I will be interested to see the extent of the collateral damage - to wit - how much the counties and states rely on ever increasing home prices and hence real estate tax revenues to support public outlays.
The last time I observed this was in the late '80s in Fairfax, VA. Not only did they count on housing prices not receding, but they cranked in continued parabolic growth, and spent accordingly...new police helicopters, new town hall. Then boom, the '92 recession hit. Ooooops. Who will pay for the helicopters now????
Lots of folks back then wanted to refi to get lower mortgage rates. The only thing was, their house prices dropped so much that the new lender observed that they had no equity in them. You had this absurd situation where someone wanted to drop from say $1,600 per month at 10% to $1,200 per month at 7.5%. They had been making the $1,600 no problem, so why would $400 less per month be a problem? Well...no equity in the house, no new loan. Keep paying the $1,600 unless you could bring a lot of cash to settlement.
Today sounds very similar to the late '80s real estate boom. About 15 years of water under the bridge, short memories, denial of reality. This time its different. Yeah. We are due for another bubble and unhappy pop in real estate.
Look on the bright side. Japan used to be eating our lunch, the way China is now. The Japanese used to own Manhattan. If the foreigners are buying our real estate (instead of T-Bills) at ridiculous prices because of the currently low dollar, and then the real estate bubble collapses....unlike the T-Bills, those are Eurodollars we never have to pay back. Is China headed the way of Japan??? The Japanese have been in a heap of hurt for un plus longtemps. I remember the senior managers where I worked drinking green tea, and trying to learn Japanese, and to be like them becuase the Japanese clearly understood the new business paradigm. Wrong!!!! Borrow too much. Pay to much for assets. There will be rivers of tears. Its been happeneing since the ancients.
What is too much for an asset??? Simple. Will the rent service the debt? It doesn't matter if its a drilling rig or a condo. It doesn't matter if its France, Russia, Japan, South America, or Miami Beach. Everything, EVERYTHING I read suggests that currently there is about a 30% shortfall of possible average rents from real estate to service typical debt levels - say 10% against a new real estate purchase. |
