The Housing Market
So the housing market is still heading down, though there are plenty of economists who are happy to talk about how it is going to level off or head back up. Meanwhile, the sub-prime loan market continues to rack up high-levels of defaults and numerous sub-prime lenders have exited stage left, over-burdened with bad debt.
So what I’m wondering is why the housing market is going to be going back up any time soon? Look at it this way. Why is the housing market so high right now? It is so high because people have over-extended themselves to buy houses they couldn’t really afford. That was fine as long as the value of those houses kept going up. They could eventually sell the houses, make a profit, and move on having eliminated their bad debt.
A guy I worked with at an old job had this exact plan. He bought a place last year with a 5-year interest only mortgage. There is probably no way that he could afford the house under normal means, but only having to pay the interest part of the loan was affordable. The plan was to let the house appreciate for 5 years and then sell it off at a profit before he ever had to make any of the larger payments.
Now this plan only works if someone else was willing to assume bad debt on their own to buy the house from him. In a situation where the housing market was going up, lots of people were willing to take on that debt. But the housing market is now no longer going up. In fact, it is going down. Which means there is no good reason for someone to take on bad debt to buy more house than they can really afford.
From my point of view, this can only serve to drive prices down. The people living next door to where I grew up are currently trying to sell their house. It is the sort of place that maybe a year ago, I would have considered a million dollar house. Its in a good town, right on public transportation, in what is considered a good school district and it is a large old Victorian house. Their list price started at 925,000 and its currently down to 899,000 having been on the market for over 2 weeks. I’d be surprised if they got over 800,000 for it.
And that’s my point in a nutshell. When people start selling off their houses at a loss or even at a small gain, they’re not going to have the money to invest in another bigger house. The entire housing market has been like a giant pyramid scam. You sell your house for a profit, which lets you buy a bigger house for a profit, which lets the person you bought from do the same thing. But that only works when the first guy takes on enough bad debt to let you buy that next bigger house.
When that doesn’t happen, the entire bubble stops bubbling. And that’s what I see starting to happen now. There is no incentive to take on bad debt to buy a house if you don’t think that someone else will be willing to take on even more bad debt in five years to take it off your hands. With the American saving rate being negative and credit card debts only going up, I think Americans are starting to get wary of taking off more debt, especially when the housing market is seeming like less than a sure bet. Which means I don’t see the housing market rebounding any time soon.
Of course, I could be completely wrong. But the entire thing is a house of cards and the bottom is looking awfully wobbly right now.