by Mike Whitney
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% to soften the blow from the
stock market meltdown. Rather than tighten interest rates and let
the country to 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 7 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 which 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%
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 video-game. 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%, a
plummeting housing market could pave the way for another (dare I say
it) Great Depression.
$10 trillion!?! 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% to 20%. 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% to 30% of their 2005 value; diminishing equity
value by approximately 45% to 50% 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 house.
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%.)
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%, 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 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 Treasurys; $9 billion in US
securities and a paltry $8 billion in Treasury bonds.
What does it mean? It means that no is dim-witted 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.
http://www.smirking
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Friday, November 24, 2006
Just watch as the "For Sale" signs go up on lawns
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