Like an ATM that’s out of money

no credit

That’s what financially strapped homeowners now realize about their homes. The party is over. There will be more borrowing on the line of credit, because home values are falling now, not rising.

The Fed has aroused from their slumber long enough to say, hmm, this housing thing might ‘weigh’ on the economy more than we initially thought. Inflation is rising. To combat it the Fed must raise interest rates. But that will kill any possible housing resuscitation before it happens as well as dooming even more people to losing their homes because the payments for their variable rate mortgage will then rise.

I’m guessing not one member of the Fed is in danger of losing a home or even knows anyone who is. So they will continue to issue soporific statements (don’t want to roil the markets, y’know) while housing collapses around them. Then they will raise interest rates. Well, one of their primary purposes is to protect the assets of the monied class, so they can’t be upsetting investment banks, bond traders and hedge funds, now can they?

National Association of Homebuilders now says the building slump could last until 2011. That means a whole lot of hurt for a whole lot of businesses; realtors, contractors, building supplies – and all the businesses those people shop at. New car sales are down with the housing slump being an obvious factor. Vacation trips, meals out at restaurants, etc. will also take a hit.

In Debt We Trust covers much of this, concluding with a comment about lawmakers trying to mandate a way out.

We have to drop our pink colored glasses: there is little or nothing we can do. A debt binge is either paid or defaulted. And no lawmaker has the ability to change the outcome. Two options… only.

  • DJ

    What a mouthful! Let me begin here:

    “A debt binge is either paid or defaulted. And no lawmaker has the ability to change the outcome. Two options… only.”

    They could be talking about Bush’s debt binge as well. Except the President has the ability to cause more money to be created. That’s what causes inflation. (Wait a minute… inflation is already upon us!)

    “To combat it the Fed must raise interest rates.”

    Actually, consensus is that rates will remain unchanged through the end of the year. But that’s just a prediction, which could be wrong. If the government keeps spending money like raving liberals, inflation– and rising interest rates– are a foregone conclusion

    I wonder, though, why more people aren’t concerned about inflation happening at the same time as a housing slump that threatens our economy with recession. That’s not supposed to happen… and it hasn’t since Carter. Does the word stagflation ring a bell? Thank our Presdient’s Keynesian liberal economic policies, which aren’t working any better now than they did in the late 60s and early 70s.

  • DJ

    It is also worth mentioning that there are still significant local variations in this not-quite-national phenomenon. Several markets that missed the boom entirely and are currently quite healthy. All but 2 counties in UT fall into this category.

    I live in one of those 2 counties, where prices spiked because of an influx of money from LA and Vegas. But even here, prices have stabilized well above their 2005 levels. Here’s an actual example: a 4-bed, 2-bath home in Cedar City sold for $120,000 in March 2005, before the price spike. In June 2006, it would have sold for $225,000– an astounding 87% increase. Right now it’s selling for $160,000– still 33% higher than two years ago.

    Of course, if you bought it at $225K with a big ARM, or if you maxed out $225K in equity, you’d be hurting right now.

    As to the homebuilding industry here, it has slowed from what it was before. That means the guys are no longer working 6 days a week, 12-hours a day. But layoffs do not appear to be on the horizon. A contractor friend of mine told me he’s still got a six month lead time for any new projects. And just try and find a plumber!

    I presume this is a local variation, but since it is in a market that nearly doubled in 15 months, it appears significant. OTOH, maybe the dire predictions are overstated.

    In any case, as you so nicely point out, the real culprit is debt. I surely wish people were required to learn about the dangers of debt in school– but of course, the neo-con way (liberals that they are) is to finance the economy on debt, both consumer and government. So discouraging debt would be against their interests. Kind of makes one pine for a conservative leader, to whom debt is anathema.

  • It’s the major metro areas like L.A., S.F, Miami, Vegas, and the D.C area that are feeling major pain. The bubble was huge there.

    The Housing Bubble Blog has posts every day on this.

    The Fed has been talking about inflation, so they may have to raise rates. Especially because war spending is causing huge debt by the government.

    Me, I had a condo in LA double in value in 2 1/2 years, then sold it when Sue and I got married. It never even occurred to me to pull equity out of it because – you have to pay that money back, with interest. And I loathe debt.

  • DJ

    “It’s the major metro areas like L.A., S.F, Miami, Vegas, and the D.C area…”

    Don’t forget that half of Americans still live in rural communities. So while the urban boom/bust impacts a lot of people (and ripples into rural areas as well), it is by no means universal.

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