My husband and I were looking to buy a home. The news was telling us about the real estate market currently undergoing a "soft landing". Things are still good and this right now is a buyers market, they say. Our guts told us to keep researching because somehow paying 500k for a fixer-upper seems well, insane and not what I thought a buyers market would look like at all. Being economically illiterate, I couldn't understand this whole the economy is robust rhetoric I keep hearing everywhere from Bloomberg news to NPR to CNN and so on. My research on the real estate market shed light on the real reason for this economic boom we've been hearing so much about and the papier-mache foundation it's made of.
From what I've gathered, it goes something like this. Low interest rates allowed non-traditional exotic mortgages to flood the market. Home owners and home buyers were now able to take out mortgages they normally would not be able to afford because the low interest rates allowed for illusionary low payments. This gave homeowners the extra capital to fix their homes, buy cars, go on vacation etc. which wages/savings had failed to do. This borrowed money is the only thing fueling our economy. As people begin to choke on their debt because of rising interest rates, devalued properties, outsourcing, energy prices, stagnant wages a mass movement is afoot to either refinance, sell or worse yet, foreclose. The problem with refinancing is many people bought homes that are now valued less then what they mortgaged it out for. The banks will not refinance your mortgage if you owe more then the house is worth. The only other option is to sell the house at a loss or foreclose. With the new bankruptcy laws you can see who the real looser in this game is.
A sharp reversal is now hitting the US housing market: another of this system's endemic boom-bust cycles. As is widely known, over the last decade at least, while the US economy became sharply more unequal (rapidly rising gap between rich and poor), it managed to avoid a severe recession. Goods and services purchases kept rising fast enough to keep unemployment from worsening as much as it otherwise would have (given outsourcing, automation, and other factors diminishing the quality and quantity of jobs in America: see Stanley Aronowitz, Just Around the Corner: the Paradox of the Jobless Recovery, Philadelphia Temple University Press, 2005).
The remarkable economic reality was that American workers' real wages did not rise across these years. Their stagnant wages would not have allowed those rising consumer purchases. What financed them instead was debt. The US working class took on levels of personal and household debt never before seen in this or any other country. Some of that debt (credit cards) was unsecured by any collateral. But much of that debt was secured by home mortgages. American workers borrowed massive amounts of money at historically low interest rates by increasing their mortgage debts. Thus the US housing market enabled American workers to borrow more, which they used to make the rising purchases that kept the economy from sinking into deep recession or depression.
Basically, it worked like this. People borrowed to buy or expand a home. Housing prices (home values) were bid up. With more value in their now higher-priced homes, American workers had more collateral with which to borrow more. The boom in building and improving homes generated a huge portion of the rising consumer spending that kept the US economy afloat. This cycle of borrowing-building-and borrowing more-and building more produced an historic run-up in home prices alongside an historic rise in consumer debt. The rapidly increased borrowing allowed all kinds of consumer spending to rise, not only spending on housing. It all worked out very nicely so long as borrowing and spending kept rising and raising each other.
But the building has now stopped growing and started tanking. The LA Times reports that the California Realtors Association recently adjusted its projection for total housing sales in 2006 from a fall of 2 per cent to a fall instead of 16.8 per cent. Hello! Usually, where California goes, so goes the nation. Thus, the chief executive of the largest homebuilding corporation in the US, D.R. Horton, Inc., told investment analysts that his company's national sales "fell off the Richter scale" in June, 2006. According to Money Week magazine, Ameriquest -- a leading US mortgage lending company -- recently announced that it is closing 229 branches and laying off 3,500 employees. The mortgage lending business is tanking as housing sales drop.
http://mrzine.monthlyreview.org/wolff240706.htmlThis from an economist from Merrill Lynch:
Grab a red pen and circle May, 2007, on your calendar.
That month is full of foreboding for the U.S. economy, according to Merrill Lynch & Co. Inc. North American economist David Rosenberg, who sees inauspicious portents in the data.
"They all put a big fat bull's eye on May, 2007, as the month that we could see an actual economic turndown," he says in a note to clients.
The economist adds that the outlook is gloomy no matter what action the U.S. Federal Reserve Board takes on interest rates. "It may well be too late and the seeds could well have already been sown for an outright recession next year."
http://www.theglobeandmail.com/servlet/story/LAC.20060725.RMERRILL25/TPStory/Business
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