Housing Bubble & Government Complicity

[unlawflcombatnt]

THE HOUSING BUBBLE and GOVERNMENT COMPLICITY

The biggest culprit in the housing bubble is the United States Government and the Federal Reserve. The lowering of the prime rate by Greenspan has resulted in a drastic reduction in mortgage rates, allowing people to apply more money toward principle, and less toward interest. This has allowed people to afford more expensive homes, causing prices to skyrocket.

The dubious performance of our economy has shifted money away from business and stock market investment into long term bonds investment. The resultant lowering of long-term bond rates has perpetuated the low mortgage rates that were initiated by Greenspan. (Banks usually sell mortgages as bonds or securities to a secondary holder. Banks must pay interest on the bonds to the secondary holder. In order to make a profit, banks must charge a higher interest rate on the mortgage than they pay on the bond. If bond interest rates are high, banks must pay the secondary buyer more interest on the bond. As a result, they must charge more interest on their mortgage loans to make a profit. This is why mortgage rates are tied to bond rates.)

Finally, an increased demand for bonds reduces the interest banks must pay to sell the bonds. As a result, banks can charge less interest on mortgages and still make a profit. This increased bond demand accounts for the lack of effect of recent prime rate increases on mortgage rates. However, purchase of long-term bonds by foreign governments has slowed recently, and will ultimately lead to an increase in bond rates and mortgage rates. Though non-government buyers have recently increased their bond purchases some, this is starting to level out.

Federally insured mortgage backers Fannie Mae and Freddie Mac have increased the limit on the mortgage value they will insure every year. This means banks can loan out larger amounts of money, and then sell them as securities on Wall Street. These securities are backed by the United States government. In other words, if the loan payments aren't made, the government will pay back the holder of the securities. This means the U.S. taxpayer will have to foot the bill for loan defaults.

Of the $2.6 trillion in mortgages last year, almost $900 billion were government backed through Fannie Mae or Freddie Mac. If these loans default, the American taxpayer will have to bail out Fannie Mae and Freddie Mac.

Government agencies have also relaxed the requirements for loans they will insure. This has resulted in many more risky loans. Standard loan practices in the past usually required a 20% down payment for a home mortgage. This placed some limits on those who could purchase homes. Now that particular limit has largely been removed. By removing the requirement of a 20% down payment, many more people are now able to borrow money to buy homes that would not have been able to previously. This has greatly increased the number of buyers on the market. This has caused a huge increase in demand for homes. This new increase in demand has greatly increased home prices. Again, this price increase is exclusively the handywork of the Federal government.

The loosening of down payment requirements has also allowed speculators to purchase a larger number of homes. If a speculator is only required to put 10% down, instead of 20%, he can buy twice as many homes. Many speculators are in double digits on homes purchased. This has artificially reduced the supply of homes, which also increases the price.

All of this government-sponsored housing overvaluation is greatly inflating the housing bubble. Unfortunately, the American taxpayer will be asked to bail out the banks when this all comes crashing down. As a result, even those of us who have been wise enough to stay out of the housing bubble will be paying for the greed and irresponsibility of banks and speculators.

unlawflcombatnt

[BillZBubb]

1. Too true. Repug weasel Greenspan is up to his earlobes on this

The lowered loan requirements are going to come back and bite us all in the ass--just like most of what passes for "conservative" economics these days.

The whole economy is in Titanic mode with icebergs on the horizon.

[rumpel]

2. an additional tragedy is that many could lose those homes to foreclosure

particularly the ones who have increased the debt via cash out to stay afloat in a depressed jobs and payroll environment. The banks and speculators however will be able to take those homes at cost and auction off or resell with a profit.
But since there is so much big speculator money in the market, I don't think they will allow the housing prices to drop to the point that they themselves will jeopardize their investment.

The whole "rosy economy" is an illusion by design. But what good does it do if the majority of the population is squeezed to point, that there is no more blood to draw?

[gasperc]

3. banks will have to negotiate or face mass foreclosures

greed has made us fat and happy and soon we'll suffer the consequences

[zoeb]

4. I agree, I think this economy has been floating along on

real estate investments, like continued home "flipping" and equity loans but with interest rates creeping up and a recession looming, all due to higher gas prices, this little rosy economy is going to screech to a halt.

[Rockholm]

5. Is this the ONLY subject you discuss on DU?

Seems that you just can't get enough of talking the RE market down. Wonder why that is?

[Name removed]

6. Deleted message

Message removed by moderator. Click here to review the message board rules.

[unlawflcombatnt]

11. Dishonesty will get you nowhere

I've never "admitted" I hoped the real estate market would crash. Nor have I said anything resembling that. And you know it.

You're simply worried that the truth about the housing bubble will come out, and you're out there trying to discredit anyone who tries to convey the truth. And now you're lying about what I said.

unlawflcombatnt

[unlawflcombatnt]

10. Real Estate Deception

Because real estate agents are out en masse trying to deceive the public.

"Is this the ONLY subject you discuss on DU?" You'd know the answer to that if real estate wasn't the only subject you were concerned about.


It's interesting you've never responded to any of my other posts, of which there are over 400. I've posted numerous opening posts on other subjects. You weren't interested in posting comments on any of those. It appears this is the only subject you are interested in.

unlawflcombatnt

[David Zephyr]

7. Hey. What's the timeframe on your option call?

How much longer do you have before you lose or make money on your option / gamble on the real estate market dropping? When's your deadline to make or lose? Are you running out of time on your gamble? I hope not for your sake.

Still, posting one negative article after another on this subject at the DU will not influence the market enough to help you. Are you working other internet forums this hard, too?

I really hate to see you lose money after how hard you've worked this.

[1932]

12. If RE isn't in bubble mode, unlawfulcombat's posts wouldn't matter.

That you're worried about unlawfulcombat's posts suggest you think RE is in bubble mode.

[unlawflcombatnt]

17. Exactly

1932,

Very good point. If he wasn't worried about the bubble bursting, he wouldn't respond to my posts. Given he is a real estate agent, his concern is no surprise. He stands to lose a lot if the bubble bursts.

unlawflcombatnt

[newswolf56]

8. The one point upon which I differ with your analysis is your...

belief in a forthcoming crash -- and I make this point not to flame but with all due respect. While all of your facts are unquestionably correct -- the reduced down-payment requirements suggest a frightening analogy to the buying on margin allowed in the stock market before the Crash of '29 -- your belief in a forthcoming collapse suggests you regard the present-day economy as yet another expression of the normal capitalist cycle of boom and bust.

This is where -- reasoning not from economic principles but from the examples of history -- I emphatically disagree: what I believe we are witnessing is a genuine apocalypse economy, one thus most closely analogous to the economic conditions during the collapse of the Roman Empire, when the price of "fixed value" goods -- land, precious metals, grain etc. -- skyrocketed (precisely as real estate and fuel are doing today), even as the value of the ever-more-debased currency collapsed (precisely as the dollar is becoming ever more worthless). Then or now, the bottom-line reality of the resultant price structure remains ever the same: material wellbeing is placed, irrevocably and seemingly forever, beyond the reach of anyone who is not wealthy -- thus, 1500 years ago, the birth of the "nobility" that has endured into the present. The resultant economic and political structure -- a tiny, obscenely wealthy oligarchy ruling over a huge, utterly wretched, effectively enslaved proletariat -- characterized the entire Western World for the next 1400-plus years: specifically until the Bolshevik Revolution of 1917 terrified the oligarchy into a massive redistribution of wealth -- a redistribution that here in the United States was known as the New Deal.

With the death of the Soviet Union, the oligarchy immediately began a huge campaign of gleeful take-backs: withdrawing and nullifying the concessions it had made to bribe working families and thus stave off the threat of Communist revolution. (During the '30s, the Communist Party was the best organized and third-largest political party in U.S. history.) Everything that has happened since the death of the Soviet Union -- downsizing, outsourcing, workers' loss of health insurance and pensions even as executive salaries soar to ever more obscene heights -- all this is merely the oligarchy reasserting itself in the wake of the Soviet collapse. Hence the present day economy: real estate and fuel prices will continue to climb as the plutocrats re-concentrate their wealth into a neo-manorial, neo-feudal recreation of the world-order Marxism forced them to temporarily abandon. Hence -- this time -- there will be no bursting bubble. Real estate prices will continue climbing and remain high. So will petroleum prices. The prices will level off only when the oligarchy is finished with its creation of the new serfdom: all American workers reduced to defacto slavery -- home ownership or affordable transport now forever beyond our reach.

The modern equivalent of the Roman Empire's collapse in the face of barbarian invasions is Peak Oil -- this in combination with the Jihadist onslaught, ironically (and again in parallel to ancient Rome) a set of conditions the oligarchy itself has created. As then, only the wealthy will survive in relative comfort. All the rest of us will be flung into ever-worsening wretchedness, precisely as we see happening.

But focused on the short-term bottom line to the total exclusion of the long-term potential, the plutocrats seem miss one important point. There are still Marxist states in the world: China, Vietnam, Cuba, Venezuela, etc., and many Europeans believe there is a growing likelihood (deliberately unreported in the U.S.) of a second Communist revolution in Russia. China especially is the wild card in this deck: by one estimate, China is using capitalism against itself, thereby not only avoiding the economic errors that brought about the downfall of the U.S.S.R., but positioning itself uniquely well to foreclose on the huge U.S. debt that is now mostly financed and underwritten by Chinese money. What an irony if ever more Americans are living in ever worsening starvation and homelessness even as the people of these Marxist nations, however collectively impoverished, still manage three meals a day, adequate employment and adequate healthcare. This world of starvation and homelessness is precisely the world to which Marxism offered an antidote in 1917. The return of such conditions is precisely why Marx is again relevant today: not as an ultimate solution, but surely -- as in the New Deal years -- a starting point for developing a peaceful, Constitutional, uniquely American response.



Edit: addition of fourth paragraph.

[unlawflcombatnt]

14. Do we really disagree?

I'm not sure we actually disagree. I think we is heading for an economic downturn. A big one.

I do think the housing bubble will burst sometime in the future, and possibly in the very near future.

Someone has to have enough money to purchase goods in a capitalist society. Without consumer purchasing power, capitalists cannot continue to profit. The current plutocracy is being maintained by ever increasing debt-financing of consumer spending. This cannot continue indefinitely. The middle class and the poor will be hit by this sooner than the rich. But the rich will eventually become less rich as well. A certain level of consumer wealth is absolutely necessary for capitalism to work. Without this, the wealthy will lose their wealth as well. There will be no one for them to profit off of.

Returning to housing, the same principles apply. Someone has to have enough money to purchase the homes, if home appreciation is to continue. And this most certainly is not the case. More money has been thrown into the housing market by the risky, irresponsible loans many banks are making. This is being fueled by relaxation of loan rules at all levels, and our government's backing of these risky loans. As a result, the demand for homes has been artificially increased, driving the prices still higher.

Current problems are not the fault of capitalism or the free market. These problems are the fault of the Bush corporatocracy, and it's policies designed to prop up banks, corporations, and the real estate industry. Without extensive government backing and insurance, the housing bubble never would have occurred.

Our current economic problems are not a failure of free enterprise or capitalism. They are the fault of our current corporate plutocracy, which has been disguised as capitalism. Government backing of the banking and real estate industries is not "free enterprise." And billions of dollars in corporate welfare certainly don't constitute "free enterprise" or "free markets." This is corporate fascism. There is nothing "free" about any of this. These problems aren't the result of lack of government oversight or intervention. These problems were created because of government intervention. Corporate America has benefitted greatly from government intervention on their behalf. So have the banking and real estate industries.

The Republican party has now become the party of big government. They now champion the cause of government interference in every walk of life. Their whining about "onerous regulatory burdens" is just a hoax. Most regulatory burdens and government interference help Corporate America. It's time we stopped letting them pull the wool over our eyes on this issue. The Republicans want big government. They just want us to think otherwise.

unlawflcombatnt

[Nikki Stone 1]

29. Excellent post, newswolf.

Thanks for a good read.

[wli]

9. ripe for a 1929-style margin call collapse indeed n/t

[unlawflcombatnt]

16. 1929 - type crash

We certainly are on the path to a similar crash. People are now buying homes on "margins," instead of buying stocks on margins. A housing crash has the potential to be much worse. Only 10% of the population was invested in the stock market in 1929. In contrast, 69% of the population is invested in real estate. And at least 25% of them are "investors," who will try to dump their homes when they see a large depreciation on the horizon. And this will just accelerate that depreciation.

[kineneb]

13. Have any of you noticed this?

More of the properties sold recently are to speculators and not to people who want a house simply in which to live. It is happening already out in rural Lake Co. CA.

Folks are buying "affordable" housing here and then commuting over the hills to Santa Rosa (~1.25+ hours). Less expensive properties around the lake are selling to the investors, who are just sitting on the deed, hoping to sell at a profit. But I don't think the prices will continue to go up at the same fast rate.

Seems that the tourist biz has been a little slower here than last year. Gas prices may be eating into the vacation funds.

Just makes me wonder.

[unlawflcombatnt]

15. Speculators

Kineneb,

Yes indeed. There certainly has been a huge increase in the number of speculators on the market purchasing homes. There are several homes in my neck of the woods where no one is living. It appears these homes have been purchased by speculators, since no one is living in them and they are not for sale.

The California Association of Realtors president recently stated that 3 of 4 homes in the San Diego area were purchased by speculators. Nationwide the number has been put at a minimum of 25%, though many think it is much higher.

unlawflcombatnt

[unlawflcombatnt]

18. Bubble Formation & CA Housing Graph

I thought I'd insert a link to a simple explanation of bubble formation by Robert Reich. Though the topic he discusses is "How China can burst U.S. housing bubble," his explanation of "bubble" formation is also very useful.

Basicly, bubble formation occurs as a result of easy obtainability of capital for investment, and buyer belief that the price of what was invested in will continue to increase. In this case, it refers to home prices. The link is:
http://sfgate.com/cgi-bin/article.cgi?file=/c/a/2005/08/14/INGN3E5T5D1.DTL

I've also included a graph comparing income changes with home price changes. Home prices have increased much faster than incomes. (How can people continue to increase their home payments more than their income increases?)



unlawflcombatnt

[unlawflcombatnt]

19. Housing Bubble Deflation Indicators

Below is a link to the Wall Street Journal article titled "Cracks in the Ceiling." The author makes many good points about the housing bubble. He decribes numerous indications that it is starting to deflate.

The time that homes remain on the maket has increased nationwide. New home construction has plateued over the last year. There have been a decreased number of mortgage applications in 4 of the last 6 weeks. The inventory of foreclosure properties increased 5% in July. Sales growth at home-and-garden centers has declined sharply from its peak in 2004. The National Association of Home Builders index of new home sales has declined for the 2nd straight month in August, matching its lowest level in the past year.
http://online.wsj.com/public/article_print/0,,SB112413145968613525-oxRmKyVbGrn91b2zGlnEEZU3SUM_20060818,00.html

unlawflcombatnt

[kerrygoddess]

20. Great stuff!

You need to get this out in the blogosphere!

[unlawflcombatnt]

21. Thanks

Kerrygoddess,

Thanks for your comments. I completely agree with you. This information needs to be widely disseminated to counter the misleading propaganda being disseminated by the banking and real estate industries.

unlawflcombatnt

[unlawflcombatnt]

22. Prices to Decline as Demand Dries Up

"Prices in the hot U.S. housing market are poised to decline as demand dries up due to the inability of first-time buyers to afford a home, a Merrill Lynch analyst said in a research report on Monday...."

The entire article can be found at:

http://news.yahoo.com/s/nm/20050822/bs_nm/economy_housing_dc;_ylt=AoEAyfXdVK.9K83QEEavOGeyBhIF;_ylu=X3oDMTBiMW04NW9mBHNlYwMlJVRPUCUl


unlawflcombatnt

[FreeStateDemocrat]

24. Supply and demand drives most markets along w/bubbles by speculators

Thanks for all the insightful information.

[sendero]

23. A small point..

.... I agree with most of what you say but would make a small correction. I'm sure it varies from region to region, but up until the recent relaxation you speak of, the down payment requirement for homes here in TX has been 5%, not 20%.

I bought my first house in 1978 with 5% down, so this has been a longstanding practice. Now, depending on whether you had an FHA or Conventional loan, you might have to have PMI (private mortgage insurance) until you had at least 20% equity in the house.

I see the relaxation of loan standards for housing the same way I see a similar relaxation of all consumer debt of late. "Zero down, no payments for 6 months" and similar "deals" have become the norm. It all seems to be to be a case of too many goods chasing too few consumers, so that the least creditworthy are courted. It seems like the death rattle of a failing economy.

[unlawflcombatnt]

25. Loosening of credit

I think 20% down has been the historic standard. I haven't ever bought a home, so I don't really know what I would have been asked to put down. The numerous home price affordability "calculators" usually start with an assumed 20% down. A lot of homes now are bought with $0 down, at least here in California. It's basicly taken much less credit-worthiness and wealth to buy a home. This puts more buyers in the market who can afford homes. Naturally that raises demand, and raises prices as a result. Such demand has been created with NO increase in consumer wealth or wages. They've simply made it possible for many buyers to start off in an even deeper hole.

unlawflcombatnt

[unlawflcombatnt]

26. Housing Decline Evidence Increases

Existing home sales declined in July. Home sales declined to an annual rate of 7.16 million, down from June's rate of 7.35 million/year. The supply of homes increased for the 4th straight month. July's inventory increased to 4.6 months worth from June's 4.4 months worth. This marks a 15% increase in home supply over March's 4.0 month's supply. Since March, the annual rate of increase in unsold homes has been 36%.

Increasing supply puts downward pressure on prices. This has been born out by the fact that home appreciation increases have declined. Though prices of existing homes have increased, the rate of increase has slowed greatly. If the current trend continues, prices will decline. Further downward price pressure is being applied by declining new home prices, which have decreased 7.7% over the last 2 months, and -0.4% year-over-year through June. Tomorrow's release of new home sales is anticipated to show a decline in the annual new home sales rate by 25-45,000 thousand homes. July median new home prices will probably decline as well.

The following is a link to Briefing.com's Existing Home Sales:
http://www.briefing.com/Silver/Calendars/EconomicReleases/exist.htm

The following is a link to Briefing.com's New Home Sales:
http://www.briefing.com/Silver/Calendars/EconomicReleases/newhom.htm

All evidence points to a slowdown in the housing market. Home construction spending has declined for 4 straight months. New home sales are anticipated to decline for July. New home prices have declined for 2 straight months, and will probably decline this month as well. Homes are staying on the market longer in many of the hotter markets.

unlawflcombatnt

[unlawflcombatnt]

27. Housing Bubble Deflation Continues

Median new home prices declined for the 3rd straight month in July. Since April of 2005, median new home prices have declined 14%. Prices have declined 10.5% over the last 2 months alone. The decline over the last 2 months is at a 63% annual rate. At the current rate, new home prices will be less than 1/2 of their current level by July of 2006!

July's median new home price declined to $203,000 from June's 214,000. This was a 5.4% 1-month decline. This follows a 6.1% decline in June from May's $227,000. This follows May's 2.2% decline from $232,000 in April. The year-over-year change in new home prices is -4.0% from last July's $212,400. Adjusting for an annual inflation rate of 3%, this month's new home price would be $197,686 in 2004 dollars. This marks a -7.4% yearly decline in inflation-adjusted new home prices.

New home sales did increase for the month of July, though price reductions were largely responsible for this. However, existing home sales declined for July, bringing the annual existing home sales rate down by 2.6%. In addition, there has been a 15% increase in inventory of homes since March alone. July's increase in supply of homes marked the 4th straight month of increases in home inventories. This would be expected to sustain a continued decline in home prices.

Combining the price and sales declines with 4 straight months of home construction decline, evidence is mounting that the housing bubble is deflating. And the deflation appears to be picking up speed.

The link to the article about today's new home price declines is at:
http://biz.yahoo.com/ap/050824/economy.html?.v=15



unlawflcombatnt

[unlawflcombatnt]

28. Correction

In my previous post I understated the monthly decline in new home prices. The 1-month decline is actually 7.2%, based on the upward revision of new home sales in June to 219,000 from the previously reported 214,000. Thus, new home prices have declined 3 months straight, with an ever increasing rate of decline. July's -7.2% change is over twice that of June's -3.4%. This follows a 2.2% decline in May.

unlawflcombatnt