Promoted by Steven D.
I wasn’t going to write this, but then I saw skippybkroo’s post on the spike in housing foreclosures languishing at the bottom of the diary list, and realized that he had caught the Scoop of the Week.
It may not have been obvious: This week has seen several interesting and portentious events. But the import of his diary is this: Our economy has entered the black hole of no return. We have crossed the event horizon.
His diary did not quite spell it out, and one might have missed it. But this week I have been following the stories posted on The Housing Bubble, and change is in the air. Go ahead and read. Construction has stopped on major condo projects all over the country. Unsold units abound. Sold but UNOCCUPIED units abound. Suddenly we are seeing what appear to be TORCHINGS of construction projects with no attempt to make it look accidental. The smell of panic is as thick as the smoke.
Single family houses are not doing much better–except that there have been no spectacular torchings. New developments increasingly feature empty houses. The market has gone into a coma, with sales simply failing to happen, starting roughly last summer. There are no buyers. Prices have frozen up, and are beginning to drop.
The back-story to this has two major parts.
The first is the housing market itself. For several years, we have seen a trend of spectacular, ever-increasing prices–your classic bubble. It has been nation-wide, indeed world-wide. There are housing bubbles in the United Kingdom, Australia, and parts of Spain. In the US, southern California has been at the forefront of the rising trend, but virtually every part of the country–from Oregon to Florida and from Arizona to Massachusetts and parts in between–has seen bubble activity. Price rises overall have risen some two to four times the base prices before the bubble began–200% to 400%.
Where is the money coming from? Nobody is quite sure. Asian investors are suspected. But that is clearly only part of it. With the stock-market crash at the end of the 1990s it was noticed that money was moving out of the stock market and into housing.
Also, under Bush, interest rates were depressed, and the Fed was loaning money to banks freely and cheaply, while exotic lending practices were allowed to flourish. “Exotic” is the industry euphemism for unsound, risky, absurd, or criminal. New kinds of mortgages were created where the borrower would not even begin to pay back the loan at a full rate for several years. These were the ARMs and the IOs. Cheap at first–literally free money–after a few years the loans would automatically reset and become very, very expensive.
Why would anyone take out a mortgage like that? Even if it looked good at first, one would soon be trapped into overwhelming mortagage payments. Well, suppose you could buy a house at $600k and sell it in two years for $715k? Suppose you could borrow the ENTIRE purchase price, and pay (nearly) nothing on your mortgage in the two years you held the house? The resale would get you out from under, with the mortgage paid off, before those nasty high rates kicked in–and with a huge bundle of extra money besides. Anyone could do this. Mortgage companies did not even require that you be employed or have a source of income to take out the loan.
Why would a mortgage company do this? Up until the mid 1980s banks and mortgage companies generally held the loans they underwrote, so they were very careful to see that the loan was likely to be repaid. By the 1990s the habit was to bundle the loans into securities instruments and sell them off to large investors. The originators of the loans soon realized that they did not have to care if the loans were any good: They would be bundled and sold to become Somebody Else’s Problem. The mortgage companies were making their money by creating and selling loans–not by collecting interest and repayment on them.
Also, as money flooded into the housing market, and prices began to be bid up, a Ponzi scheme was created–everyone involved in flipping houses would make money AS LONG AS THE PRICES CONTINUED TO RISE. Builders built, and overbuilt. Buyers bought, and bought again. Houses stood empty, bought and waiting only to be resold at a higher price. The owners never moved in, and often never expected to: They were “investing”.
This did result in some externalized inconvenience. People who wanted to buy a house to live in were priced out of the market. People who already owned their homes found their property taxes leaping up as the “value” of their neighborhood climbed with over-inflated sales. But for “investors” large and small, this was a vast money machine–perpetual motion.
The second part to the back-story is that since 1980 the US started off-shoring its industry, and off-shoring became a major trend in the 1990s, remaining to this day unabated. This means that the building and furnishing of houses represents an ever-enlarging portion of our economy, to the point where it is a critical part: Most of what the US still does is tied in some way to the building and furnishing of houses.
These two threads came together this past summer, when buyers quit showing up to pay inflated prices. Why the bubble chose exactly then to end is hard to say–by rights it ought to have burst at least a year earlier. Nonethelesss, that was the top. (Your local region may vary.)
Without buyers, the sellers could not sell, but, not wanting to take losses, they did not lower their prices either. The market froze–as represented by the measures of unsold inventory, and houses withdrawn from the market.
The turn, which some have long suspected and anticipated, has now arrived. Whether due to mortgage resets or some other reason, people are missing payments (“NOD”) and being foreclosed upon by the banks holding their mortgages. That the foreclosure rate is the highest in eight years–for California–and rapidly climbing, is the indicator: The huge mass of foreclosures waiting to happen, is starting to happen.
Many people are stuck, and will go bankrupt: They cannot afford the reset rates on their loans, but they cannot sell at a price that will pay their mortgage off. With prices freezing, and soon declining, they are “upside down”–owing more than their houses are worth. Most will go into foreclosure, and the banks will take back the houses to resell them for what they can. This will drive prices down steeply.
This is called a crash. The last housing crash–in 1989-1990–took six years to reach its bottom.
The complication this time is the crash is likely to take down with it every industry related to home building and furnishing, as well as the banking sector. The automobile industry, long an important economic sector, is already in trouble and will be dragged down as well.
Not many people will be immune. Where did all those mortgage securities, with their unexamined but junky loans turn up? Some are probably in your pension plan. Large institutions of all types will be at risk.
This is coming at a time when the US is having an increasingly difficult time financing its debt–both national and governmental.
The house of cards is about to come down.
With the spiking of foreclosures, we have crossed the event horizon. Staving off the coming trouble will not be possible. The Treasury is having to offer higher rates to sell its debt, but interest rates would have to go down to cushion the collapse. Between these conflicting requirements, there is no longer any room to manoeurvre.
By this summer, expect the crash to be obvious to everybody, with general panic getting underway.
Expect it to be worse than the Great Depression.
Plan your life accordingly.