Saturday :: Apr 8, 2006

Betting Against The House

by pessimist

Anyone who has been paying attention has noticed neighbors working low-wage jobs appearing to be living well beyond their means. The time to pay for this extravagance has been nigh ever since the housing markets slowed down late last year, as the evidence I have of my immediate neighbors recently returning their leased Expeditions and F-250s attests. They are now driving old Toyotas and Hondas.

Lots of 'For Sale' signs are cropping up all over, especially on houses that just sold in the last year or so. some are even advising 'Price Reduced'. I'm sure that it's to avoid losing everything already invested that drives that decision.

I'm not alone in this observation. Elizabeth Warren notes:

A Liberal is a Conservative Who Got a Foreclosure Notice

At least one conservative business analyst is warning his political compatriots that their middle class base may melt away when homeowners begin to experience the coming housing crash. Andrew LaPerriere sounds the alarm in the most recent Weekly Standard, telling conservatives to get some answers ready for the people who are going to lose their homes.

And from the signs I'm seeing, that is going to be an awesome number. Isn't it a sad things for 'conservatives' to see one of their own admitting that the hated liberals are right in their assertions that many people aren't benefitting economically like George says they are?

Ms. Warren continues:

While LaPerriere, the managing partner of a Washington brokerage firm, seems to want to distance himself from the “liberal economists, columnists and bloggers” who have been talking about this problem for several months, he agrees with every single point that that this unsavory group has been making.
In fact, he even plays with the numbers and adds some new data about the price-income ratio
that look worse than anything Paul Krugman has come up with.
LaPerriere dismisses those who claim the housing market is stable. Comparing them to the cheerleaders, he describes their explanations for how housing will sustain its current price levels as “ever more creative.” But he adds a political analysis that is amazingly candid, calling his fellow conservatives “strangely silent” on the problem and consequently vulnerable to the political fallout when conservatives across the country discover that no one in Washington was watching out for them.

LaPerriere offers no solutions. Instead, he sends up the plea that someone figure out a way not to blame this mess ... on “Bush’s tax cuts and other policies that have created a hollow and unsustainable economy.” His best answer is that it was loose monetary policy (read: inadequate mortgage regulation) in 2002-2004 that fueled this problem, as if that should let everyone in power in Washington off the hook.

He clearly doesn’t want to say it, but the way he aligns the numbers makes it clear that LaPerriere has heard the rumble of the earthquake. And he fears that the coming collapse will realign both housing prices and political affiliations.

And just why would that be a bad thing? Many reasons - the graft-and-gravy-train would be derailed, the tax slaughter would come to an end as the US will begin to repay the massive debts run up under Republican mi$-governance, and the wealthy will return to the ranks of the merely employed from whence they came - if they are lucky.

I now turn the mic over to Mr. Laperriere to explain the coming crisis:

Have we been living beyond our means?
by Andrew Laperriere
04/10/2006, Volume 011, Issue 28

"If something can't go on forever, it won't."
- Herb Stein
WITH NEW HOME SALES DOWN 10.5 percent in February, and with home prices declining for the fourth month in a row, it's high time for a sober look at the consequences of a major housing correction. The big question is this: Will the housing sector experience a soft landing and slow the economy or a hard landing that pushes us into recession?

[T]he concerns about unsustainable growth in consumer debt and home prices are not easily dismissed. A weakening housing market could transform what has been a virtuous cycle into a vicious one, substantially reducing economic growth during the next couple of years (and going into the 2008 election). [C]onsumers have withdrawn $2.5 trillion in equity from their homes ... spending as much as half of it and thus making a huge contribution to the growth the U.S. economy has enjoyed in recent years (consumer spending accounts for two-thirds of GDP).

But consumers cannot keep spending more than they make. Eventually, home prices will flatten, the flood of "cash out" refinancings will become a trickle, and consumer spending will slow - as will job creation in housing-related industries. If this borrowing of home equity remains very high but slows from current levels, which is a near certainty if home prices flatten, it would have a depressing effect on the economy.
Roughly a quarter of the jobs created since the 2001 recession have been in construction, real estate, and mortgage finance.
Countless articles in the financial and popular press have now been devoted to the question of whether we are in a housing "bubble." Unfortunately, the weight of the evidence strongly suggests a bubble. Economists at international banking giant HSBC have identified 18 states and the District of Columbia as "bubble zones." House prices in these zones look remarkably similar to the rise in the S&P 500 during the 1990s stock market bubble...
The price of the median home is up an inflation-adjusted 50 percent during the last five years, an unprecedented national increase.
[P]rices are overextended in enough areas that a real estate correction would have national fallout. The mortgage insurance company PMI estimates that regions accounting for more than 40 percent of the nation's housing stock are overvalued by more than 15 percent. Other estimates of overvaluation are much higher.

Rolling Snake Eyes

NOT ONLY ARE HOUSE PRICES at extreme levels by traditional measures, but the manner in which home purchases have been financed in recent years is also disconcerting. [W]hy have so many people embraced financing schemes that leave them vulnerable to higher interest rates or even a modest correction in home prices?

Consider the growth of interest-only and "pay-option" adjustable rate mortgages--loans that initially don't require borrowers to repay principal. With the latter, also known as an option-ARM, the outstanding balance owed can actually get bigger every month.

Such loans are risky because after an initial period of three or five years with low rates and no principal payments, the loans 'reset',
and consumers can experience 50 percent or even 100 percent increases in their monthly payments.
About $2 trillion in loans, or a quarter of outstanding mortgage debt, will reset in this fashion during the next two years according to Therefore, millions of households are about to experience significant payment shock.

A recent study by First American Corp. shows that many of the borrowers who have taken advantage of the lowest teaser rates and are going to experience the greatest payment increases have little or even negative equity in their homes.

If home prices fall modestly, millions of homeowners will see their equity wiped out. Many of those with the least amount of equity, as we've already shown, are going to face significant increases in their monthly payments.

So what has been a virtuous but unsustainable cycle for the economy--higher home prices, more borrowing against home equity, higher spending, increased job creation, even higher home prices--could easily reverse and become a vicious cycle--higher monthly payments, declining home prices, less spending, job losses, foreclosures, even lower home prices.


The nation's bank regulators have seen enough and have issued draft rules that will take effect this spring requiring banks to tighten standards on loans where the consumer isn't required to pay principal up front. That's going to tighten credit in the high cost markets, reduce demand for housing and put downward pressure on home prices.

It's also going to bring George's highly touted economic 'boom' to an end - right when he's going to need good news the most.

Similar economic moves are being made on the international front, as Japan in particular is tightening its monetary policies. Other nations are going to follow suit quickly, as that is the only way they can lessen the coming fiscal damage caused by American profligacy. China in particular is reported to be interested in picking up American mortgage notes in order to be the owner of record of real property - something that would have real value over the promissory note that is the American Dollar.

Americans are going to learn to despise the IMF and Wolfy's World Bank as much as the rest of the world does, as the corporatist interests turn the economic Frankenstein's Monster they created on us like they have so many other nations in the past. The point is going to be driven home that people don't matter as much as money does to those who will benefit from these entities taking action to reclaim 'value' for those who 'invested' in our economy just like they did others - no matter who it is taken from.

It isn't going to matter if your job goes away, for some wealthy investor in some foreign land must be given his due, paid with the property of your employer. It's far more important that said investor be allowed to reclaim his assets to reinvest in some other land where his profit picture is much more rosy.

Just tell yourself that he's done the right thing as you watch your loved ones sicken and die when the economy collapses.

I have just finished reading an advance copy of a new book coming out soon, The Messiah of Morris Avenue, written by Tony Hendra and published by Henry Holt and Company. I'll be covering this book in more detail soon, but a couple of lines in it really caught my attention, and it is most apt that I use them here:

Selfishness is behind every kind of inhumanity. Evil is caused by selfishness, by people acting out of the belief that they and their needs are paramount.

Have we not heard this message through words spoken by Owwer Leedur, when he tells of his constituency (being made up of "the Have$... and the Havemore$") needing the tax breaks that take away from the rest of us the things that once made American lifestyle the envy of the world?

Tell me again. Who is it that really hates our freedoms?

Many of these Rangers and Pioneers who paid for the ascention to power of King George to take away from the poor to give to the politically-connected aren't going to be among those whose fortunes survive the coming crash. Many of them followed the same foolish economic practices as too many home 'owners', only on a much larger scale thanks to the largesse bestowed upon them by Hizz Hindni$$. They are leveraged to the hilt in order to acquire as much as they could as quickly as they could. Their economic necks are out-stretched tighter than a hangman's noose bearing a rustler in the blazing Texas sun.

They are going to be in the same predicament that they cast the rest of us - and they will be the most angry that they lost everything. After all, they were the ones to taste the forbidden fruit of unbridled greed. They will know well what they have lost.

All I have to say to them is, "Welcome to Hell. No one you paid for in Washington was watching out for you."

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