Is the end of the housing bust in sight? A prominent money manager known for his maverick views thinks so, but not without reservations. Charles Peabody, of Portales Partners, was one of the presenters at the meeting we attended in New York last week of the Committee for Monetary Research and Education. He says that 'Four Horsemen' have been working hard to pull the economy out of the mire of a housing/credit bust. The horsemen are the Federal Reserve Board, Congress, the SEC and/or FASB, and the Treasury Department. Three of the horsemen have fully materialized, he says, and it is only a matter of time before the fourth, Treasury, succeeds at the crucial objective of stabilizing the dollar. Once this has been achieved, says Peabody, several positive things will happen: 1) the housing market will stabilize (albeit at depressed levels); 2 we will pull ourselves out of the recession; 3) widening spreads in fixed-income markets will reverse; and 4) a rally in financial stocks will develop. For Peabody's bullish scenario to play out, housing prices must first find a bottom. He says this is imminent because housing affordability is slowly shifting in favor of buyers. We think this is where his bullish argument fails, though, for two reasons. First of all, even though real estate prices have been falling for more than 20 months, that doesn't necessarily make homes more affordable. In fact, lending standards have tightened so dramatically as to all but negate the would-be stimulus of lower prices. Whereas buyers could once take possession of homes without a downpayment or verification of income, now, to qualify for a mortgage loan, they must meet far more stringent income guidelines and come up with a downpayment of at least 20%. These new hurdles are formidable and have probably more
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