Housing Bubble: A Primer

Yesterday at work, I saw what by all accounts appeard to be a foreclosure short-sale, somehwere in the neighborhood of fifty-thousand dollars short. And although short-sales are fairly uncommon, bankruptcies and foreclosures are on the rise. And today for instance, I saw a couple take out a $215,000 mortgage. With it, they paid off a 50,000 equity line, and about $150,000 worth of unsecured, higher-interest credit card debt. These two situations are problems endemic to the housing bubble – which I’ll outline below, and I’ll detail further in a post to follow shortly.

For many reasons, the market has begun to tank here in Michigan, not the least of which is the steady decline of our dinosaur industries. The skyrocketing real-estate values, brought about by the cheap-credit-induced “sellers market” of the last few years, have exacerbated the problem. Led on by the belief that one’s property was a “risk-free” investment, many, people have been induced to borrow against their equity. People who’ve lived in a house for 10 years, who still owe 28 and a half years’ worth of mortgage payments because they’re continually refinancing and cashing out whatever modest equity they’ve heretofore amassed. And as long as bank credit remains cheap, people have been doing this. But rates must eventually rise. And with rising interest rates, many people will be unable to refinance. Well and good, you say? They’ll just start applying payments to principle on their notes – concurrently returning to their old savings/consumption ratio?

Well, I don’t think so. Because it’s simply not what the evidence indicates. I’m seeing a rush for liquidity, if you will. In the metro-Detroit area, there are literally some 40,000 houses for sale. And none of them are moving. I believe the average listing now is approaching 180 days, if it hasn’t already exceeded that…

There are a few problems here: First and foremost, the historically low interest rates are a double-edged sword. Much fanfare was made several years ago when rates were “as low as they have been in fifty years.” Well, fifty years ago, our currency still clung to a modicum of responsibility. Again, I digress. The other problem, and I’m not sure which is worse, is the habitual refinancier. But where low interest rates is a double-edged sword, equity is a silver bullet. Have a lot of equity in your house and you can’t sell it at the asking price? Simple solution used to be: Lower your price. All it used to mean is that you made less net profit on the sale. In many people’s cases these days, lowering the asking price means that the seller must come to closing with thousands of dollars. Ahh, the proverbial Charybdis and Scylla.