As the Credit Bubble Bursts
Filed under: Credit Tinkering, False Equity — admin @ 3:33 pm
This isn’t going to be a quick fix.
“The real estate slump will persist as a glut of houses on the market depresses property values and lenders toughen mortgage requirements to stem credit losses. The Federal Reserve last week said the outlook had worsened and pledged to do whatever was needed to keep the economy growing. (full story)”
Throughout this financial crisis, there have been many industry “insiders” who have opted to take the route of eternal optimism. The declining value of the dollar, enormous deficits, increases in the cost of goods, declines in real income and a fundamental distrust in the American mortgage market are all contributing to a potentially difficult recession/depression for the economy. To make matters worse, every time home prices slide, there is a corresponding loss of wealth through equity.
Is it all doom and gloom? Honestly, it is pretty bad out there. But on the other side, it has to be put in perspective. We created a bubble in housing prices through credit. You will notice that Texas, limited to 80% cash out, did not have the “cha-ching” appreciation of the last 7 years…and today, most of their markets have weathered the bubble static or with even modest (very modest) appreciation in housing values. While Texans didn’t have the advantage of 20-25% appreciation in housing values, they are also not losing the false appreciation associated with credit tinkering. The only reason that houses could appreciate in certain markets to those high levels was because credit was available at low cost and with little consideration of ability to repay. In the real world, you can’t mark a home’s value up if no one can afford to buy it. And now those homes are being marked down to the level of community affordability.
Now the liquidity crisis is causing these markets to dry up… 1. Homes given to borrowers that couldn’t afford them are going into foreclosure and default, causing housing prices to decline. 2. Borrowers that can afford to purchase are finding that they are unable to obtain loans as cheaply or quickly, which means they have to buy less home or stay put. 3. All of those midnight infomercial “investors” are walking away from their dreams of Trumpness, causing those homes prices to devalue even further. 4. Global investors are unwilling to invest in a market that may or may not offer a real rate of return, making mortgage dollars more expensive. The crisis will last until we can offer our investors real return on quality loans…period. They don’t want smoke and mirrors, elaborate debt structures or fuzzy ratings… they want to know that they will get a return on their investment…period. The industry has dried up all of its permissiveness…but the damage has been done. We need a solid history of investment return…and that will take time.
Stumble it!