Step one will be an agreement will be forged between banks, perhaps including an assortment of central banks, and Greek politicians. The only sticking point will be the portion of the debt that has been purchased by hedge funds, then insured by purchasing credit default swaps. The hedge funds will make the most money ifGreeceis forced into bankruptcy; their second best scenario is forGreeceto be able to roll-over the sovereign debt at 50¢ on the Euro. The first situation does not square with the political aspirations of the Eurozone; the second simply forceGreeceto repeat the bailout in a matter of months – 12 months at most. Will the Eurozone politicians have the stomach forGreeceto renounce the debt acquired by the hedge funds? That, along with writing down the debt to 30¢ on the Euro, would go a long way towards making possible Greek economic recovery.

Getting through step one requires the Greek government to make cuts that are well beyond what the electorate will tolerate. The downstream net result, step two, will be that Greek government will be forced to abandon some of the promises and cuts. The Eurozone will most likely tolerate that failure, as it has been doing for years.

Step three will be to return to step one. Eventually, even Greek politicians will figure out that Greece needs both jobs and a workforce that will actually work at those jobs.

But in the meantime, the very, very important outcome will be what doesn’t happen: panic. No disorderly default will mean no panic in the equities markets and no discovery that, once again, the banks and insurance companies have written so many CDSs that they are illiquid or worse. Steps one and two will buy time for the world’s economy to strengthen (absent some other grand and greedy stupidity by the banks and/or hedge funds).

All that means a gradual return of solidity to housing prices in the coastal cities of the US; it means Canada will have a not-very-severe loss of confidence in its housing market; housing prices in England,FranceandGermanywill solidify.SpainandPortugalwill continue to have high default rates, in large part because they are economically mired in the 1930s. On the other hand,China,Brazil and India will continue to prosper, though their outrageously high growth rates (echoes of “Irrational Exuberance”) will move down towards long term stable rates.

The worlds bourses/stock markets will continue to have the ups and downs that are normal; the general trend or, as economists like to call it, “drift” will remain up for the major economies.

Expect slow growth outside of China,BrazilandIndia. But slow growth is better than no growth, and much, much better than contraction.

But if step one blows up – Oh, my! Anything could happen, and the prospects for anything good are very slender.

Today’s numbers were a little bearish for the economy but not so bearish for homeowners. New housing starts were down 18,000 units and the number of building permits pulled was down by 1,000. Those are nationwide, not Portland, not a subset of Portland. That’s not much to write home about, whether for better or worse.

If builders don’t build and the economy picks up — new claims for unemployment insurance were down 50,000 from a week ago, a large decline — then folks will buy the bank owned and nearly-in-foreclosure/short sale homes at attractive prices, and the “overhang” will disappear. Then builders will increase their outputs. If they buy American, the building industry will provide upwards of 50,000 new jobs not in building trades but in related things such as nail manufacturing and plywood/oriented strand board manufacturing, even in plumbing products. The increase in the cost of a house? One to two percent which is negligible, given how the real estate industry actually works.

If builders don’t build and the economy doesn’t pick up, we will see fewer houses on the market but not being bought. But there will be no jobs for the trades and no opportunity to buy American.

Historically, this is a very strange situation. America has shipped so much of its manufacturing capacity abroad that the building trades cannot lead the way out of the depression. Instead, they really need to see jobs created elsewhere so that their houses will be purchased. And they need to buy American. It would help if all purchasers of new homes insist on American made “board and nails” in the houses they buy, even though that will cost and extra $1,000 per $100,000 of value.

Why do I say Buying American will cost so little? Last time I did a cost analysis for a developer, I found that roughly 17% of the cost of a house is comprised of the cost of the materials, the board and nails. Labor is the largest cost, then land. Permits are not trivial, either, nor is the cost of selling a house.

Today’s final bit of economic news is good: the Consumer Price Index rose by 0.1% this past month which is ever so slightly more than 1.2% per year. That’s not going to scare the Fed into raising interest rates, nor should it provide an excuse for lenders to raise rates. Hooray! And small inflation is much safer than zero inflation because zero can easily slide to negative. Deflationary depressions are very, very difficult to fix. The last one we had led to World War II.

What to watch for

I will be watching for the housing market to stabilize, perhaps even turn up. With that, I will be watching for joblessness to decline and for a substantial number of new jobs to be created in the US. Thus I look for the stock market to rise, but I expect increases in interest rates to remain muted as the Fed keeps pressure on and both Eurozone & Arab money looks for a safe haven, meaning US Treasury notes and bonds.

Abroad, I will be watching for Syria’s Assad to be removed from power. The Eurozone will find ways to work together more, both politically and financially. The Chinese renminbi will continue to rise, which may help address American balance of payment problems. Iranian leaders will continue to speak irrationally, to make threats which ultimately they can’t afford to back up. Chinese, Indian and Brazilian economies will continue to grow, though not at the pace of the last couple of years.

What to watch out for

American politics will find a way to derail the fragile economic recovery. To do so would benefit the Republicans at the expense of the majority of Americans. If this happens, the stock market will head down, exacerbated by the European recession. The crude oil market will remain high and likely go higher as US regulators continue to give a free pass to giant banks as they corner the market, “on behalf of their clients,” said clients being giant hedge funds in which the banks may well be invested.

Expect a recession in Europe. Watch out for it getting deeper and longer than the world’s economy can handle, dragging the fragile US economy into another recession. Really watch out for the slight chance that China, India and Brazil will be dragged into a serious recession, a.k.a. “depression.” If that happens, there will be social consequences in Europe and perhaps in the US.

Arab Spring will become Summer, bringing with it right wing theocracies in Egypt, Libya, Syria and, of course, Iraq. Expect increased attacks in Afghanistan as Pakistan’s military intelligence community, the ISI (inter-services intelligence, officially), increase funds and other support to the Taliban and any other anti-Indian group if can find. If the Iranian government chooses to believe its own rhetoric, look for a shooting war in the Straits of Hormuz, creating an opportunity for hedge funds to reap billions instead of millions from the crude oil market. Did I mention many hedge funds have extensive “investment” from the oil-producing states?

My Hope for 2012

I would prefer the “Watch for” conditions to the “Watch out for” situations. There is no possibility of a short term fix for the US and Eurozone economies. I hope that politicians of all stripes recognize this (not bloody likely, is it?) and even tell the voters that, since it took 40 years to export most of the middle class jobs and to reorient Western businesses to a “What’s good for the CEO is good for the Country” point of view, away from a business-centric model, it will take at least half that 40 years to recreate the 50 million jobs that can afford an upscale, 3,000 square foot home AND two cars, without two incomes.

I hope that Europe’s recession is shallow and brief; that the economic slowdowns in China, India and Brazil are temporary; that we, the 99%, are all a little better off at the end of 2012 than we were at the end of 2011.

Today I have divided the Case-Schiller report into three segments: East Coast, West Coast and Non-Coastal. I am starting with the middle of the country.

The two things that leap from the chart are that Las Vegas and Tampa had major price bubbles, and that those unfortunate residents of Detroit desperately need a new industrial base to provide jobs with wages that will support the costs of home ownership. Cleveland also seems to be lacking in jobs that pay middle class wages and I suppose I can abuse the language by noting Las Vegas prices have fallen below those of 2000, proving sin doesn’t pay, or at least doesn’t pay a decent wage.

Tampa and Las Vegas prices are still falling noticeably, but other areas are trying to stabilize. Is the lesson here that Alan Greenspan could not have been more wrong when he said the government shouldn’t let air out of bubbles? Here the two biggest bubbles are the two with the greatest downward momentum.

On the East Coast we see similarities with respect to jobs. Atlanta home prices have fallen below their 2000 cost while D.C. prices have remained high and are now rising. As much as we might like to believe those prices are due exclusively to scumbag lobbyists and everyone else’s slimeball politicians, the truth is there are not enough lobbyists and politicians to pull prices up. There are jobs paying decent wages that allow workers to buy homes that cost 180%, on average, of what they cost in January, 2000. Boston and NYC also seem to have stabilized at well above costs of nearly twelve years ago. Miami, like Tampa, saw a large price bubble and still has downward price momentum. Evidently, Florida needs to find a source of good wages for a much larger portion of its population. If it doesn’t, we may see prices continue to fall for some time yet.

On the West Coast, the two price streams that are closest to stable are Portland and San Diego. Portland may have put in its bottom, and San Diego is falling slowest among the rest. Los Angeles prices are highest relative to their 2000 base at 164%; San Francisco prices lowest at 130%. Do not confuse the prices compared to 2000 prices with the prices compared between cities; Portland prices are the lowest on the West Coast even though on a relative basis they are better than both San Francisco and Seattle.

On the West Coast, the job issue is most clear. Only Portland lacks a deep water port, a fact which has resulted in it being the smallest and least prosperous of the major West Coast cities. The California cities fell much more sharply — from higher climbs — than did Portland and Seattle. Then they bounced, only to fall back again. It would not be surprising to see prices stabilize in all these communities within six months.

While prices across the country are still falling on average, DC, NYC and Boston housing prices seem to have bottomed and begun to climb. On the West Coast we see more vertical motion in California, which makes the situation unclear. The bottoms may well have be in the past in all West Coast cities except Seattle. The rest of the country is faring less well (or more poorly) than the Northeast and West Coast, but most cities are nibbling at stable real estate prices. I will continue to update the situation as time goes by.