The chickens have come home to roost

[local 12 proud]

Millions spending beyond their means like its a crapshoot, now the house of cards will fall!

"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.

"Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

Some of the nation's leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.

The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida. Builders like Chicago's Neumann Homes, which filed for bankruptcy protection this month, could go under.

Massive job losses would curtail consumer spending that makes up two-thirds of the economy. The Labor Department estimates almost 100,000 financial services jobs related to credit and lending in the U.S. have already been lost, from local bank loan officers to traders dealing in mortgage-backed securities. Thousands of Americans who work in the housing industry could find themselves on the dole. And there's no telling how that would affect car dealers, retailers and others dependent on consumer paychecks.

Some homebuyers gambled on interest-only loans. The mortgages, which allowed buyers to pay just interest at a low rate for two years, were too good to pass up. But with that initial term now expiring, many homeowners find they can't make the payments. The hopes that went along with those mortgages -- that they'd be able to refinance because the equity in their homes would appreciate -- have been dashed as home prices skidded across the country.

"It's been said a lot of people have been using their homes as ATM machines," said Thomas Lawler, a former official at mortgage lender Fannie Mae who is now a private housing and finance consultant. "The risk has a lot of tentacles."

http://biz.yahoo.com/ap/071124/apfn_doomsd...nario.html?.v=1

 

[777 fixer]

"We haven't faced a downturn like this since the Depression,"

Does anyone remember the late seventies and early eighties. Remember stagflation, where we had high inflation, high interest rates and high uneployment? In 1982 unemployment hit ten percent! If it were to happen again then I might agree with Mr. Gross.

 

[local 12 proud]

"We haven't faced a downturn like this since the Depression,"

Does anyone remember the late seventies and early eighties. Remember stagflation, where we had high inflation, high interest rates and high uneployment? In 1982 unemployment hit ten percent! If it were to happen again then I might agree with Mr. Gross.

Its not a matter of If, the warning signs are abundantly clear!

 

[KCFlyer]

"We haven't faced a downturn like this since the Depression,"

Does anyone remember the late seventies and early eighties. Remember stagflation, where we had high inflation, high interest rates and high uneployment? In 1982 unemployment hit ten percent! If it were to happen again then I might agree with Mr. Gross.

777...I think that the debt that American's has taken on...the "wealth accumulation" they achieved by mortgaging their homes to the hilt...the "credit society" which encourages spend spend spend, but gives little regard to where the money they are spending is coming from. What would the 70's and 80's looked like if, instead of high interest rates (which discouraged borrowing to run the economy), we would have had artificially low interest rates and folks borrowed against the equity in their homes? I think the guy is spot on...if there are more hiccups in the mortgage industry...then we will see a quick end to a lot of the "income" that has been powering our economy. And the effects of that will be devastating. If the money you were spending was dependent on the speculation that your home value would just continue to rise...allowing you to "print money" in the form of home equity loans...and that source of spending is shut off....it will affect a LOT of industries.

 

[local 12 proud]

777...I think that the debt that American's has taken on...the "wealth accumulation" they achieved by mortgaging their homes to the hilt...the "credit society" which encourages spend spend spend, but gives little regard to where the money they are spending is coming from. What would the 70's and 80's looked like if, instead of high interest rates (which discouraged borrowing to run the economy), we would have had artificially low interest rates and folks borrowed against the equity in their homes? I think the guy is spot on...if there are more hiccups in the mortgage industry...then we will see a quick end to a lot of the "income" that has been powering our economy. And the effects of that will be devastating. If the money you were spending was dependent on the speculation that your home value would just continue to rise...allowing you to "print money" in the form of home equity loans...and that source of spending is shut off....it will affect a LOT of industries.

You see it, I see it, And a whole bunch of other folks are about to see it!

Regards,

Local 12

 

[Gilding the Lily]

Local and I disagree about the prospect of a recession. I see it as a possibility, but believe that it is a mere market correction that will not bleed over so far into our general economy that we see an actual slide in growth (slow down, yes. Slide, no.). Also, the latest index of leading economic indicators recently came out with their numbers... And it was not signaling a recession.

But, if a recession were to occur, it would actually do some good things for our country.

* It will force our federal government to return to the days of fiscal restraint.

* It was expose Wall Street's write-off extravaganza. More transparency will occur.

* It will cleanse the excesses of the housing boom, putting homes in the hands of people who actually deserve them.

* It will redistribute wealth (new wealth always spends more, thereby turning the wheels of the economy).

* It will end uncertainty, allowing the dollar to reach its bottom and then climb back up.

* Our recession will cause a bubble burst in China, delaying the inevitable financial power shift.

* It will force ingenuity in searching for alternative energy sources.

* It will force consumers to increase savings rather than living by the credit card.


*** Note: I am biased, as my line of work flourishes during recession and near-recession periods.

 

[local 12 proud]

GTL, I think what is transpiring is much more than a market correction. In case you have'nt noticed the World is preparing to dump the 'Dollar' and thats not good news.

Exactly what is your line of work anyway?

Printing funny money?

Regards,

Local 12

 

[Garfield1966]

I'll be the first to admit that I do not know jack about the economy but isn't 1 million homes going into foreclosure a bad thing? I know they got into it on their own but I would think their misfortune will be our problem in one way or another won't it?

 

[Gilding the Lily]

I'll be the first to admit that I do not know jack about the economy but isn't 1 million homes going into foreclosure a bad thing? I know they got into it on their own but I would think their misfortune will be our problem in one way or another won't it?

Yep. It is a bad thing for many people involved. It is bad for those homeowners because they lose their home and now have bad credit. It is bad for the lending banks because now they lose the profits from the interest and often lose the value of the loan because they cannot recoup it in a foreclosure sale. It is bad for the people and organizations who invest in mortgage-backed securities because they invested in financial products that could never be sustained. It is bad for homebuilders (i.e. Neumann Homes). It is bad for real estate agents and brokers.

It is good for those entering the housing market (particularly 1st time home buyers) in the near future because they get a larger house at a fraction of the cost. It is good for those who shorted mortgage-backed security products or bet against sub-prime institutions. It is good for those professionals involved in resturcturing and risk management. It is good for those speculators who purchase assets at the valley.

Obviously, it hurts more than it helps. But there are upsides of these types of things.

 

[KCFlyer]

Obviously, it hurts more than it helps. But there are upsides of these types of things.

True enough...BUT...with American's owning a negative savings rate...with SO many homes mortgaged for MORE than they are worth...how long before this great bonanza for first time homeowners turns out to suck the money right out of the economy? Real wages haven't risen, yet more and more people have luxury cars, boats, plasma TV's...all because of the "equity" in their homes. How many people have tapped their home equity to "invest in the market"? Just read yesterday that the S&P lost in a day all the gains it's made over the past year. That can't be good for the guy who took out the equity in his home to "invest".

 

[Garfield1966]

All I know is I am sitting on 4.5% on a fixed 15 yr loan (11 yrs left) and I am not planning on moving. he house is pleanty big for the two of us and our pets. I ought well below my approved level and I live with in my means (harder now since my means have decreased an expenses increased) and we are way ahead of the Jones's who everyone else seems to be trying to keep up with.

 

[KCFlyer]

All I know is I am sitting on 4.5% on a fixed 15 yr loan (11 yrs left) and I am not planning on moving. he house is pleanty big for the two of us and our pets. I ought well below my approved level and I live with in my means (harder now since my means have decreased an expenses increased) and we are way ahead of the Jones's who everyone else seems to be trying to keep up with.

Oh...I'm like that too, although because of divorce, I owe a bit more on my house at a little higher interest rate. But I think when you look at the rest of the country, folks like us are the exception rather than the rule. I know a LOT of people who took out all the equity in their homes...and they still somehow owe a ton on credit cards. My ex is in real estate, and the number of people she sees who are upside down in their homes is amazing...even in the affordable midwest. And even the slightest downturn in the economy can end up hurting those folks BAD.

 

[delldude]

I'll be the first to admit that I do not know jack about the economy but isn't 1 million homes going into foreclosure a bad thing? I know they got into it on their own but I would think their misfortune will be our problem in one way or another won't it?

Easy credit and easy money from your homes equity make for all too many people signing and spending without thinking.They got themselves into this debacle and now it brings part of the country down with them,a part which instigated this mess in the first place.S&L of the new century?

 

[local 12 proud]

Easy credit and easy money from your homes equity make for all too many people signing and spending without thinking.They got themselves into this debacle and now it brings part of the country down with them,a part which instigated this mess in the first place.S&L of the new century?

Now set back and watch the house fall, bringing all us down!

 

[Gilding the Lily]

Just read yesterday that the S&P lost in a day all the gains it's made over the past year. That can't be good for the guy who took out the equity in his home to "invest".

It could be good if that guy shorted a fund based off of the S&P. The money doesn't just vanish, it goes somewhere... if the "lost" money goes into another American's hands who uses it wisely and keeps the economy moving, then no harm no foul. Where the "foul" occurs is when it either goes into another country that does not spend it in the U.S.; or if the masses' money goes into the hands of a relative few who do not spend it.

(wide generalizations made; I am not arguing that this is good; just suggesting that there is *some* good)

And although many economists have changed their status of prospect for recession to 50-50, the economic indicators have yet to signal a recession. And a lot is depending on this holiday shopping season... so we will see a better image of the impact in the upcoming weeks.