It’s official: housing is a “bust”
With new home sales literally falling off a cliff this month, coming in at a 6.6% monthly drop (much higher than expected and 22% lower than this time last year), economists are finally saying what has been obvious to anyone with half a brain: housing is officially a bust, and a nasty one at that. The stock market is responding accordingly, down over 350 points at the time of this writing.
What’s going on, and why should you care?
Basically, people have stopped buying overpriced houses and have stopped paying their mortgages en masse. Foreclosures are increasing left and right as people become trapped in a falling market with “exotic” (read outrageous) loans they can’t escape, not just subprime borrowers but increasingly creditworthy borrowers too.
People stop buying over priced houses = more property on market = lower prices.
More foreclosures = more property on the market = lower prices.
(Lower prices+more property on market) = (people too scared to buy + people desperate to sell) = Even lower prices.
But there’s a worse consequence of all this, one that could wreck the economy.
All those mortgages people aren’t paying ended up fraudulently packaged as “safe” instruments sold to large hedge funds and banks, which collectively supply the nation’s credit. Now all of a sudden hedge funds are blowing up, and Wall Street is scared shitless that what it thought was safe is in fact worthless.
Scared bankers = less credit and debt they will extend.
Less credit = homeowners with nasty loans can’t refinance = more foreclosures = lower prices.
Less credit = fewer people can obtain mortgages = more property on the market = lower prices.
Less credit = fewer car loans + credit cards + other consumer debt that keeps the economy running.
Less credit = companies can’t merge, do stock buybacks, or do the things they do to keep supplying jobs to you.
In other words, the economy’s lifeblood is suddenly drying up and grinding to a screeching halt.
No economic lifeblood = recession, and whatever that means to you.
Any questions?
sunchaser:
Dow down again big today based on those fears. It’s going to be interesting to see what the fallout is. I’m wondering if Robert Shiller won’t be right again with his bubble theory.
I was going to hunt for a place to buy finally, but now I”m wondering if it’s worth the effort, if things keeps falling. Maybe it would be better to wait until Shiller advises his own daughter to buy?
July 26, 2007, 6:27 pmJoe:
Sunchaser, I would definitely wait to buy. Most of the toxic mortgages people are drowning in were issued mid ‘05 to mid ‘06. Since most of them were the 2 year adjustable rate type of thing, they are all only beginning to reset to the much higher rates people can’t afford now. This problem will get much much worse before it gets better, foreclosures will spike much higher, which is good news to any potential buyer willing to be patient and wait for prices to fall further.
The only way I would buy now is if I were willing to commit to staying in the place for at least 5 years to a decade, because it could take that long for prices to recover to what they were.
July 26, 2007, 11:41 pmTed White:
Where the hell have you been? I miss reading you.
August 30, 2007, 3:58 pmJoe:
Thanks bud
I’m still here..just taking it easy for a little while. I felt like I needed a break, and I’m working on some other projects. I’ll be writing again, and was recently thinking it was time.
Thanks for thinking of me..it’s nice to be missed!
August 31, 2007, 12:42 am