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Worst Housing Drop Since the Great Depression

30 December 2008 Jose D. Roncal www.financialspeculation.com

30 December 2008

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Jose D. Roncal

www.financialspeculation.com

In the book I co-authored—The Big Gamble: Are You Investing or Speculating—I wrote a chapter during the first quarter of 2008 entitled, The Mother of all Crisis: Haven’t We Learned?  The following appears on page 86:

 “Foreclosures in 2006 increased by 42 percent compared to 2005, according to Realty Trac.  By 2007, the increase was 75 percent compared to 2006. Things got worse as we entered 2008. For the first quarter of the year, foreclosure filings, according to the Realty Trac index, were now 112 percent higher compared to the same period during 2007.

[…] By the first quarter of 2008, home vacancies and foreclosures in the United States had hit an all time record, as people kept losing their homes, or simply walking away from their mortgages.  Robert Shiller  […] warned that house prices could drop by over 30 percent. A worst drop than was registered during the 1930s depression.”

Since writing that, things have gone from bad to worse. Today there are nearly a million repossessed homes on the market. Statistics reveal that on average, foreclosed homes are priced almost 40 percent lower than normal real estate listings. Home prices in 20 major U.S. cities declined at the fastest rate on record because of increasing foreclosures and slumping sales.

None of this should come as any great surprise.  For the past two years we’ve seen the same question being raised over and over again, “Is the housing bubble about to burst?” That question in and of itself implied that we all knew that the big party going on in the housing market was unsustainable.

The Fed are unquestionably implicated. Back in January 2001, former Fed Chairman Greenspan attempted to jump start the economy out of recession by slashing the federal funds target from 6.5 percent down to a ludicrous 1 percent by June 2003. Then they steadily ratcheted back up to 5.25 percent by June 2006. By then, the build up had generated more than $8 trillion in housing bubble wealth and it was inevitable that we’d end up in this mess.

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Not only did Greenspan do nothing to halt the growth of the bubble, he actually encouraged it by recommending that we all take out adjustable rate mortgages. He even dismissed those who warned of the impending bubble, assuring us that everything was under control. Was it just coincidence that these interest rate moves ran parallel to the pumping up and popping of the housing bubble? Or was it a case where artificially low interest rates lead to poor investment decisions that would require a recession to correct?

It’s now obvious that Shiller was optimistic when he estimated a 30 percent drop in housing prices. If that figure is now at 35 percent, what’s going to happen when you factor in the record job losses, consumer paralysis, retail and other business bankruptcies.  We are probably looking at an even worse scenario in the coming year.  

This country is placing an inordinate amount of hope and trust in the incoming administration. But in our opinion, it’s going to take a team of super heroes to come up with a workable plan to get the housing market stabilized and back on track.  And until we get our house in order here at home, the economies around the globe could continue to suffer and slide further into the abyss.

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About the author

José D. Roncal is a truly global executive with over 20 years of experience in international business and finance, having worked and travelled frequently in six continents

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