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Housing – Simple As That

The User's Profile Chris Martenson December 17, 2007
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Monday, December 17, 2007

Executive Summary

  • A series of government bailouts attack the symptoms, utterly failing to address the root cause.
  • The bailouts were for the big banks, not you.
  • House prices need to decline in price by 30% to 50%, and they will.
  • Trillions of dollars of losses lurk in ultra-safe pension bond funds and small Norwegian towns, as well as in some unlikely places.
  • Current crisis is one of solvency, not liquidity.

Q: “Has the housing market bottomed, is it soon to bottom, or is it in the process of bottoming?”

A:  No, nope, and no.

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

~ Ludwig Von Mises

In order to get at the question of ‘Just how bad is the current housing crisis?’ we need to understand the dimensions of the problem. It is a complicated mess if one considers all the scenery in detail, but it’s startlingly simple when viewed from a distance.

The threat to our banking system is described by the extent of the mortgage losses, and those will depend on how far (and how fast) house prices fall, together with the impact of outright fraud. Below we shall explore the (very) simple reasons that explain why house prices must fall by 30% to 50%. Each one can be lumped into a category of fraud, reducing demand, or boosting supply.

  • House prices rose far above income gains. Too far. They became unaffordable, and now they are in the process of correcting back to affordable levels. What goes up must come down. Simple as that.
  • Mortgage lending standards are tightening up, leading to fewer people qualifying for loans. Fewer qualified buyers means demand will drop and prices will fall. Simple as that.
  • From 2000 to 2007, regulatory oversight of lending practices was so lax that there was effectively none.

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