House Of Cards

Over the weekend, Zandardad mentioned to me that he's really, really sick of seeing the stock market tank. In the last 18 months, the market has lost 50% off its October 2007 peak. We both agreed that there's little hope for a recovery until the housing market turns around. Eventually, Pops argues, Americans are going to decide to buy houses again. That's true to a point.

The problem is that it's much harder to get a mortgage these days. It's a reverse "Paradox of Thrift" scenario, call it the "Paradox of Lending." Banks don't want to lend long-term right now in this market. When the housing market is continuing to collapse, making a mortgage loan right now is good for the industry as a whole, but very bad for banks individually. Banks make money long-term on mortgages, and in the short-term they were making even more as home prices went up. If the person couldn't afford the mortgage, the home asset the bank would repossess would still go up in value. It was okay to make zero down payment mortgage loans because the market was going up, up, up.

But now, making a mortgage loan is a huge risk for the bank. They are demanding as much as 15%-20% up front as a down payment now, so the practical upshot is that the home that was out of reach at $300,000 and no down payment is even more out of reach at $200,000 and 30 to 40k up front. That turns into an even worse short term deal for the consumer should that home drop in price. They've sunk tens of thousands into a home up front that will probably lose another 25% or more in value. Good deal for the banks, but in today's job market a suicidal move.

Until the housing market bottoms out, it's not going to turn around. And it won't bottom out until people can buy. Banks want a big down payment now, one that people can't afford, and the irony now is for Americans tapped out in personal debt, and especially having lost a huge chunk of equity in their current home and in the stock market, it's harder to buy a home at these prices then it was in 2006, even though the total price is far less.

Still, home prices do have a ways to go. For the most part they are still too high, which shows you just how out of control the housing bubble got. At this point government intervention is the only thing that will get this housing market out of the death spiral it's in. Obama is at least taking steps to keep people in their homes, but Republicans continue to say keeping Americans in their homes is not the government's business.

Has it occurred to the Republicans that if the government doesn't do this, then the free market is incapable of doing so until home prices fall nationally to Detroit levels?

According to the Chicago Tribune, the median price for a home sold in the month of December 2008 in Motor City is Seven Thousand, Five Hundred dollars.

Let me run that by you again.

You can buy a house in Detroit for less than the cost of a used car. That, ladies and gentlemen, is what is in store for the rest of the country should this death spiral continue. Folks who bought mortgages in the 90's and early 2000's are in real, real trouble nationally. When home prices drop so low that they end up owing more on their house than the house is worth, the banks will jack up their mortgages. They will lose their homes. In turn, this will depress housing prices even more, and more people will leave and lose their homes...depressing housing prices even more until we get the Detroit Scenario all over. It's happening to a lot of other cities in the US right now too.

The country is slowly coming apart at the seams right now, one housing disaster at a time. The housing depression has reached critical mass, folks. We're on the edge of a complete meltdown in this country. Pray Obama can help fix it.