Housing bubble, debt bubble or same thing?

It is not the drop in the value of a house that causes the foreclosure; it is the lack of ability to pay the cost of ownership. People will not walk away from their homes just because of a loss in market price they will sweat it out as long as they can.

The exception is the owners that were speculating on the value going up, and that entered the market late. They will run for fear of taking ever-increasing losses.

What will force out owners (who were not speculating) from their primary residences.
1) Higher interest payments
2) Higher taxes
3) Higher energy bills
4) Loss of job
5) Over leverage of home equity lines

Of these elements one and five are the most difficult to deal with. The job market has been relatively stable and unemployment historically low for quite some time. In most places the tax assessment is based on purchase price so it does not fluctuate much and if home prices truly go down there may be just cause for reappraisal and reassessment so taxes might be moderated. Energy is a factor in affordability but in most cases is not going to force someone out of their home.

Recent homebuyers do not have home equity loans because they have little or no equity. That brings us back to the first trust deed and rising interest rates. The rates have been rising for over two years in a very measured and somewhat predictable increases, Thanks to Alan and Ben for not shocking anyone.

So interest rates have gone up. They are not high, just higher. I wonder what rate people thought they would be paying when their ARM termed out. Most ARM's are for five years. People buying five years ago have seen tremendous increases in home value and should be OK. People buying this year should have four to five years remaining on their ARM's before they see a bump.

Every way I look at this I see the greatest pain going to the greatest speculators, be they lenders, builders, borrowers, and the like

"If there are a large number of foreclosures the banks will lose more money than the borrowers." How can a bank lose money? They creat it out of thin air. How much money does the government make, maybe 5%. The banks make 95%? and it is all debt. Time to get rid of the banking systems and have governments creat all the money.

Scott
CANADA

Scott,
If a bank loans 95% of the money on a house appraised at $300,000 then they have loaned $285,000 and the borrower put up the other $15,000. If six months later the house drops in value by 20% than the value is $240,000. If they are forced to foreclose then the borrower loses their $15,000 plus costs, and the lender loses $45,000 because at present market value they can not get their original loan amount back. The loss to both borrower and lender are actually higher because of various expenses and transactional costs.

Did the bank go into there fault and give the loan in cash? No. It created the money from nothing. Adding 1's and 0's into a computer is not money. Therefore, they have lost nothing. The actually made money from the interest they charged on money they don't have. I changed my mine on haveing the government creat the money because they cannot be trusted.
Scott

Debt and Depression. The current "debt bubble" is like the "debt bubble" based on installment payments that created the 1920's boom economy and then the 1930's depression economy. In that time, as now, a horrible maldistribution of income resulted in the middle classes maintaining their existence through credit. In that case, it was installment paymenst. Today, it is credit and credit cards. A depression is the inevitable byproduct of a conservative government that "rolls back" the "redistribution" plans of "liberals" who ruin the country. In fact, what occurs, as it did in the 1920's, is a declining buying power of the middle class as money goes upward not downward. The end result is an economy in which the products created cannot be purchased by the creators except on credit. Hence, boom to depression.

On the issue of the debt, there are two ways out. The first is to increase taxes and cut spending. Austerity and downward mobility as a patriotic flag-waving game. Cuts are not probable because one person's "saving" is another person's "income" and people vote to save their "income" benefits. The second option is "stagflation" in which inflation gradually erodes the purchasing value of money and the debt is "paid back" in money that is worth less when paid back then when the debt is incurred. This also produces "downward mobility" primarily for the middle classes but is so gradual, and less destabilitizing, that the harm is less than increases in taxes and direct cuts in benefits. There are only two choices folks: cut the spending or live with the inflation.

Of these, those with "cash" prefer to cut spending so it is no coincidence that the nation's wealthiest, like Oprah, are now focused on DEBT and DEBT REDUCTION. Those without "cash" prefer the gradual deflation of the currency. However, those with cash like that less because their net worth declines.

Now, who will win? The Republicans or the Democrats?

While I agree that most of the credit bubble has gone into real estate, I also agree with the writer in that I saw a chart that showed a large growth in margin credit for the stock market. I think that the housing crash could have implications for the dollar, causing it to drop like a rock. That may help exports, but may not help the stock market as a whole, as spending by tapped out homeowners slows.

Scott,
Educate yourself about banking and life and don't be sad. Be knowledgeable. Be informed.
Peace

I think it would be helpful to most who have an interest in real estate at this time to view the most recent presentation (August 18, 2006) titled "Real Estate Reality Check" given at a Chicago National Association of Realtors Leadership conference by their chief economist, David Lereah:

http://www.realtor.org/Research.nsf/files/Leadership Summit (August 2006).ppt/$FILE/Leadership Summit (August 2006).ppt

This presentation shows the regional nature of real estate markets, as well as the fact that such a large number of markets have currently reached what are likely unsustainable prices.

I think many of the bloggers with conflicting views will find that they are reflecting their different perceptions, which are naturally going to be influenced by their own market experience.

My personal view, although I live in Dallas, one of the "more rational" markets, is that there has been a credit bubble, fostered by the loose money policies of the Fed and unsustainable in the long run.

The Controller of the Currency has much more to do immediately with lending practices and he gave an excellent speech in October 2005 suggesting that bank examiners are going to be clamping down on the credit bubble.

If the credit bubble pops, and the indications are that this is occuring, then there will be fewer eligible buyers at every price level. The inevitable result will be a drop in prices, more severe in some markets than others, and considerable pain for those with low, nonexistant or even negative equity in their own real estate portfolio.

Thanks to all for considered comments.

Zebra365 (Not related to OK Zebra)

Sorry for the link error above, one of these below may convert to the proper live link by AOL, or I've found that if you copy the entire link above and paste it into your browser, you will get to the presentation. It requires that you have Powerpoint or I think you can click [open] rather than [save] and it will open in your browser window.

Zebra365

http://www.realtor.org/Research.nsf/files/Leadership Summit(August 2006).ppt/$FILE/LeadershipSummit(August 2006).ppt

http://www.realtor.org/Research.nsf/files/Leadership%20Summit%20(August%202006).ppt/$FILE/Leadership%20Summit%20(August%202006).ppt

BOOM, BUST, WAR!
© 1994 - 2006 Christopher D. Day

Rap Verse 1 Intro

Congratulations! Look what you've done,
We live your corruption, are ya havin’' fun?
Your puppets deceive on the flickering screens,
We could not resist the "Master of Dreams."

Chorus 1

BOOM, BUST, WAR!
Keep 'em entertained, and keep 'em poor — said,
BOOM, BUST, WAR!
How do you plead? It's been decreed!
Justice? Hah! We call it the “Rule of Law."
BOOM, BUST, WAR!
"In God's Name” we proclaim,
When we ring the bell, you better sell — said,
BOOM, BUST, WAR!
Created by the SUPER rich to keep us poor.

Rap Verse 2

Well it's plain to me, where there's more than three,
We talkin' about a conspiracy.
The boys up top have got it down,
Their funny-money makes the world go round,
Create the credit, get em' hooked,
Gangster banksters, corporate crooks.
Redraw the globe with digital borders,
Serfs unite 'cause it's a New World Order!

Chorus 2

BOOM, BUST, WAR!
Keep 'em entertained, keep 'em poor — said,
BOOM, BUST, WAR!
You’re a number, not a name,
In Big Brother's terror game — said,
BOOM, BUST, WAR!

Barcode the kids, put an eye in the sky,
We've got your numbers so don't even try — said,
BOOM, BUST, WAR!
Created by the SUPER rich to keep us poor.

Rap Verse 3

Interest and inflation, the two sides of the one,
Give us all your money and you might end up with some.
They say it all began when interest was demanded,
When banks create more money, very few can understand it.
Seeds grow into flowers, beasts create more beasts,
Money grows on TV screens, miracles never cease — hallelujah!

Chorus 3.

BOOM, BUST, WAR!
Keep 'em entertained, and keep 'em poor — said,
BOOM, BUST, WAR!
How do you plead? It's been decreed!
Justice? Hah! We call it the “Rule of Law."
BOOM, BUST, WAR!
"In God's Name” we proclaim,
When we ring the bell, you better sell — said,
BOOM, BUST, WAR!
Created by the SUPER rich to keep us poor.

Rap Verse 4 Finale

United in global division, the Dark Force appears supreme,
The 'living' dead celebrate its power, until soul wakes from the dream.

(Boom, Bust, War! ends)

Chris,
Thanks for sharing. I do not agree with the rich trying to keep you poor theme, since a large percentage of the rich were poor or middle class at some point. Check out the Forbes 400. Kirkorian, Oprah, Jobs, Spielberg, J.K Rowling, Sorros, Dell, and many more started from modest means. The trick is to create something other people find of value, or to find value where others have not yet detected it.
Peace

Real Estate values have become a function of interest rates MUCH more this time around that in the past. Nobody buys a house with the notion of EVER paying off a mortgage, most people today don't care what a house will cost them, they care what a house is going to cost them PER MONTH. In the US, it's no longer about your balance sheet, it's about cash flow.....I don't think that was too much the case in the past.

I'm a real estate appraiser in Upstate NY and I can tell you that i've done more foreclosure appraisals in the last 2-3 months that i've done in the last 7 or 8 years.

Even when you put 2% down, most of the time, depending on the structure of the loan, you are personally liable for a lot more than 2%. For example, those loans of 80/10/10, where 10% is home equity loan, you will be 100% liable for the entire amount. It's called deficiency, see my post here.

Here is my post. Couldn't use href.
http://www.1stmillionat33.com/2006/07/deficiency-judgment/

All this debt can never be paid back. Paper (fiat) money is dead.
We are on our way to hyper-inflation. After Germany's hyperinflation in the 1930's, they voted for Hitler.
Already we have a wannabe Hitler as the gov't clamps down on rights by stealing private lands, illegally wire-tapping phones, banning books like "America Deceived" from Amazon, conducting improper search and seizures, printing unbacked currency and starting 2 wars based on lies.
As the US crumbles beneath paper money, debt and easy credit, the neo-cons will give us the solution of One World Gov't. Coming soon to a checkpoint near you.
Final link (before Google Books caves to pressure and drops the title):
This is a sick society we live in. The US gov't violates the 1st Amendment by caging protestors, and banning books like "America Deceived" from Amazon and nothing happends. The gov't tramples on the 4th Amendment by conductin illegal wire-taps and nothing happens. The gov't starts 2 illegal wars based on lies and nothing happens. 2 citizens feed themselves from a trashbin and they are in jail.
Sick.
Final link (before Google Books caves and drops the title):
http://www.iuniverse.com/bookstore/book_detail.asp?&isbn=0-595-38523-0

Dear 1stMil,
Most home loans are non-recourse loans. Most Home equity loans will not allow you to exceed 80% total loan to value counting first and second and are also non-recourse loans. A recourse loan does a bank no good if they drive you into personal bankrupcy. They need to get it out of the house. It is possible that in some cases they would ask for additional guarantees but this implies your guarantee is worth something.

Interest only loans do not usually allow 100% leverage. Low down payment loans (higher leverage) are most often sold off and have some form of government backing to protect the institution. It is very rare that you put down 2% and are buying 100% exposure. If you know of such a loan please let us know which banks are offering these loans, I have not seen one.

Looking forward to more info.