When Will Housing Recover? Let's Talk About Oil

We're approaching the one-year anniversary of Bear Stearns' decision to throw its two subprime hedge funds into bankruptcy, a move that cost investors about $20 billion. A few weeks after that Countrywide co-founder and CEO Angelo Mozilo, during an earnings conference call, likened U.S. housing market conditions to that of the Great Depression.

Twelve months have passed since the mortgage industry began its freefall, taking along with it the housing market, the nonprime lending industry, construction jobs, Wall Street jobs, mortgages jobs and anything related to housing finance. The only bright spot for the industry is the servicing side of the business and foreclosures (that is, if you make money off of foreclosures). It's not a pretty picture. And the chief question many are asking (those who still have jobs) is this: When will the industry recover?

Coming up with answers isn't easy. Currently, there is a 12-month supply of new and existing homes for sale (give or take a month or two). Consumers are feeling anxious. White- and blue-collar jobs are disappearing. The domestic auto industry is shedding workers because their reliance on the SUV market turned out to be a Trojan horse: car makers got hooked on the fat profit margins of larger vehicles without paying attention to warnings that cheap gasoline would not last forever.

Banks, S&Ls, mortgage companies and investment bankers are all cutting workers because the loan market is in the doldrums and writedowns on mortgages assets (subprime and other wise) are not over, at least not yet. We're at $250 billion in "hits" and counting.

All things being equal, contrarians (of which I'm one) might say, this could be a good time to actually enter the mortgage business. But there is an economic problem that continues to plague not only housing/mortgages but the overall economy: rising oil prices. As I write this column oil is coming off a week in which it entered the nosebleed territory: $140 a barrel with investment bankers and others predicting $150 within a few weeks.

High oil prices make consumers feel bad and for good reason: the more they pay at the pump, the less they have to spend on everything: clothing, food, entertainment, going out to eat, utilities, savings, take your pick. The less consumers save, the less money that will be available for a down payment. Some first-time homebuyers might look around, thinking the market has bottomed, but when gasoline hits $4.50 a gallon they might reason: "Might as well wait. Home prices could drop even further and I might not have a job." Who can blame them for thinking like this? Not me.

I'm not going to pretend I have answers to the nation's oil crisis, but I'll argue this: if oil were at $80 a barrel, the housing market might be finding a "floor" after 18 months of declining home prices. Instead, oil is reaching for a new ceiling - weekly, which means the housing floor keeps sinking. In the U.S. we ship a majority of our goods by trucks, which run on gasoline. (When's the last time you read a news story about a transportation company working on a new rail line?)

When oil prices rise as rapidly as they have something has to give. Consumers need gasoline to drive to work. When they cut back it will be on nonessentials. But cut back, they will. And when consumers stop spending businesses start hurting and when businesses start hurting they begin laying off workers and when workers get laid off they stop paying their mortgages. It's a bit like that children's book, "If You Give a Mouse a Cookie." The moral of the story? Answer: one economic event (high oil prices) leads to a whole new set of woes, setting off an economic chain reaction.

If the oil crisis can be solved, it will help the housing and mortgage industries (and every business tied to them) recover. We keep hearing that oil is so expensive because India and China keep gobbling it up as though they were Americans (how dare they!). Oil is also going sky high because the dollar is weak and speculators are buying up future contracts because it's the only investment game in town.

Some economists keep telling us oil could be a bubble waiting to happen - just like Internet stocks and housing. Maybe so, but in the interim consumers worldwide are paying more, creating huge amounts of wealth for oil producers, especially those in the Middle East who seem none-too-willing to increase production. But they have done us at least one favor: some have bailed out our financial institutions by investing in preferred stock and taking a piece of the action, which leads me to ask: Is this any way to run a country?

Paul Muolo is executive editor of Mortgage Servicing News and National Mortgage News. He can be e-mailed at Paul.MuoloSourceMedia.com. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/