The Future of Our Industry?

"Christopher Thornberg, senior economist with the respected UCLAAnderson Forecast, told a business group that he believes a drastic deceleration in home sales is coming. "You are starting to see a slowdown in housing market activity, and that says loud and clearthat things are starting to break." He believes house prices areabout 30 percent to 40 percent overvalued. "If you have a big decline in unit sales, you'll have mortgagebrokers and real estate agents and construction workers all losingjobs. And what's driving the California job market right now?Construction, finance and real estate jobs. Those will go away...all that wonderful money is going to disappear.
Suddenly, the house isn't going to be able to pay for the kids' education, it's not going to pay for your retirement inBermuda and it's not going to pay for that face-lift at age 74." Thornberg adds, "...we have peaked. And beyond that is a downhillrun." Consider: * 42% of all first-time buyers put down nothing. More thantwo-thirds put down almost nothing. * They don't pay back a dime of principal. One-third of allmortgages are now interest only. In California, about half of all mortgages are interest-only. In the Bay Area, make that two-thirds. * Thanks to easy terms, the payments on the new place are lowerthan on the buyer's previous home...for the time being. * Lots of buyers are skipping occasional monthly payment andadding the difference to their debt. * More than 1/3 of all home sales involve second homes, usuallyspeculations. Florida is packed with condos that no one lives in - up to 40% of "home" sales in some markets.
What's happening is that home buyers and sellers are tradingpieces of paper that say some house is worth, let's say, $450,000. But nobody's bank account or paycheck is taking a hit to pay those prices. No one is working longer hours to repay the vast new debts. It's a fool's paradise - until interest rates go up,principalpayments come due, and prices start to tumble. We're talking about borrowers who spend every dime and live from paycheck to paycheck. They never save a penny. In 2005Americans' personal savings rate dipped into negative territory, minus 0.5 percent, something that has not happened since the Great Depression. This means that Americans not only spent all of their after-tax income last year but had to increase borrowing (unless they had savings to wipe out). The savings rate has been negative for an entire year only twice before, in 1932 and 1933, two years when the country was struggling to cope with the Depression, a time of massive business failures and job layoffs. Worse yet, they've loaded up on credit card debt as well asmortgage debt. Their adjustable house payment will go up like crazy at the very same time their house loses value. Do you think they're going to tough it out and continue to make those payments? Don't count on it. Most of them couldn't do it if they tried. In fact, millions will lose their jobs as the economy turns down. 40 percent of the new jobs in this country in the last few yearshave been housing related. Those jobs will go "poof!" Look for a huge, huge wave of defaults. Desperate homeowners will load up the furniture, hand the keys to the lender and driveaway. What's more, they'll do it by the millions, bringing down theworld's biggest financial institutions and crashing the stock market while they're at it. The Wall Street Journal says, "In recent years, the housingindustry has bent over backward to allow people...to buy houses they couldn't previously afford. Now the bill is coming due." Money Magazine reports that home prices are going up fivetimes as fast as personal income. "In fact, the market could not have run this far if not for the proliferation of interest-only mortgages, which make it possible for people to purchase more home than they could otherwise afford."
Forbes warns, "Get out now, because house prices on the urbancoasts have peaked. That's the consensus of experts, based on ratios such as house prices to local incomes...Rising interest rates have started to put the brakes on house appreciation. The number of 'for sale' signs in California is exploding like spring pollen." And The Daily Reckoning (dailyreckoning.com) says, "Fannie Mae and Freddie Mac are the lenders behind $4 trillion of housing loans. These institutions are guilty of manipulations that make the folks at Enron look like a bunch of Boy Scouts. They've cooked their books, concealed huge losses, paid off politicians, and lied to investors every which way from Sunday. "These giant lenders are in no position to weather even a smalldownturn. But the downturn has already started, and it's NOT going to be small. When these big companies fail, it will rock financial markets. Interest rates will soar. "The main difference between these scandals and Enron is SIZE. The wealth that will go down the tubes this time is thousands oftimes greater. Every single investor, homeowner, and government in the world will feel the shock. Home buying could dry up becauseborrowers can't get financing. And anyway, who wants to buy a house that's losing value? Wait six months and you can get it cheaper, people will figure. Those of us who were in the real estate and mortgage market in the Jimmy Carter years know what that's like. Those of you who weren't around then have a big surprise in store. And this one will make those years look like a picnic. The downward spiral won't stop once people stop believing thatreal estate always goes up. Americans owe $7 trillion on their homes - twice as much as 10years ago. But our incomes - our ability to pay - have gone up by a fraction of that amount. It's painfully clear a lot of that $7 trillion will never be paidback. And the biggest lenders on the planet are going down."
(much of this material is based on an article from dailyrecokoning.com