Housing Market

The so-called experts are acting as though the housing "adjustment" is about over. I'm afraid that's wishful thinking. When housing booms (bubbles) of the past topped out, the aftermath has tended to last eight to ten years or even more. The aftermath of the recent housing bubble is about one year old. The odds are that there's more to come -- probably a lot more.

From the end of the year 2000 through the third quarter of 2006, mortgage debt increased by $14.7 trillion (that's not billion, that's trillion). As much mortgage debt was created in the most recent six years as all the mortgage debt of the last 50 years.

With subprime lenders now in trouble, the normal reaction by the Fed would be to lower rates as quickly as possible. But that's not feasible today, not with the dollar on the edge, not with the US dealing with massive trade, budget and current account deficits.

As for the markets. After two 90% down days within a four-day period, yesterday produced a 90% upside day. This might suggest a change in sentiment -- first two panic days to the downside, then yesterday an almost hysterical "buy day" on the upside. The question, the big question, now is how much of a bullish follow-up can the market produce? Was yesterday's big 90% upside day simply a "dead cat bounce" -- or are investors ready to take the market substantially higher?

One hint is that volume was heavier on the downside Monday than it was on the upside Tuesday. That suggests that a good deal of Tuesday's advance was a product of short covering.