FRED
09-16-07, 01:15 PM
http://www.itulip.com/images/house-front.gifImportant Tipping Point in Housing
by Dr. David Wiedemer - Sept. 14, 2007
Co-author, "America's Bubble Economy"
In our book "America’s Bubble Economy" we promised you important updates on the book's web site. This is not a specific market update. Rather it is an update on an economic event that will effect all markets—stock, housing and the dollar. This update involves the much discussed sub-prime mortgage meltdown and our take on it.
We feel that the sub-prime market problem is the pin to burst the housing bubble. The bursting of the housing bubble, as we said in the book, will put pressure on the economy and ultimately on the stock market; it will collapse both.
The expected sequence of events is as follows:
Sub-prime loans will fall dramatically in number by spring 2008 due to severe problems in selling these loans on the secondary market. Alt-A or “no documentation” liar loans will be decreased dramatically for the same reasons, as we just saw with the collapse of American Home Mortgage.
The lack of sub-prime and Alt-A funding will put downward pressure on prices and new home purchases. As we have mentioned previously, even though the total number of sub prime and Alt-A loans is only 20% of the total market, it is more than 60% of new home buyer loans and it is the new buyers that set the prices for housing, not the people who already own houses. This is an obvious but important fact that is often ignored in discussions of the effects of the sub-prime meltdown.
The fall in home prices will cause further problems with people who have refinanced into adjustable rate sub-prime mortgages and will cause a huge increase in foreclosures which we are already starting to see. It is hard for us to imagine that there won’t be at least 2 million foreclosure filings this year. Given that only about 6 million used homes are sold each year, that’s a lot of foreclosed homes coming on the market that will have to be sold, further pushing prices down.
When price falls are big enough, say around 20%, new home construction will fall dramatically and greatly affect the economy. The amount of home equity loans will be falling thus reducing consumer spending. Some home equity loans will be lost entirely because there is not enough equity to cover them, causing serious problems for mortgage lenders. The ripple effects across the economy will start to be felt hard, unlike today when they are only beginning to be felt.
These ripple effects will be strong enough to put the economy into a mild recession. This will collapse the stock market to below 10,000 over the next 18 months to 2 years and real estate prices will fall with it.
The economic and market downturn will become severe enough that dollars will start to flow at a much faster rate out of the US than today. This will raise interest rates, especially mortgage rates, causing a further decline in real estate and all this will further depress the stock market. The decline in the dollar is the ultimate trigger for the beginning of Phase II.
See americasbubbleeconomy
Copyright © iTulip, Inc. 1998 - 2007 and The Foresight Group 2006, 2007 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer (http://www.itulip.com/GeneralDisclaimer.htm)
by Dr. David Wiedemer - Sept. 14, 2007
Co-author, "America's Bubble Economy"
In our book "America’s Bubble Economy" we promised you important updates on the book's web site. This is not a specific market update. Rather it is an update on an economic event that will effect all markets—stock, housing and the dollar. This update involves the much discussed sub-prime mortgage meltdown and our take on it.
We feel that the sub-prime market problem is the pin to burst the housing bubble. The bursting of the housing bubble, as we said in the book, will put pressure on the economy and ultimately on the stock market; it will collapse both.
The expected sequence of events is as follows:
Sub-prime loans will fall dramatically in number by spring 2008 due to severe problems in selling these loans on the secondary market. Alt-A or “no documentation” liar loans will be decreased dramatically for the same reasons, as we just saw with the collapse of American Home Mortgage.
The lack of sub-prime and Alt-A funding will put downward pressure on prices and new home purchases. As we have mentioned previously, even though the total number of sub prime and Alt-A loans is only 20% of the total market, it is more than 60% of new home buyer loans and it is the new buyers that set the prices for housing, not the people who already own houses. This is an obvious but important fact that is often ignored in discussions of the effects of the sub-prime meltdown.
The fall in home prices will cause further problems with people who have refinanced into adjustable rate sub-prime mortgages and will cause a huge increase in foreclosures which we are already starting to see. It is hard for us to imagine that there won’t be at least 2 million foreclosure filings this year. Given that only about 6 million used homes are sold each year, that’s a lot of foreclosed homes coming on the market that will have to be sold, further pushing prices down.
When price falls are big enough, say around 20%, new home construction will fall dramatically and greatly affect the economy. The amount of home equity loans will be falling thus reducing consumer spending. Some home equity loans will be lost entirely because there is not enough equity to cover them, causing serious problems for mortgage lenders. The ripple effects across the economy will start to be felt hard, unlike today when they are only beginning to be felt.
These ripple effects will be strong enough to put the economy into a mild recession. This will collapse the stock market to below 10,000 over the next 18 months to 2 years and real estate prices will fall with it.
The economic and market downturn will become severe enough that dollars will start to flow at a much faster rate out of the US than today. This will raise interest rates, especially mortgage rates, causing a further decline in real estate and all this will further depress the stock market. The decline in the dollar is the ultimate trigger for the beginning of Phase II.
See americasbubbleeconomy
Copyright © iTulip, Inc. 1998 - 2007 and The Foresight Group 2006, 2007 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer (http://www.itulip.com/GeneralDisclaimer.htm)