The Great American Housing Nightmare
Martin D. Weiss, Ph. D. takes a closer look at sinking home prices and explains how it is very possible for those prices to decline further. In this issue of Money and Markets, Dr. Weiss discusses the Great American Housing Nightmare and what occurrences lead up to it.
Jupiter, FL (PRWEB) November 11, 2008 -- Martin D. Weiss, Ph. D. takes a closer look at sinking home prices and explains how it is very possible for those prices to decline further. Dr. Weiss discusses the Great American Housing Nightmare and what occurrences lead up to it.
According to Weiss, one of the greatest blunders of our time is made by those who blindly assume home prices are so low they couldn't possibly go any lower. In reality, home prices don't stop going down at some particular level that appears to be cheap. Nor do they stop falling because they match some historical price that was previously a low. The end of the decline in home prices will come only when there are no new economic forces driving them down. So far, most of the troubles in the housing market have been caused by bad mortgages going sour. Meanwhile, the more common causes of housing slumps are just starting to kick in. And the most powerful causes, depression and deflation, are still on the horizon.
If the U.S. sinks into a depression, home price declines could be as deep as, or deeper than, those of the Great Depression, especially in the hardest hit regions of the country. Yet, on the positive side, a sharply reduced price for the average home is the only fundamental, enduring mechanism for making homes more affordable and restoring demand.
Already in 2008, one-in-ten American homeowners has defaulted on their mortgage or lost their home in foreclosure. Nearly four-in-ten owe more than their home is worth. And all this is before the recession deepens and before we experience the next phase of the Great American Housing Nightmare. No one can tell with precision how far U.S. home prices will decline, when they will hit bottom, how many homeowners will lose their homes, or how soon a real recovery will begin. Reaching recovery could take many years.
By mid-year 2008, the Federal Reserve reported a grand total of $14.8 trillion in U.S. mortgages outstanding, 40% more than the entire national debt and triple the total of all the mortgages in America just a dozen years earlier. It was not just the overwhelming quantity of debt that was so dangerous. Even more dangerous was the substandard quality of the debt. In the frenzy that preceded the Great American Housing Nightmare, millions of Americans bought homes with zero money down. Lenders didn't merely look the other way while home owners borrowed the down payment; they actively encouraged it. Homebuyers without enough cash to buy a $500 TV set were declared the proud new owners of $500,000 luxury homes. Many took it one step further with serial purchases of homes. By virtually every measure, the debts piled up prior to the Great American Housing Nightmare are far bigger and worse than any debt pile-up ever witnessed in history.
At the peak of the housing bubble, the average price of an existing home reached nearly five times the total yearly income of its owners, the highest in history. At the same time, the affordability of each home plunged to its lowest level in history.
Fueling the bubble, government agencies like Ginnie Mae, government-sponsored enterprises like Fannie Mae and Freddie Mac, and private investment banks bundled up mortgages and resold them as securities that could be traded much like stocks and bonds. These securities, in turn, were bought by banks and investors in the U.S., Europe and Asia. The total amount of mortgages transformed into these securities: $4.8 trillion, 60% more than the total value of all the stocks in the Dow Jones Industrial Average.
In just one year, 2006, $2.4 trillion in new mortgage-backed securities were created, more than triple the amount of just six years prior. Even in past investment manias, there was no such structure. Some of the largest speculative bubbles of all time were born out of government-sponsored monopolies, nurtured by government-bred bureaucrats and kept alive beyond their time by government-inspired corruption, fraud and cover-ups.
The U.S. Government has given Fannie Mae and Freddie Mac monopolistic control over America's largest debt market, mortgages. And then, beginning in the early 2000s, the government spurred these monopolies to compete aggressively with private subprime lenders. Not surprisingly, the results were extreme complacency, excessive risk-taking, and, ultimately, fraud.
In September 2004, the Office of Federal Housing Enterprise (OFHE), Fannie's and Freddie's primary regulator, issued a special report revealing massive accounting irregularities. And four years later, in September 2008, the companies had still not cleaned up their act, prompting the Securities and Exchange Commission to launch new investigations into accounting deceptions.
In their official filings and public pronouncements this year, Fannie and Freddie consistently and wildly overstated their capital, while understating their risk. Repeatedly, the company executives swore on oath that they had more than enough capital. And even on the eve of their demise, their regulators testified before Congress that the companies were solvent.
However, this is not the case. For longer than anyone cared to admit, Fannie and Freddie had been insolvent. Meanwhile, their chief executives hid behind carefully camouflaged facade, marched into riskier corners of the mortgage market, and trashed the trust of millions of Americans with no sign of restraint and little expression of regret. Between 2005 and 2008, Fannie Mae purchased or guaranteed at least $270 billion in subprime mortgages, high-fee loans to high-risk borrowers. That was more than three times as much as it had bought in all its earlier years combined.
Suddenly, however, in September 2008, it was finally recognized that all the financial statements and all the sworn testimony about solvency were unabashed lies. Suddenly, the two largest mortgage lenders on earth, supposedly rich and prosperous, were thoroughly bankrupt. And suddenly, underscoring the depth of their demise, each company needed an unprecedented $100 billion injection of government funds just to keep it alive.
The potential bill to taxpayers is $200 billion. But that figure assumes an end to the credit crunch, no more debt collapses, no recession, and certainly no depression. If any of these assumptions should prove wrong, $200 billion will barely cover what is fast becoming history's largest cesspool of sinking debts and commitments, $5.2 trillion in mortgages guaranteed or owned by the two companies, their $1.5 trillion in debts, and their $2 trillion in derivatives.
"Never before in history has so much debt, speculation, government manipulation, fraud, corruption and consumer abuse been heaped onto any housing market. And if there's one thing that history teaches us, it's that unprecedented causes lead to unprecedented consequences. The most important lesson of all: Don't underestimate the potential depth, speed and duration of the decline. As the debts are unraveled, the economy comes unglued and the deceptions are uncovered, home prices could continue to plunge much further," Dr. Weiss states.
To read this issue online, please visit:
http://www.moneyandmarkets.com/the-great-american-housing-nightmare-next-phase-27880
About MARTIN D. WEISS & MONEY AND MARKETS
Martin D. Weiss, Ph.D., founder and president of Weiss Research, Inc. and a leading advocate for investor safety, is a nationally recognized expert on domestic and international financial markets. With more than 35 years of experience, including many years in Latin America and Asia, Dr. Weiss has helped empower millions of investors to make better financial decisions through his monthly Safe Money Report and daily Money and Markets.
Dr. Weiss' keen understanding of foreign markets and the global economy has earned him a reputation for thoughtful, in-depth analysis that investors can rely upon to make informed financial decisions. Regularly called upon by the media for his independent investing guidance, he has been featured in publications nationwide, including The Wall Street Journal, The New York Times, Chicago Tribune, Investor's Business Daily, and Forbes and has also appeared on CNN and CNBC.
Throughout his career, Dr. Weiss has been an advocate for consumers and investors in the insurance, banking and brokerage industries, dedicating his time and resources providing analysis and data for Congressional testimony, constructive proposals for reforms in the securities industry and legislation for full financial disclosure as well sound accounting and fiscal policy. In November 2004, he launched the Sound Dollar Committee, a nonprofit organization dedicated to building a network of investors seeking to protect the nation's future by demanding honesty in government accounting, a balanced budget and sound economic policy.
Dr. Weiss is author of The New York Times best-seller, The Ultimate Safe Money Guide, which gave baby boomers a road map to grow their wealth safely. It was listed on the New York Times Business, Wall Street Journal, and BusinessWeek best-seller lists, as well as the Barron's Roundup for 2002.
Dr. Weiss holds a bachelor's degree from New York University, a Ph.D. from Columbia University and is fluent in eight European and Asian languages.
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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