Below is an excellent report that further refutes Bernanke's vision of green shoots in his world. It also explains how the Big Banks will get ravaged in 2011 as a massive wave of Option ARM mortgage losses materialize and even notes that this is the reason why the banking stress tests ended in 2010 - for convenience of course.

Green shoots in PM's perhaps - VHF

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The Real Housing Crisis Has Yet to Begin

James Quinn

May 13, 2009

Super-Size It

The average home size in the US has increased from 1,000 square feet in 1950 to 2,400 square feet today - a 140% increase. The average household square footage per person has increased by 218%.

In 1950, only 1% of homes built had 4 bedrooms or more, but 39% of new homes had at least 4 bedrooms in 2003. We have one fewer person per household, but we’ve added one extra room. Our society has chosen to super-size our houses, our vehicles, our TVs, our kitchens, our burgers, our sodas, and our egos. This desire to "keep up with the Joneses" convinced millions to pour money into their homes and amenities. This seemed like a great idea when home prices were rising annually at a double-digit pace.

Now, with home prices down 25% to 50% in many parts of the country, the “Joneses” are in a heap of trouble.

The desire to appear more successful by owning more home transcends class. In his book Luxury Fever, Cornell University economist Robert Frank noted that Microsoft (MSFT) co-founder Paul Allen built a 74,000-square-foot house. According to Frank, that roughly equaled the size of Cornell’s entire business school, with a staff of 100.

Frank sees a “cascading effect” of imitation all along the social spectrum. The super-wealthy influence the wealthy, who influence the upper middle class, and so on. The damage from this game of one-upsmanship would be minor, if all the money hadn’t been borrowed.

Americans have accumulated so much stuff that their McMansions can’t contain it all. In 1984, there were 6,601 self-storage facilities with 290 million square feet space; in 2008, there were 51,250 “primary” self-storage facilities representing 2.35 billion square feet - an increase of more than 2.0 billion square feet. There's 7.4 square feet of self-storage space for every man, woman and child in the nation; thus, it's physically possible that every American could stand -- at the same time -- within the space we've allotted to self storage.

Home Equity - The Drug of Choice

The tax code has always encouraged homeownership, with tax deductions for mortgage interest and property taxes. The bigger and more expensive the house, the bigger the tax deductions. In 1997, President Clinton signed a bill that essentially eliminated capital-gains taxes for selling your home. The tax incentive gave people a massive new inducement to invest ever more money in real estate - and they did.

Home ownership skyrocketed after this incentive was introduced. When prices started to take off in 2000, the rapid appreciation -- without tax consequences -- encouraged people to move to the most luxurious house they could “afford.” No money down, option ARMs, and negative amortization loans made perfect sense, because you would just trade up in 2 years with the guaranteed 30% appreciation. This was a can’t-lose proposition.

Even the people who weren’t flipping their houses every 2 years found a way to get in on the act. The “irreversible” relentless appreciation in home prices allowed every homeowner to treat their home as an ATM. Americans extracted over $4 trillion of equity from their homes between 2000 and 2008. The equity was spent on all manner of consumer goods, since everyone knew that home prices never go down.

Even the National Association of Realtors -- via its mouthpiece, David Lereah -- said so. Lereah regularly trumpeted the infallibility of housing as an investment - in interviews, on TV, and in his 2005 book, Are You Missing the Real Estate Boom?

Lereah said, in January 2006, that "the level of home sales activity is now at a sustainable level, and is likely to pick up a bit in the months ahead." Of course, existing home sales have plunged 30%, and prices have declined 25% since he spoke those words.

The $4 trillion of equity extraction was essential to artificially making our economy appear strong from 2001 through 2007. Without it, GDP would have hovered between -1% and +1% over this entire period. The Bush tax cuts and rebates didn’t create a strong economy. Borrowing and spending led the way.

The median price of an existing home in 2000 was $143,600. It skyrocketed to a peak of $221,900 in 2006, a 55% increase in 6 years. Despite this tremendous rise, owner’s equity remained in the 60% range, the same place it had been since 1990. Today, median prices have plunged to $169,000 - still 18% above the 2000 level, but owner’s equity is down to 43%. That’s the amazing thing about debt: It remains fixed as the asset behind it drops 24%.

Alan Abelson, of Barron’s, passed along the wisdom of Minyanville Professor Stephanie Pomboy regarding the much-anticipated recovery in the housing and financial sectors:

“The complacent reaction among the investment cognoscenti is that the credit markets are wildly oversold. More likely, [Pomboy says], it has something to do with the fact that 'an overwhelming portion of some $8 trillion in mortgage debt (or 80% of the total) is teetering on the edge of, or in some state of, negative equity.'

“As to the Fed’s claim that the equity of homeowners as a group stands at 43%, she points out that what the Fed neglects to tell you is that roughly a third of them have their houses free and clear... 67% of homeowners with mortgages have equity of less than 15%. That, Stephanie [says], suggests the 'destruction priced into the credit markets hardly seems out of whack with potential reality.'

“And while, thanks to 'the transfer of toxic assets to taxpayers' and the magic of accounting legerdemain, the scarred financials to some significant extent may be spared further pain, the same, alas, can’t be said for the nonfinancial sector. Little recognized, she insists, is how much the extraordinary gains in domestic nonfinancial profits from the low in 2001 to the peak in 2006 -- a stunning rise of 388% -- owed to the housing bubble.”

The fascinating chart below paints a clear picture of the housing gamblers from the past decade. If you purchased a home with no money down between 2004 and 2008, you're now underwater on your loan. More than 20 million residences, or 22% of all homes in the US, are in a “negative equity” position; in some markets, nearly 70% of all homes are underwater. With at least another year of declines and another 10% reduction in home values, this doesn’t appear to be a recipe for a strong housing recovery.

Jim Cramer said on April 19, 2009: “The bottom, well, is now. We are seeing a huge wave of buying of foreclosed homes in Northern and Southern California and in Florida. The numbers are too positive to think that these, the hardest-hit areas, aren't putting in long-term bottoms.”

Based on past results, I think I’d rather put my faith in Professor Robert Shiller, who called both the tech bubble and the housing bubble. According to the Case-Shiller Index, home prices have dropped between 25% and 30% since the mid-2006 peak.

According to the Case-Shiller Futures Index -- which has performed better than a Jim Cramer appearance on The Daily Show -- the bottom of the housing market will occur in late 2010, with further declines of 5% to 25% in major markets.

How can anyone in their right mind say that housing has bottomed, when the supply of new homes is at an all-time high (13 months) and the supply of existing homes is at 10 months? Furthermore, there will be 2.1 million foreclosures in 2009 versus 1.7 million in 2008, and 7 to 8 million more people will lose their jobs in 2009. Housing prices will complete their trip back to 2000 levels.

Boulevard of Broken Dreams

Though the subprime crisis is mostly behind us, the Option ARM and Alt-A crisis is just now beginning to pick up speed.

The Option ARM may win the prize for most creative financial product of mass destruction. These are ticking time bombs set to explode in 2010 and 2011. (We’re now in a momentary lull of mortgage resets.)

The beauty of an Option ARM is that it usually has 3 options: You can make a principal and an interest payment, just an interest payment, or a minimum payment that increases the principal balance. Most of these loans also had low introductory teaser rates. The resets for these loans skyrocket in 2010 and 2011; payments will go up 50% to 80%. Most of these loans are already underwater.

Luckily, the Federal Reserve and Treasury cut the stress test off in 2010; the enormous bank losses we’ll see in 2011 -- which could affect firms from Bank of America (BAC) to Wells Fargo (WFC) to Citigroup (C) to JPMorgan (JPM) and beyond -- would have produced very different results.