This is the typical response when I try to lay out for people why they need to be concerned. It is really simple in my simple mind.
When markets are lending, when credit is being created, things look good. Money is everywhere because people can borrow. This is inflation.
When markets want that debt paid back, things get ugly fast. Money dries up because people can’t borrow anymore. This is deflation.
My concern stems from the fact that over the last several years it is the government stepping in and artificially “forcing” the market to lend more than they wanted to. Blame the banks if you want for greed, but they are just taking their cues from the Fed.
Now we find way too much debt in the system. Sub-prime is the first casualty as it should be. The bulls claim that this deflation won’t spread. I do not believe this: everything in the economy is at the margin and one little leak can spring the dike.
Thanks Mr. Practical.
Bloomberg is reporting Foreclosures May Hit 1.5 Million in U.S. Housing Bust but the optimists just yawn.
Dale Westhoff, a senior managing director at New York-based Bear Stearns Cos., the largest underwriter of mortgage bonds, said last week that failing subprime lenders “are going to be absorbed very quickly.”
“Hedge funds and private equity are going to play a very important role in buying distressed assets,” Westhoff said.
In contrast to the 1991 housing skid, worker productivity is increasing, consumer confidence is expanding, interest rates remain within 1 percentage point of the 40-year low and the jobless rate fell to a five-year low last month. Last month, 7.4 million new and existing homes were sold at an annualized pace, more than twice the 1991 bottom.
And real estate people tend to be the world’s most optimistic, said Bryce Bowman, director of development for Randolph Equities LLC in Chicago.
“There’s a lot of capital chasing real estate and that has not ceased with this bust,” Bowman said. “Developers have stopped building crazy speculative housing developments and are burning off their inventory, so we’re excited about the end of ’07, and we want to be ready to go when business picks up in ’08.”
Other than the lending sector, the market is giving a big yawn too. Some (as noted above) are even excited. Paulson is chirping the Global Economy is Strong. “We have a global economy with low inflation, high levels of liquidity and I feel very comfortable with the global economy.“
But I’m with Mr. Practical. This is the start of something serious not the end of it. A huge downward spiral has begun and there is now no way to stop it. There is simply no way this economy can absorb a knockout punch of what is likely to be another 1,500,000 homes added to the market via foreclosures this year, nor can the economy absorb all the people who are going to be losing their jobs in the upcoming recession when consumers will finally be forced to cut spending.
If 1,500,000 foreclosures sounds high consider that RealtyTrac reported 130,511 new foreclosure filings during January alone, an increase of 19 percent from the previous month and an increase of 25 percent from January 2006. That is an annual rate of 1,566,132 foreclosures (and rising) so an estimate of 1,000,000-1,500,000 could be at the low end, and that is for 2007 alone.
There is a lot of money (credit) going to money heaven over this. Real estate prices are going to take another big hit as a result and banks will liquidate REOs for any price they can get. That will cause a further cascade in home prices which will also prevent many from refinancing. Tens of thousands of homeowners will find they can not refinance, sell, or move because they owe more on their house than what its worth. Those trapped in that situation will feel as if their house owns them as opposed to the other way around. But for now anyway, the start of this downward spiral is for the most part being greeted by a big yawn from the real estate optimists, the optimists at the Fed, and Paulson at the treasury.
Mike Shedlock / Mish/