Decline in Home Prices Pulls the Carpet out from under the Mortgage Market

Martin Weiss, Ph.D. examines the relationship between falling home prices and the declining mortgage market. In this issue of Money and Markets, Dr. Weiss discusses the reasons why these two markets are correlated.

Jupiter, Fla. (PRWEB) August 30, 2007 -- Martin Weiss, Ph.D. examines the relationship between falling home prices and the declining mortgage market. Dr. Weiss discusses the reasons why these two markets are correlated.

The time for protective action is now. The U.S. housing market is crumbling. Large chunks of the U.S. mortgage market are being swept away by a flood of home foreclosures and mortgage company collapses.

According to Merrill Lynch, there's another candidate for failure, known as Countrywide Financial. The company has exhausted its $11.5 billion in credit lines. It has just received another $2 billion capital infusion from Bank of America. And it's still not enough.

Why is Countrywide doomed for failure?

Just last week Angelo Mozilo, admitted on CNBC that the mortgage crisis striking America today is "one of the greatest panics I've ever seen in 55 years in financial services." He even predicted
that the housing downturn is so bad it's likely to drag the economy into a recession.

Dr Weiss replied, "Even without a recession, even with plentiful credit, even with all those supposedly 'goldilocks' conditions, we have the worst foreclosure surges and the worst situation.

So the question is when will there be a scarcity of credit?

When there is a decline in the economy and a bigger pinch on the consumer? Then what will be seen in the housing market? Then what will be seen in the mortgage market?"

Sunday's New York Times hints at some of the answers:

"The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.

"Rather than being limited to the once-booming Northeast and California, price declines are also occurring in cities like Chicago, Minneapolis and Houston, where the increases of the last decade were modest by comparison.

"On an inflation-adjusted basis, the national median price is not likely to return to its 2007 peak for more than a decade."

This home price decline is what's pulling the carpet out from under the mortgage market. This is the key factor that's driving home owners into foreclosure and mortgage lenders into bankruptcy.

What's most amazing is that, despite abundant warning signs of trouble, virtually no one was expecting it. On Sunday, The New York Times put it this way:

"This reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen."

Now, even economists with a natural inclination to deny or downplay the dangers are finally, but grudgingly, acknowledging what's long been obvious to analysts: The housing and mortgage bust could have a larger and more direct impact on wealth, employment, and the economy than any other single event in this lifetime.

So don't believe that this is not a big deal and don't believe that declines could never happen. And most importantly, don't be lulled into complacency by the myth that the U.S. Federal Reserve will magically save the day.

The Fed will try to save the day. It will drop the Fed funds rate, pump in more money, pull a few new rabbits out of the hat, and periodically bring a loud chorus of cheers on Wall Street. But it cannot succeed for three reasons.

The first reason being that the mortgage meltdown is too big and too far gone. It has already engulfed trillions of dollars in loans. It has already spread to 20,000 cities and towns across America. It has already bankrupted lenders of subprime mortgages, Alt-A mortgages, jumbo mortgages, even prime, conventional mortgages.

The second reason is that the nation's mortgage markets are largely outside of the Fed's control.

When the Fed pumps money into the economy, it doesn't bail out mortgage lenders that have taken wild risks. The money goes almost entirely to commercial bankers. Causing the Fed to persuade bankers to take the money is hard enough. To get the bankers to dump substantial sums down the drain in the mortgage market is next to impossible.

And the final reason is that the U.S. markets have sprung a hundred leaks, and U.S. dollars are gushing overseas.

"Many people think the Federal Reserve can just pump money into the U.S. economy, and that's where it stays. Not true. The U.S. markets are like a bucket with a hundred leaks. The more money the Fed pours in, the more money that's likely to gush out to Western Europe, China, and Japan.

International investors are being scared off by the dominos falling in the mortgage market. And they're scared off even more by the Fed's efforts to flood the U.S. market with increasingly worthless dollars. When that money rushes back to its home country, the dollar's decline becomes a rout, and the rise in foreign currencies becomes an explosion," Dr. Weiss concludes.

For more information and to read the full article, visit this link:
http://www.moneyandmarkets.com/press.asp?rls_id=908&cat_id=6&

About Martin Weiss & Money and Markets
Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.

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