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From Bubble To Rubble...

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From Bubble to Rubble

Friday, May 5, 2006, 02:29 PM


“A house is just like a bank account,” insisted my well-meaning but misguided relative. “It appreciates in value and within a few years you can sell it for more than you bought it for. And don't worry about getting a mortgage loan; there's always a way to get one.”

“Until you pay off your mortgage, you don't really own your house,” I replied. “You're actually renting it from the bank.”

“But it's not like renting your duplex,” objected my relative. “You're actually putting money into something that is gaining value, so you can make money on it. And if you get in trouble you can always sell your house at a profit and move into something smaller.”

“The problem with that approach,” I objected, “is that it assumes that demand will always rise, and interest rates will stay low. But what we're seeing right now is that millions of families, who took out loans when rates were kept artificially low, are losing their homes as the rates rise, and their ARMs reset. And at the same time we're seeing demand for new homes decline in a lot of places. And a lot of people are getting trapped with negative equity. I really think the best thing to do is pay off our debts, save some money, and wait until the housing market becomes more rational.”

“But buying a house can help you get out of debt!” asserted my relative, her eyes aglow with the undaunted fervor of the True Believer.

“How does taking out a huge debt help get me out of debt?” I asked in genuine puzzlement.




The bubble will burst, and when it does, the people who thought they would be living the easy life of a landlord will find out that what they really signed up for was the hard servitude of debt serfdom.”

America is presently on the declining side of the peak real estate market, Hudson points out. On that side of the mountain, recent homebuyers “who bought at the top and who now face decades of payments on houses that soon will be worth less than they paid for them, trouble is brewing. And they are not an insignificant bunch.”

What does the immediate future look like? Predicts Hudson:

“A real estate boom that began with the promise of `economic freedom' almost certainly will end with a growing number of workers locked into a lifetime of debt service that absorbs every spare penny.”

A couple of years ago, just before he started to goose the prime rate, Alan “Destroyer of Worlds” Greenspan urged home “owners” to refinance to ARMs, the rates for which were going to go only one direction, and it wasn't down. Today, in one last massive gesture of desperation, many home “owners” are scrambling to refinance again, often to fixed-rate, interest-only loans. (Hat tip: Karen DeCoster.)

Typical of such cases is that of 38-year-old software salesman Mahesh Desai, 38, who “decided that because interest rates were about to rise, it was time to refinance his house in Darnestown,” reported

the Washington Post. “He had a three-year, adjustable-rate loan at 3.625 percent, and he knew from news reports that rates that low were coming to an end.

"I'm still going to have sticker shock in my next payment, but I've enjoyed lower rates for a while," states Desai. "Guess the party's coming to an end."

I guess so:

“His new rate is 6.625 percent, and the monthly payment will jump 72 percent. It is an interest-only loan, but he will be pressed to afford the new payment, even without paying down the principal.”

Which is to say that he will be renting the house he “owns” for the foreseeable future, no matter how severe its depreciation – assuming he manages to keep it.

This is the sort of fun I've missed by not buying at or just after the peak of the bubble.

I could just kick myself.


The blinkers have really been on for the last few years. Everyone has been walking the walk and talking the talk until now that is. Debt levels are sky high and for those late entrants lucky enough to hold on to their property during the bust it will mean a lifetime of debt and lost opportunities for them.

More bearish stories ahead. I wonder how long it will be until reality in the UK sinks in...?

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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