Interesting article by Dr. Chris Martenson on our current housing situation… the executive summary speaks for itself:
- A series of government bailouts attack the symptoms, utterly fail to address the root cause
- The bailouts were for the big banks, not you
- House prices need to decline in price by 30% to 50%, and they will.
- Trillions of dollars of losses lurk…in ultra-safe pension bond funds, small Norwegian towns, as well as in some unlikely places.
- The current crisis is one of solvency not liquidity
The entire article is here. It’s outlook is pretty pessimistic, but that’s not to say it’s off-base. No one knows the future, but Dr. Martenson’s warnings ring true to me. His is one of several articles I’ve seen recently about how the current problems we’re seeing in financial markets are ones of solvency, not liquidity. This quote from Dr. Martenson’s article is telling:
To put it in the simplest of terms, the total amount of bank capital in the entire country is a little over $1.1 trillion while more than $11 trillion in real estate loans exist meaning that a 10% to 15% loss on those loans would translate into the complete bankruptcy of the US banking system. What this all means is that we have a crisis of solvency, not liquidity. Currently the Federal Reserve has teamed up with a few European central banks to provide vast new sources (unlimited really) of liquidity to the banking system. The central banks will allow specific institutions (big banks) to trade in their piles of dodgy loans for electronic piles of cash for a specified period of time. After a period of time the banks will have to buy those dodgy loans back, at par and with cash, at some point in the future. If those loans are bad (‘bad’ like a $500,000 mortgage on a $300,000 condo) then this maneuver by the Fed simply won’t work. Instead, we need to quickly recognize that the loans are simply going to permanently underperform or enter default. This means we will probably lose a financial intuition or two (or thirty) along the way, but delaying the inevitable does not change the outcome, only the length of time you spend in pain.
As always, the message is to get out of debt if you can. Not many of us (assuming you’re holding a mortgage, anyway) will be able to completely erase our debts, but we can concentrate on credit cards and other (relatively) smaller, high-interest ones.
There is a house up the street from my place that was for sale over the summer. The owners were asking 2005-level prices, and there were no takers. They never lowered their price, and eventually the sign went down. I didn’t think much of it, but after our recent snows I noticed that the driveway was unplowed, and there was only one set of tire tracks in several weeks’ time. The blinds are up; there’s no furniture to be seen inside and there’s a sign taped to the front window. I haven’t gotten close enough to check it out, but I’m assuming it’s a notice for either foreclosure or power shut-off. This house hasn’t shown up in the local foreclosure notices yet, but I’m expecting it to.
Since the owners never lowered their asking price much, I’m assuming they must have done something like a zero-down loan and are walking away leaving the bank holding the bag. If there is an auction on the house, I’ll be very curious to see what it sells for, since that will give me a good idea as to the real current price of my own house. It was unsettling for me to see this empty house standing in our neighborhood… I’m guessing it may not be the last one I’ll see in the next few years.