Plenty More Gloom and Doom Ahead

Posted by: Ben Steverman on August 04, 2008

Wall Street keeps wishing that problems in the economy and financial system would at least stabilize. Stocks rally every so often on hopes that an end is in sight and a rebound is around the corner.

Three groups of experts crunched the data and issued reports today. All three warn against premature optimism.

Stifel Nicolaus (SF) analysts say home prices should be expected to fall 28% from peak to trough, a bottom that won’t arrive until late 2009. Expect no rebound “for the next three to five years.” They added:

This is the unfortunate consequence of a full decade of overbuilding combined with perhaps the easiest credit environment in history. This was the backgrop for mutually reinforcing factors that drove unsustainable bubbles that will take years to deflate, in our view.

(The report, “Six Degrees of Housing Mayhem,” was written by Michael R. Widner and Chris Brendler.)

And it’s not just the U.S. that’s the problem. Steven Weiting of Citigroup (C) wrote today: “A more clear global slowdown is evident to us, not just in financial markets, but in real economics activity. The weakest readings are still to come.”

Meanwhile, Goldman Sachs’ (GS) Jan Hatzius is worried about a “vicious cycle between lower credit supply, a weaker economy, rising defaults, and yet more balance sheet strains” — with those balance sheet problems caused by the housing downturn. Hatzius expected total mortgage credit losses to total $500 billion, but he added:

We’ve seen announcements of over $400 billion already, without any evidence that we’re close to the end. Much will depend on how far further home prices decline. … We continue to expect another 10% home price decline over the next year or so. This suggests that the losses will likely continue to pile up.

For more on the home price issue, check out Prashant Gopal at Hot Property on whether the hard-hit California real estate market might be the first to hit bottom.

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Businessweek’s Emily Thornton, Amy Feldman, Ben Levisohn, and Ben Steverman focus on matters great and small for investors, from the views of a hot fund manager to an explanation of the latest products devised by Wall Street’s rocket scientists. Exploring trends in any area, from bonds and stocks to closed-end funds and futures, always with an eye towards giving investors a better understanding of the sometimes confusing and often chaotic world of finance. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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