Originally posted by: Vic
Originally posted by: LegendKiller
No, most markets in America are insanely over valued. The bubble is bursting, in case you haven't noticed.
I will say it again... you need to compare mortgages to rents... NOT credit cards. People will always need housing, housing will always have value, and
someone will always need to own that housing even if it is rented.
What you aren't getting is that unsecured borrowing is easier to "let go", followed by less "hard" secured borrowing, such as vehicles. That's why losses on unsecured borrowing or cars are *always* higher than mortgages. Thus, unsecured or softer lending is always a good leading indicator.
If one were to look at rents, then one would see that many areas are as much as 100% overpriced, of course that is the extreme, but even a 10% overprice relative to rent would mean a decline of at least 5% (assuming "meet half way"). That 100% will lead to a massive shock.
I think what people don't realize is the holistic view of the housing market. They assume that housing is isolated and unaffected by larger events. Once you put all of the small events together they do form a large one.
Take for example the slowdown in the economy, caused by a slowdown in building, buying and selling. That means that less goods and services are demanded, causing less overtime and wages to stall. Jobs are lost.
In isolation, thats OK. However, considering the fact that consumer debt is much higher than any other point in history (even adjusted for inflation) *AND* prices are going down, you have a lot of people with HELOC (or just HEL) that are goign to end up flipped on their house.
In isolation, both of those are OK. However, when you comebine a slowing economy with over extended credit *AND* declining prices, people losing their job and real wages declining *WHILE* rates have risen and ARM (option or straight financing) resets, you start to get a big effen mess.
To make matters worse, as the houses decline and financing raises you get more "house poor" people, who stop going out to eat or buying stuff. Then they start foreclosing, causing more houses to be dumped onto the market.
This then causes more price decreases, flipping even more people. As the price gains of the past 5 years unwind, the 2nd mortgages (Hel or heloc) do not, since they don't have the money to pay for them in the first place.
All of this is a "doomsday" scenario, sure, but I don't think it's too far from what will really happen. Growth has far outstripped reasonable levels, as with any other statistical variation from the mean, you eventually get a regression.
Considering that housing went up more than 4x in 1/10th the timeframe as the past 100+ years, that means that we have *A LOT* of regression to do. Now, whether or not that regression comes in the form of a severe decline or a "leveling" whereby inflation outstrips housing appreciation, causing a "real price" decline is anybody's guess. My gut feeling is that we will see a cumulative nationwide decline of anywhere from 10-15%, followed by 5-10 years of "flat" growth. This will cause prices to correct in "real terms" anywhere between 30-40%, which I think is more than reasonable.
Face it, Americans have the saving mentality of a 10 year old in a candy store. The world has been our lender for the past 10 years, sucking up all of those securitized bonds, dropping borrowing costs, while this country has had a negative savings rate. Part of that frothy spending was due to equity cash-out through HEL or refi, both of which have depended on the cycle continuing, throwing good money after bad in a never-ending ponzi-scheme.
It is about time we paid the piper. The sad part about it is that we will not learn. Even now, the President says China needs to stop saving so much. People like him, who can moderate and temper the prolific (and idiotic) spending *COULD* influence people. Instead he prefers to make a "big splash" in history while presiding over a good economy.
As a final statement. People have forgotten that borrowing is nothing more than bringing future earnings into the present. However, borrowing on what *may* be (irrational appreciation of a house) has done nothing more than saddle borrowers with much more future pay-back than they can handle.
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