From Staff Reports
When asked about their outlook for the crisis-ridden U.S. housing and financial-services markets, two U.S. financial experts provided outlooks that completely contradicted one another – once again underscoring how tough it is for investors to predict when the U.S. economy will turn around.
Jim Rogers, a best-selling author who co-founded the famed Quantum Fund with George Soros back in 1970, told Bloomberg News Thursday that the global credit crisis caused by the subprime mortgage meltdown is nowhere near over.
"I doubt that we're half way through the financial crisis," Rogers stated at a Barclays PLC (BCS) news conference Thursday in Singapore, where he now lives with his family. "We certainly haven't hit the bottom as far as I'm concerned."
Not only did Rogers' comments contradict those put forth this week by the heads of several Wall Street investment banks, they even ran counter to statements made by former partner Soros, who said this week that he believed the "acute phase" of the worldwide financial crisis was nearly done – meaning the U.S. economy might soon start displaying the benefits.
Rogers' downbeat outlook also ran counter to some upbeat observations made by Ronald J. Peltier, the chairman and chief executive officer of investing guru Warren Buffet's HomeServices of America Inc. real estate company, who told CNBC-TV that the beaten-up U.S. housing market has leveled out and is poised for a move to higher ground.
"I think the real truth is the market has been in a phase of correction," Peltier said Thursday morning during an interview on the popular financial cable channel. "We are seeing some light at the end of the tunnel."
So who's correct?
Rogers, currently the chairman of Rogers Holdings and the author of the new investment bestseller, "A Bull in China," seems to think that's a pretty easy question to answer. After all, big global securities firms and commercial banking enterprises have taken about $319 billion in write-downs since the start of 2007 and have slashed away 65,000 jobs in the past 10 months as the financial crisis spread across the globe, Bloomberg reported.
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And there's more to come.
"Most of the European banks and Asian banks haven't taken a huge write-off yet," Rogers said. "I suspect there are more write-offs to come in Europe and Asia."
Echoing comments he made two months ago during an exclusive interview with Money Morning Investment Director Keith Fitz-Gerald, Rogers told listeners in Singapore Thursday that he's avoiding financial stocks and is betting that the share prices of U.S. investment banks have a lot further to fall. He also sees continued major problems for U.S. homebuilders that very often doled out mortgages that did not require documentation regarding assets or income, and for government-sponsored mortgage financier Fannie Mae (FNM). That's why he's expecting housing stocks and Fannie Mae's shares to decline even more than they already have as investors avoid all but the safest assets – such as U.S. Treasury debt.
Such ongoing uncertainty and fearfulness can't help but cause overall stock-and-bond prices to fall even further, Rogers told reporters.
Indeed, during his recent exclusive interview with Money Morning's Fitz-Gerald, Rogers said it's even possible that the U.S. Federal Reserve could ultimately fail.
As if to defy his gloomy predictions, stocks have rallied since mid-March, when JPMorgan Chase & Co. (JPM), the No. 3 U.S. commercial bank, agreed to buy The Bear Stearns Cos. Inc. (BSC), in a central-bank-sponsored bailout deal. In fact, the MSCI World Index has gained 10% since touching a one-year low on March 17, Bloomberg reported.
While HomeServices' Peltier agrees that was a problem – a "lot of people bought ahead of themselves," and speculators damaged the market even more – he told CNBC that he now believes the U.S. housing market has actually returned to its pre-boom times, with home sales running at an annual rate of about 5 million.
"I think that's a normalized market and I think that's a sustainable level," he told an interviewer. But he also divided the market into two distinct parts:
- The primary market of discretionary sellers.
- And the distressed market, which includes some of the regions that experienced the "meteoric" rise in housing prices – and which now are suffering the fallout.
Even after that, however, it's clear that "housing prices are still within 8% to 10% of all-time highs," Peltier said. "The markets that have fallen off the most are actually the markets that were the most overheated."
As the housing market returns to its more-normal operation, Peltier believes stability will return and that prices and sales numbers will return to a point that was sustainable.
There is one wild card that has the executive concerned, however: Will the pressures of soaring fuel costs and a tight credit market put an inordinate amount of pressure on consumers who are attempting to work out their housing problem – as opposed to just walking away?
"A lot of people bought ahead of themselves," Peltier said in the interview. "Frankly, I think to some degree the lending industry, the mortgage business, lost its moral compass in terms of providing the proper credit standards and qualifications."
Speculators proved to be the real troublemakers: From 2001 to 2006, a full 25% of sales were made to buyers who believed they could turn a quick profit, and not to people who were planning to live in the houses and make them into a home.
In retrospect, Peltier said it's clear the U.S. housing market got way ahead of itself from a price standpoint, with the flames of speculation getting fanned by unscrupulous appraisers and lenders who ended up putting lots of consumers into houses that they couldn't afford.
Industry officials "knew it was an overheated market," Peltier said. "There were people for the first time ever having opportunity to buy part of the American dream under credit conditions and credit guidelines that were very, very shaky at best … And they were buying at the peak of the market with very low teaser rates, not fully understanding the implications of that adjustable-rate mortgage [re-setting at a much-higher rate] sometime in the future, and the probability that they could not afford that home under the new reset conditions. That's a travesty, because there are a lot of people that got hurt."
He called on Congress to find a workable solution to the housing crisis, something that has been elusive as the legislators and President Bush spar over who should benefit from pending legislation.
On the broader political landscape, Peltier said the housing industry generally does better when Republicans are in office, though he did not endorse a specific candidate in the presidential race.
"There has been more showboating and discussion than actual rubber that meets the road," he said regarding the legislative impasse. "The fact of the matter is we really need to have some new legislation in place to slow down and stall the foreclosures where people basically bought into a home under mortgage financing programs they didn't understand."
[Editor's Note: Just two months ago, Money Morning Investing Director Keith Fitz-Gerald's flew to Singapore for an exclusive interview with investing guru Jim Rogers. The two-part series that resulted is available here, free of charge. In Part 1, Jim Rogers predicted more pain for the U.S. dollar and the possible failure of the U.S. central bank. In Part II, Rogers talked about China's unstoppable economy.
News and Related Story Notes:
- Bloomberg News:
Jim Rogers Says Financial Crisis Hasn't Hit Its Worst.
Buffett Real Estate CEO Sees Housing Comeback
- Money Morning Financial Analysis:
The Baywatch Effect:Can China's Growth Help Gold Prices Triple?
- Money Morning News:
Soros: "We Have Not Yet Seen the Full Effect of Possible Recession."
- Money Morning Exclusive Interview with Jim Rogers (Part I):
Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve.
- Money Morning Exclusive Interview With Jim Rogers (Part II):
Jim Rogers: China's Economic Advance is All But Unstoppable.
- Money Morning News Analysis:
Bear Stearns' Friday Stumble, Sunday Sale Reignites Concerns About More Failures in U.S. Financial Sector.