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Pastimes : Where the GIT's are going

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To: Ken Adams who wrote (136130)	2/28/2007 11:20:23 AM
From: Augustus Gloop	Read Replies (2) of 225578

What concerns me is the banking sector. I don't want to climb the wall of worry but banks have not been judicious in their lending. Lower rates allowed them to loan money to people who normally wouldn't qualify. Unconventional mortgages made this problem even larger. This was compounded by an abnormally high growth rate in the housing sector. That growth allowed people to take even more equity from their homes and, in essence, allowed them to live beyond their means in the same way the stock market did in the late 90's. Americans currently have less equity in their homes than at any time on record. I believe our savings rate is the lowest of any industrialized country. It's widely believed that the fed overshot by .50 basis points when they were raising rates. Think about that for a moment. You can still buy a home at rates of 6-6.25% and we've overshot? Those are historically great rates! But when people were approved for home loans and subsequently placed in unconventional mortgages the banks were approving loans that could only remain solid if rates stayed low. It's hard to believe that a move from 4.75 to 6.25 would be enough to crash mortgages but thats exactly whats happening. People were allowed to buy more home than they normally could afford and thats the issue! When that starts to crumble - and it's already happening in the 500k housing and above - we'll either be forced to lower rates OR the banks are going to own a lot of property. Since appreciation has slowed the only thing thats going to save people is either greater income or lower rates so they can continue to finance incredibly high debt to equity ratios. Many people have already experienced this on a much smaller scale by leasing cars. They never achieve equity but they get to drive a car that's beyond their means. They've become "payment buyers" instead of car owners. The same thing has now happened with the largest investment most people will ever make - housing. It creates a churn and burn atmosphere but when housing skids there's no assurance you can sell your property. There is no guaranteed buy back with the support of residual value like there is on a car lease. That plus a sliding housing market, higher rates and historically low equity in housing is going to cause some serious problems. No down payment loans have basically created almost a credit card like debt for people because now housing has virtually become unsecured debt. Zero equity + rising rates + a glut of houses equals lower prices and that means some people and banks are going to take it in the shorts. This run was supported by low rates, easy loans and the feds willingness to print and spend huge amounts of money. Just a normal recession could turn into a nightmare that sends people and banks into the dumper. Will all this happen? I don't know. I've found that usually the thing that bites us is different from what I thought would be the issue. That said - we now have several generations that never felt the impact of a depression (myself included) and as a result they're conducting their finances in a way that leaves no room for error. The slightest slip could result in a real problem for a lot of people. Just look at what a modest rate of 6.25 (instead of 4.75) on housing has already done. Scary

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