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January 1, 2008
– A real estate office in once-booming Orange County, California
employs 73 real estate agents. Formerly buzzing with activity
and sale after sale, over the past three months these 73 agents have
combined for a total of zero sales. Yes, that is zero as in
one less than one.
In title insurance offices, there is now
a daily update on which mortgage companies no longer exist.
The question in all of this is will
things worsen or get better? Will the problem level off or implode
into a lengthy recession. Well, a brief look at the road ahead
offers some pretty obvious clues.
Between now and June more than $700
billion worth of loans will readjust.
Ok, that is a simple sentence. But
let's take a second with it. $700 billion. Now, this is
not the amount of money due on home loans over the next six months,
these are just the loans that will "adjust."
What "adjust" means, for those of you
still not familiar with the details of the ARM-loan situation that
has led to the housing meltdown, here is a simple way of
understanding it. People were sold loans they new they had no
chance of being able to pay. The trick was, they were
Adjustable Rate Mortgages, ie ARM's. The rate and payments of
the loans for the first five years were set artificially low so, for
this introductory period, they would be at a level they could
afford. And so, people signed on to buy $300,000,
$400,000, $700,000 houses when they really only could afford
$100,000 or $200,000 homes.
The sales pitch, trick, and problem in
all of this was simple: after 5 years the loan doesn't only
readjust to what the payment for a home of that price should be, it
adjusts even higher to make up for the artificially low payments of
the first five years. And so the payments people had been
making, which were usually set at the max they could afford on a
monthly basis, suddenly - and by suddenly we mean over the course of
one month - double or triple or worse. The fact is simple:
no one imagines for a second that the loan holders will have any
possibility of being able to make these payments.
So why would people sign on to these
loans, and why would banks make them? The sales pitch was,
"Well, with housing prices climbing as they are, you're going to
sell your house within five years anyway, aren't you?" It is
like those late night infomercials. The loans let you lock
onto a house that is worth far more than you can afford, you hold it
as the value rises, then sell it, take the profit and use that as
equity toward your next purchase.
I personally was offered such a loan a
few years back, and two things occurred to me. One, I might
want to sell before five years was up, but with such loans being
sold, a large number of people would be forced to sell their homes
all at once. It wouldn't be as in previous down markets when
people could just hold on, keep making their payments, and wait for
prices to recover before they sold. With mortgage payments
suddenly tripling overnight, a mass of people would have no choice
but to sell at once. And the bigger problem would be that, as
more and more of these loans come due, more and more would join the
ranks of having to sell, and so the problem would snowball.
That was one of the problems. The
other was that, in my estimation, the house I was being offered was
not really a house that was worth the extra money, and so a good
investment. The "more expensive" properties people were buying
were really artificially inflated due to a combination of extremely
low interest rates and, ironically, these loans. You see, if
you were the only one able to get such a loan, then you have an
advantage. But when these loans were all over the market and
being sold en masse, all it did was take $100,000 homes and change
the price to $200,000 or $300,000. This created the illusion
that the housing market was booming, when in reality it was a fake,
artificial bubble cause by people being willing to pay far more than
they could ever afford and far more than properties were worth.
So, now we are at the front end of the
correction. It is not a meltdown, but simply a pulling of the
Wizard's sheet. The houses never went up in value as it
seemed. To go up in value would mean people who could actually
afford $300,000, $400,000, $700,000 took out a loan they could
afford for the houses. As the ARM loans began to reach the end
of their five-year teaser rates, deflation in the housing market
began. The government has made some efforts, and you see all
the large financial groups, from Citibank to Merryl Lynch, making
large write-offs and seeking large influxes of cash to offset the
problems.
Unfortunately, this is just the
beginning of the readjustments. $700 billion more will happen
just between now and June. And there are five years worth of
these loans out there on the market. There is nothing really
that can stop this problem from continuing to unravel and drag the
economy down with it.
Add to this the massive credit card debt
Americans have. Then add to this the fact that the government
does not have the ability to cushion the situation as in past
problems due to being bled dry by the Iraq War and Bush tax cuts.
The only possibility for a somewhat less
devastating landing is buyers moving into the market, and we are and
will see some of that - not from within our country so much but from
overseas. With the dollar extremely weak, buyers from Europe
to China will move in and buy up some of our nation.
But the reality is, with gas prices
through the roof, loans readjusting buy the hundreds of billions
year after year, credit card debt insurmountable, interest rates
bound to climb, and the national government having to pay back the
massive debt it owes to foreign banks with a massively weakened
dollar, America will be lucky just to have a horrible recession
rather than an all out depression or financial collapse.
Yes, it sounds extreme, but so did this
meltdown when we talked about it years ago. Unfortunately, it
was just reality.
And add to this that housing prices are
not the only ones that are artificially high. Since the late
1990's, Americans have been setting a new record for personal
bankruptcies every year. And the prices of products and number
of things they have been purchasing have been artificially inflated,
just as in the housing market, by easy availability of credit card
credit and similar teaser rates to those in the housing market.
And so housing prices are not the only
ones over-inflated beyond what the American market can actually
support. So as the credit crunch tightens with the housing
meltdown, the nation will have to see a general deflation and
substantial retraction across the board. It's been a couple
decades of unsustainable excess unlike our nation has ever seen.
Remember, credit cards as they are only came on the scene during the
1970's, and only spread as openly and freely, even to college
students without jobs, during the late eighties on into the
nineties. This is a new problem.
The dot com bust of the late 1990's was
to be that readjustment, but the massive cutting of interest rates
and introduction of these ARM loans led to refinancing and easy
credit that prolonged the day of reckoning and allowed Americans to
take the problem to a much higher level. Now, it is all coming
due at once at the same time basic staples like energy prices have
nearly quadrupled. Oil has increased tenfold since the late
1990's, when it was $10 a barrel.
For those of us who have not gotten
ourselves into massive debt or a loan we can not afford, it will be
a great couple of years. Unfortunately, that may be limited to
just the handful of rich people who have gotten the cash from the
Bush tax cuts, oil windfall, and war contracts. In other
words, the consolidation of the wealth to a handful while the rest
fall into a new level of poverty is the scenario our nation is
looking at for the foreseeable future.
The piper played, Americans followed,
and now he wants his due. Just think of the situation as with
the obesity epidemic - we have eaten so much we are so swollen and
fat we simply can't consume anymore. Unfortunately, as
liposuction and gastric bypass are the treatments people are having
to undergo to adjust to the problem, and still the fallout in
diabetes cases and other serious problems aren't being avoided, the
economy will have to have liposuction and economic bypass. And
what this means is deflation and a serious reduction in consumer
consumption, ie spending.
Recession, without question. But
don't underestimate the possibility of an all-out economic collapse.
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