No more bubbles to bail out the housing bubble

[Target_For_Exterm]

"Wall Street has a soft spot for the "soft landing" thesis, but to me it's crystal clear that a serious economic slowdown is under way. What has been surprising: not that the economy is weakening but that so many people seem to expect a soft landing, and therefore remain in denial about the seriousness of the slowdown.

I guess the predilection toward a soft landing is a function of the following: So many folks in the investment business -- and in the country at large-- haven't experienced a consumer-led recession in so long that they think this outcome is just not possible. That's because the Federal Reserve Board has evolved into being a business-cycle suppressor and bubble manager. Consequently, folks just assume that economic weakness is a feature of the business cycles of yesteryear.

Bubbles begat bubbles
To review: We had a mindless equity bubble that was precipitated by a complete abdication of responsibility on the part of Fed monetary policy. That bubble popped in 2000, precipitating a recession led by businesses cutting back from their previous misallocations of capital.

Next came our umpteen interest-rate cuts and tax cuts to help fight the aftermath, the result of which was a massive housing bubble -- aided and abetted by the utterly irresponsible actions on the part of lenders. The housing bubble topped out well over a year ago, though it's taken some time for the problems in real estate to begin affecting the consumer."

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/NoMoreBubbles.aspx

What do you think of this?

[Eurobabe]

1. In Charlottesville VA, I've been following spec houses

in a neighborhood next to my old home, and this week the builder SLASHED the prices on several townhouses that were so overpriced it wasn't funny. They dropped them $25K down to $249K for about 1700 sq/ft. No garage, no basement.

I was selling houses until May 2006, the drop off started in Sept. 2005. It's gonna get alot uglier.

[phantom power]

2. I think you are fundamentally correct: there are no more bubbles left.

We are entering an age of three converging planet-wide disasters:

Economic depression
Peak Oil
Climate collapse

[jazzjunkysue]

3. I know less than nothing about money, but I'm glad I pulled my grand

out of my stock last week. It's been sliding ever since.

Hey-The market can't go up unless it also goes down. It's just gonna go way down, and that's not good if you just lost your job and are trying to sell your house and start over....


It's all good news for the dems, though. Gas prices, deficits, and high property taxes have proven the GOP too expensive. We're buying democratic in '08. That's why all the talk is Obama/Hillary. No one really thinks the GOP has a chance in '08 so it doesn't matter who they run.

I almost think McCain is running precisely because he knows he won't have to serve.

[Warren DeMontague]

4. I think I wouldn't trust a guy with this haircut to wash my car, much less give me money advice.

Holy Mullet, Batman!

[NVMojo]

5. a good place to follow the news on this: thehousingbubbleblog.com

[cobalt1999]

6. The housing bubble has a long way to go before it impacts the economy that much.

For example, I bought a rental house in 2001 for $125K. 8 months ago I could have sold it for $300K. My current renters have offered me $250K for it recently.

I could look at it as a $50K drop in 8 months, but in reality it is still a 100% increase in that investment in 5 years! All the folks that bought property in this area up to about 2003 are still WAY ahead. The bubble caught recent purchasers hard and killed the speculators business, but that alone won't drive the economy to it's knees.

When that house is back to a 8-10% return on investment over the years, then we are close. If it drops below that, then the economy will take a HUGE hit.

[cascadiance]

8. That's always the way folks at the top of a pyramid scheme feel...

... and that is what the housing market is evolving into. There's no way you can get into the housing game now and come out ahead, and you could just throw away your life savings (if any of us have that much these days) in the process. That's why many people are staying out, and moving out of expensive rental areas.

Some of you may feel you're still ahead, but for the vast majority of the rest of us, especially those entering the housing market, the game's rigged against them, and they no longer are going to ante up for what appears to be a losing card play now.

When you add to that interest rates being kept artificially low, the economy being propelled by people borrowing off of their home equity (folks like you that still have some) instead of the salaries they earn, if interest rates go up and housing market demand drops even more precipitously, you might have your house valued back to what you paid for it. And you might be the one of the lucky ones. Many others will be bankrupt and have their houses repossessed if they've borrowed to heavily against their home equity, if their houses are valued lower than what they paid for them.

Why would interest rates be allowed to go up much into the "danger zone"? Well, for one, if the Chinese and other countries suddenly start shifting more of their money into Euros instead of the U.S. Dollars because of their frustration of return on investment (when our country's increasingly dependent on foreign investment now), that will force the FR to raise rates, and then trigger the housing collapse. Pretty soon they will be faced with the choice of the collapse of the dollar, the collapse of the housing market, or both, if they don't manage the interest rates and the trade deficit resultant from our insane "free trade" policies we have in place now!

[Porcupine]

7. I think it cost me my job.

I was working for a property management firm in Northern California taking care of rental properties. Up until the Katrina episode investors were buying new houses sight unseen and renting them out to tenants through management companies like mine. The management company I was working for had developed very sloppy business practices because no matter who they pissed off another sucker property owner would walk in the door to replace the last one.

Well the ponzi scheme got shaky when it started to be clear that rental properties were not going to gain 15 to 20 percent equity every year. Suddenly everybody started looking very carefully at their cash flow. Bye-bye company and my job with it.

Right now housing prices are down $20-$40k on $350K homes with on market times stretching out. People are trying to sell empty houses they haven't even bothered to have cleaned or painted inside. That indicates a serious lack of cash flow and desperate sellers. Add to that a local economy that consists largely of selling real estate to people from out of town and you have a problem. We don't have the jobs base locally to support the real estate inventory on the market right now and it's going to get worse next month.

It's very bad and getting worse. I expect desperation on the real estate front next August after some sellers have had units on the market for a year or more despite multiple price drops.