Pay no attention to the value of housing in this crisis brought on by the collapse of the housing bubble, apparently it has become irrelevant. The credit crisis has taken an odd turn in the last couple of days. It turns out that that once the focus is on Washington, all other factors fall by the wayside.
On Monday when Congress failed to pass the $700 billion emergency bailout, the Dow dropped 777 points and the “dire consequences” were at hand. Maybe. But if people really believed things had gotten to a critical point how is it that the reason cited by some in the Republican camp for failure to support the bill was that Speaker Nancy Pelosi (D Calif.) said mean things about them. The truth is probably that the votes were never there but that someone would suggest such a thing in a crisis is a testament to how out of touch our leaders really are.
It seems that the market no longer reacts to fundamentals, just how those fundamentals may affect government policy. So the dramatic market drop was bullish because it would bring about a deal and the Dow rallied nearly 500 points on Tuesday. On the same day the S&P/Case-Shiller Home Price Index for July (remember home prices, negative equity, foreclosures and all that stuff) was released showing “Continued record declines and a continuation in the trend of double digit declines across many cities in the prices of existing single family homes.”
The 10-city and 20-city composite home price index each reached new record annual declines of 17.5% and 16.3% respectively. It was the 10th consecutive record decline for the 10-city index. This was a bad report and perhaps good for the market because the bailout would be back on track.
For the last year, maybe longer, we have seen this odd situation where markets do not respond to fundamentals but how those fundamentals will shape policy. Bad economic news is bullish because it will force the Fed to cut interest rates; the failure of the largest U.S. Savings Bank, great now Congress will come back and pass the bailout. Given this environment, it makes it almost comical that some Republicans cited free market principles as a reason for opposing the bailout. Kind of like seeing the 400 pound guy ordering a diet coke with his three Big Macs and supersized fries.