November 19, 2005

Can you say "global economic meltdown?" - Dangers of a runaway mortgage market


The warning signs are everywhere. And conservative financial institutions -- insurers and pension funds -- are set dead in the path of the runaway train.

The long-awaited slowdown in the U.S. housing market is upon us. So far the deceleration is a long way from a car wreck. Housing sales and housing prices are still projected to climb in 2006, just not as fast as in 2005.

But over-revved markets generally crack up rather than slow down gracefully: They've built up too much momentum to handle a change in direction without at least a bang against the guardrail.

Adding to the odds of a crackup is the very peculiar nature of the investment market for mortgages. Right now, there's a huge disconnect between the folks who are making the mortgage loans and the investors who ultimately wind up owning the mortgages. The mortgage lenders who know individual mortgage borrowers the best -- and the risk they do or don't represent -- are selling their riskiest mortgages. The investors who buy them know nothing about individual borrowers and are relying upon the magic of the Wall Street derivative market for risk protection.

Sound like a car wreck waiting to happen?

16 comments:

skytrekker said...

The only reason why might have this global trainwreck coming is this; we have had the most liquidity worldwide since the 1920s. Massive speculation (going on 10 years) starting with stocks and the IT bubble, and now in Real Estate. Massive debt, too much money chasing too few returns. When this thing cracks- it will flush the system of the 1920's and Robber Barrons style of economics and set the USA up for serious social reforms, that will begin to make us competitive again.

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Anonymous said...

watch "absorption rates" closely. It's a time-tested yardstick for home sales. Does it prove that the Housing Bubble has already popped? You bet it has.

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Anonymous said...

The real estate market really . Overpriced homes. Underpricing buyers. Especially tough to sell in a market more interested in hurricanes than square feet under air. But maybe this is the way. Enjoyed your site. Thanks.

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The average home is currently on the for about 4 months before it goes to contract. Around 15% of initial real estate contracts never make it to a successful closing ... something goes wrong, and the frustrated seller puts the home back on the real estate market .

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