[A-List] A Dissident Voice on Real Estate "Non-bubble"

["Sabri Oncu" <soncu@xxxxxxxxxxx>]

Doomsday: The Final Months of the ?Housing Bubble? 
by Mike Whitney
www.dissidentvoice.org
July 27, 2005
  
   
 ?The worldwide rise in house prices is the biggest bubble in history.
Prepare for the economic pain when it pops.?   

-- The Economist


I sold my home three weeks ago anticipating what I believe will be ?Economic
Armageddon? in the United States. It wasn?t an easy thing to do. My wife and
I have lived in the same home for 25 years, raised both of our children
there, and owned the property outright without any loans or mortgage. The
house was paid for in ?sweat-equity?, that is, by wielding a shovel day in
and day out in my one-man landscape business. I don?t say that for sympathy,
but to illustrate that we played by the rules, worked hard, paid our taxes,
and took advantage of the American dream of home ownership.

All that has changed.

I sold my home for one reason: George W. Bush. He and his protégé at the
Federal Reserve have submerged the country into a morass of ?unsustainable?
debt, disrupted the nation?s economic equilibrium and thrust us towards
fiscal disaster. They?ve also generated a humongous housing bubble through
their irresponsible and self-serving manipulation of interest rates.

The facts are astonishing.

The current housing bubble is ?larger than the global stock market bubble in
the late 1990s (an increase over five years of 80% of GDP) or America's
stock market bubble in the late 1920s (55% of GDP). In other words, it looks
like the biggest bubble in history.? (The Economist, June 16, 2005)

The banks have lowered the standards for home loans to such an extent that
the traditional loan of 20% down and a fixed interest rate is virtually a
thing of the past. Instead, those conservative practices have been replaced
with ?creative financing? schemes that put the entire housing market at
risk.

Consider this: In 2004 ?one-fourth of all home-buyers -- including 42% of
first-time buyers -- made no down payment.? (New York Times, July 7, 2005)

No down payment?!

Sorry, but if a buyer can?t come up with at least $5,000 dollars for a down
payment, he shouldn?t qualify for a home loan.

Equally troubling is the fact that ?nearly one third of all new mortgages
this year call for interest-only payments (in California, it's almost half)?
(NY Times) This tells us that a large number of new buyers can barely make
their payments, but are gambling that their property value will go up enough
to justify their investment. This is ?equity roulette,? a shell game that
anticipates that salaries will go up while interest rates stay low.

Is that a reasonable judgment?

No, Greenspan has said that he will continue to ratchet up interest rates to
head off inflation. This means that an economic slowdown is a near
certainty. Remember, ?class-warrior? Alan Greenspan lowered the prime rate
to a ridiculously low 1% in 2002 to keep the economy humming along while
$300 billion was sluiced into Bush?s ?preemptive? war in Iraq and while the
tax cuts were siphoning the last borrowed farthing out of the public
coffers. The Bush tax cuts transferred an average of $400 billion dollars
per year into the pockets of America?s plutocrats. Now, the country is flat
broke and Greenspan will have to ?incrementally? raise rates to stabilize
the sagging dollar. This means a sluggish economy for most of us and
doomsday for over-extended homeowners.

Greenspan assumed he could carry out his plan without too much unnecessary
carnage. Unfortunately, gluttonous mortgage lenders have lowered long-term
loans while the prime rate continues to go up. The banks, it seems, are
addicted to the ?cash cow? of shaky lending and are providing even riskier
loans to new applicants. This has upset the Fed master?s strategy for a
?soft landing?, and Greenspan has begun feverishly issuing warnings about an
inevitable ?adjustment? when the market bogs down. The bottom line is that
the housing bubble is getting bigger by the day and increasing the potential
for catastrophe.

The current problem is compounded by the dramatic surge of speculation in
the housing market. As The Economist says, ?A study by the National
Association of Realtors (NAR) found that 23% of all American houses bought
in 2004 were for investment, not owner-occupation. Another 13% were bought
as second homes. Investors are prepared to buy houses they will rent out at
a loss; just because they think prices will keep rising -- the very
definition of a financial bubble.?

What will happen to these ?speculative? buyers when the market ?flattens
out? or the economy takes a sudden dip?

And, what will happen to the US economy when the jobs that depend on new
home sales vanish overnight?

?Over the past four years, consumer spending and residential construction
have together accounted for 90% of the total growth in GDP. And over
two-fifths of all private sector jobs created since 2001 have been in
housing-related sectors, such as construction, real estate and mortgage
broking.? (The Economist)

?Two out of every five? private sector jobs are now entirely dependent on an
industry that is built on pure quicksand.

So, why would banks foolishly loan money to people who can?t even scrap
together a few thousand dollars for a down payment or who can scarcely meet
their ?interest-only? obligations?

The reason is simple: because they are not the ones taking the risk.
Mortgage loans are acquired by investment banks and chopped up into various
securities where they are sold in mutual funds, hedge funds and pension
funds, etc. To some extent, this takes the lenders off the hook, but it also
means that the shock to the system will be much more widespread when the day
of reckoning finally arrives. If we encounter a major glitch in the economy
the shock waves will be felt throughout the world. ?Investors now hold $4.6
trillion in mortgage backed securities. That?s more than the outstanding
value of the US Treasuries.? (NY Times) Think about it.

Shaky lending, interest-only loans, no down payments, a US government that
is $8 trillion in debt due to Washington?s profligate spending, and a
?ticking-time bomb? of adjustable-rate mortgages that will reset within
three years -- the table is set for a disaster of Biblical proportions. If
we hit a bump in the economic road ahead (rising gas prices? recession?) the
?Land of the Free? will be knee deep in bankruptcies and foreclosures. We?ll
all be fighting for a soft spot under the freeway onramp.

The fatuous Greenspan believes that all this can be avoided by regulating
the money supply.

He?s dead wrong, and I bet my house on it.

Note, the current dilemma could have been avoided if Greenspan had
incrementally raised rates as the bubble began to appear. Instead he lowered
rates to facilitate Bush?s war in Iraq. It was purely a political decision
that ?postponed? the economic pain of the conflict and allowed the Bush
administration to shift the cost of the war onto future generations.

Consider, also, how Greenspan paved the way for the budget-busting tax cuts
(which he enthusiastically approved) and how they have increased America?s
debt by $3 trillion. This is real money that American workers will
eventually have to pay back in the form of taxes and a higher cost of
living. This ?class loyalty? is strikingly at odds with his philosophy as a
young man when he said, ?Deficit spending is simply a scheme for the
confiscation of wealth.?

So it is. And the $3 trillion dollars that evaporated on Greenspan?s watch
was in fact stolen from the American people while the Fed chief concealed
the crime behind the smokescreen of low-interest rates. In the final
analysis, Greenspan will be seen as a greater traitor than Bush.

Mike Whitney lives in Washington state, and can be reached at:
fergiewhitney@xxxxxxxx