Rod Dreher, Maybe you shouldn't own a house

Chuck Butler, Housing Continues to Slow

06/26/2007 - Housing Continues to Slow
"The Fed policy makers continue to be more sanguine on the outlook for housing and the economy. Fed Chairman Ben S. Bernanke said earlier this month that restrictions on the availability of mortgage credit will slow housing demand."

Mike Whitney, The Mother of All Bubbles

The Fall of the Housing Market
The Mother of All Bubbles

By MIKE WHITNEY

JHK's forecast for 2007

at CFN

Some snippets:

Finance has been trending away from economic reality since the Ronald Reagan era on an accelerating basis. By this I mean the role of finance no longer represents sets of mechanisms and institutions designed to raise legitimate capital for investment in legitimate productive activities. Finance is now an end in itself, essentially a racket. The capital is no longer capital, i.e. genuine wealth accumulated from previous productive activities. Now it is jive-capital: notional "wealth" spun out of activities that are fundamentally not productive -- for instance, sub-prime mortgages bundled into tradable securities. In reality, the mortgages backing these securities are contracts for repayment of huge loans made on hazardous terms by shifty means to people with poor prospects for making their payments for assets (suburban houses made of vinyl and glue) that are, in any case, fated to lose much of their nominal value, becoming worth less than the obligations yet due on them, and rapidly so.

The sub-prime loans were made in the first place because the contracting institutions (banks) could pass off the risks associated with these jive contracts by off-loading them to larger institutions such as the government sponsored enterprises Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) which are largely exempt from regulatory oversight and hence could buy up whatever cockamamie paper contracts they felt like buying and convert them into bonds, certificates said to represent future earnings. (Not.)

These mortgage backed securities were only one species of engineered abstract financial "instruments" among many orders of incomprehensibly abstract mutant financial "products" (derivatives, credit default swaps) and procedures (carry trade, leveraged buyouts,) based on the fundamental unreality that it is possible to get something for nothing.

The inertia part of the story is that this collective hallucination (that jive-capital was real) was sustained through 2006 by the sheer massive weight and flow of jive capital and its ability to elude scrutiny by countless chimerical conversions from one abstruse form to another -- from loan, to bond, to bet, to position, to Christmas bonus. . . . The final result, though, was a nation with an increasingly impoverished middle class, a bankrupt public treasury, and all remaining wealth (notional or residual) creamed off by a racketeering upper crust of logrolling insiders who, for the moment, could convert their dollars into multiple mansions, private jet planes, and sky boxes at the gladiatorial combats du jour.

The rest of the US economy was increasingly composed of a suburban development hyper-boom that amounted to little more overall than a colossal misinvestment in a living arrangement with no future (and the irreparable destruction of the remaining US landscape). The building-and-selling of suburban houses and the ancillary accessorizing of them with collector highways, strip malls, and big box stores, fast food huts, and all the jobs associated with constructing, lending, evaluating, selling, servicing, and staffing these things, along with additional rackets like home equity withdrawal refinancing to keep the cash registers ringing in the Wal-Marts and Home Depots -- these were the activities supposedly keeping the "regular" (i.e. lumpenprole) economy chugging along. If you subtracted all this "housing bubble" activity from the rest of this economy since 2001 there was very little left besides, hair-styling, fried chicken, and open heart surgery.

Yet, marvelous to relate, the whole toxic, entropy-laden, creaking, reeking cargo of shit-and-deceit that comprised this system just managed to keep rolling along for another year without collapsing under its own stinking, fantastically stupid weight.

and

Looking Ahead

I will be so bold to say that I called the housing crash correctly last year, though the worst symptoms are slow to present for technical reasons. There's no question that the action on the real estate scene changed drastically in mid-year. The implosion of this mighty structure of fraud, folly, and misinvestment so far has taken place in such breathtaking slow-motion that its victims have not really felt the pain from the falling bricks yet. By late summer, buyers started evaporating. Real estate signs planted in lawns last June are still sitting there on New Years. Prices have come down a bit in many markets, including most of the hotties such as Florida, Phoenix, Las Vegas, San Diego, and Boston. But the buyers are still not bidding. Meanwhile, the sellers have dug in, determined to get something at least close to their wished-for inflated prices, egged on by their representatives, the realtors. This mutually reinforcing psychology cannot hold indefinitely. Many of these sellers don't have the luxury to wait around forever. Some have had to move to other houses in other places because of job changes, and are stuck paying two mortgages. Many are stuck with "creative" mortgages that all the evil ingenuity of the human mind conjured in recent years to enable the feckless to live above their means -- adjustable rate, payment optional, no money down contracts that suckered buyers into booby-trapped obligations whose initial low-interest terms lured them in and are now set to blow up in their faces as terms automatically re-set upwards to higher rates and "optional" deferred payments get backloaded onto the principal, putting the mortgage holders so far underwater on their contracts that a tour of the Titanic would feel like a day at the beach.

The trouble is, when both the sellers and their agents decide to get with the reality program and lower their prices, they will only stimulate a massive death spiral of house price deflation as buyers see the numbers go lower and hold out longer in the expectation that prices will go down even further. That would, of course, put more sellers into gross distress and lead them either to dump their properties or enter the cold waters of default and foreclosure. The whole process could run for a couple of decades, and as that occurs it will be made much much worse by oil depletion -- as so many suburban houses drastically lose locational value, combined with the consequences of poor construction carried out in cheap materials like vinyl and chipboard.

Add to this that the late stages of the hyper-boom caused so much "product" to be brought onto the market by the "production home builders" that there now exists an unprecedented oversupply of exactly the kind of crappy suburban houses (in all price ranges) that are bound to lose value going just a little bit forward. Foreclosures will only add more to the oversupply. In the subprime mortgage niche, defaults are officially reported to be running at 20 percent. Foreclosures are trailing because the process is so awkward, and many have not yet shown up in the housing markets. I predict that foreclosures on subprime mortgages will run above the 50 percent range when all is said and done.

As the music stops in the lending rackets, liquidity in the form of mortgage backed securities and other sources of hallucinated "money" will dry up, and will start to make itself felt in all the other arenas and regions that "money" has been migrating to. Jobs associated with house-building and all those ancillary enterprises -- big box shopping, chain restaurant revenues, car sales -- will disappear and incomes with them. Many home sales in past decade were made to people benefiting directly from the housing bubble. (The sheer number of real estate agents in America more than doubled since 2001.) This evaporation of both credit and incomes will impact the so-called "consumer economy", said to make up 70 percent of the total US economy. In other words, the term "depression" might be applicable as this economy lurches into actual contraction of more than a few percentage points.

This scenario suggests that earnings in corporations listed on the public stock exchanges -- the companies that elude acquisition by "private equity" -- would necessarily see severe drops in earnings, and therefore in stock value. While many commentators view the rise in the Dow as just another symptom of inflation -- asset inflation -- the activity in these assets -- companies making, doing, and selling things -- must be reported on a quarterly basis. And if that activity is trending strongly downward, then stock prices will trend down even if the value of the dollar is going down and it takes more dollars to buy an equivalent share of stock year-over-year. So I would conclude by again predicting a substantial drop in the Dow and other equity markets. To some extent, it seems to me that the 2006 blow off in stock prices was just another symptom of the finance sector being decoupled from economic reality since real GDP probably contracted one percent in the second half of the year while misreporting and delusional thinking drove stock prices up.

One would think that the US dollar is poised to take a beating, and indeed the signs have been abundant that this is underway -- especially when the value of the dollar started to implode against the Euro around Thanksgiving. It has leveled off since then. But since then there have been other moves around the world to de-link commodity prices from the US dollar and restate them in Euros, especially oil, and the dollar's plunge will probably continue. A lot of commentators around the web have pointed out the side benefit for the US government to promote dollar inflation: to inflate itself out of crushing debt. But the government can't accomplish this without destroying the purchasing power of ordinary Americans and whatever remains of their meager savings. I'd have to conclude that the Federal Reserve is out of tricks for goosing economic activity. Their last major trick was hitching a jive economy to a real estate bubble by making loan money available to any jabonie with a pulse and promoting the demise of lending standards. The gambit lasted five years and is now blowing up in America's face.

Jephraim Gundzik, Global economy faces a dangerous year

From Asia Times:

Global economy faces a dangerous year
By Jephraim P Gundzik

Rising inflation and falling home prices are likely to push the US economy into recession by the second half of 2007. Gathering economic weakness, combined with negative real yields on US Treasury securities and growing political pressure to weaken the dollar will lead to significant dollar depreciation against most currencies.

Economic growth in Asia, Europe and Latin America will also weaken in 2007. Slowing global economic growth will be very bad news for equity markets around the world. Dollar depreciation and rising international energy and grain prices will be good news for precious metals.

Impact of instability on commodity prices
While global geopolitical instability has ratcheted higher every year since the terrorist attacks on the US in September 2001, global asset markets have hardly responded. In 2006, many of the world’s stock markets, including America's, reached record highs. As geopolitical instability increases further in 2007 the probability of major disruptions in energy supplies will grow.

Instability in the Middle East and Africa is very likely to increase in 2007. Intensification of Iraq’s civil war, conflict between Washington and Tehran, escalating war between the Israelis and Palestinians, and growing domestic pressure on Lebanon’s US-backed government will heighten instability in the Middle East. This instability will help fuel growing unrest in Sudan, Chad, Congo and Somalia, provoking significant military conflicts in Africa. Afghanistan’s insurgency is also expected to become more violent, prompting the gradual withdrawal of NATO forces.

Unprecedented global geopolitical instability will have its most obvious impact on international commodity prices. More frequent energy supply disruptions in the Middle East and Africa, combined with accelerating natural oil production declines in the world’s largest oil fields, will keep crude oil and natural gas prices buoyant. Slower than anticipated global economic growth will not push oil prices lower in 2007.

Production discipline - much greater than generally understood - among the world’s major oil exporters will ensure oil supply growth remains below demand growth. The continued rise of global energy prices in 2007, paired with growing demand for renewable energy, will produce further strong increases in international grain prices. In 2006, corn and wheat prices in the US jumped by 70% and 60% respectively. Much of this jump occurred between September and December.

Rapid growth of ethanol production capacity worldwide has contributed to this leap in corn and wheat prices. Prices for soybeans and other oilseeds have also begun to head higher on the back of rapidly growing global demand for biodiesel fuel. The substantial increase in petroleum-related energy prices since 2001 is only one factor behind growing demand for biofuels. Increasingly stringent environmental regulations, energy security concerns and targeted levels for alternative energy use in many countries is also driving demand for biofuels.

Inflation and recession
The growing use of corn, wheat, soybeans and other grains to produce biofuels is expected to nearly double prices for these commodities in 2007. In addition to grain-related foods, prices for other food staples that are grain-dependent, including meat and milk products, will also head higher in 2007. The result will be much higher than expected US inflation. Consumer price inflation (CPI) in the US is already significantly higher than CPI in Germany, Switzerland, the UK and Japan. In 2007, US inflation will accelerate, widening the inflation gap between it and other countries.

By every measure, inflation in the US has clearly accelerated since 2004. In 2005, the Federal Reserve’s preferred measure of inflation, the personal consumption expenditure (PCE) deflator exceeded 2% for the first time since 1995. The core PCE has continued to accelerate in 2006, and will likely top 2.5% by the end of the year. This is significant because the Fed’s stated aim is to keep core PCE between 1.5% and 2%. The steady acceleration of core PCE shows that inflation from rising energy prices has penetrated the broader US economy.

Despite the obvious acceleration of inflation, the Federal Reserve shifted monetary policy into neutral in late summer. The Fed has justified more accommodative monetary policy in the face of rising inflation by suggesting that slowing US economic growth will eventually mitigate inflation. This is a huge gamble because US inflation is being pushed higher by supply-driven energy price shocks rather than demand. In 2007, continued energy supply shocks are likely to feed a grain supply shock, stoking a sharp increase in food price inflation and further acceleration of core PCE.

The stated logic behind the Fed’s monetary policy change is spurious, to say the least. A 12-year-old child could grasp the idea that energy supply problems are pushing US inflation higher and that these supply problems are likely to intensify in 2007. This suggests that another explanation must be behind the Fed’s shift to more accommodative monetary policy. The most likely seems to be growing concern among Fed policymakers over increasing systemic problems for the US financial system arising from the collapse of the US housing market.

Between 2001 and 2005, very low interest rates in the US, combined with the proliferation of non-traditional mortgage products and easy credit access, allowed many American households to convert substantial home price gains into income gains through cash-out mortgage refinancing. Cash-out mortgage refinancing accounted for about 50% of all mortgage refinancing between 2001 and 2004. In 2005, cash-out mortgage refinancing accounted for 73% of all mortgage refinancing. In the first half of 2006, cash-out refinancing accounted for a staggering 87% of all refinancing.

Home price appreciation in the US slowed sharply in the first half of 2006. In the third quarter of 2006, home prices began to fall steeply. According to data from the US Census Bureau, new home prices dropped nearly 10% in September 2006 from the same period in 2005. This marks the sharpest fall in US home prices in 35 years. Rising inventories of unsold homes have been pushing home prices lower.

Recently, America’s largest home builders and home sellers have begun trying to convince investors and home buyers that the housing market has stabilized. Falling long-term interest rates have reduced mortgage rates, encouraging a very small number of buyers to return to the market. However, the housing sector’s weak pulse is very likely to vanish again in early 2007 as confusion over Federal Reserve policy mounts, the pace of inflation quickens and financial markets in the US swoon.

America’s economic fairytale has turned into a nightmare and very few investors realize it. In addition to producing a sudden and sharp decline in household income by eliminating the prospect of new mortgage refinancing for many Americans, declining prices for new and existing homes will have a strong negative impact on the US financial system, severely restraining credit growth. Falling home prices, especially in what were once the hottest housing and mortgage markets in the US, have caused mortgage default rates and foreclosures to surge higher.

The combination of rising defaults, foreclosures and falling collateral values is beginning to weaken the balance sheets of mortgage lenders, including several of America’s largest banks. Growing weakness in the banking sector is very alarming. Banking sector and economic crises in many countries over the past 25 years can be traced to overly enthusiastic credit growth used to finance either capital investment or real estate speculation, or both. Japan offers a stunning example of what can happen after a real estate bubble bursts.

The Federal Reserve appears determined to let financial markets “self-correct” in order to adjust interest rates to changing expectations for economic growth and inflation. Self-correction is a defining feature of financial markets. However, with the Fed rudderless, it is very unlikely that this self-correction will occur in an orderly and gradual manner. Rather, such self-correction will be sudden and sharp.

Dollar devaluation
Growing concern at the Federal Reserve over the impact of rapidly rising mortgage defaults and foreclosures on the US banking system will prevent it from tightening monetary policy in 2007. Inflation in the US is already substantially higher than inflation in Europe and Japan. Rising energy prices joined by rising food prices will have a greater impact on inflation in the US than in Europe and Japan because dollar depreciation is expected to partially offset rising dollar-based commodity prices in 2007.

In addition, inflation will rise from a much lower base in Europe and Japan than in the US. As a result, US inflation will be much higher than inflation in most other countries in 2007. More importantly, real yields on US Treasury securities, which are only marginally positive now, are expected to become negative in 2007 as US inflation climbs higher and the Fed begins to cut interest rates.

At the same time, real yields on European and Japanese government bonds, which are already higher than real yields in the US, are expected to move higher. The growing real yield gap between the US and other countries will place enormous downward pressure on the dollar. Waning Fed credibility and increasing political pressure in the US for dollar depreciation will speed the dollar’s decline.

Democrats will take control of the US Congress in January 2007. Democrats have a strong history of economic intervention and are very likely to use trade and exchange rate policy changes in an attempt to reinvigorate rapidly slowing US economic growth. Asia’s economic giants, Japan and China, are likely to take the brunt of any economic policy changes engineered in the US Congress.

Legislation in the US aimed at prying open export markets in Japan and China is likely to inflame already substantial trade tensions, especially between Washington and Beijing. Meanwhile, the implicit change in US exchange rate policy that will precede such legislation will increase downward pressure on the value of the dollar against all major currencies, particularly the yen.

The dollar is likely to depreciate by at least 20% against the yen, the Swiss franc, the euro and the pound in 2007. The dollar will also depreciate against the currencies of emerging market commodity exporters. Finally, Beijing will probably allow the yuan to appreciate about 10% against the dollar. Rather than political pressure from Washington, continued high energy prices and soaring grain prices will motivate the revaluation of the yuan.

Sliding stock markets
Economic growth in China is likely to slip towards 6% in 2007. Beijing’s enormous fiscal latitude will ensure that ramped up fiscal spending will partially offset significant weakness in China’s US-oriented export sector. Accelerated yuan revaluation against the dollar will help offset the inflationary impact of rising energy and grain prices. Economic growth in Japan will probably fall below 1.5% in 2007 due to export sector weakness. In addition to importing all of its energy needs, Japan relies on imports of US corn for sustaining domestic meat production. This reliance on energy and grain imports will encourage the Bank of Japan to push the yen higher against the dollar to contain inflation.

Economic growth in Korea should slow towards 1% in 2007. Growing tensions between Washington and Pyongyang will undermine private consumption and investment while much weaker US- and China-bound exports will slow export sector growth. Like Japan, Korea is also a major importer of US corn. Won appreciation against the dollar will be limited by growing security concerns. As a result, inflation will accelerate, further undermining the won.

Economic growth in South and Southeast Asia will also slow sharply. In addition to slowing US economic growth, increasing global geopolitical instability will lead to more frequent and violent terrorist attacks, especially in India, Indonesia, the Philippines and Thailand. These attacks will produce further political and social instability. Foreign capital flight, driven by much slower than expected economic growth and a sharp correction in US equities, will make these countries Asia’s worst investment performers in 2007.

Economic growth in Latin America will also suffer from the US downturn in 2007. Mexico, where political and social instability are expected to increase substantially while US-bound exports grind to a halt, should follow the US into recession. Capital flight will weaken the peso, preventing exchange rate appreciation from offsetting the impact of sharply higher corn prices on the domestic food industry.

Economic growth in Brazil, Colombia and Peru will also slow sharply in 2007. Brazil’s export sector will benefit from soaring grain prices, while Colombia and Peru will suffer from the same. Equities in all four countries will follow US equities downward. Economic growth in Venezuela, Ecuador and Argentina will benefit from soaring commodity prices. This will not prevent equity market correction, but should underpin exchange rates in all three countries.

With the notable exception of Turkey, economic growth in Europe should suffer the least from slowing US economic growth in 2007. Monetary policy in the EU will tighten further, underpinning currency appreciation. Economic interdependence between EU members will insulate the region somewhat from slowing economic growth in the rest of the world. Russia will benefit from rising commodity prices. Despite more promising economic prospects, equities across Europe will follow US equities in a sharp correction.

Bond markets around the world are likely to be very volatile in 2007. Rapidly changing economic growth and inflation expectations will produce wide price swings. This volatility will be led by US bonds, which will see falling yields in early 2007 be replaced by rising yields in mid-2007 as inflation increases and foreign capital flight accelerates. Spreads on emerging market bonds will widen with falling equity markets around the world. Commodities, including energy, grains and precious metals, will probably perform much better than traditional investment assets as both investors and central banks speed diversification.

Jephraim P Gundzik is president of Condor Advisers. Condor Advisers provides investment risk analysis to individuals and institutions worldwide. Visit www.condoradvisers.com for more information.

K. Richebacher, A Dangerous Addiction

A Dangerous Addiction
By Dr. Kurt Richebacher

It has become customary in the United States to speak of
"asset-driven" economic growth. "Asset-driven" is, of
course, a euphemism for bubble-driven, because it requires
particularly large rises in asset prices.

Many modern economists consider asset-driven growth a valid
alternative to the traditional growth pattern, nowadays
called "income-driven" economic growth.

Mr. Greenspan gained high regard in the late 1990s for
nourishing the rising stock values that provided such a
massive "wealth effect" and, therefore, such a massive
boost to consumer spending. Plainly, this inspired him to
subsequently nourish the housing bubble. A new, indirect
and apparently more efficient method of stimulating
consumer spending through intermediation of an asset bubble
was invented.

It seems to have two great advantages. Rising asset prices
can boost "wealth" much more quickly than income growth,
while also providing facilities with high leverage. But if
these are advantages, they cannot be regarded in isolation.
For obvious reasons, the bullish publicity concentrates on
the two best-looking statistical aggregates as the key
measures of economic performance. That is, real GDP and
productivity growth. As a rule, they are in line with what
people actually experience in the incomes they earn and the
prices they pay in the shops. But this time, there is an
unprecedented gross discrepancy between the very good looks
of these two aggregates and what they experience in actual
life. It is an open secret there is extensive statistical
spin.

Frankly speaking, we liken asset bubbles and associated
credit bubbles with drugs. Just like human bodies can
become dangerously addicted to drugs, economies can become
dangerously addicted to these bubbles. Of course, drugs
cause severe damage to body and soul, and so do asset and
credit bubbles to the economy and its financial system. In
the U.S. case, these damages are highly visible. See the
collapse of saving, the monstrous trade deficit, the
capital spending crisis, miserable employment and income
growth and, on top of that, the debt explosion devastating
balance sheets.

These are definitely the attributes of pathological,
unstable and unsustainable economic growth. These are more
than just symptoms, because they exert their own malign
effects. The decisive problem is that credit bubbles do not
evenly distribute their effects across the economy. They
concentrate on one or two areas, which expand out of
proportion to normal trend growth. In the U.S. case, the
latest credit excess has centered on durable goods, housing
and financial speculation.

Put differently, asset and credit bubbles distort the
economy's demand and output structure in an unsustainable
way. At some point in the future, the related spending
excesses flag, either under the pressure of credit
tightening or on their own accord. Depending on their size,
the bubble economy slides into recession.

Have the borrowing-and-spending excesses of the past years
in the United States been of a size to make a severe
adjustment crisis and deeper recession possible or
probable? That is today's most important question, not only
for the U.S. economy, but for the world economy. A crucial
related question, of course, is the U.S. economy's
resilience and flexibility to resist the coming adjustment
shocks.

According to forecasts, the consensus economists expect the
U.S. economy to see little more than a brief and minor
economic slowdown from the housing blow. Basically, it is
still in their eyes a "Goldilocks" economy, its outstanding
emblem being low inflation interest rates.

For American economists, it is dogmatic that low inflation
rates are the infallible indicator of economic health. The
Great Depression of the 1930s, and also Japan's prolonged
economic malaise, both having followed many years of a
stable price level, should have taught a lesson about the
inadequacy of this aggregate as a measure of health and a
guide for policy.

The key point about the U.S. economy, really, is that the
forces that caused the 2001 recession never went away. They
went from bad to worse. Business fixed investment has not
really recovered from its slump in 2000–02. Its recovery in
the following years has been far too weak to offset the
prior loss. The counterpart and implicit cause of this
capital spending crisis are the spending excesses on
consumption and housing absorbing a growing share of GDP.

In 2005, consumer spending and the housing bubble accounted
for 90.1% of real GDP growth. Now consider the following
two figures: Real disposable income of private households
grew 1.2%. This compared with an increase in real consumer
spending by 3.5%. That is, spending rose three times as
fast as disposable income!

It is no secret what made this incredible discrepancy
between the two aggregates possible: equity extraction
against inflating house prices. Over the four years 2001–
05, outstanding mortgages of private households have jumped
from $5,292.9 billion to $8,888.1 billion, or 68%.
Apparently, the housing bubble was not only the icing on
the cake. It was the cake.

While U.S. real economic data overwhelmingly keep
surprising on the downside, comments by economists and the
media keep surprising on the upside. According to a count
by Kleinwort Benson (Dresdner Bank), the frequency with
which the word "Goldilocks" is mentioned in the financial
press has risen to its highest level since the word came
into vogue as a description of the ideal U.S. economic
environment.

This is grotesque. Compared with 2000, when the last
downturn started, the U.S. economy's growth fundamentals —
savings, investment and the trade balance — have
dramatically worsened. Debts, in particular of private
households, have escalated as never before.

And now comes the housing bust – a bust that has barely
started. The housing-driven wealth effect that Americans
have been enjoying has disappeared. And now that home
prices are falling, the wealth effects will become anti-
wealth effects.

Rising home values have been supporting the U.S. economy's
recovery. Any significant fall in home values will abort
it.

[Joel's Note: The housing bubble wasn't the only thing the
world's most notable classical economist predicted way
ahead of time – the wilting U.S. dollar and a plummeting
savings rate has lead Dr. Richebacher to some other ghastly
conclusions regarding current U.S. economic trajectory. The
following report outlines the coming crisis and, more
importantly, details exactly how you can prepare yourself
and your portfolio for it. Greenspan fans need not apply.

The Coming Crisis and How You Can Best Prepare
http://www.isecureonline.com/Reports/RCH/ERCHG813

Mike Whitney, Housing bubble smack-down

Housing bubble smack-down
By Mike Whitney
Online Journal Contributing Writer


Nov 21, 2006, 00:18

Give me five minutes and I’ll convince you that you should sell your house immediately and invest your life-savings in gold or a Swiss bank account.

Okay?

For some time now we’ve been hearing about the so-called housing bubble and what effect it could have on your net worth and future. Well, the numbers are finally in and you can decide for yourself whether its time to sell now or try to ride out the storm.

In 2000, the total value of homes in the US was $11.4 trillion. Today, that number has shot up to $20.3 trillion; nearly double.

At the same time, mortgage debt in 2000 was a trifling $4.8 trillion (about half) while in 2006 it skyrocketed to a whopping $9.3 trillion.

So, how do we explain these enormous increases in value? After all, wasn’t the housing boom just the natural outcome of “supply and demand?”

No it wasn’t. That’s an unfortunate myth that should be interred with the withered remains of Milton “free-market” Friedman.

If we really want to know what’s going on, we need to look back at the machinations at the Federal Reserve in 2001, that’s when Greenspan lowered interest rates to 1.5 percent to soften the blow from the stock market meltdown. Rather than tighten interest rates and let the country go through a period of recession, Greenspan lowered rates and ramped up the printing presses to full throttle.

Voila; the housing bubble! Or what the conservative “Economist” magazine calls “the largest equity bubble” in history.

The housing bubble has nothing to do with supply and demand or with the fictional increase in workers' salaries, which have actually gone down since Bush took office. Rather, it is the predictable result of dramatically increasing the money supply while expanding personal debt via home-mortgages.

Remember, the central banks are not in the mortgage business; they are in the “money-pedaling” business. And the way you sell more money is by making it as cheap as possible. The Fed intentionally inflated the bubble with cheap money so they could keep the printing presses whirring along. They worked in concert with the banks to lower the requirements for mortgages so they could attract an endless swarm of unqualified customers who wanted to join the feeding-frenzy.

Isn’t that what happened?

And, didn't that make it possible for every Tom, Dick and Harry to borrow hundreds of thousands of dollars on “no down payment,” “interest only,” ARMs or other equally risky mortgage-packages?

Of course it did.

There are some who will argue that the Federal Reserve just made an honest mistake and were merely trying to steer the country away from impending recession.

That may be true, but let’s consider the facts before we draw any hasty conclusions.

Did the Federal Reserve double the money supply in the last seven years?

Yes.

Did they know what they were doing?

Yes.

Did they know that printing more money creates inflationary pressures and reduces the value of money already in circulation?

Yes.

Did they realize that the money was going directly into the real estate market where it was creating an unsustainable equity bubble that would eventually crash and destroy the lives of hundreds of thousands of Americans whose greatest asset is their home?

Of course, because it's the Federal Reserve which produces all the relevant facts and figures, charts and graphs, about increases (and trends) in the housing market. How could they NOT know?

In other words, they doubled the money supply and then sat back and watched while $4.5 trillion went directly into the real estate market via mortgage loans to people who were under-qualified, knowing that these same people would eventually fail to meet their payments and adversely effect the entire market.

The Federal Reserve knew all of this. In fact, they knew where every dime was going, but decided to persist in their swindle to the bitter end.

Have the real effects of this monster-bubble been softened by the huge trade deficit?

Yes, because America currently borrows $800 billion a year from China, Japan, etc., which keeps the economy sputtering along while our manufacturing sector continues to be ransacked.

The $800 billion account deficit is like a sedative that lulls us to sleep while the country is looted right in front of our eyes. For example, in the last 12 years, foreign ownership of US assets has soared from $3 trillion to over $12 trillion (400 percent). At the same time, over 13,000 major US companies have been sold to foreign corporations since 1980. Nevertheless, Americans are only too happy to ignore these unpleasant facts, as long as they can totter off to Wal-Mart to buy little Johnny his new videogame. It’s only a matter of time before the scattered, bleached bones of American industry appear everywhere across the American heartland.

And, does the Fed realize that Americans borrowed another $825 billion from their home equity in the last 12 months (to spend on house repairs, shopping, boats, etc.) and that without that consumer spending the nation’s growth rate (GDP) will shrivel to nothing?

Yes, because they provide all that data, too.

So, what does this mean for the homeowner whose future depends on the steady increase in his home equity? What can he expect?

Well, first of all, you can ignore all the gibberish you hear on the business channel about “soft landings” and a “temporary downturn.”

There’ll be no soft landings. This is the Big One; Real Estate Armageddon followed by a plague of locusts.

JUST LOOK AT THE NUMBERS! There’s a $10 trillion difference between the aggregate in 2000 and 2006; $4.5 trillion of that is new mortgage-debt! That’s more than a little “froth” as Greenspan likes to say. In an economy that’s currently growing at a feeble 1.6 percent, a plummeting housing market could pave the way for another (dare I say it?) Great Depression.

Ten trillion dollars! Some things are worth repeating.

First of all, if we compare our situation to what happened in Japan during the 1990s, we can expect that prices will continue to fall for years to come, perhaps, a decade or more. Many of the slower markets are already showing a decline of 10 percent to 20 percent. This is a trend that is likely to speed up dramatically in 2007 when $1 trillion in ARMs reset. That’s when we’ll begin to see a truly new phenomenon in the US, that is, people who’ve always been solid members of the middle class sliding downwards into the ranks of the working poor.

By 2008, if the present trend-lines persist, housing prices will probably drop to 25 percent to 30 percent of their 2005 value; diminishing equity value by approximately 45 percent to 50 percent for most homeowners.

If you own your home outright; you can sweat it out, but if you got into the market late; you’re toast. You’ll be joining the throng of mortgage-slaves who are shackled to loans that are significantly higher than the current value of their houses.

Imagine paying off a loan for $400,000 when your house has been reassessed at $250,000 or $300,000; that’ll be the reality for an estimated 30 million Americans. Meanwhile, inventory will continue to grow (already at an 8-month backlog), the economy will continue to contract, and the dollar will continue to weaken. (Many of the major home builders; Centex, Beazer and Toll Bros, are reporting that profits are down by nearly 65 percent.)

At the same time the Fed just issued another $10 billion in Treasury Bonds last week, raising the national debt to a mind-boggling $8.6 trillion. This loosey-goosey approach to printing fiat money and creating debt explains the recent surge in the markets. As “The Daily Reckoning’s” Richard Daughty says, the “bull market is manufactured from rampant government deficit-spending and financed by the Federal Reserve creating the money.”

Amen. Its all fluff and there's nothing to it. It's just loose money finding a temporary perch before the approaching squall. Don’t trust the smoke and mirrors. Behind the merriment and gusto, Wall Street analysts are expecting a collapse . . . and soon.

How soon, you ask?

Well, Daughty also notes that “revolving credit like credit card loans grew by $2.85 billion, or at an annual rate of 4.00 percent, to $857 billion.”

So, credit card debt is going up, which is an indication that the people who were siphoning money from their home equity have switched over to plastic. That’s a sure sign the writhing consumer-beast is in its last throes. The end is near.

Why Should I Care About Net Long-term Capital Inflows?

In another bit of disheartening news, the net long-term capital inflows fell short of what the US needs to cover the current account deficit. The inflows were only $65 billion when we need $70 billion to make ends meet. This is another way of saying that foreigners are no longer mopping up our red ink. Interestingly, foreign central banks are buying considerably fewer Treasuries; $9 billion in US securities and a paltry $8 billion in Treasury bonds.

What does it mean? It means that no one is dimwitted enough to buy our debt anymore, because we’re no longer a good risk.

That’s a very bad sign. Under different stewardship the "full faith and credit" of the US Treasury meant something. That's no longer true.

Also, according to Marketwatch, “US residents purchased a net $22.9 billion in foreign securities, up from $2.7 billion in August. Foreign holdings of dollar-denominated short-term securities, including Treasury bills, fell by $10.8 billion.”

Foreign investments are up $20 billion in one month? Are you kidding me?

So, the smart money is getting out of Dodge pronto; leaving the rest of us behind in a leaky canoe.

Thanks, Greenspan

Some of you may have seen Alexander Cockburn’s shocking article, “Lame Duck,” on Counterpunch. Cockburn refers to a report published by the Financial Services Authority (FSA) “a body set up under the purview of the British Treasury to monitor financial markets and protect the public interest by raising the alarm about shady practices and any dangerous slides towards instability.”

The report “Private Equity: A Discussion of Risk and Regulatory Engagement” states clearly: “Excessive leverage: The amount of credit that lenders are willing to extend on private equity transactions has risen substantially. This lending may not, in some circumstances, be entirely prudent. Given current levels and recent developments in the economic/credit cycle, the default of a large private equity backed company or a cluster of smaller private equity backed companies seems inevitable. This has negative implications for lenders, purchasers of the debt, orderly markets and conceivably, in extreme circumstances, financial stability and elements of the UK economy.”

The problem is even greater in the US where unregulated fractional lending has allowed banks to lend unlimited amounts of money on measly reserves. Hence, “the default of a large private equity company is inevitable.” The whole deregulated banking scam has turned the system into a Vegas-style “crap shoot” with no guarantees that you’ll ever see your money again. The same is true with the new-fangled investment “instruments” like hedge funds, which contain few tangible assets and more and more “collateralized debt.” That means that they depend heavily on the “worker bees” at the bottom of the economic Totem Pole, who are expected to continue making their payments even while the economy begins to swoon.

The present system is fraught with peril and likely to come crashing down in a heap. As Cockburn sagely notes, “The world’s credit system is a vast recycling bin of untraceable transactions of wildly inflated value.”

“Market transparency” has gone the way of the Dodo. The new “deregulated” markets are intentionally opaque so the medicine men and hucksters who designed them could fleece the public from the comfort of their Wall Street enclaves. No one should be too surprised that the whole rickety contraption is tilting towards the dumpster.

Happy Days in the Weimar Republic

So, what was the “Grand Plan” the Fed had in mind when they decided to anesthetize the American public with low interest rates and flood the planet with worthless green scrip?

Did they think that Bush would corner the oil market and, thus, force the rest of the world to take our anemic greenbacks? Or were they just planning to steal every last farthing from the American people before they loaded the boats and fled to more promising markets in Asia?

Or perhaps they were delusional enough to believe that really wonderful things would happen if they just kept tossing banknotes into the jet stream like New Year’s confetti?

Whatever the madcap rationale might have been, the country is now facing an agonizing wake-up call as the full effects of Greenspan’s tenure materialize and the stronghold of global consumerism deteriorates into Weimar USA.

In the long run, Greenspan’s treachery will loom larger then that of his “would-be” understudy, bin Laden. He put the country on the fast track to disaster.

Just watch as the “For Sale” signs go up on lawns across America in Dear Alan’s honor.

Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com.

US housing bubble: Economy in denial

US housing bubble: Economy in denial
By Axel Merk

Every day, another economist claims that the impact of the slowdown in housing on the US economy has been overstated; a few months ago, many still disputed that there even was a housing bubble. There has been a housing bubble, the bubble has only started to deflate, and it may have very negative long-term implications for the US economy as well as the US dollar.

Almost every day, a high-profile company directly or indirectly targeting the US consumer warns that its outlook is bleak. Let it be Yahoo warning about advertising revenues; let it be Dell's warning that its eternal rebate programs cannot push sales any more; or let it be the automakers that sell many of their brands at prices below last year's level, yet are still unable to boost volume. All these incidents are linked to the US consumer; and US consumer spending, in turn, is very closely linked to the health of the housing market. It also comes as no surprise that so far this year, the US dollar has fallen significantly versus a basket of currencies.

Home-building activity has collapsed, with some builders reporting as many as half their orders canceled. The volume of homes sold has declined and inventories are up. Home prices have - so far - held up reasonably well, mostly because the cost of long-term mortgages has been reasonable; while short-term interest rates have risen, interest rates on longer-term loans have in some instances even come down.

As a result, the squeeze on consumer spending has been relatively mild and limited to a squeeze on homeowners who have been dependent on adjustable rate mortgages who have seen their rates rise; beyond that, the squeeze has been on home owners who have employed their homes as automated teller machines - these owners are dependent on eternally rising home values to finance their spending.

By keeping inflation expectations low and the threat of an economic slowdown high, the Federal Reserve (Fed) has engineered an environment where homeowners have the opportunity to move out of adjustable-rate mortgages into longer-term, fixed-rate mortgages.

Click on the link above to read more.

More pessimistic than James Howard Kunstler

Mike Ruppert, that is. Whether his speculation about the U.S. government's complicity in various events is right or not (or the criminal activities of various officials), I won't address. Mr. Ruppert's website (mirror).

Now for the reason for this poist: his latest speech--heads up to the person who posted this at JHK's blog. It's unfortunate that he doesn't list his sources for the various points he makes about what is going on in the world right now. Perhaps the various intelligence agencies within the Federal Government could confirm (or deny), but we don't have access to that information now, do we? Just whatever news reporters provide.

And a story (found at From the Wilderness):
The housing bubble has popped
Reports of falling sales and investors stuck with properties they can't sell are just the beginning. Property owners should worry; so should their lenders.
by Bill FleckensteinMSNMonday, April 24, 2006

A recent story in the Wall Street Journal, "Hot Homes Get Cold" offered lots of its useful vignettes that serve as a microcosm of manic markets -- starting with the bravado-cum-denial displayed by a medical-equipment salesman in Stuart, Fla.

Concerned about his real-estate investment apparently going sour, he can't afford to reduce the price to what homes now sell for in his neighborhood -- which is about $100,000 less than he's asking. Says the salesman: "If I got in a jam, I would have to drop the price, but I am not at that point." His game plan: Rent the house, so as not to "lose my shirt."

That's the mentality often seen in manic markets -- the belief that you can't possibly lose, and, when the price goes against you, you don't have to deal with it, because it will come back. This fellow (and millions more like him) is going to find out that his belief is a mistaken one, in the same way that folks did when the stock bubble burst.

Dwelling takes a little shelling

The story went on to note that many formerly hot markets in California, Arizona, Washington, D.C., and Florida are now "languishing without buyers or even prospects. Many once-booming markets are seeing double-digit declines in sales." The magnitude of the drop in Florida home prices (once the frothiest market in the country) is striking. Single-family home sales declined 20% in February, year-over-year. Similarly, California sales dropped 15%. Some of the hottest towns in those states were off twice as much.

I loved the point that what seems to be really alarming is how "real-estate agents in some of these formerly red-hot markets have been surprised at how suddenly (my emphasis) market conditions have deteriorated in the past few months." Of course, that's what happens when manic markets and bubbles turn. Prices change radically and, seemingly, for no reason.

Many people will say that the real-estate market has turned due to higher interest rates, and rising rates have hurt. But the real-estate market ignored rates going up for quite some time. Its topping was caused by exhaustion. Same with the stock bubble -- many folks think it was rising rates that caused the implosion. That isn't true. The stock bubble ran until it popped in March 2000, having ignored everything up to that point.

Symptoms of the doldrums

To me, it's not debatable that the real-estate bust is starting to gather steam. The top was approximately when Time Magazine published its June 12, 2005, cover story: "Home $weet Home: Why We're Going Gaga Over Real Estate". (For more, check out my June 13, 2005, column, "Straight talk on what the Fed has wrought," and my Aug. 29, 2005, column, "It's RIP for the housing boom.")

After having leveled off for a while, the real-estate market is now starting to slide. We're seeing signs of sales slowing and inventory accumulating, which are all quite classic, even though the timing of when this would begin was not possible to predict in advance.

Continuing on, the article noted that Florida is "ground zero for the housing market" and as good a laboratory as any to watch. The real power behind the housing bubble, i.e., irresponsible lending, was "exacerbated in Florida." Quoting from Mark Zandi,
chief economist at Moody's Economy.com: "There were more lenders, more realtors, more foreign investors" than the rest of the country -- which is how a hot market gets really wild.

The story cited the plight of investors who'd purchased homes in formerly hot housing developments that now resemble "ghost towns." One such individual is Paul Zani (no pun intended, I'm sure), who'd bought a couple of condos, listed them for more than he paid and now can't sell them. However, he doesn't want to reduce the price (even though he'll probably have to). This mentality is an example that many real-estate "investors" seem to share -- heads we win, tails the bank loses. (Some people are sanguine these days because, as the article notes, "while sales are slackening, they aren't collapsing." To that, I would add: "Yet." They will.)

By and by, heartburn for the bankers

It is indeed the financial institutions that are most at risk in the real-estate market (which is not to say that consumers and speculators won't get hurt). The lenders will bear the brunt of the pain, because in many cases, they loaned the entire purchase prices of many homes. As I have said often, the housing bubble has been more a lending bubble. It will be the impairment of the financial institutions that will stop the flow of credit to the real-estate market. In turn, that will accelerate the collapse in house prices somewhere along the way.

The story closed with a description of how slow the market has recently become in Florida -- via the following comments in an e-mail by real-estate broker Mike Morgan: "We went three days this week with not a single showing. That's incredible. I have 35 listings. We usually get 2-6 showings a day. ... I received more desperate calls from sellers than ever. One lady broke down into tears. Her husband bought two investment properties, and they are now going to lose their 'life savings' if they sell the homes in today's market."

Ladies and gentlemen, unfortunately, a lot of people around the country are going to be badly hurt as this bubble unwinds. And, after they have taken their losses, the
financial institutions that were the engine behind this folly will take their own hits. 'Easy Al' Greenspan at the Fed tried to bail out one bubble with another bubble. While it bought some time, it will end in far-worse pain.