Comments
The problem isn’t so much the price of housing, but: a) during the boom equity in home values went to an all time low (I believe, I’ll have to research that again to be sure), meaning that people had used home equity loans to purchase more goods, cashing in on the value of their homes, perhaps thinking the value would continue to rise; and b) the crisis now is really a credit crisis, with a danger that lack of credit could lead to a major downturn in the economy.

Look at the big picture: in 1981 we had a debt of 30% of GDP, and as late as 1985 (I think — I may be a year or two off) we still had a current account surplus, meaning we were net investers in the rest of the world. By 1991 our debt soared to 60% of GDP, and our current account went into an ever deeper deficit. We didn’t notice it in every day life due to the deficit spending, government spending kept the economy appearing very healthy. In the 90s the debt stablized, but we still didn’t feel pain due to cheap oil combined with a stock market bubble that created the illusion of wealth. Meanwhile, the current account deficit rose to 5 and then 6% of GDP, an unsustainable level. This means, essentially, that our consumption and credit were financed by foreign banks and countries, most notably Saudi Arabia and China. When the stock market bubble burst, the housing bubble allowed consumer spending to continue via home equity loans and very easy credit, putting private debt at ever higher levels while the public debt remained at around 70% of GDP. Now that this bubble has burst, consumer spending likely won’t bail out the economy (debt levels are too high) and the credit crisis is tightening credit dramatically — banks are in trouble. Add to that the fact that the way you correct a current accounts deficit is through devaluation of the currency, the dollar probably still has a ways to fall.

Put that all together, and things don’t look very good — add in high oil prices, and right now I’d say the economy may emerge as a far greater problem than terrorism (and of course, acts of terrorism can make economic woes worse).

Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Another big problem is not how it will effect housing, but how it is effecting investment companies. As long as property values were going up, lots of people were taking out subprime mortgages and getting a teaser rate, with the plan of refinancing right before the teaser expired. When the property values drop, they no longer qualify to refinance, and since they cannot afford to pay the loan at the normal rates, they lose the house in foreclosure.

So in addition to some people being out of a house, the bank holding the mortgage is now holding a property that is no longer worth the amount of the loan debt. So they end up having to write off the difference.

Most of those subprime loans aren’t held by the banks anymore, they get packaged together and sold to investment companies. So it isn’t really the bank that has to write off the difference, it is a hedge fund somewhere. It keeps rippling from there. Right now the losses to investors due to subprime losses is in excess of $80 billion, and Citibank is expected to report another $10 billion or so.

Written By: Dustin Vines
URL: http://
When it comes down to it, GREED and SPECULATION is driving this "crisis"

If you have good credit, and want to buy a good property, banks will still give you a loan.

Written By: Keith_Indy
URL: http://asecondhandconjecture.com
meaning that people had used home equity loans to purchase more goods, cashing in on the value of their homes, perhaps thinking the value would continue to rise;
I believe this statement entirely. What I do not believe is that it is the governments job to bail these people out for making poor choices. Greed and speculation DROVE this crisis. Now these companies need to figure out a way to get through it and not make the same mistakes again.

Written By: meagain
URL: http://
Well for years we’ve been hearing wailing and gnashing of teeth about "affordable housing". It seems to me that a couple years of drops like this and housing will become much more "affordable" to the average wage earner.

Written By: Paul
URL: http://
I believe this statement entirely. What I do not believe is that it is the governments job to bail these people out for making poor choices. Greed and speculation DROVE this crisis. Now these companies need to figure out a way to get through it and not make the same mistakes again.
I agree. But while I can understand if you just dismiss this as another gloom and doom prediction from the guy who sees decline, I really think that this is going to bring to a head the growing economic crisis in the US and cause some real pain. Credit markets won’t be able to provide liquidity, no more bubbles for people to borrow against and keep up consumer spending, and a current accounts deficit that is unsustainable. I think we’re in a for a really rough ride.

In any event, having bought a new house (brand new) in April, I’m glad we were able to sell the old one by September! It was put on the market for $199,000, and sold finally for $176,000. I feel lucky. Maine isn’t feeling the same kind of pain that California and Florida feel, but in talking to real estate agents, they certainly are feeling the downturn!

Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
My personal opinion is that the ’crisis’ is overblown. It is certainly a crisis for all the financial wizards and ferociously competent and exceedingly well paid CEOs whose embarrassing incompetence has been revealed and whose jobs are now in jeopardy. However, although large numbers of mortgages may be worthless, the mortgaged property is not, and is still capable of generating significant income.

The people who are defaulting on these mortgages are not defaulting because they have become poor; they are still able to pay rent or mortgage payments. The crisis sems to be that they cannot increase these payments, more of a potential loss than an actual loss. If I had the money, I would sure be buying real estate right now, either as rental property or for sale with a realistic mortgage, to the current residents, who have proven their ability to make payments.

Written By: timactual
URL: http://
PS
Does anybody remember 1987?

Written By: timactual
URL: http://
Does anybody remember 1987?
Tim, read my first post — first massive deficit spending kept us going, then cheap oil along with a stock bubble, and then a housing bubble and record borrowing against housing values. Meanwhile we went from a creditor to a debtor state, our current account went from surplus to unsustainable deficit, meaning the dollar is very overvalued. Look at the reality, not vague references to history when circumstances were very different.

A word: stagflation. Watch for it.

Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
"Does anybody remember 1987?"

"...not vague references to history..."

A simple ’no’ would sufficxe.

Written By: timactual
URL: http://
Interesting post. To me, it seems like all the cities that had hyper-appreciation of real estate values from 2000 through 2005 are now really taking some major value declines.

Here in San Diego, I subscribe to: http://www.brokerforyou.com/brokerforyou This San Diego real estate publishes a real tell-it-like-it-is blog. His 12-31-07 post Real Estate Market Predictions for San Diego in 2008 is a realistic idea about what this year will hold for not only San Diego, but, all the cities that had hyper-inflation.


Written By: San Diego Lasik Doctor
URL: http://

 
Add Your Comment
  NOTICE: While we don't wish to censor your thoughts, we do blacklist certain terms of profanity or obscenity. This is not to muzzle you, but to ensure that the blog remains work-safe for our readers. If you wish to use profanity, simply insert asterisks (*) where the vowels usually go. Your meaning will still be clear, but our readers will be able to view the blog without worrying that content monitoring will get them in trouble when reading it.
Comments for this entry are closed.
Name:
Email:
URL:
HTML Tools: Bold Italic Blockquote Hyperlink
Comment: