The Dearing Dialogue

Dr. Housing Bubble gives a convincing argument on the coming collapse in our economy due to the factors that supported the inflated housing market over the last 5 years.  He explains that historically, housing prices paralleled inflation, now roughly at 3-4% according to US government data.  So the current housing environment must be representative of either an outstanding inflation rate or an inflated housing market.  He also explains that roughly 70% of our economy is fueled through consumer spending, and 70% of Americans own their own homes.  Take into account the use of home equity loans in supplementing stagnant middle class wages and you can see the presence of unsustainable spending and the alarm bells following it.

My prediction?  The market propagandists from their studio pulpits are heralding a summer “bounce” as just the thing to get it all rolling again to 20% growth levels.  As the end of summer rolls around, the figures will start to show that not only are homes not being sold, but the level of foreclosures will grow exponentially as interest rates adjust.  This will be just the right ingredients to slip us from a contagion of fear into outright recession, if not worse.  We’ve already seen the market “adjust” itself for the second time since March, with the S&P losing 4% in one week.  It’s likely to see by far, greater adjustments.  A move to corporate bonds, short-term treasuries, or energy stocks is my prescription for preventing a loss in the market.  One market observer agrees:

“In our view the potential effects of the falling housing market on both the economy and the financial arena puts the stock market in an exceedingly risky position in the period ahead.”

Why sub-prime mortgages may have impact on the whole economy

Exactly how far could this cotagion go?  I suspect it has alot to do with expectations.  Right now, the public can not stop talking about the sub-prime mortage fiasco, which I think should have been picked apart a long time ago.  This “adjustment” is long overdue.  Maybe society is just coming to that realization and going overboard, however, the Fed is remaining extremely calm.  Tomorrow will tell us a lot on just how calm they are.  If they raise interest rates, its likely to fight inflation and likely to create even a greater and quicker demise to borrowers and lenders in the sub-prime market.  This can have a ripple effect over the next few months on consumer spending in the economy.  Given the fact that much of the spending over the last 5 years has been fueled by home equity loans, a rise in interest rates will likely curtail the behavior of home owners to spend - thus shrinking the prime mover of our economy, asset allocation. 

The Global Urban Real Estate Boom

With the end of ARMs, Interest Only Loans, and other conveniant gimmicks thought up by unregulated mortgage brokers, borrowers will be forced to put down anywhere from 5 - 20% on loans for new homes.  But how many in our debt-laden economy are going to be able to come up with 20k or 40k on a 400k home?  The inevitable conclusion is a decline in home prices.

Now the other option for Chairman Bernanke is to lower interest rates in order to spur consumer spending.  But that will tank the US dollar and only make a bad, inevitable conclusion, much worse.

It’s gonna be a wild ride down!