their balance sheet with $1.25 trillion of mortgage-backed securities of highly questionable value. These purchases, which artificially reduced mortgage rates by at least 0.5%, concluded on March 31, 2010. Mortgage rates have already risen 0.25% in three weeks.       

Considering the pile of tax dollars thrown at the housing market in the last year by our leaders, you would think new home sales would be above the level sold in 1963. New home sales in 1963 reached 600,000 when the U.S. population was 189 million. Today, new home sales are trending at 400,000 and the population is 310 million. At the peak in 2005, the total of existing and new home sales reached 9.2 million, with inventory for sale of 2.8 million homes. Total home sales are now trending at 5.4 million, a 40% decrease, while inventory for sale is 3.7 million, a 30% increase.

According to the Census Bureau, the real median price of homes in the U.S. peaked at $261,000 in the first quarter of 2006. The median price bottomed at $168,000 in the first quarter of 2009, a 36% drop. After throwing $100 billion at the problem and artificially depressing mortgage rates, the government has achieved an increase in prices to $173,000, a 3% surge. Based on this data, the market appears to have stabilized. An eight-month supply of inventory with prices up slightly sounds like a fledgling recovery. Nothing could be farther from the truth.

Foreclose This House

Believers in the fledgling recovery are ignoring some key facts. There are already 11 million homeowners underwater on their mortgages. As of March, banks had an inventory of about 1.1 million foreclosed homes, up 20% from a year earlier. Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process. This “shadow inventory” was up 30% from a year earlier.

At the current rate of sales, it would take banks nine years to clear this inventory. They are likely to increase the rate of sales as inventory continues to pile up. This will compel prices to go lower. Prices would fall even if a tsunami of Option ARM and Alt-A resets weren’t hurtling down the track – but they are. Beginning in June, a surge in resets will begin and not subside until late 2012. These liar loans were riddled with fraud, and the vast majority of these mortgagees will default after the reset. A surge in foreclosures is just over the horizon.

 Reversion to the mean cannot be circumvented. It can be delayed, but it will not be denied. The combination of expiring tax credits, the failure of HAMP, the conclusion of the Fed buying dodgy MBS, the growing shadow inventory of foreclosures, Option ARM and Alt-A resets, and rising interest rates will result in a further fall in home prices of at least 20% in the next two years. Mr. John Paulson will be wrong this time. Maybe we could even arrange a bet. If I’m right, I get to take my clan to one of his 19 mansions for a weekend of fun among the ruling elite. If he is right, he gets to spend a weekend at my underwater condo in Wildwood among the real people.

This article was originally published in the May edition of  The Casey Report. To get 3 free months of this fantastic report click here.

43 thoughts on “JOHN PAULSON WILL BE WRONG THIS TIME (Featured Article)”

  1. Things are also looking bad in Canada. Don’t believe that Canada has escaped the

  2. I just read an article entitled “20 Areas with the Highest Foreclosure Rates.” Ok, this is NOT an article with the meticulous analysis of Quinn or Dr. Robert Shiller, but here goes.

    Florida leads the pack with 9 metro areas on the list. California has 8, and the other 3 are in Arizona and Nevada.

    These are not insignificant metro areas on the list: Sacramento, Riverside, Fresno, Phoenix, Las Vegas, Ft. Myers, Orlando and so on. Tens of millions of people will continue to experience significant decreases in their home values. I don’t get Paulson’s statement of a rebound of 8-10% in home prices in the past year. That seems virtually impossible.

  3. Oops.

    I said, ” I don’t get Paulson’s statement of a rebound of 8-10% in home prices in the past year.”

    I meant, “I don’t get Paulson’s statement of a rebound of 8-10% in home prices IN CALIFORNIA in the past year.”

  4. Florida, California, Nevada, Arizona. These are states with some of highest populations of illegal immigrants. Highest percentages of mexicans and central and south Americans. It seems to me there’s another story behind the government programs for “first time homebuyers.” Who are they?

    Were the government’s taxpayer-funded first time homebuyers programs targeted to benefit illegal aliens–at US taxpayers expense?

    Seriously I think many taxpayers would like to know. There must be statistics out there somewhere which shows the demographic groups the benefited most.

    Also statistics and graphs of the demographic and income groups (legal or illegal) that make up most of the foreclosures would show who is benefiting most from the modification programs.

    This administration is so pro illega alien and anti US citizen I am concerned there is discrimination going on AGAINST US citizens in favor of illegals.

  5. Strader

    Excellent questions. I don’t think anyone has the answers.

    Illegal immigrants for the most part have bogus papers, thanks in part to the corrupt Mexican consulates along the border with the U.S. There is NO QUESTION that the government of Mexico assists illegals to stay in the U.S. Why? The 3rd largest source of income in Mexico is money sent home by illegals, just after oil and tourist revenues.

    Most illegal immigrants don’t purchase houses in the U.S. until they have been here for quite a number of years. For those that can afford to do so, I’m sure they’ve jumped in on the first time home buyers deals offered by the USG. But I can offer no assurances that is the case.

  6. Shiller is an ok source because he’s an insider, not specially smart. Run a Google on “Shilling for a New World Order” to get the story on him. No wonder all his predictions work. He has the game plan.

  7. As a 20 year real estate veteran, I’ve never seen a market more on the edge than it is right now. Being in SE wisconsin, the only property selling are second homes to the wealthy from Chicago. There is literally no year around local market to speak of. When these resets hit, it will be lights out. Everyone in the business fully expect a second deeper downturn to come over the next 6-18 months. People underwater are short selling or walking away entirely. The banks can’t keep up. This my friends is going to be a painful next couple of years.

  8. This talk of a real estate recovery is about as juvenile as the prospect of increased corporate eranings growth and 3%-plus US GDP growth. (Oh, and banks have beaten earnings estimates too! – unless you discount their asset values and loan losses.)

    I listened to a radio show about real estate over the weekend, and even the eager-beaver, I-want-to-make-you-rich host said that home prices will drop for another 2 years.

    Everyone expects prices to keep falling. The only ones who are buying are those who think that prices won’t fall any more than about 20% from here. I think, however, based upon wide ranging sources of info, that price deflation will go on for much longer and much more deeply than almost anyone can believe today (e.g., like more than 90% lower than where we are over the next 7 or 8 years.) That, or global financial implosion due to the competitive hyper inflation of the major currencies, which would make RE prices “higher” – so choose your poison.

    There are massive, truly unprecedented amounts of debt and debt-linked derivatives all over the world that will/must be reconciled. Remember, Robert Rubin and Hank Paulson admitted that even they didn’t realize how large and complex the problems were back in ‘07, and now the true scale is still emerging. What the FED and the Fed. gov. has done and is doing is almost a joke compared to what they’re up against.

    Hunker down, learn to be self-sufficient, simplify, reduce your fixed costs of living, and try to enjoy the show.

  9. Great article with facts that confirm most of our suspicions. For me & my family, it’s gold/silver is too high to invest in for the depression coming soon (or Revolution or Civil War).

    My recommendation is to invest in canned food. Their expiration date is now 8/2013 so you can buy a can of beans for $1 today & eat it in 3 yrs. By then (2013) inflation will have risen 40%+ so you saved .40 cents. Your family has food to eat so you don’t have to worry & you don’t have to pay capital gains to the federal govt. It’s called taking care of your family & yourself during hard times.

  10. This on top of such a wise and intelligent great leader and his congress will be the demise of theUSA and give rise to the USSA. The southwest will escape the USSA to be returned to Mexico as witnessed by the current actions of our great leadership. The drug gangs already have control over small parts of what is currently US soil. Half the billboards in my little town are in spanish. Let us split the country now. Texas, Okalhoma, Ark, we can fix Mississippi. Allow folks to move then close the borders and build a true republic. Have a greast day!!!

  11. Things look ugly, they are ugly. However, I can say some markets have bottomed. Sacramento for instance overshot to the downside in 2008. some individual houses since have doubled in price. I watched some indivdual homes being sold at $50k now going for 100K

    It’s hard to look at statistics and tell if things are going up or down. Prcies can look like they are going up simply if more expensive homes begin to sell in a particular area. Hard to say with statistics.

  12. Canned Food?
    Survival blogs also talk of how to fix trucks/engine etc. If
    a ‘crisis” requires one to make shoes from tires, fix own engines, etc.,
    prob. there will be other serious problems, lack of medical care, etc.
    Still, some emerg. prep. supplies make sense now if ‘cheap’. If fuel is costly/scarce,
    how can ‘relocation’ help anyone (they’ll move to a new set of problems>)?

  13. Just because some nit wit walks in and pays $100K for a property that was selling for $50K only proves that sometimes “Education” is an expensive proposition, it does not establish a trend. As far as California housing prices go, they will be going a lot lower without the Shiller Index projection. People are leaving California in droves and coming here to the midwest, where white people live and to live the good life. Soon California will be just another Mexican/Chinese State controlled by drug gangs. Good people do not choose to live in a dangerous environment. The people now residing in California are not Ameri-cans they are Ameri-can’ts. California is a poster child for what is wrong with America.

  14. The major adjustments in the USA are that: the cost of living will slowly but surely skyrocket, the middle class will be decimated, and many Americans will lose control of their jobs or incomes to foreigners) The Government has acted to support home prices, although real wages earned by Americans have actually declined iver recent years. As a result, Americans are really struggling to make their mortgage payments and foreclosures are going up.

    So bingo … the Government is certainly sticking to the BIG PLAN of making things more unaffordable.

  15. All of this – past, present and future, is predicated on the employment picture. And the employment picture is predicated on – what?

    – Housing?

    – Internet 2.0?

    – Intel’s light-speed chips?

    – Solar power/alternative energy?

    You know the answer…

    And that will be the next shoe to drop in this whole farce. Where are the jobs going to come from that will underpin any type of meaningful, lasting recovery?

    Well, I’ll tell you where, but most won’t like it and we’re not likely to get real with it until much further pain and lower standards of living become the norm – but we’ll get there. Of that, I am confident.

    – Shoes
    – Socks
    – Shirts
    – Belts
    – Pants

    Where are they all made now?


    – Stuff for your kitchen
    – Stuff for your bedroom
    – Stuff for around the house
    – Utility items
    – Tools
    – Plastic mfg’d. goods.

    Where are they all made now, and why?

    Those are just a few of the questions that you will see popping up as people begin to look at each other and the ‘country of origin’ labels on the goods they purchase, only one paycheck away from their job being outsourced.

    Get the Government off our backs and the HELL OUT of business, so that small businesses can begin to make stuff here again, competitively – material costs, Regulation costs and Labor costs too.

  16. We haven’t seen anything yet. The trouble ahead is going to make the war of northern aggression look like a Springtime Sunday Social. You folks better start passing out Atlas Shrugged and Starving The Monkeys by the truckload!

  17. Jimmy Q would you care to name two Keynesian economists in Obama’s Team, because I do have problems with discerning them??

    If Keynes was to see what is being made in his name, I reckon, he’d vomit…

  18. A great article, except:

    “A veteran in the mortgage industry recently noted that a HAMP application he reviewed showed that these poor people needed a reduction in their $1,880 mortgage payment while incurring the following expenses in the prior month…The conception behind this plan was that these homeowners were just down on their luck and needed a little help. The facts have proven otherwise.”

    “A HAMP application that he reviewed”??? “A”?!?!? That’s a sample size of ONE, Jim. Granted, the Stat component of most Nova MBA programs is stunted, but you should have at least learned enough to know what a boatload of crap your assertion was.

    This seems to parallel Cato et al’s desire to punish the 90% of worthy UE benefit recipients for the lazy opportunism of the other 10%.

    There’s classical liberalism, and then there’s just being an a**hole. I tore up my Cato and Mises memberships when I realized the distinction had become almost meaningless over the last 10 or so years.

    1. enduromanrapido

      The facts are that the vast majority of morons didn’t qualify for HAMP and those that have received modifications have redefaulted at a 75% rate. I think that example is dead on.

  19. Quinn is a certified nut case…been singing the blues for years….don’t you think the market has priced all this in… keeps going up…Quinn is still driving a 10 yr old car!
    Morons unite!

  20. I’m a housing bear for all the above coupled w/ rising credit standards, falling wages, blah blah.

    HOWEVER, the impact of slowing (not reversing) this situation by taking mortgage rates to all time lows must be thrown into the mix. It doesn’t resolve the recasts but certainly softens the blow as ARM’s reset into a lower interest rate (doesn’t resolve that most follks were interest only and now likely need to pay principle and interest…just saying it offsets some of what I and others anticipated a couple of years ago that interest rates would spike). Instead, seems gubmint is committed to ever lower (at least for the next decade plus) treasury and resultant mortgage rates. The impact of potential 3.5% 30yr fix rates won’t fix it but will slow the decline. Paying half the interest of just a couple years ago means you can buy twice the house (all things being equal…ok, I know lot’s of folks have fallen off the credit worthy wagon) decelerating the downward pricing pressures.

    Of course, this is one of the last bullets to be fired because you can only go so low (3% 30yr fixed anybody?) and then any subsequent interest rate rises will be doubly painful increasing interest costs and pushing down home values. Return to a median 7% interest rate would be catastrophic for fed debt and homeowners alike. So don’t expect it will be allowed so long as the gubmint can avoid it.

  21. Some years back I worked at a company that had a pension plan, and I was there long enough to become vested in it. Ever since I left, I’ve received an annual statement telling me I’d receive around $250 a month after I reach retirement age.

    Last week, I received a letter telling me I now have the option of taking a lump sump payout next month of nearly $16,000.

    I don’t want to invest it with my weasel of a “financial planner.” I think he spends more time reading those stupid Morningstar reports every day than paying attention to what’s actually going on in the world, because he is always telling me to put money in the stock market. Either that, or he’s self-serving and dishonest and just wants me to invest in things that will make him rich. This is entirely possible. The guy isn’t even faithful to his own wife, which is why I call him a weasel.

    My mortgage is paid off, and I have no debt and no kids. My car is ten years old, but still plugging along just fine and has less than 100k miles on it. I probably won’t need another one for a few years.

    I know that $250 a month is only going to be worth a nickel in today’s dollars if I wait thirty more years to receive anything. So I want to take my $16,000 now, but I don’t want crooks on Wall Street, crooks in government, or inflation to fritter it all away from me.

    What would you guys do with it? Would you go to your local jeweler and buy gold with it, and hoard it in the back of a spare closet, in a safe? Would you stick it in your checking account? Blow it on vacations and try to enjoy life now, before things get really bad?

  22. Pirate Jo

    I personally like Casey’s suggested allocation: 33% physical gold & silver, 33% cash, 33% selected energy companies.

    You should always have at least an 8 month of expenses emergency fund in cash.

  23. You are wrong just like people in 2007 said he was wrong shorting sub prime.
    So a year from now lets revisit what you wrote and see who is right. Then you take down your web site and learn from your mistakes.

    1. Walter

      It is pretty easy to win a rigged game. John Paulson should be rotting in prison with Lloyd Blankfein getting conjugal visits in the shower from a 300 pound black guy. He can’t fix this game. Nice name by the way.

  24. You are also a fool ! That is why he is buying gold and gold miners and the same thing that Greenlight capital is doing and has been for years now. So what if real estate in CA does not come back? Look at his top holding in his fund and what he is preparing for here? The Dollar dropping and he is going to be the 30 B man instead of the 15 B Man.. Get with it

  25. There are only two motherfuckers alive who are more fucking stupid than John Paulson. One is the gay traitor transvestite David Pierre and the other is you Walter Leadbone. You fucking IMBECILE, Paulson is bragging about being long the big banks. I’d rather own subprime real estate in Detroit. Come back and post after you get a lobotomy.

  26. So Smokey did you buy banks in March 09 as he and other hedge funds did? You say imbecile, but have not proof to back your point and again he is not about being just now long but bought them at the bottom and is long on them, What are banks going down tomorrow? NO. Look at his track history. So you go own subprime in Detroit and come back and post a year from now .

    1. Walter Bonehead

      You seem to be factually challenged.

      Bloomberg News recently reported that Paulson’s $9 billion Advantage fund was down 5.8% in the first six months of the year. His Advantage Plus fund was down 8.8%. And while his Recovery fund was reportedly up through June, it suffered a 12.4% decline that month.

  27. Walter Leadbone—-I was long the banks until March 09 and I was down to my last $100,000. That’s when I shorted the dogshit out of them. I got margin calls when I blew out that final 100 grand, then went upside down 35 thou. Now, I flip burgers during the day at the Royal Castle for $7.50 an hour and deliver pizzas for Domino’s at night. I’ve already paid off $2,000 of that 35 and only have $33,000 to go and I’ll be back even. Then I’ll save enough to move out of my parent’s basement. First thing I’ll buy is a moped, and then a green 3 pc suit. And then a Pete Rose baseball card. Then, I’ll save up for a color television with a remote control. I’ll get me a 350 sq ft bachelor’s pad and invite over some chicks to provide with a hot beef injection. If no chicks are available, I’ll just make some hot chocolate chip cookies. I’d just as soon eat those cookies as have sex anyway.

  28. Again like I said you dont follow what John was doing and have no idea what the trends are so enjoy your life and whatever you can make up! But no joke to readers this site has no understanding of John and what he did and what is coming and if you read about him you will see and can do as he will and not have to be like the fool above me.

  29. Pirate Jo

    Quinn’s advice is sound. Cash out. If that 16 grand is needed to cover an 8 month emergency fund, you can stop right there.

    If you have the cash emergency fund covered, take a look at some preferred stock in energy companies, such as Georgia Power and Light or Florida Power and Light. They pay 6% or better interest. Not a bad deal. Safe companies (everything is relative) and a decent return in today’s roller coaster market.

  30. Admin – Calling Walter Leadbone a whore is a bit off, and it offends hardworking whores everywhere. Ain’t no way Paulson is paying him. He is a dirty slut and is giving it up for free.


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