The Great Housing Crash of '07

From CounterPunch courtesy of J. Orlin Grabbe:

The housing bubble is a $10 trillion equity balloon that will explode sometime in 2007 when more than $1 trillion in no-interest, no down payment, adjustable-rate mortgages (ARMs) reset; setting the stage for massive home devaluation, foreclosures and unemployment. ("By some estimates housing activity has accounted for 40% of all the jobs created since 2001". Times Online) July's plunging sales are just the first sign of a major slowdown. The worst is yet to come.

And

There is no real growth in the American economy. Figure it out. Last year Americans saved less than 0% of their net earnings while they borrowed a whopping $600 billion from their home equity to piss-away on a consumer spending-spree. Once home prices begin to retreat, that $600 billion will evaporate, real GDP will shrivel, and the economy will begin flat-lining. (Consumer spending is 70% of GDP)

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I keep saying that we're living in a house-of-cards economy, and this housing bubble is one of the many reasons why. Because wages have been stagnating for decades now, the economic elite have been forced to be clever in order to keep the economy moving. One of those strategies has been to make access to credit cards much more open and easy. In the wake of 9/11, something similar was done with the mortgage market.

Imagine your slacker kid brother taking an extended break from college and working at, say, Starbucks in order to support himself. Obviously, this guy is not a good credit risk, but, for some reason, the credit card companies pound him with dazzling offers. Pretty soon he's accumulated $50k in debt, screwed for the next couple of decades or so. Well, that's not a new concept; it's been happening to twenty-somethings for years and years now. But change the example to a yuppie couple that's doing well money-wise, but can't quite afford to break into the tight housing market in order to fulfill their Ward and June fantasy: suddenly adjustable rate mortgages, no interest loans, and all that stupid dangerous crap is dangled in their faces; pretty soon they're up to their ears in debt, but they naively believe it's good debt, the kind that ultimately equals an investment. They're dead wrong. The market's inevitably going to tank, and they'll be left with expensive loans on a low-value house. Poof: all that good debt becomes bad debt.

And nobody's going to be building any new houses, so the construction market tanks, and all those jobs are gone, and all their dependent industries also tank, and...you get the idea. I may be wrong, and hopefully my buddy Matt will come along any moment now to point out something I've missed, but I am afraid here. The US has a negative savings rate, which is what has essentially kept the domestic economy in the black for years, but it just can't last. We really are spending our children's inheritance.

But I have a feeling that's going to bite our asses well before it bites our childrens'.

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