Pop! The sound of the housing bubble bursting.

[survivor999]

By Ian Welsh

Mish over at Mish's Global Economic Trend Analysis has a fascinating complilation of posts from a realtor - starting at the beginning of 2006 and going to July 20th (http://globaleconomicanalysis.blogspot.com/2006/07/lights-out-in-georgia.html).

More relocation prospects than any January in memory. The economy remains very strong.

Mish and I would seem to have very different points of view on what 2006 holds in store. I am basing my forecast on what I am seeing, and what I am seeing is a strong economy.

There will be no recession in 2006.

That was from January 4th. It starts off strong. As I'm sure you can guess it doesn't end that way.

Mish himself has a good analysis of why we had this bubble, that I agree with:

Where the blame really belongs.

1. On the Fed (not for raising rates) but for cutting them to 1% in the first place and flooding the world with dollars in the biggest liquidity experiment the world has ever seen
2. On banks and Fannie Mae for loose lending standards
3. On government for promoting the "ownership society"
4. On themselves for getting caught up in bubble madness just as they did with stocks in 2000, then taking cash out refis and spending like drunken fools further fueling a runaway economy

I'll note on #1 that I could live with dropping them that low (there was a real fear of deflation), but they let them stay low too long, and didn't raise them fast enough or soon enough.

More: http://agonist.org/ian_welsh/20060730/pop

[Warpy]

1. I took advantage of those lower interest rates and loose standards

and now I live in a house that is paid for. It's not much of a house, but it's MINE.

The main thing that caused the bubble was the stagnant stock market after the go-go Clinton years conned everybody into thinking they deserved that kind of return on investments. They began a bidding war on real estate, especially in areas where the supply was limited, like the big cities of California and the east coast. Speculation fueled those markets.

I do feel sorry for anyone who bought a house primarily for shelter at the peak of the market. They're pretty much stuck until the bank forecloses because they can't come up with the difference between the mortgage amount and the deflated value of their home. That's next, by the way.

I also feel sorry for people who got suckered into ARMs and didn't convert when they had the chance. About a third of those will be reviewed every year now and go up. If a cap is reached, the paper will be sold to somebody else with a higher cap. Expect foreclosures.

This is going to be as big a mess as it was a paper bonanza. Unfortunately, paper isn't going to be what gets hurt. It will be families.

[Freedom_Aflaim]

2. That part doenst happen

"If a cap is reached, the paper will be sold to somebody else with a higher cap."


The cap is defined is the original note. Selling the note doesnt change the terms of the note.

Still most of the caps are quite high and most folks will be inforeclosure before they even reach the cap.

Rest of the post is right on though.

[Warpy]

3. Right, and all those ancient credit cards that were charged

up in the 70s had their interest rates fixed at 18.9%, too.

Face it, industry is writing the laws and that original paper doesn't mean squat.