Thursday, October 22, 2009

The housing market since 1992, and at an accelerated pace, since 2001 has been going rapidly up. Now, it seems that it’s all over. How could such a devastating reversal happen? On the one hand there are various theories on how the interest rates much go up now in the United States, in order to attract foreign capital, to fund the trade deficit and keep the dollar from collapsing in value. Yes, but how does that explain the rising prices in housing and other real estate in Western Europe, and even in Eastern Europe and spots in the developing sector? In a word, these are the economics of globalization, where protectionism of national sectors has been gotten rid of. In its place is the credo that the market decides everything, and that international capital can travel freely from country to country? A policy of looking at housing as investment properties, as opposed to finding affordable housing so most people can have a decent place to live is bound to cause foreclosures and suffering.

What is driving prices down, particularly in the U.S. is the exotic mortgages used to drive up prices, especially in key East Coast, West Coast and Florida markets in the first place. These are exotic mortgages, where there is little or no down payment, there are low payments for the first three to five years then, the payments increase dramatically. This creates a situation, where potentially half of the people who used these mortgages to buy housing which is half of the home buyers, could be forced into foreclosure. Right now there are over 1 million housing foreclosures a year, but what would things look like is there were, say, 10 million foreclosures a year?

Of course, oddly enough, this has created a new booming business for mortgage brokers, the refinancing business. This has shifted from refinancing homes in the boom to their higher market prices, and then having the homeowner cash-out the extra value as money in their pocket. Now the big rush is to shift from ARMs (Adjustable Rate Mortgages), to Fixed Rate mortgages, before the prevailing interest rates become even higher.

There is definitely a need to get national credit, from the US Treasury Department, or properly channeled from the US Federal Reserve, to fund new construction projects, especially infrastructure, that is, roads and bridges, power plants, etc. These have been allowed to continue to rot, even during the best days of the real estate boom. Otherwise, the politicians have to intervene before too many foreclosures spin the financial situation out of control.