The Housing Market’s Last Gasp

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Wed, 28 Dec 2005 00:54:47 -0500 (EST)

The Housing Market's Last Gasp

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December 27, 2005

 

The Housing Market's Last Gasp

 

By Mike Whitney

 

Four months ago I wrote an article, " Doomsday; the Final Months of the

Housing Bubble " that predicted a dramatic fall in housing prices that

would have a catastrophic effect on the American economy.

 

In truth, I'm a lousy forecaster and simply collected the relevant

data from a number of sources that convinced me that the end was

quickly approaching. Now, it seems that dismal day is upon us and the

Grim Reaper has begun churning out the disappointing statistics that

we've dreaded from the very beginning.

 

In November the sales of new homes plunged by the largest amount in 12

years. The 11.5% decline from October was 4 points higher than

expected by Wall Street analysts, fueling the belief that the red-hot

housing market is headed for the dumpster.

 

This sudden downturn is expected to slow the wave of speculation that

has kept the market booming for the last few years. According to an

Associated Press report, sales dropped by " 22% in the West, the

biggest decline in the region since February 1995. "

 

Many readers will wonder why trimming the spec-market threatens the

overall economy. The reason is, as the " Economist " points out is that

" 23% of all American houses bought in 2004 were for investment, not

owner-occupation. Another 13% were bought as second homes. Investors

are prepared to buy houses they will rent out at a loss; just because

they think prices will keep rising -- the very definition of a

financial bubble. "

 

If we consider the effects of 36% of buyers moving out of the market

we can grasp the magnitude of the problem.

 

The crisis is compounded by the enormous effect of the housing market

on both growth and jobs.

 

" Over the past four years, consumer spending and residential

construction have together accounted for 90% of the total growth in

GDP. And over two-fifths of all private sector jobs created since 2001

have been in housing-related sectors, such as construction, real

estate and mortgage broking. " (The Economist)

 

" 2 out of every 5 " private sector jobs!?!

 

" 90% of the total growth in GDP " !?!

 

These are figures that simply boggle the mind. What it tells us is

that the market has been artificially inflated by the Federal

Reserve's shortsighted low-interest rates policy and the shabby

lending practices of the major mortgage companies.

 

The banks have lowered the standards for home loans to such an extent

that the traditional loan of 20% down and a fixed interest rate is

virtually a thing of the past. Instead, those conservative practices

have been replaced with " creative financing " schemes that put the

entire housing market at risk.

 

In 2004 " one-fourth of all home-buyers -- including 42% of first-time

buyers -- made no down payment. " (New York Times, July 7, 2005)

 

Equally troubling is the fact that " nearly one third of all new

mortgages this year call for interest-only payments (NY Times) This

tells us that a large number of new buyers can barely make their

payments, but are gambling that their property value will go up enough

to justify their investment. This is " equity roulette, " a shell game

that anticipates that salaries will go up while interest rates stay low.

 

We can anticipate that many overstretched homeowners will begin to

fall from the economic precipice in short order. In fact, many markets

are already showing a 40% increase in foreclosures even though the air

has just begun hissssssing out of the bubble.

 

The ridiculously low interest rates coupled with the irresponsible

lending practices has precipitated a feeding frenzy for cheap money.

Greenspan is expected to raise rates another one-half percent before

he leaves in January which should be just enough to collapse the

market and put the economy in a permanent coma.

 

As Paul Van Eeden says in " The End of the Real Estate Boom " , " This is

not a trivial matter…As the real estate market goes, so goes the

economy and the stock market. The only thing that could keep the US on

life-support a little longer is another round of interest rate

reductions, but this time it could hurt the dollar, and that would

mean higher gasoline prices again, so it's a double-edged sword. "

 

Van Eeden provides a good description of the mess that Greenspan has

created; a blind alley from which there is no foreseeable escape. The

Federal Reserve has managed to keep the economy running on fumes by

dropping rates 12 times to a rock bottom 1% after the fall of the

stock market (another Greenspan fiasco which cost the American people

$7 trillion) It was basically " free money " loaned out to keep the

country limping along (and to facilitate Bush's tax cuts) while

millions of Americans tried to recoup from their losses. Regrettably,

the cheap money and shaky loans simply created an even bigger and more

lethal bubble that is following the same trajectory as the Hindenburg.

 

Ka-booom!

 

Adding insult to injury, the Federal Reserve announced 2 weeks ago

that new steps will be taken to regulate low-interest, high-risk

loans. In the third quarter a full 33% of first-time home buyers took

advantage of " non-traditional " mortgages. ( " No interest " or " ARMS "

adjustable rate mortgages) Try to imagine the chilling effect on the

housing market when 33% of first-time homeowners are removed from the

pool of potential buyers?

 

Still think you'll be able to sell your house at a profit?

 

Jittery Americans don't need a crystal ball to spot the shipwreck

looming just on the horizon. The last remaining droplets of prosperity

are trickling from the ailing economy and Greenspan's 18 year quest to

flatten the American middle class will soon be realized. " The

Economist " summarized it best when they said, " The worldwide rise in

housing prices is the biggest bubble in history. Prepare for the

economic pain when it pops " .

 

 

 

Authors Bio: Mike lives in Washington State with his charming wife

Joan and two spoiled and overfed dogs, Cocoa and Pat-Fergie.