Thursday, December 08, 2005

The Housing Bubble

A pet peeve of JAC's is the constant rumble of the bears. You know... the boys like me who look around and say... "Holy crap! This is all a big house of cards just wait for someone to bump the table!" Well just this once I hope the ol' feller cuts me some slack while I explain just why all this is crap is gonna fall apart, in very simple terms, that everyone can understand.

Ok boys... put on your imagination caps. Your employer comes up one day and says, "We're cuttin' everyone's pay in half. Ya feel dizzy... your stomach knotts up... then your local union rep struts up and tells you how hard they worked to make sure you only got a 50% paycut... oh but hey don't worry.... in three or four years... you'll be back to full pay. So he says.

So what do ya do? Ya can't go get another job... not one that pays what your old one did... and the bills are coming due. Savings will get ya through a few months but that's it.

So... ya go out and ya start living off credit cards. You borrow and borrow and borrow to fill in the gaps, because once the big payday comes in the next few years, you'll be fine. You just have to survive until then.

Every one of you knows that's stupid right? Every one of you knows that's the exact wrong thing to do. Right? The predictable outcome is finacial ruin and bankruptcy. Right?

Well that my friends is exactly what the Fed has done.

When the tech bubble burst, the keynes playbook says "print more money". So, they drop interest rates to the floor and pray. People see the insanely cheap money to be borrowed on their homes, and figure they can't lose. People start refi'ing their homes left and right, and spending the money and therefore keeping the economy going just fine. As more and more people borrow, this in turn drives up the cost the all ready moderately inflated housing market even more. It's simple really... people want money.. bank wants to give it to them.. so appraisors simply write it up and call it day. Doesn't matter if the house really isn't worth it... after enough false appraisals, you can eventually push up the market. People borrow more and more... with the low rates... more and more people buy houses. It goes on and on and on, and the prices go up and up and up.

But in the end.. the bill eventually comes due. It's a race. Its a race to find the next boom before the borrowed money runs out, and you pray the boom is enough to pull you out of the hole you dug.

Now... the hope is a few people take it in the keister when the housing market goes bang.

Here's the trouble with that solution. It's not a few people. New home sales are driving this bad boy, and have been for the last few years. So we still have millions of people out there, who's homes are not worth what they owe on them. They borrowed a bunch of money, and blew it, and now they have these handy little adjustible rate mortgages, that are just about to start choking them to death.

It's like quicksand. Your house isn't worth what you owe on it... so you can't afford to sell it... and every quarter... the payment goes up.. and up.. and up... and there is just nothing you can do about it.

The bill's comin' due boys. Is it coming tomarrow? No. Will there be a few more spikes in the stock market here and there before it happens? Yes. Does that mean it's not going to happen? No.

When you've got the cheerleaders on the MSM business shows talking about the looming housing bubble... you can rest assured the problem is already to bad to fix.

No comments: