The Fall of the House of Cards
Pop Goes the Bubble!
By MIKE WHITNEY
12/27/05 "ICH"
-- -- Four months ago I wrote an article, "Doomsday; the Final
Months of the Housing Bubble" that predicted a dramatic fall in
housing prices that would have a catastrophic effect on the American
economy.
In truth, I'm a lousy forecaster and simply collected the
relevant data from a number of sources that convinced me that the
end was quickly approaching. Now, it seems that dismal day is upon
us and the Grim Reaper has begun churning out the disappointing
statistics that we've dreaded from the very beginning.
In November the sales of new homes plunged by the largest amount
in 12 years. The 11.5% decline from October was 4 points higher than
expected by Wall Street analysts, fueling the belief that the
red-hot housing market is headed for the dumpster.
This sudden downturn is expected to slow the wave of speculation
that has kept the market booming for the last few years. According
to an Associated Press report, sales dropped by "22% in the West,
the biggest decline in the region since February 1995."
Many readers will wonder why trimming the spec-market threatens
the overall economy. The reason is, as The Economist points
out is that "23% of all American houses bought in 2004 were for
investment, not owner-occupation. Another 13% were bought as second
homes. Investors are prepared to buy houses they will rent out at a
loss; just because they think prices will keep rising -- the very
definition of a financial bubble."
If we consider the effects of 36% of buyers moving out of the
market we can grasp the magnitude of the problem.
The crisis is compounded by the enormous effect of the housing
market on both growth and jobs.
"Over the past four years, consumer spending and residential
construction have together accounted for 90% of the total growth in
GDP. And over two-fifths of all private sector jobs created since
2001 have been in housing-related sectors, such as construction,
real estate and mortgage broking." (The Economist)
"2 out of every 5" private sector jobs!?!
"90% of the total growth in GDP"!?!
These are figures that simply boggle the mind. What it tells us
is that the market has been artificially inflated by the Federal
Reserve's shortsighted low-interest rates policy and the shabby
lending practices of the major mortgage companies.
The banks have lowered the standards for home loans to such an
extent that the traditional loan of 20% down and a fixed interest
rate is virtually a thing of the past. Instead, those conservative
practices have been replaced with "creative financing" schemes that
put the entire housing market at risk.
In 2004 "one-fourth of all home-buyers -- including 42% of
first-time buyers -- made no down payment." (New
York Times, July 7, 2005)
Equally troubling is the fact that "nearly one third of all new
mortgages this year call for interest-only payments (NY Times)
This tells us that a large number of new buyers can barely make
their payments, but are gambling that their property value will go
up enough to justify their investment. This is "equity roulette," a
shell game that anticipates that salaries will go up while interest
rates stay low.
We can nticipate that many overstretched homeowners will begin to
fall from the economic precipice in short order. In fact, many
markets are already showing a 40% increase in foreclosures even
though the air has just begun hissssssing out of the bubble.
The ridiculously low interest rates coupled with the
irresponsible lending practices has precipitated a feeding frenzy
for cheap money. Greenspan is expected to raise rates another
one-half percent before he leaves in January which should be just
enough to collapse the market and put the economy in a permanent
coma.
As Paul Van Eeden says in 'the End of the Real Estate Boom",
'this is not a trivial matterAs the real estate market goes,
so goes the economy and the stock market. The only thing that
could keep the US on life-support a little longer is another
round of interest rate reductions, but this time it could hurt
the dollar, and that would mean higher gasoline prices again, so
it's a double-edged sword."
Van Eeden provides a good description of the mess that Greenspan
has created; a blind alley from which there is no foreseeable
escape. The Federal Reserve has managed to keep the economy running
on fumes by dropping rates 12 times to a rock bottom 1% after the
fall of the stock market (another Greenspan fiasco which cost the
American people $7 trillion) It was basically "free money" loaned
out to keep the country limping along (and to facilitate Bush's tax
cuts) while millions of Americans tried to recoup from their losses.
Regrettably, the cheap money and shaky loans simply created an even
bigger and more lethal bubble that is following the same trajectory
as the Hindenburg.
Ka-booom!
Adding insult to injury, the Federal Reserve announced 2 weeks
ago that new steps will be taken to regulate low-interest, high-risk
loans. In the third quarter a full 33% of first-time home buyers
took advantage of "non-traditional" mortgages. ("No interest" or
"ARMS" adjustable rate mortgages) Try to imagine the chilling effect
on the housing market when 33% of first-time homeowners are removed
from the pool of potential buyers?
Still think you"ll be able to sell your house at a profit?
Jittery Americans don't need a crystal ball to spot the shipwreck
looming just on the horizon. The last remaining droplets of
prosperity are trickling from the ailing economy and Greenspan's 18
year quest to flatten the American middle class will soon be
realized. 'the Economist" summarized it best when they said, 'the
worldwide rise in housing prices is the biggest bubble in history.
Prepare for the economic pain when it pops".
Mike Whitney can be reached at:
fergiewhitney@msn.com
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