It's all about the Housing Market

300 points. 400points. 250 points. 300 points. 150 points.

5% 3% 2% 6% 7%....

No the above is not a clever algorithm or code. The above listed numbers indicate swings you most likely saw in the Dow, and percentage changes you saw in the major US indexes this and last week-- many of them swinging up and down in these percentages each hour.

What the Phuket Thailand is going on? I've read economics papers and listened to 'professionals' that do everything from run huge hedge funds, former AIG CEO's and commodities traders, and everyone has a pretty similar answer-- short sellers and oil speculation. There was even a rant recently by a TV economist that put the blame on terrorism. Cute.


But no one really wants to get out there and say it: HOUSING IS REALLY THE REASON WE ARE IN A BIND. There I said it. But why? 1st and foremost, we are a capitalist economy (thought the Fed's socialist take overs of late don't dictate that), and the oil of capitalism is the consumer. We have essentially knocked the consumer out of the game by ALLOWING him to be drown in debt and pulling his ability to get into more debt. What? That's right-- the consumer is MAXED OUT and will not be back in the game any time soon. The consumer is like a hammered townie at a Midwest bar, who has been drunk for the last ten years... the only way he knows how to deal with life is by being all sauced up. And now we are taking his booze away, kicking him off the bar stool and saying, 'get it together.' But drunkie doesn't know any other way to live. The American only knows one thing-- debt. Debt for the car, the home... use the Visa for the movie tickets and put the kids college on the Equity line-- finance the Dillard's purchase on the Amex and put the plane tickets to Hawaii on the Master Card-- Oh, and while you are at it, can we go to Dinner tonight at the steak house on the Discover Card-- we get 1% cash back! And what will you do with the debt Mr. Consumer? Mr. Consumer... Sorry, he can't answer-- he is applying for the new Citi Card that gives him airline miles.

We have allowed the consumer to get really into trouble... and we let them do it with the house. Through rouge speculation and lax lending we allowed the average home to increase 85% in the last ten years... and in some areas of the country we let those puppies pop 150-200% in that time... and then we ENCOURAGED the consumer to rip out that equity and spend spend spend! And the consumer did. Some people would say that this is a natural phenomenon of housing, and that real estate prices are always appreciating at a rate of 4-6% yearly... tell that to someone who bought in San Diego in 2004 on a 3 year arm.


And still, amidst talks of the brightest and smartest political economists, along with Paper Tiger Paulson and Big Benny B... no one seems to realize that this whole downturn is STILL and will continue to be about the housing market. In this plan they aim to 'STOP FORECLOSURES!' by helping the consumer renegotiate the mortgage. But wait! The most common renegotiation of the mortgage includes lowering the RATE and PAYMENT so it is more affordable. This answer does NOTHING to help the negative equity, and until this is addressed, foreclosures won't stop. The way a loan works is that interest controls the 1st 12-15 years of the loan, with 85% of the payment paying back the bank-- so when someone is $100,000 upside down on a house and you lower their rate and payment so they are paying $100 less a month, it will still take them 1000 months (83 years) to recuperate the negative equity-- of course the home will be paid off by that time, or will it? Not a chance-- when someone is making principle payments of $300-$500 a month for the 1st 12 years of the loan, WHY would you stay in an upside down home EVEN if your lender gives you a 2% fixed rate loan??? Lenders already know that that home is a loss, and the $100,000 loss will come now, in a few months or a few years, but that loan will never be able to be 'cured' until someone tackles the negative equity issue in housing.


But here is another problem-- Lender loses. If a lender, say Countywide, holds a HUGE stake of mortgages in a highly depressed area, say Southern CA (down 34% from the peak), how does the lender mitigate the loss. If they have 100 thousand home loans that are $70,000 upside down (in many cases this is a LOW number) it makes it VERY hard to just forgive the Ridiculously large sum of money-- 7 Billion Dollars worth of the green backs that would just vanish? How would banks be able to 'cope' with these losses? But the question needs to be asked-- Are these losses already on their books? They should be, because as this keeps unraveling, more and more of these people are going to walk away because that home is NOT going to increase in value any time soon, and that homeowner can buy the SAME home down the street for much less, let the original home foreclose and, other than credit rating, have a better and cheaper standard of living. Shoot, $70,000 less financed saves over $400 a month-- enough money to go out and get a shiny new Escalade for the new garage! And if the borrowers do in ALL at the same time, they can get a the new home and a new car before the original lender even notices the 1st late payment on the mortgage... Why file bankruptcy when you can just let it all go! Gotta love America!

And, as the big wigs are hoping this 'magical bailout plan' will magically stop the housing collapse, they are wrong. As the economy sinks lower each month, gas rises and people move away from the suburbs-- less and less people will buy homes and less and less people will be able to get financing... and until the DEMAND returns to the housing market... there is no recovery. And until the housing market unloads the SUPPLY, there will be recovery for the broad economy...

So, as a lender, for example Countrywide, decides to lower ALL these underwater loans to 2.5% fixed in hopes that the people keep paying for their worthless asset, maybe they should consider re amortizing the loans and forgiving the $70,000 deficiany balance TODAY instead of taking a $110,000 hit on these loans in the future.