* Housing starts may need to drop 40% more to get supply back in line with demand, according to Morgan Stanley's chief economist Richard Berner. And home prices? They'll have to drop 10% to make homes affordable again. So says this Wall Street Journal posting.
My personal take is that the new home market is oversupplied to the tune of 150,000 to 200,000 units. The existing home market is even worse, with about 2 million more homes for sale now than is customary. That overhang will indeed take some time to chew through -- with a combination of lower home prices, less construction activity, and lower interest rates doing the dirty work.
* The Collateralized Debt Obligation downgrade parade is still marching on. Fitch Ratings now says it might slash ratings on $36.8 billion of CDOs that contain subprime mortgage bonds. You can blame the performance of the now infamous 2005, 2006, and 2007 crop of subprime loans. Many will go down in history as some of the stupidest mortgages even written on this planet -- or any other (though in the interest of full disclosure, I haven't personally traveled outside of our solar system to verify this).
* Louisiana-Pacific keeps on sliding, thanks to its housing exposure. The company makes oriented strand board (OSB) used in home construction; it's going for about $170 per 1,000 sq ft. now versus $522 at its April 2004 peak, according to Bloomberg data. It lost $67.8 million in the third quarter, versus net income of $9.5 million a year earlier.
* Another 300 employees at Bear Stearns are reportedly being shown the door amid a downturn in debt trading. Bank of America recently said it would cut 700 jobs as part of a plan to stop making wholesale mortgages -- loans through brokers rather than retail loans made in its own bank branches. And title insurer Fidelity National Financial, for its part, recently eliminated 1,700 positions.
Lastly, as you may know, there's a Federal Reserve meeting this week -- a two-day affair that starts tomorrow and culminates with the usual 2:15-ish policy announcement on Wednesday. Expectations are for a 25 basis point cut to the federal funds rate.
I think there's a decent chance these guys go 50 -- or cut 25 and signal more cuts are coming. They've demonstrated for some time that they care little about the plunging U.S. dollar, $93+ crude, $790 gold, and so on and so forth. That's not "real" inflation (because food and oil prices don't count). Besides, there's a housing crisis on and the politicians are on a warpath. It's a heck of a lot easier to cut rates now in order to ease the housing crunch, even if that path boosts longer-term inflation risks. At least, that's how I suspect policymakers will see things.