A look back: Credit Crunch Cassandra edition

My very first post on blogspot. Seems apropos given the recent news. Awww, memories.

Thursday, April 07, 2005

Bubble, bubble...[housing trouble]

I've been hanging out a lot at the Angry Bear and other econ blogs lately, and I'm starting to get the feeling, my friends, that we're in for a world of hurt. There's been talk for months and months that the housing market is unsustainable. But now the gloomy sentiment is becoming mainstream. I heard not one, but two stories on NPR yesterday about impeding trouble in the housing sector. Prices in 'hot' markets on the coasts have gone completely insane. The housing boom was initially fueled by rock-bottom interest rates, but now speculation is rearing its ugly head, with 85% of condo sales in Miami going to investors. Meanwhile, even ordinary people are throwing caution to the wind and buying the most house they could, even if it means stretching themselves to the limit financially. They've seen their friends and family refinance their way to the good life, and now they want to get in on the action themselves, just as those who are in the know are starting to worriedly mouth the dreaded word -- 'bubble'.

With so many potential customers clamoring for home loans, the financial industry have come up with many new 'creative' products so that marginal clients who would have been turned away in staider times can grab their piece of the American dream. 35-year morgages. Interest-only payments for three or even five years. Despite historically low interest rates, people are eschewing fixed-rate morgages for adjustable-rate morgages because, in the short term, the payments are lower. You don't have to be Alan Greenspan to foresee that many of those American dreams are going to end in the nightmare of foreclosure and bankruptcy. The banks don't care because as soon as they make the loan they turn around and flip them to Fannie Mae and Freddie Mac -- government sponsored enterprises that buys the loans, no questions asked. Government sponsored -- meaning that if their overstuffed portfolios of questionable quality causes those quasi-corporate behemouths to go down, they're probably going to get bailed out with tax-payer's dollars.

What I did not foresee: that the fallout from the US sub-prime crisis is going to have such a direct domino effect worldwide. Investor's teeth are on edge in this part of the world after the events of the past few weeks, when the markets have first flushed from foreign investment and then quickly blanched as the subprime crisis rocked the US markets. It might actually be a good time to buy local stocks now.