Tuesday, September 26, 2006

More "non-news" you can use

This just in :) : housing is finally going down in the US!

Seriously, I thought this was the oldest story on the planet. But after talking to a few people who live in areas where housing price changes have traditionally been more moderate, I found some people who didn't realize this was happening....or worse, figured it wouldn't happen in their neck of the woods.....

While plenty of well known and respected economists debate the degree of the slowdown, I think it will be a very difficult time for either home values or the dollar or both- everywhere.


Because the seeds of this bubble -- ridiculously loose credit standards, coupled with low interest rates -- are not regional phenomenae. Both are/were national, if not worldwide, drivers, meaning too much debt was chasing too few goods.

NATIONWIDE, median home prices have gotten WAY AHEAD of incomes. The median home in the US is selling at 3.7X the median US income. In some "hotter" areas, it's much, much higher. The historical average is 2.8X the median income.

(note: --if you are thinking about buying, waiting for the price drop to move in DO NOT BUY until the median price to median income is AT LEAST back to the historical average in your area. The reality is, the price will probably "overshoot" on the way down. Don't try to catch a falling chainsaw....while it is still running....while blindfolded.....between your legs!!! )

Why is 2.8X the historical standard? Well, much beyond 3X and a reasonable person would start to doubt the borrowers ability to repay the loan. However, as many of you know, the banks have gotten more and more creative with their financial engineering in an attempt to keep the ponzi scheme alive. While enumerating the multitude of products that allow buyers to lower their monthly and down payments would be interesting, the biggest reason has been the "securitization" of the loans. By "securitizing" the loan, they sell the debt to someone else, take down a HEFTY fee for doing the paperwork, and move on....

If you don't have to worry about being repaid personally (or your company) it all becomes a giant game/puzzle for the loan broker to figure out how to get you to qualify for the loan to get you into the house of your nightmares. Here is an interesting story out of the bay area, as the media is FINALLY starting to report on this.


Unfortunately, the ramifications will not be felt only by those participating/benefitting from "liars loans". Undoubtedly, the backlash will mean *overly restrictive lending practices*.

Newly self-employed will probably not have "stated income" loans as an option in the future.
Comps will crash for newly purchased homes once bkruptcies, foreclosures, and short-sales begin. A family needing to move for work or another valid reason will be stuck upside down in a loan valued more than their house.
Empty, or half-finished housing developments will forever scar the neighborhoods of people who were responsible with their debt, and the housing debacle will have ramifications unforeseen to this point.

In the end, perhaps we shouldn't worry:

-perhaps these are the ravings of another chicken little
-perhaps people will abandon living outside of their means, relinquish the McMansion in favor of something that doesn't take as many resources to maintain, OR start living in their McMansions with a larger portion of their extended family or families. That would probably be good for the social fabric, imo...although it would certainly create "new" stresses people are unfamiliar with.
-perhaps, sane lending practices will return without a gross overadjustment, which could make it difficult for some deserving people to get credit.
-perhaps the dollar will just adjust downward gradually, letting debt ridden citizens, and the govt, pay back its bloated debt with cheaper paper.

In the end, however, probably just more of the same....
-"woe's me", innocents, taken in by greedy corrupt system in the press.
- lawyers filing class actions against everyone (and their mother).
- politicians cracking down with an overly heavy hand after much grandstanding and chest thumping. government bailouts for everyone with tax monies collected from those that were actually responsible.
- carpetbaggers (realtors and mortgage brokers) moving on to the next bubble-de-jour.

What will it be? precious metals? bullets? bottled water? fed printing presses?....or tickets to South America? :)

ciao for now,

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