Housing Bubble:
Bankrupting Suburbia
By Kentroversy
At the same time we in America are experiencing record deficits and overwhelming debt, there is a coexistent housing bubble. A result of a seller's market in housing, this current real-estate market bubble is unsustainable, and could result in the ruination of many millions of American families, if they are caught with a mortgage debt that they cannot pay off when the inevitable market crash occurs. If any Federal Reserve member bank is caught in a downward spiral toward bankruptcy, it is logical that they will make a move to call in all their outstanding loans, including home mortgages. Please take notice that I said WHEN and not IF this crash occurs. My reasoning will be stated below, and is the result of my own examination of current market indicators.
A recent eight-page article in the June 13, 2005 issue of Time magazine referred to a "blistering real-estate market" and spoke of how "record home prices are inflaming passions." The article referred to several people who had admittedly made a tidy profit in cities such as Boston, Chicago, Indianapolis, Miami, and Washington, DC. In Boston, for example, prices have risen so dramatically, that the median-priced home now sells for a $2,079 monthly mortgage payment.
In Chicago, a housing study by Dartmouth professor of real-estate John Vogel, Jr. revealed that in two apartment buildings built only four years ago, condo rentals were $1,800 per month and one could purchase one of those condos for $270,000. In 2005, only four years later, the prices in this same set of buildings have reflected the unusual aspects of the housing bubble, where the cost of purchasing a condo has risen to $450,000. However, the rental price of these condos has remained reasonable, falling by $100 to $1,700 per month. In fact, in the past year, 25 of the 50 states plus Washington, DC have seen double-digit appreciation in the prices of houses for sale.
In every sense of the word, this is a seller's market...
Large global multi-billion dollar mass media companies such as AOL Time-Warner spend loads of effort on how to extract the maximum psychological advantage from everything they present to the mass population. In the June 13, 2005 Time magazine article entitled 'America's House Party,' there were constant references to this great big party in which the reader was a fool by not participating. The article listed seven people in just one block in Chicago, North Wood Street, who had seen dramatic appreciation in the value of their properties:
* 1745 North Wood Street 72 year-old Jean Kieres purchased her home in 1958 for $22,000 -- and has since seen its' value rise to $700,000.
* 1744 North Wood Street Bruce Fischer, 60 years-old, purchased his 100 year-old home in 1992 for $90,000 -- and has since seen its' value increase to $700,000. He was described as having "used his home as a piggy bank," by taking out a $200,000 home-equity loan. This home-equity loan had removed approximately $420,174 of his accrued equity, placing it in the hands of his lending bank. By the time all factors were considered, Mr. Fischer came out with negative equity in his home.
* 1731 North Wood Street Jeff Bruce's house had changed hands three times in nine years. Daniel Cooper paid $312,000 in 1996, Charles Ehle paid $350,000 for it in 1998, and Jeff Bruce paid $580,000 in 2003. By 2005, the home had become worth $640,000.
* 1715 North Wood Street Courtney Lance had seen her property tax explode in the decade between 1992 and 2002, an elevenfold increase. In 1992, her property tax was only $483. By 2002, it had increased to $5,600. Calling it "Highway robbery," she sold it in 2002, and today's owner pays $6,930 per year in property taxes.
Is this 'House Party' one to which you and I have been invited?
In my area of the country, housing values have already begun to decrease -- with my own home worth approximately $10,000 less than what I paid for it only seven years ago. Let's face the facts; housing prices only increase in areas in which many more people desire to live there, than there are available homes to accommodate them all. Even with my home worth approximately ten percent less than it was when I purchased it in 1998, my property taxes have continued to increase. In fact, they have increased each of the seven years in which I have lived in this house. With the current problems involving a $400 million-dollar budget deficit here in both the city of Buffalo, New York USA and Erie County, I am expecting my property taxes to double by the time this crisis will have been resolved.
According to the National Association of Realtors, the median price for a home in the United States has now risen to $206,000 -- up 15% in the past year alone, and up 55% in the past five years. Economists have compared this run-up to be similar to what happened in the 1990's tech boom that occurred in the NASDAQ stock market. Have Americans learned anything from that market crash, which removed six-trillion dollars from the wealth of the American middle class, and transferred it to the increasing wealth of those in the elite upper 1% of all wage earners? That is what these self-generated market crashes are designed to do -- and every indication sees the housing market as the next market sector to crash.
In 1966, before he became involved in the Federal Reserve Banking scam, Alan Greenspan admitted that "deficit spending is simply a scheme for the confiscation of wealth." This is what is going on with the housing boom -- and the techniques employed are remarkably similar to the shenanigans that brought down the NASDAQ stock market in the spring of 2000. Anyone involving themselves in a home mortgage is paying more than FIFTEEN TIMES the stated interest-rate printed upon the mortgage contract. This is deficit spending -- because the mortgage holder is paying much more than the actual market-value of the home -- by the time all the interest-compounding is computed on the 360 payments (12 months x 30 years = 360 total payments) required to retire the mortgage at the end of those thirty long years.
Let's take a look at one of the examples above, in which the homeowner saw his home increase in market-value by a factor of seven, while a home-equity loan transferred every penny of the accrued equity back into the hands of the bank, leaving him with negative equity in his home. The person named above to whom I refer is 60 year-old Bruce Fischer. Mr. Fischer paid $90,000 for his home in 1992, when the 30-year fixed-rate mortgage was between 8% and 8.5%. Since then, his home has increased to its' current value of $700,000.
This represents an increase of $610,000 -- at least one would think so.
However, Mr. Fischer did an extremely foolish thing. He took out a home-equity loan, valued at $200,000. Home-equity loans are never a good idea, as they truly are confiscation of wealth, as Alan Greenspan himself pointed out in 1966, many years before he became involved in the federal Reserve as the Chairman of the Federal Reserve Board. This $200,000 withdrawal decreases Mr. Fischer's profit to a level of $410,000. However, with this home equity loan being at least 5.75% -- this actually puts him in a negative equity situation. This home-equity loan being at least 5.75% costs Mr. Fischer $420,174 -- with a monthly payment of $1,167.15. By the time Mr. Fischer walked out of that bank with a home-equity loan in his pocket, he was a minimum of $10,174 in debt -- with 100% of his equity transferred into the hands of whatever bank he used to make the transaction. Let us also not forget this man is sixty years-old, and most likely he will never live to pay that last 360th payment.
How this does NOT violate TRUTH-IN-LENDING laws, I will never understand.
Some of the prices quoted in the Time magazine article were simply outrageous. The average price for an apartment (not a condo) in Manhattan now costs more than $1 million dollars. As previously mentioned, the median price of a home in the USA is now $206,000 -- which has increased by 55% in just the past five years alone. A recent study found that Los Angeles homeowners believe that their homes will increase in value by 22% each year for the next decade. This expectation is simply out of touch with reality, but nonetheless David Lereah, chief economist for the National Association of Realtors, forecasts another record-breaking year for 2005 -- with property values rising by 9% across the board.
Housing now accounts for a full 25% of the nation's Gross Domestic Product, which places an inordinate amount of pressure on this single sector of the economy to keep the entire economy afloat. The importance of housing and real estate sales is reflected in how often it is mentioned in the financial news -- where housing starts and real estate sales are frequently mentioned in their reporting. 32% of all household spending is on housing -- and this is what makes it so important and vital to our nation's economy. Therefore, it is axiomatic that when (and not if) the housing and real estate sector collapses -- it will bring great harm to the entire U.S. economy.
While it is certainly true that home-mortgage interest rates have fallen approximately 40% between 1990 and 2004 -- most people simply have no capacity to understand that low interest-rates have been used to pitch home-equity loans "near zero percent," as most local banks prepared for a very callous game of financial bait-and-switch. And as the Time article mentioned, "Your house is now your piggy bank, ATM and 401(k)." The article dangles the idea of home-equity loans as a manner in which to "take out some cash to put your kids through college." While the author of this article makes statements like the following: "Folks brag about having bought their home in the 90's the way they used to brag about having bought Microsoft [stock] in the 80's." --- nothing is ever said about the negative consequences to the borrower.
And, what are the proceeds from these home-equity loans spent on?
In 2004, U.S. homeowners took out $139 billion dollars of their equity -- up from only $26 billion dollars just five years ago, according to Freddie Mac. This shows that the banking television and mass media marketing campaigns supporting home-equity borrowing are effective. Of the proceeds from such loans; 35% went into home improvements, and retail chains like Home Depot and Lowe's have profited tremendously from this remodeling. 16% went toward making further consumer retail purchases, and used 26% to pay off preexisting debt -- such as credit cards, and still more consumer retail purchases, according to Federal Reserve statistics.
Such mainstream press reporting never mentions anything about the true effects to the person borrowing the money. Most people never fully understand what it is in which they are truly involving themselves. So, to provide that service to my readers, let us take a deeper look at the housing statistics as presented in the Time magazine article -- which represent the years of 1990-2004:
* The 30-year fixed-rate mortgage interest-rate fell from 10% in 1990, to 5.75% by 2005.
* The median (in the exact middle of all possible prices) price of homes more than doubled, from $98,000 in 1990 to $206,000 by 2005.
* The increase in the number of people buying a second home more than doubled during this time period of 1990-2004.
* Homeowners' equity rose from $4 trillion in 1990, to $10 trillion by 2004.
But now, people are taking more risks in their financial investments:
* The number of adjustable-rate loans rose from 10% of all mortgages in 1990, to 33% of all mortgages by 2004.
* The number of homeowners who are reducing their equity stake in their home via home-equity loans, has increased from $225 billion dollars of such loansin 1990, to almost $900 billion dollars of such loans by 2004. This represents fourfold increase in home-equity loans.
* The widespread use of such loans has increased total household debt by an enormous amount. In 1990, home-mortgage debt was $2.25 trillion dollars. By 2004, this amount had risen to $8 trillion dollars. This represents more than a threefoldincrease in such debt.
* The foreclosure rate has increased from 1% in 1990, to 2.5% in 2004. When those making late payments on existing home-mortgage loans are considered, this figure jumps to 10%.
* With credit-card debt now at $2 trillion dollars, and current home-mortgage debt at $8 trillion dollars, the total of $10 trillion dollars completely cancels out the above-referenced $10 trillion dollars of homeowners' equity.
This is how the game is rigged -- they may give it to you in some way -- but they make sure they get it back some other way. Here the PLUS was the tremendous increase in the value of homes, and the MINUS was the equal amount of consumer debt that was created by the consumer society we have been manipulated into becoming. This is a party to which you and I aren't even getting a seat at the kiddies' card-table -- let alone a spot in the receiving line! If you have ever wondered how someone can work their entire adult life, and get virtually nowhere, think of how the imbalanced scales of this example show how one hand takes from the other, and the whole time our typical American was ruminating on whether his favorite team would finally win the 'big-game' this season!
They spellbind society with distraction after distraction -- and in plain sight -- they talk in coded messages -- which are the seemingly inexplicable statements that certain politicos make to the press. For example, Federal Reserve Board Chairman Alan Greenspan has warned about "froth" in the housing market, and mentioned the "irrational exuberance" of years' past. For those who understand the nomenclature of macroeconomics, Alan Greenspan is telling us that the housing market is overextended, with a possibility of behavior like the 1990's tech boom. In other words, Alan Greenspan is warning of the impending crash of the housing and real-estate sector of the U.S. economy.
I also choose to remind you of Alan Greenspan's comments as part of his semi-annual report to Congress, which took place on February 18, 2005:
"Several important economic challenges confront policy makers in the years ahead. Prominent among these challenges in the United States is the pressing need to maintain the flexibility of our economic and financial system."
When we look deeper into the statement above, we come to realize that what Alan Greenspan is talking about is the increasing difficulty in keeping the entire Federal Reserve banking system afloat -- amid a collapsing dollar, burgeoning trade and budget deficits, rising unemployment, and interest-rates that are getting ready to skyrocket towards levels not seen since 1980, when they were a staggering 18%. Remember that this whole system will correct itself in the end, but there is concern as to whether we will make it through this crisis.
The Time magazine article did point out one problematic aspect of the current housing and real-estate bubble:
"There are troubling aspects to the real-estate boom. At the stock market's peak, 1% of investors controlled about 33.5% of stock wealth; the top 1% of home-equity holders have only 13% of housing wealth. In other words, a broad drop in home values, should it happen, would affect a far larger cross section of Americans than did the NASDAQ bust."
The NASDAQ bust stole $6 trillion dollars from the middle-class -- with some having lost their entire life-savings. The real-estate bust could turn out three times greater than the NASDAQ crash of the spring of 2000. Therefore, it is important to keep that party going, and to keep that house of cards from falling in on itself.
In the Time magazine article, there was a single line that read almost like it did not belong. However, I immediately recognized that it was a coded reference to the crash of the hedge-fund market, which has been precipitated by the bankruptcy of General Motors and the severe money problems of Ford Motor Company:
"California's $186 billion state pension fund is worried enough to have begun unloading some of its' real estate holdings."
This is a very worrisome statement, because when one starts hearing of problems related to state, federal, or union pension funds -- this means that there are troubles with the holdings of these funds. For example, when General Motors fell into bankruptcy and seen their stock rated at junk status, such pension funds were then forced to sell of their holdings in the troubled companies. And, both GM and FORD are held by many such pension funds in all levels of society.
Edward Leamer, economist and director of UCLA Anderson Forecast, has many worries about the current housing bubble, which he claims is in already turbulent waters. "We've had a more than doubling of housing prices in the past three years here in Southern California. For instance, there is no fundamental driving it," he was recently quoted. "There isn't some big crush of people coming to California. That's ridiculous."
When the time comes that we see banks ready to collapse because of the final destruction of what little is left of the American economy, we will certainly see these same banks begin to call in all types of outstanding loans. They will need to do this to stay liquid themselves, and a home-mortgage holder may find themselves with a letter demanding full repayment of the total outstanding balance within sixty to ninety days. When we find ourselves at that point, it appears that many millions of people will see their homes being foreclosed, all because they were unable to write a check for $100,000 or more.
Is renting an option, in the above scenario?
I had stated in the summer of 2000 that I saw a future with multiple families living in one house. This was after the big financial meltdown in the NASDAQ stock market, which devastated all but those who were prepared for the emergency. The coming financial problems are going to be many orders of magnitude worse that what America experienced during the years of 1929-1934. For those readers with a sharp eye and an even-sharper mind -- with the onslaught of each new problem in this country -- we see larger and larger price-tags associated to the events. While none of the expert economists can agree on WHEN the housing and real-estate market will collapse -- they are in agreement that it WILL happen. What we all can do for ourselves at this point, is minimize the damage that will befall us when the time comes for the U.S. to finally pay the piper -- a payment that is seriously overdue.
The following sources were used in the writing of this Kentroversy Paper:
Bentkowski, Kent Daniel Will You Survive The Coming Financial Crash? (PDF), June 2, 2005
Bureau of Labor Statistics
Designed To Sell (HGTV) - Check home values and selling prices across the USA.
Extreme Makeover: Home Edition (ABC-TV)
Fannie Mae
Federal Reserve Banking System
Freddie Mac
Mortgage Bankers Association
Mortgage Calculator (Simple)
National Association of Realtors
National Average Mortgage Rates 1990-2005
Poniewozik, James America's House Party, Time magazine, June 13, 2005, pgs. 16-24.,8599,1069097,00.html?internalid=AMP
Property Ladder (TLC) Check Sales and Foreclosures in America's Top Cities.
Rich Dad, Poor Dad
Sell This House (A & E)
© 2005 The Kentroversy Papers



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