Take a break from the election news and speculation with me for a moment, please. A couple news items this week lend credence to the concept that the recession that we fear is not a future possibility, but rather a present reality.
Exhibit A:
"Housing Meltdown" Business Week January 31, 2008
This story posits that home prices are likely to continue to sink another 25% over the next two years as the fallout of the subprime mortgage mess works its way though the market. People will soon stop using their homes as ATMs, withdrawing equity to use buying things- because the equity will no longer be there in many cases. As an open window in winter eventually cools your home, the home market will eventually effect other areas of the economy through reduction of liquidity. The Bush administration solutions to the problem are called "FHASecure", which offers new mortgages to certain well-qualified borrowers, and "Hope Now", a private-sector program to streamline the modification of unaffordable loans. But FHASecure isn't open to people who are underwater on their mortgages-in other words, those who most need help. And the Hope Now alliance doesn't seem to be coping successfully with the mounting backlog of loan delinquencies.
Exhibit B:
cnn.com's latest article on the mortgage debacle is entitled "Toubled Homeowners: Can't pay? Walk away". Need I say more? Well, it is legal to default on your loan and say goodbye to the home. The other solution, arson, is illegal. Do not go there.
Exhibit C:
Consumer confidence slumps a little farther every month. Don't worry, it still has room to go lower. If the housing industry and banking sector end up dropping 200 billion as we can probably expect, we can probably expect a ripple effect as the pain sinks in and the bankers reflexively stuff their wallets deeper in their pockets so that we can not yank any more of the money out.
So my conclusion is not optimistic. We tend to lag behind reality in economic negative events. Often we sell out of the stock market just as it reaches bottom, and the buyers do great. Often we recognize a recession at the bottom, rather than during the trip there. I realize that we are working on an economic stimulus plan, but that plan will supply liquidity only after a number of additional foreclosures take place. One or two grand of tax rebates are not not going to help someone who is twenty or thirty grand down in the mortgage mess.
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Comments: 37
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Of course we are entering recession. Guess what? We also entered winter a few months ago, and will be entering spring in a little more than a month.
Why is any of this "news"? Recession is a natural part of the economic cycle.
The drop in housing prices is WONDERFUL news!!!! I hope they keep dropping. I want my kids and grandkids to be able to buy a house one day, and still have enough of their paychecks to enjoy life, and maybe even save.
Yes, some people will lose real money because of the drop in housing prices... but fewer than most people think. What is being lost is mostly paper profits.
Carol- self fulfilling prophecy? I think that could be true in a sense- if everybody trying to sell a home insisted on keeping the price high, then the prices would not fall. On the other hand, I am not sure that there would be many buyers, so I think that much of the inventory we are saddled with would just sit there.
Human nature being what it is, if one is stuck with a home that suddenly is more than one can afford, one is tempted to sell at a loss just to stop the bleeding. This makes it a good time to be a buyer and a bad time to be a seller- especially if you are a buyer who is not in a hurry.
Unfortunately, I need to sell my mother in law's home sometime this year...
For years, social activists and socially active politicians have been pounding on the fed and the mortgage industry to ease requirements to allow minorities living in bad neighborhoods and the poor to gain access to home ownership. This was a worthy goal -- but the bankers had a point. Often times these people were using volatile incomes to buy property in volatile markets and it took Voodoo to qualify them for loans.
Now we are paying the price. It is easy to blame the scandal on "greed". It is less easy to admit that often what seems to be doing the right thing --- does more harm than good.
Wow, Greg....now there's some screwed up kind of logic. Fact is that there have been federally-guaranteed programs in place for these people for a long time. But they didn't offer the mortage lenders and banks the big pay-offs that were available with these sub-prime bait-and-switch instruments. It was the geniuses that developed these bait-and-switch and took the big pay-offs when they sold and shuffled who are to blame, as well as the government officials who KNEW this scamming was going on, but kept their regulatory mouths shut. I wouldn't be surprised, given a good investigation, if government people were paid off to do just that.
there is a political divide on this issue of the origins of the subprime mess. I tend to come down on Sheryl's side which is probably not a big surprise considering that I'm fairly liberal leaning.
In any event, nobody held a gun to the head of the mortgage industry to force them to push loans that were unworkable. It is their job to crunch numbers and sadly inform the borrower "you would be very likely to face foreclosure so I cannot authorize this loan". Instead they usually said "sign here, we will make it work for you". (And if it does not work, it ain't my problem!)
Chris - this has absolutely nothing to do with liberal or conservative, Rep or Dem...it's a fact, pure and simple. I'm in the financial investment business. When you look at how these sub-prime instruments were devised and then how they were handled by the market, they are nothing short of a pyramid scam. Come on....not everything is looked upon through a political lense. Sometimes, it's just the plain, honest truth. That's part of the problem with this country, Chris. We need to see everything as if it had two ways of looking at the facts...the liberal and the conservative. Sometimes, a fact is a fact is a fact. Everything else is just excuse and spin. All the people who were in on this scam should be indicted and sent to prison, just like the Enron scum.
Apparently you are very young or have a short memory. I remember the days when ACORN and other activist organizations held sit-in's at S & L and mortgage offices because of the perception that tight mortgage regulations denied minorities and the poor access to home ownership.
I remember the day when your mortgage could not exceed 1/4 of your income.
Apparently you and I are not in the same neighborhood. As I type this, I look out my window and can see houses for miles -- I would guess that not one of them qualifies for a government program.
These houses are in poor repair. Many slump toward each other. There are broken windows, sprung doors, shifting foundations -- these are the kind of homes that poor people can afford -- these are the very homes most affected by the subprime crisis.
These are not the homes that qualify for government loan guarantees.
Quite the contrary.
I agree w Sheryl and Chris' analysis of our financial situation. Greg seems like he just trying to push the blame on the government in 1992 when it was the greedy bankers who are leaving their jobs now with millions of dollars in pension and pay-offs who are ultimately responsible. It was those bankers who allowed people whom they knew could not pay off their expensive adjustable mortgages to enter the housing market. And it is those people who are walking away from their upside down loans. They have no other choice. Who can afford to pay a monthly mortgage of 4-5,000$? Only the rich or a family with 3-4 working adults, and how many of those are you aware of?
On the the veiled "those people" were the ones that got in trouble, there was an article in the Chicago Tribune about a month ago that many minority home buyers were steered toward ARM's/subprime even tho their credit rating and financial security didn't warrant it--I know that some of the cities mentioned were Chicago, Houston, San Diego, some in Florida.
I was listening to Ed Schultz today when he said that a Home Builders Association(American Home Builders? National Home Builders? I didn't quite catch the name) was quoted as saying we are in a depression. Housing market has taken a 30% decline in sales--that's not people who got in over their heads, that's people who just aren't shopping to buy property.
> financial press often states the definition of a recession
> as two consecutive quarters of decline in real GDP.
I look at this as the "tax" we pay to various non-government
entities because they know how to game the system in various
ways and have enough clout to keep the government from going
after them. It is debateable that we are in a recession, certainly
a downturn, and likely due to Bush policies I'd more likely agree to.
Home builders are hurting, but I am looking at trying to rebuild
an old house in this area and I have not noticed any bargains
from builders yet, so I think they are mainly whining.
> "financial press often states the definition of a recession as two consecutive quarters of decline in real GDP."
Home builders in my area are beginning to offer slight discounts. Those will get much better as time goes on so be patient if you can! How old is the house you're rebuilding?
Or shrub will borrow more money from China....is there anything left to sell? Oh, yeah...our GREAT grandchildren's future....
(hint: I'm not a repub)
Digital dogs has a good point that every economic slowdown has some opportunity in it if you look at it carefully and objectively. I think that green technology is still an opportunity, especially long term because we are not going to return to the days of $1 gas, and climate change is only going to grow as an issue. Infrastructure seems like a possible winner too, and maybe more so internationally than here at home because economic growth rates are higher in other parts of our planet.
How else are mortgage lenders supposed to meet their goals?
When Congress set unrealistic goals, it should have anticipated how those goal would be met.
There are basically two ways to qualify an under-qualified borrower:
1) Lie by overstating income or credit worthiness.
2) Issue an ARM.
The second method works for everyone: the Congress, the mortgage lenders, the cities, the borrowers; as long as interest rates remain stable and housing values rise.
When housing values dropped and interest rates rose, the wheels came off the wagon.
Yes, there was fraud, but there was also far more to the crisis.
An interesting note from Wikipedia
And Chris W. and Carol are correct - there are always opportunities to be had for the individual in terrible economic times. Wouldn't it have been great to have a bunch of potatoes to sell in the Irish Potato Famine? You'd have been sitting pretty, with all those people just DYING to buy your product.
(BIG hint: I am not a heartless, opportunistic schmuck.)
Investor's Business Daily: "Stores' weal sales signal consumers, economy in trouble"
Wall Street Journal: "Credit Card pinch leads consumers to rein in spending"
(one highlight of that article is that in December 2007, 7.6% of all credit card loans were at least 60 days delinquent or in default, up from 6.4% a year earlier)
Certain groups of people know in advance where these opportunities are going to be and they rush over there and start another bubble. I don't really think it is fair to call this capitalism, or free enterprise, because there is no transparency or efficiency to these kinds of "markets".
It is more insidious because it is akin to gambling where some people win and some people lose alongside the big interests that always wins, and that appeals to people's motivational systems. Look at the huge increase in gambling, and what the stock market has turned into with valuations of companies many times what they are worth by any accounting method.
People who hype the free market are simply saying they like this game and think they can win, not that they really believe in Capitalism, because this kind of thing is not really capitalism.
Understanding how supply and demand works and how it effects the global marketplace is not gambling. If you do your research, that is. It also doesn't require inside information.
After all, it doesn't take any special brains to look around you and figure out where the opportunities are going to be coming from in the future. Bushco has succeeded in decimated our armed forces, their equipment and most especially our National Guard and their equipment with a special emphasis on their vehicles, none of which will be returning from Iraq when our guys & grrls finally get to come home. Those vehicles have been trashed! we see em every night on tv. It's a no-brainer investment opp IMHO.
Same is true with companies that repair and rebuild infrastructure. We need to get our people in the US back to work and we need to repair our roads, bridges, and tunnels, and the best way to fix that is to start a WPA-like program. Again, to me this is a no-brainer.
Also, I'm planning a green remodel of my home. I'm adding a 2nd floor, rooftop deck (so I'll have an ocean view ;') solar roof tiles, gray-water recycling, cistern, passive heating under floors, clearstory windows, etc. I'm saving in advance of my remodel so I can borrow as little cash as possible to keep my monthly payments down (radical thought, huh?). But what really interests me is that once Bushco is gone I expect that whoever ends up in office will actually have a working brain this time and wake up to find out that we desperately need to stop sucking on the tit of Arab oil. This means alternative energies of all types will have more credence in the market and with a smart thoughtful person in the White House this time we should be getting rebates and incentives for people doing green building and remodeling. So, of course, I'm not leaping into a remodel before I can afford it and before I can take advantage of the rebates and incentives I know our government will be offering. After all, if the US is not able to create a new sector for viable green technologies then we will all be pretty desperate in the coming decades.
You need to think through a problem to understand your options for your future. Not run head on into something you're not prepared for.
Gee, wouldn't it have been wonderful if Bushco had figured that out before going into Iraq?
You can tell us it is a recession all you like, and by all means have fun. The truth remains.