"The crash of the housing bubble will not be pretty.
Millions of people stand to lose their homes and life savings. However, it was
inevitable. The bubble created a fantasy world that could not continue. At the
peak of the bubble, 160,000 people a week were buying a home, most at bubble
inflated prices. The longer the bubble persists, the larger the group of people
who paid way too much for their home. While it is not good that so many dreams
had to be ruined, the number will be even larger if the bubble deflates slowly.
So I make no apologies about hoping for the hasty demise of the bubble."
Dean Baker, "Slow Motion Train Wreck" --The American Prospect, Aug 2,
"No question about it, the housing downturn is here
now, and it�s big." --Jim Hamilton "New Home Sales continue to
Fall", Econbrowser Aug 25, 2006
I wonder if Alan Greenspan takes a copy of the business page
along with him on the chairlift at Aspen, so he can read about the plummeting
housing market before swooshing down the well-groomed bunny-slopes at his
favorite ski resort. After all, no one played a larger role in inflating what
the "Economist" called the "biggest equity bubble in
history" than the retired Fed-master. His low interest-rate bonanza triggered
a stampede of speculation in the real estate market sending prices through the
stratosphere and setting the stage for the biggest economic bust in American
The whole catastrophe was cooked up Sir Alan and his coterie
of brandy-drooling elites at the Federal Reserve.
Greenspan has undoubtedly taken note of the sudden spike in
foreclosures which have set off alarm bells from Wall Street to the American
heartland. The effects of his "cheap money" policies are finally
sending tremors through America�s fragile economic landscape. In September,
2006 the US Foreclosure Market Report released a statement that over 112,000
homes had entered some stage of foreclosure "a 63 percent increase from
September 2005. September was the second straight month in which more than
110,000 new foreclosure filings were reported nationwide, evidence that the
spike in August was not just a one-month anomaly."
No, it is not a "one-month anomaly" and it is
bound to get considerably worse as $1 trillion of ARMs (Adjustable Rate
Mortgages) reset in 2007. The rising foreclosure numbers are the result of
rising monthly payments on the new-fangled loans which have low introductory
interest rates, but can unexpectedly double after a two- or three-year period.
Imagine mortgage payments that suddenly jump from $1,300 per
month to more than $2,000 on a $129,000 house. That�s what many people will be
facing in 2007 when their loans reset and they are suddenly forced out of their
homes and onto the streets.
The housing bubble is actually an extension of the stock
market bubble; Greenspan�s earlier swindle which cost American investors $7
trillion in retirement and life-savings. Both equity balloons can be attributed
to the shabby and exploitative monetary policies of the Federal Reserve. By
expanding credit and money supply via low interest rates, the Fed has kept the
economy whirring along, creating the impression of prosperity when it�s all
just smoke and mirrors. America�s opulence is built on a mountain of debt
that�s piled a mile high. Regrettably, that mountain is about to cascade on the
American people sometime in 2007-2008. There�ll be no escaping the fallout from
the $4.5 trillion dollars of new mortgage debt that�s built up in the last
seven years. By the end of 2007, we should be able to identify many of the
painful trends that accompany a deep recession; prices of homes will steeply
decline, GDP (gross domestic product) will fall, and Greenspan�s mighty Temple
of Debt will crash to earth.
Don�t believe me?
The New York Times reported last week that "about 2.2
million borrowers that took out sub-prime loans from 1998 to 2006 are likely to
lose their homes". That translates into about 10 million people! But that,
of course, is just the beginning of the bloodbath. The real fun begins when the
whole, ugly ball-o-corruption starts to unwind and we get an insider�s-view of
a system that is rotten to the marrow. The housing industry is saturated with
fraud; the banks, the mortgage lenders, the Fed and the homeowners themselves
have all played a major role in this sordid confidence game.
Consider this, for example: In 2006 the Mortgage Brokers
Association for Responsible Lending (MBARL) said that "Liar�s Loans"
(those based on what you TELL the bank you are earning, rather than what you
are REALLY earning) "shot up to an estimated 62 percent of mortgage
originations . . . A recent sampling of 100 stated income loans by an auditing
firm in Virginia (based on IRS records) found that 90 percent of the income
statements were exaggerated by 5 percent or more, WHILE ALMOST 60 percent OF
THE STATED AMOUNTS WERE EXAGGERATED BY MORE THAN 50 percent." (Dan Dorfman
New York Sun)
Are you kidding me? A majority of loan applicants are
grossly exaggerating their income and the banks are handing out hundreds of
thousands of dollars WITHOUT EVEN CROSS-CHECKING IRS STATEMENTS?
The question is, how many of these "liars" will be
unable to meet their mortgage obligations when the bill comes due in 2007-2008?
And, how will their (myriad) defaults affect housing prices for everyone else?
Another indication of hanky-panky appeared in the back-pages
of the New York Times last week under the appropriate title "A Phantom
Rebound in the Housing Market" by Daniel Gross. The article points out
that while the Commerce Dept. was celebrating the latest rise in new home sales
(in Nov) the reality was quite different. In fact, the government is
overstating sales "by up to 20 percent." The Commerce Dept. failed to
subtract the thousands of people who signed contracts but "simply walked
away from their deposits when they realized they couldn�t flip the houses for a
Ooops! So the government is falsifying the figures to make
things look better than they really are?
You bet. And, most of the high-end homebuilders like Toll
Bros are reporting cancellations in the neighborhood of 37 percent!
The Times adds that, "Mr. Zandi of Economy.com
estimates that the differential is even greater. �Given the rise in cancellation
rates, it suggests that between 150,000 and 200,000 home sales are being
counted that actually did not occur.�"
"Did not occur!" So, the government is beefing up
their stats with an extra 200,000 homes a month?
Okay, so the homeowners are lying on their loans, and the
government is lying about the sales (and inventory) figures; is that it?
No. In an earlier article (The Fed�s role in the Housing
Crash of �07), we already covered how the banks are loaning out as much money
as possible through all kinds of "untested" Mickey Mouse mortgages,
so that unqualified borrowers can get on board the housing gold rush. These are
the ARMs; the "no-down payment," "interest-only" loans
which Business Week magazine called "the riskiest and most complicated
home loan product ever created." Many of these ARMs are timed to explode
sometime in the next two years and the aftershocks from the defaults are
expected to be felt throughout the economy.
Of course, the banks never would have exposed themselves to
such extraordinary risk if they weren�t able to bundle up these dubious loans
and ship them off to Wall Street. Fund managers have been more than eager to
take this "collateralized debt" and use it in the booming hedge fund
industry. No one really knows what will happen to the stock market when
foreclosures begin to skyrocket and the banks and hedge funds are unable to
recoup their losses. But a major "correction" (meltdown) is certainly
not out of the question.
Once again, all of these problems originated at the Federal
Reserve where interest rate manipulation and the loosey-goosey approach to
money supply have created the potential for an economic firestorm.
Bubble, bubble, toil and trouble
So, what can we expect when interest rates tighten up and
the market begins to slump?
Well, first off, according to the Wall Street Journal,
lenders will get "more cautious in initiating new loans and have been
setting aside more reserves for potential loan losses." The banks are
battening down the hatches and preparing for the worst. This just confirms that
the real hurricane hasn�t even touched down yet and that America�s
over-leveraged consumers should try to straighten out their financial affairs
as swiftly as possible. (Get out of debt, pronto!)
A USB study indicates that a "high percentage of
borrowers with delinquent, defaulted and foreclosed loans have second
mortgages. These borrowers are so overburdened by the added debt that THEY HAVE
TROUBLE MAKING THE PAYMENTS ON THEIR FIRST MORTGAGES. This is an ominous
development since 34 percent of all mortgages in 2006 were second
In other words, it�s not simply people in the sub-prime
market who are feeling the pinch. Millions of Americans either have loans that
will reset at significantly higher monthly rates (which they won�t be able to
pay) or they are completely maxed-out financially after draining every last
farthing out of their home equity. In fact, falling prices have decreased the
amount of money that homeowners are able to take out of their home equity.
(Equity withdrawals decreased by 70 percent in the last year alone!) That means
that there is $525 billion less fueling the overall economy (GDP). As housing
prices steadily decline, we can expect that America�s growth will shrink accordingly.
The American consumer is hobbled by debt and has no way to
increase his revenue as long as wages remain stagnant. Additionally, US
households are now showing negative savings. (minus .2 percent) When the home
equity "punch bowl" dries up, it�ll be hard times for the average
over-leveraged American consumer. He�ll have nothing left for his buying sprees
but the plastic in his wallet. (Credit card debt is soaring)
It�ll be tough on the banks and Wall Street, too. After all,
over 50 percent of all mortgages since 2003 have been these shaky,
non-conventional loans which have ignored the standard criteria for loaning
money (20 percent down payment, fixed interest rate, sufficient collateral and
earnings) Now they�ll have to "pay the piper" and accept the dismal
aftereffects of their profligate lending.
The banks should have spotted this disaster a mile away.
Instead, they decided to improvise on mortgages so they could keep the money
flowing and maximize profits. Now there�s not a life boat big enough on Planet
Earth to bail us out.
Once again, we need to remind ourselves that the housing
boom was not created by market forces, but by cheap money pumped into the
system (via the "creative financing" rip-off) by our friends at the
Federal Reserve. They are responsible for this whole bloody boondoggle.
When the Fed cut short-term interest rates from 6.5 percent
to 1 percent in 2001, they knew that they were simply leaping from one
equity-bubble to another. In the next five years, total mortgage debt increased
by a whopping 82 percent and total real estate value nearly doubled to $21
These are huge numbers and, of course, the Fed knew exactly
where the money was going, just as they knew what the outcome would be in the long
term. The effects of low interest rates and increases in the money supply are
like the immutable laws of science. In this case, they act like gravity pulling
the whole battered US economy into a bottomless black hole. It was entirely
So, what happens now?
What can we expect from the architects of this colossal
rip-off in the next year or two?
Well, the Fed, the US Treasury and the Bush administration
-- the real axis of evil -- would like to forestall the inevitable
recession-depression until they carry out their forthcoming attack on Iran.
That�s why Bush is sending another carrier group to the Gulf as well as a
squadron of F-16s to Turkey. (It also explains why US forces seized five
Iranian hostages in Irbil, Iraq last week.) The US is clamping down on
transactions with Iran�s main banks ("unilateral sanctions") and has
coerced the Saudis into "discounting their top-line sweet crude by $1.75
to US customers" (Jim Willie, Golden
Jackass.com) to put additional pressure on Iranian oil exports. As Willie
says, "This is the real story behind the falling (gas) prices, not the
silly (East Coast) weather".
Uncle Sam is gearing up for another Middle East dust-up in
Iran and the lower gas prices are (temporarily) averting a US recession.
The longer term prospects, however, are not so rosy. The
"sunny Jim" reports in the media about a "soft landing"
will have no effect on the impending housing collapse or on America�s downward
economic spiral; the numbers are simply too enormous. By spring 2007, the Fed
will have to lower rates to stop the hemorrhaging and to avoid a full-blown
depression. When that happens, the last wobbly bit of scaffolding that�s
propping up the greenback will be kicked-out and the dollar will slip into
As long as the Fed keeps rates fixed, the pressure on
housing will continue to intensify; pushing prices lower and inventories
higher. GDP and home equity will continue to shrivel.
It�s all bleak, bleak, bleak.
I�ll leave you with a final comment from Michael Hudson�s
"The New Road to Serfdom: an Illustrated Guide to the Coming Real Estate
Collapse" (Harpers May 2006) Hudson, who may well be the foremost
authority on the housing bubble says:
"Although home ownership may be a wise choice for many
people, this particular real estate bubble has been carefully engineered to
lure homebuyers into circumstances detrimental to their own best interests. The
bait is easy money. The trap is a modern equivalent to peonage; a lifetime
spent working to pay off debt on an asset of rapidly dwindling value. Most
everyone involved in the real estate bubble thus far has made at least a few
dollars. But that is about to change. The bubble will burst, and when it does,
the people who thought they�d be living the easy life of a landlord will soon
find that what they really signed up for was the hard servitude of debt serfdom
. . . America holds record mortgage debt in a declining housing market. Even
that might first seem okay -- we can just whether the storm in our nice new
houses. And in fact things will be okay for homeowners who bought long ago and
have seen the price of their homes double and then double again. But for more
recent homeowners, who bought at the top and now face decades of payments on
houses that soon will be worth less than they paid for them, serious trouble is
brewing. And they are not an insignificant bunch. The problem for recent
homeowners is not just that prices are falling; it�s that prices are falling
even as the buyer�s total mortgage remains the same or even increases.
Eventually, the price of the house will fall below what the homeowners owe, a
state that economists call negative equity. They can�t sell -- the declining
market price won�t cover what they owe the bank -- but they still have to make
those (often growing) monthly payments. Their only "choice" is to cut
back spending in other areas or lose the house -- and everything they paid for
in it -- in foreclosure. Free markets are based on choice. But more and more
homeowners are discovering that what they got for their money is fewer and
fewer choices. A real estate boom that began with the promise of 'economic
freedom' will almost certainly end with a growing number of workers locked into
a lifetime of debt servitude that absorbs every spare penny."
It can't be stated more succinctly than that.
Thanks, Michael Hudson, for your insightful analysis but it
may be too late.
Whitney lives in Washington state. He can be reached at: firstname.lastname@example.org.