Housing market teetering towards a collapse
By all indications, the housing market has
entered the final stage of its boom and will soon experience the usual
bubblenomics crack-up. We see this quite clearly if we glance at the loan
market, where lenders are recklessly pushing risky loans to keep the market
going.
The so-called "non-traditional mortgages," which
represented a scant 3% of the market just a few years ago, have become
increasingly ubiquitous. A July survey by the Federal Reserve found that such
mortgages constitute more than a quarter of new lending business in the housing
market. The worst kind of non-traditional mortgages are, of course, the
adjustable rate variety, in which the interest rate of the loan is pegged to
current interest rates. But what if current interest rates go up, as they must
inevitably? Then the lender and the
borrower are
screwed.
One can easily trace the
consequences of these practices on the economy at large. As the Fed, eager to
protect the assets market from possible foreign flight of capital, increases
interest rates, home owners with variable interest rate mortgages find
themselves increasingly squeezed. At this point, banks will become nervous and
the reckless lending will stop. But when the reckless lending stop, the housing
market will fall. This will put homeowners who can't pay their mortgages in a
very bad position, because now they will owe more than their homes are worth.
Under such a scenario, everyone loses. Homeowners who can't pay their
variable-rate mortgages lose their homes and their credit ratings; banks wind up
owning properties that cannot possible cover their losses on the bad loans;
homeowners in general, good, bad, and indifferent find the value of their homes
plummeting. The disaster in the home sector sends waves of devastation
throughout the economy, bringing on bad times for nearly everyone.
Posted: Fri - October 14, 2005 at 02:25 PM