Feb 4, 2008

February 1, 2008: There’s No Place Like Home, Dandelions Don’t Tell No Lies, Scurrying Home After the Curfew

The housing crisis circles overhead like a vulture with Newsweek suggesting that the U.S. economy may be facing the guillotine. Associated Press writer J.W. Elphinstone reported on January 29 that “U.S. home prices plunged by a record 8.4% in November, marking two years of slowing returns”. The decline measured by Standard & Poor’s/Case-Shiller 10-city composite index “was the biggest year-to-year drop since a 6.7 percent decrease in October”. A broader 20-city index showed a 7.7 percent decline in November over the previous year. All of this, according to the Commerce Department, a result of a drop last year of new home sales of 26.4%, the largest plunge since 1980.

Preceding the crisis the construction industry had for several years been building new homes at a rate of 125% of demand, meaning that we were building 25% more homes every year than we could sell. This led to a creation of excess housing that economists say will take at least four years to flush out of the pipeline. Nearly all of this building was done not to meet demand but by those seeking real estate investments. As supply began to outstrip demand the financial markets responded by issuing sub-prime loans: loans to consumers who did not have the income or the credit to make such investments. These were loans that consumed too great a percentage of household incomes. There were also loans that were often ‘balloon’ payments involving little or no down payment and initial monthly payments that, in most instances, didn’t cover the interest on the loan. After a specified period the loan would come due and would have to be renegotiated. Since these contracts involved selling homes to those deemed a higher risk greater interest rates could be charged. The financial institutions, having once crossed these thresholds, became rapidly addicted to the high return these instruments produced and began steering greater numbers of buyers into these sub-prime loans. By some reports nearly 45% of these contracts were issued to people who could have qualified for more conventional loans but were not given the option by the lenders. The result was that a veritable financial house of cards was constructed as the landscape was bulldozed and housing tracts sprouted up upon the land like dandelions in the spring.

“Dandelions don’t tell no lies
Dandelions will make you wise
Tell me if she laughs or cries” ---The Rolling Stones, “Dandelions”

Then the bill came due. After several years of high tide and green grass it became increasingly difficult to unload the splendid new mansions that dotted the hillsides. With rising energy and food prices, with stagnating incomes, with consumer debt at astronomical levels the market simply went dry resulting in an increase of 79% in the number of U.S. homes in some stage of foreclosure, and an estimated 2 million additional families facing eviction. Now we had not only a downturn in the construction industry but an emerging financial crisis that has sent jitters down the stone corridors of the world’s financial markets. This brought the President back from his failed quest for peace in the Middle East like a young girl on a date scurrying home after curfew. Where this will lead is anyone’s guess. As the year began ‘Ol Two-Cows’ announced that his new year’s resolution was to “be fiscally responsible and to see to it that every dollar was spent wisely”. Of course the country laughed itself hoarse at such buffoonery and the stock market took a dive. Britain’s Prime Minister Brown, a much more respectable figure, was more sober. He said his new year’s resolution was to stabilize the world economy in face of America’s credit crisis. Evidently it had not yet dawned on Crawford’s very own village idiot that the entire world order may now be at risk.

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