Two articles on the US Housing Bubble and its approaching bursting

Both these articles are long.. the first longer than the second... but they are both extremely significant for anyone who wants to come to terms with what is really happening to the US economy. Namely the on-going exporting of "real" employment and the continuing bubble driven economic policies led by the fed....



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http://www.scoop.co.nz/mason/stories/HL0403/S00330.htm

NEW BOOM OR NEW BUBBLE?
The Trajectory of the US Economy

By Robert Brenner
First Published - New Left Review 25 - Jan Feb 2004 <1>
Distributed by email on the Scoop Eco-Economy list
In early 2002 Alan Greenspan declared that the American recession which had begun a year earlier was at an end. By the fall the Fed was obliged to backtrack, admitting that the economy was still in difficulties and deflation a threat. In June 2003 Greenspan was still conceding that the ‘the economy has yet to exhibit sustainable growth’. Since then Wall Street economists have been proclaiming, with ever fewer qualifications, that after various interruptions attributable to ‘external shocks’ - 9/11, corporate scandals and the attack on Iraq - the economy is finally accelerating. Pointing to the reality of faster growth of gdp in the second half of 2003, and a significant increase in profits, they assure US that a new boom has arrived. The question that therefore imposes itself, with a Presidential election less than a year away, is the real condition of the US economy.<1>

What triggered the slowdown that took place? What is driving the current economic acceleration, and is it sustainable? Has the economy finally broken beyond the long downturn, which has brought ever worse global performance decade by decade since 1973? What is the outlook going forward?

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http://www.washingtonmonthly.com/features/2004/0404.wallace-wells.html

There Goes the Neighborhood
Why home prices are about to plummet--and take the recovery with them.

By Benjamin Wallace-Wells
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In Washington, where words are the currency, where imprecise verbs threaten the loss of a political career and misapplied nouns can doom a movement, there remain a few figures who get a general pass not just for a certain degree of verbal imprecision, but for a fairly deep-seated degree of intellectual wackiness, a penchant for regularly saying very odd things. Newt Gingrich is one of these public figures, Robert Byrd another; Helen Thomas has her moments, too.
You'll be sitting in the audience listening to a sensible speech by, say, Gingrich, and all of a sudden you get the notion that aliens have captured his brain. Befuddled, you'll turn to your friend next to you, the libertarian true-believer, and he'll shrug his shoulders and whisper back: "Oh, it's just Newt." And then, a few minutes later, the speaker's episode will subside, the aliens return the brain, and the speech continues on its before-we-were-so-rudely-interrupted track. No one says a word. The capital's press gives these folks a pass from its usual lawyerly scrutiny because they are regarded as sages who can be relied upon to speak some kind of unusual and valuable truth, whose occasional episodes of profound intellectual oddness are thought to stem from the same deep source as their general brilliance.



One of these spells flared up during the last week in February, when Greenspan recommended that the home-owning public take a good hard look at switching from fixed-rate mortgages, under whose terms payments stay the same no matter what interest rates do, to adjustable rate mortgages (ARMs), where payments fluctuate along with interest rates--which, right now, makes close to zero sense. Interest rates are lower than they've been in 30 years, and, with all economists predicting a general economic upturn, and Bush's budget deficit and the weak dollar sucking up capital, little doubt exists that interest rates must rise, in which case, switching from a fixed-rate to adjustable-rate mortgage would be pretty costly for any family naïve enough to take Greenspan at his word. The episode did not pass completely without critical notice. It was "the strangest bit of advice ever to be proffered by an American central banker," Jim Grant, publisher of Grant's Interest Rate Observer, told the San Francisco Chronicle. Then the press moved on: "Oh, it's just Greenspan."

In the short term the US economy is heading for a brick wall. When it hits some form of crisis management is going to be required from whoever is in the White House...

of homes and the government insane spending are the only things lifing the economy. Credit Card debt is at an all time high and so is credit card default. Jobs are flying overseas, the high paying jobs. Unemployment has been high. No one in the government cares. Health care is near a crital meltdown too. People have been refinancing to pay off credit cards. They are still charging 10-30% interst. That should be illegal. Someday the money will run out everywhere. If OPEC switches to Euros, goiod-by US economy. If foreigners stop investing in the US because of the debt, good by stock market and economy.

Here in Vegas - the world's capital of unrealized financial dreams - housing is going through the roof. One tract under development by Pullte saw $400,000 homes shoot up to $600,000 in a month's time! What's important to note about Vegas is that this is not the east coast or California where 6-figure salaries are commonplace. On the contrary, salaries in Vegas tend to run 20% lower than the same position on the east coast. So who, exactly, is buying all of these homes? Vegas has a low unemployment rate - about 3% - but that's only because most of the jobs here are in the service/casino industry. So, the answer is clear: it's people who are over-extended, people who would have been considered unqualified risks 15 years ago. It used to be called "speculation." Now, it's called "a piece of the American dream."

The rule of thumb used to be the two-times rule, as in, 2X gross salary = amount of mortgage you can afford (ie: if you make $50k per year, you can afford a $100k home). As the article points out, the average California home owner is now operating under an 8 to 1 multiplier (ie: a person making $50k a year lives in a home valued at $400,000). If this guy sells his home, he can't afford to buy one next door or the next town over. He needs to relocate to a low-rent district just to keep the quality of his home at the same level. In short, he can afford to sell, but he can't afford to move!

Yes, the housing bubble will burst within the next two years. The number of Americans who crash and burn with it will be astonishing. Those who are borrowing against some phony equity number that their appraiser touted to their second-mortgage lender are going to be in deep shit when their home's value deflates by 20%. Holding $500,000 in mortgage liabilities on a house valued at only $400,000 while you're earning under $100,000 per year isn't exactly a strong position to be in. Yet that's where many Americans will find themselves shortly.

The bottom will fall out when their jobs evaporate and they're forced to sell their homes. Rather than realizing a profit, many will sell at a loss (our homeowner above might sell his home for $400,000 and still owe some bank $100,000). Carrying $100,000 in debt without a job means living on the street or moving in with the relatives...or sleeping in your Hummer. Couple that with runaway credit card debt and Mr Average Homeowner is fucked!

Depression, here we come!!

with your analysis of the effect a burst in the housing bubble will have on some homeowners. The same thing is happening in Tampa Bay area, too. A lot of new developments are going up with some houses priced in the $300,000+ range, but average incomes in this area are 20-40% lower than what they are in the NYC metro area. Yet these houses all sell right away.

However, I'm disappointed with the article glossing over other pressing issues in the housing market which have aided and abetted the housing boom. For example, the problems caused by some subprime lenders, mortgage servicers and all kinds of consumer finance fraudsters entering the market to fill the niche for low income borrowers, or those who have bad credit, and have made it easier for these borrowers to overextend themselves with disastrous, often criminal, results that favor the lender or servicer.

I'm also disappointed that the article neglects to mention that the neo-cons at AEI and in the House are playing a larger role in the push to privatize Freddie and Fannie than the author suggests. The article also fails to mention that private corporations have been drooling for years to get a larger piece of the secondary market action. If I'm not mistaken, the House bill mentioned in this article is being sponsored by Christopher Shays and not only does it change Congress' oversight role over these GSEs, as the article states, but the bill's other provisions would essentially take the first step in the privatization of these GSEs.

This is the second article I have seen which rips off Krugman's trademark sober, sensible analysis in examining the upcoming problems of the housing market, but then launches into an exposition of problems allegedly exacerbated by Freddie and Fannie. I'm already suspicious.

I knew he took a whack at Fannie Mae and Freddie Mac and rightly so, but I'm guessing that people will pay as much attention to his ARM plug as they did his famous "irrational exuberance" speech.


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Greenspan hits Fannie Mae, Freddie Mac

By Patrice Hill
THE WASHINGTON TIMES
2-24-04

Federal Reserve Chairman Alan Greenspan yesterday took on the powerful housing industry, warning that the $2 trillion and growing debts being amassed by Fannie Mae and Freddie Mac pose a threat to the economy and taxpayers.


But the government-sponsored enterprises, in their race to become Fortune 500 companies, have exploited their implicit federal guarantee by monopolizing the market for single-family mortgages in recent years, while rapidly expanding debts and assets in a way that threatens the stability of the financial system, he said.

"The Federal Reserve is concerned about the growth and the scale" of the enterprises' acquisition and debt activities, and recommends that they be capped by Congress to prevent a financial crisis in the future, he said.

"Preventive actions are required sooner, rather than later," he said, echoing warnings from the General Accounting Office and Congressional Budget Office.


more.....

http://64.233.167.104/search?q=cache:uODQf3zEfWwJ:washingtontimes.com/business/20040224-112259-4811r.htm+greenspan+fannie+mae&hl=en&ie=UTF-8