housing crisis

Recent events, among them the take-over of Fannie Mae and Freddie Mac, clearly show that the housing crisis isn't over yet. As a matter of fact, I predict it will get (much) worse before it gets better. That is because many mortgages still have to reset to their "real" rates, while housing prices keep on dropping. The drop is likely to accelerate into a free fall soon as banks become increasingly aggressive dumping properties that they want off their books.

Many people, including many prime borrowers cannot -and could not ever- afford- their real mortgage rate. Many had no doubt hoped to "flip" the property or refinance before the reset happened. That is now all but impossible to do. To make matters worse, ever larger numbers are effectively "going underwater" with their mortgage balance higher than their home value. For those who do and who don't have a lot of equity in the house, the best strategy then becomes to walk away from it.

Large swats of homes in foreclosure or empty pose a real threat to local communities. Not only do the abandoned swimming pools breed mosquitos, and the unkept lawns breed weeds, there is also the increasing temptation of crime. Easy targets can tempt even upright citizens who would never dream of stealing things.

All these events leave the government with another massive burden that will need to be passed on to tax payers. But it doesn't end there. Lots of foreigners and foreign governments are invested in entities such as Freddie and Fanny, and when a take-over happens and their equity gets wiped out, they become very cautious and very aversive towards more US lending and investment. Given how much national debt we have and how much we keep piling on with our little diversions in Iraq and Afghanistan, that could mean more trouble to come. If foreigners stopped buying debt we would have to raise interest rates to make it more attractive. That would mean even more foreclosures. Not to mention the damper it puts on business.

Meanwhile jobs are disappearing fast too. With an economy that depends on consumer spending, and no growth in consumer spending, jobs will continue to disappear. Small businesses will go under. Not just in the housing sector, which is already badly damaged, but throughout retail, the cornerstone of our economy. 

Bring in a few additional temporary setbacks, such a no California budget for 67+ days, and more businesses will bite the dust for lack of credit. More people who can no longer afford their mortgage. The only "happy" place we have left is exports. But a US downturn is likely to spread around the globe and that means our one remaining happy place is also under fire.

Don't forget the underlying trend, a population that is aging fast, in need of more medical help, and largely uninsured. Do you see a perfect storm brewing?