FacebookTwitterRedditEmail

Pop Goes the Bubble!

 

Four months ago I wrote an article, “Doomsday; the Final Months of the Housing Bubble” that predicted a dramatic fall in housing prices that would have a catastrophic effect on the American economy.

In truth, I’m a lousy forecaster and simply collected the relevant data from a number of sources that convinced me that the end was quickly approaching. Now, it seems that dismal day is upon us and the Grim Reaper has begun churning out the disappointing statistics that we’ve dreaded from the very beginning.

In November the sales of new homes plunged by the largest amount in 12 years. The 11.5% decline from October was 4 points higher than expected by Wall Street analysts, fueling the belief that the red-hot housing market is headed for the dumpster.

This sudden downturn is expected to slow the wave of speculation that has kept the market booming for the last few years. According to an Associated Press report, sales dropped by “22% in the West, the biggest decline in the region since February 1995.”

Many readers will wonder why trimming the spec-market threatens the overall economy. The reason is, as The Economist points out is 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.”

If we consider the effects of 36% of buyers moving out of the market we can grasp the magnitude of the problem.

The crisis is compounded by the enormous effect of the housing market on both growth and jobs.

“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)

“2 out of every 5” private sector jobs!?!

“90% of the total growth in GDP”!?!

These are figures that simply boggle the mind. What it tells us is that the market has been artificially inflated by the Federal Reserve’s shortsighted low-interest rates policy and the shabby lending practices of the major mortgage companies.

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.

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

Equally troubling is the fact that “nearly one third of all new mortgages this year call for interest-only payments (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.

We can nticipate that many overstretched homeowners will begin to fall from the economic precipice in short order. In fact, many markets are already showing a 40% increase in foreclosures even though the air has just begun hissssssing out of the bubble.

The ridiculously low interest rates coupled with the irresponsible lending practices has precipitated a feeding frenzy for cheap money. Greenspan is expected to raise rates another one-half percent before he leaves in January which should be just enough to collapse the market and put the economy in a permanent coma.

As Paul Van Eeden says in ‘the End of the Real Estate Boom”,

‘this is not a trivial matterAs the real estate market goes, so goes the economy and the stock market. The only thing that could keep the US on life-support a little longer is another round of interest rate reductions, but this time it could hurt the dollar, and that would mean higher gasoline prices again, so it’s a double-edged sword.”

Van Eeden provides a good description of the mess that Greenspan has created; a blind alley from which there is no foreseeable escape. The Federal Reserve has managed to keep the economy running on fumes by dropping rates 12 times to a rock bottom 1% after the fall of the stock market (another Greenspan fiasco which cost the American people $7 trillion) It was basically “free money” loaned out to keep the country limping along (and to facilitate Bush’s tax cuts) while millions of Americans tried to recoup from their losses. Regrettably, the cheap money and shaky loans simply created an even bigger and more lethal bubble that is following the same trajectory as the Hindenburg.

Ka-booom!

Adding insult to injury, the Federal Reserve announced 2 weeks ago that new steps will be taken to regulate low-interest, high-risk loans. In the third quarter a full 33% of first-time home buyers took advantage of “non-traditional” mortgages. (“No interest” or “ARMS” adjustable rate mortgages) Try to imagine the chilling effect on the housing market when 33% of first-time homeowners are removed from the pool of potential buyers?

Still think you”ll be able to sell your house at a profit?

Jittery Americans don’t need a crystal ball to spot the shipwreck looming just on the horizon. The last remaining droplets of prosperity are trickling from the ailing economy and Greenspan’s 18 year quest to flatten the American middle class will soon be realized. ‘the Economist” summarized it best when they said, ‘the worldwide rise in housing prices is the biggest bubble in history. Prepare for the economic pain when it pops”.

MIKE WHITNEY can be reached at: fergiewhitney@msn.com

 

More articles by:

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

bernie-the-sandernistas-cover-344x550
September 19, 2019
Richard Falk
Burning Amazonia, Denying Climate Change, Devastating Syria, Starving Yemen, and Ignoring Kashmir
Charles Pierson
With Enemies Like These, Trump Doesn’t Need Friends
Lawrence Davidson
The Sorry State of the Nobel Peace Prize
Evaggelos Vallianatos
The Scourge in the White House
Urvashi Sarkar
“Not a Blade of Grass Grew:” Living on the Edge of the Climate Crisis in the Sandarbans of West Bengal
Thomas Knapp
Trump and Netanyahu: “Mutual Defense” or Just Mutual Political Back-Scratching?
Dean Baker
Is There Any Lesser Authority Than Alan Greenspan?
Gary Leupp
Warren’s Ethnic Issue Should Not Go Away
George Ochenski
Memo to Trump: Water Runs Downhill
Jeff Cohen
What George Carlin Taught Us about Media Propaganda by Omission
Stephen Martin
The Perspicacity of Mcluhan and Panopticonic Plans of the MIC
September 18, 2019
Kenneth Surin
An Excellent Study Of The Manufactured Labour “Antisemitism Crisis”
Patrick Cockburn
The Saudi Crown Prince Plans to Make Us Forget About the Murder of Jamal Khashoggi Before the US Election
W. T. Whitney
Political Struggle and Fixing Cuba’s Economy
Ron Jacobs
Support the Climate Strike, Not a Military Strike
John Kendall Hawkins
Slouching Toward “Bethlehem”
Ted Rall
Once Again in Afghanistan, the U.S. Proves It Can’t Be Trusted
William Astore
The Ultra-Costly, Underwhelming F-35 Fighter
Dave Lindorff
Why on Earth Would the US Go to War with Iran over an Attack on Saudi Oil Refineries?
Binoy Kampmark
Doctored Admissions: the University Admissions Scandal as a Global Problem
Jeremy Corbyn
Creating a Society of Hope and Inclusion: Speech to the TUC
Zhivko Illeieff
Why You Should Care About #ShutDownDC and the Global Climate Strike  
Catherine Tumber
Land Without Bread: the Green New Deal Forsakes America’s Countryside
Liam Kennedy
Boris Johnson: Elitist Defender of Britain’s Big Banks
September 17, 2019
Mario Barrera
The Southern Strategy and Donald Trump
Robert Jensen
The Danger of Inspiration in a Time of Ecological Crisis
Dean Baker
Health Care: Premiums and Taxes
Dave Lindorff
Recalling the Hundreds of Thousands of Civilian Victims of America’s Endless ‘War on Terror’
Binoy Kampmark
Oiling for War: The Houthi Attack on Abqaiq
Susie Day
You Say You Want a Revolution: a Prison Letter to Yoko Ono
Rich Gibson
Seize Solidarity House
Laura Flanders
From Voice of America to NPR: New CEO Lansing’s Glass House
Don Fitz
What is Energy Denial?
Dan Bacher
Governor Newsom Says He Will Veto Bill Blocking Trump Rollback of Endangered Fish Species Protections
Thomas Knapp
Election 2020: Time to Stop Pretending and Start Over
W. Alejandro Sanchez
Inside the Syrian Peace Talks
Elliot Sperber
Mickey Mouse Networks
September 16, 2019
Sam Husseini
Biden Taking Iraq Lies to the Max
Paul Street
Joe Biden’s Answer to Slavery’s Legacy: Phonographs for the Poor
Paul Atwood
Why Mattis is No Hero
Jonathan Cook
Brexit Reveals Jeremy Corbyn to be the True Moderate
Jeff Mackler
Trump, Trade and China
Robert Hunziker
Fukushima’s Radioactive Water Crisis
Evaggelos Vallianatos
The Democrats and the Climate Crisis
Michael Doliner
Hot Stuff on the Afghan Peace Deal Snafu
FacebookTwitterRedditEmail