Busted: Bankers and The Global Economy

June 16, 2008

The U.S. Housing Market Turnaround

As home and real estate prices fall, home buyers will lose a primary motivation for paying high prices for homes: making money on home price appreciation. If you don’t fall into that category and money is not an object (probably about 1/2 of a percent of home buyers), then you aren’t affected by the market. When money is not an object, your home is your pride and a merely a symbol of your wealth for the world to see.

In today’s economy, it is wise to realize that falling home prices are a symptom of a problem. Lots of people want to live in and buy homes in America. However, there is a difference between paying loads of cash for a home and spending as little as possible. Right now, this economy is “somewhere in-between”.

The housing market will, in fact, turnaround. Prices must drop a substantial amount for the possibility of a market turnaround. This is known by pundits as the dreaded “market correction”.

For years, banks and finance companies have depended on the rising value of real estate to bring home the bacon. Creative financing and the dream that housing value would never drop fueled the fire of the great mortgage bubble.

Now, the value of homes and requirement of financing in order to afford a home has come back to bite the world of banking and finance in the boo-boo. When the market value of homes drop en masse because of a market correction, demand will ultimately decrease because people are worried they will lose money when they buy a home. Given the miracle of modern financing, this is a sure bet. Given that the equity may be only 10% of the value of the home, Mr.and Mrs. Homebuyer could easily lose all of their money. This is not a wise investment. The typical home buyer has become afraid to buy. They simply cannot afford the high stakes.

Seller panic ensues as home sellers find it harder and harder to sell their homes. Buyer panic comes about when prices drop rapidly. Buyers don’t buy even with drastically lower prices.

The lack of easy financing in banking puts a home beyond the ability of many home buyers. This factor puts additional downward pressure on the housing market. With the advent of banking problems, the zero down-payment is likely a thing of the past for most home buyers as well.

The down-payment was actually designed to protect the banker in the event of default. Considering that bankers create money out of thin air with the fractional reserve power they possess, this is a straw dog argument that old bankers used to make. In the midst of their pain, bankers will be screaming for down-payments again, thus negatively impacting the market they seek to bolster.

Job security is also a major factor in the housing market. For years, wages have not rose appropriately to keep up with expenses. Jobs are being exported overseas. All the while, bankers have been there to convince Americans that they can afford a piece of the dream. As a result of financing and creative sales, the finance industry created a boom based solely on credit, ultimately generated by commercial bankers and the Federal Reserve.

Because of the failure of job market wages to appreciate over the past thirty years combined with the idea of financing every purchase and whim, Americans have impoverished themselves as a whole. The ponzi system of finance has played out the limits of its endurance for now.

For now, the home buyer alone will determine economically sustainable levels of housing prices. Only the best homes will be able to command the best market prices. The buyers market is the reality. Everyone else will have to make due until a balance is established. In the meantime, millions of nondescript tract homes sit empty while the economy tries to decide what to do with them. Hang on. A new bubble is around the corner.


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