That Hissing Sound... Me, Pessimistic?

By Ben Tripp
Created Nov 27 2006 - 9:22am

If you have ever wondered what the bursting of the South Sea Bubble or the
Tulip Bubble or the Wall Street Crash of 1929 sounded like, listen carefully
to the housing market [1] --with the rest of the economy to follow.

"Homebuilders received more unwelcome news on Friday, as a U.S. Department
of Commerce report noted that privately owned housing starts in October were
14.6%% below the revised estimate for September and 27.4%% below the October
2005 rate. Single-family housing starts also plunged 15.9%% below the
prior-month rate."

Shakka-bamm.

"Last month, the Commerce Department reported that the median price of a
new home fell by the largest amount in 35 years. The median home price in
September was $217,100, representing a 9.7%% decline from September 2005. It
was the steepest year-over-year decline since December 1970."

Fa-zowie.

Add that little nugget of brown stinkiness to the following [2]:

"Mark Zandi, chief economist at Moody's Economy.com, also expects the
savings rate to rise as the national housing market cools. His own work,
based partly on a Fed analysis of consumer finances, shows the national
savings rate across all households was a negative 1 percent through the
first quarter of 2006. For people extracting equity from their homes, the
rate was a negative 15 percent."

So dig this, hipsters. The housing bubble is bursting. You don't see words
like 'plunged' and 'steepest decline' if the economy is doing well, and the
only reason the Feds are getting away with claiming a strong economy at the
moment is they're using the Clintonian metric of the stock market, a
lucrative canard that allows the good fortune of a relatively small number
of speculators in an extremely rarified part of the economy (gambling with
the value of companies, rather than producing anything or providing any
services) to stand in for the welfare of the economy as a whole.

Look at those numbers. Savings rate of people extracting equity from their
homes: negative 15%%. Half of that amount, by the way, goes to making ends
meet. Not adding an extra bedroom or improving the basement. Just keeping up
with the basics. These are the people most at risk if their houses suddenly
lose value, which their houses are now doing: 10%% in one year. Is that a
lot? Think of it this way: if your house loses 10%% of its value every year
for 10 years, it will be worth worth zero dollars.

If you have a negative 15%% savings rate --that is, you spend 15%% more than
you earn-- and that extra cash is coming out of the equity of your house,
what happens when the value of your house falls below the value of the money
you owe on the house?

You can't borrow money on the house any more. That's what happens. Why is
that bad?

Because people are buying things with that borrowed money. Even
non-home-owners are in a negative savings zone. So when all of a sudden the
Feds are forced to stop printing funny money and the banks have to turn off
the cheap credit tit, people can't buy things. In fact, they will be
'negative consumers', in the sense that they are paying back money from
previous spending, so they can no longer buy things even if they're
neccessities. This is huge. It has terrifying consequences that make my
bottom area liquefy. I whiz with fear.

It's a domino efffect LBJ could only have dreamed about. The spending spree
of the last decade is about to end as home equity ceases to exist and people
find themselves owing huge sums of money on houses that they cannot sell for
anything like the amount they owe on them. There will be millions of
foreclosures as people drop their keys off at the bank and walk away from
worthless houses. This has happened many times in America, but not yet on
the scale we will see in the next two years or so.

Now with a clever Fed (so that's the end of that moot point) and some fancy
footwork, it would be possible to survive the crash, government-wise. All
kinds of structural adjustments and regulatory mechanisms could be put in
place, along with some serious discipline in the money-printing business.
But none of that is even being discussed. So things are primed to go very
badly indeed. As it is, the bubble could sort of crumple and we'd muddle
along somehow. But what we're talking about is a proper collapse, such as it
looks like is happening in the housing market. What would it take to spread
the collapse to the rest of the economy? what's needed is a catalyst.

American consumers, that is, you and me, account for two thirds of all
economic activity in America. That's according to the antiquated GDP, but
fuck it, that's what the government uses. So two thirds of the economy is
based on consumer spending [3].

"The interest rates on $400 billion worth of adjustable rate mortgages
will be reset to higher levels this year, and $1 trillion will reset next
year. The resets are leaving many homeowners facing monthly payments that
are 25 percent higher."

That's what I call a catalyst. A trillion and a half dollars is nothing to
sneeze at, not even if your nose is the size of ex-planet Pluto. You add
that kind of balloon debt to an already lethal overspending situation, you
have a disaster on your hands. Think of it this way: with these kind of
numbers, it's as if in 2007 every household in America is suddenly forced to
buy a Humvee and keep it gassed up for 30 years. Not catalyst enough?
Remember we're at war.

I am almost happy I haven't expatriated yet. The part of me that loves
zombie movies, anyway. Because it's going to be spectacular, unless somebody
does something at the top level of government, which they won't. We'll have
anarchy in the streets. It was that way when the stock market crashed in
1929 (after yet another disastrous period of 'conservative' rule). It could
very well be that way again. The mind has difficulty grasping the enormity
of the thing. In the short term, I'm saving my pennies and stocking up on
ammunition and tofu. Just you wait. Chaos is a bummer, but it's very
freeing.

See the film 'Weekend' by Goddard. It's all in there.

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"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson