Home Sale Relief

Dr. Housing Bubble has one of the best housing blogs out there and you shouldn’t miss his interview of expert John Rubino, someone I follow and respect a lot. I will excerpt a bit of the interview with comments, but please click and read the whole thing.

Now we can’t borrow against our homes any more because, after a long stretch of unrealistic price increases (as readers of your “Real Homes of Genius” series are aware), prices are falling off a cliff. U.S. banks are stuck with hundreds of billions in debt that will never be repaid and have pulled way back on their lending. American consumers are maxing out their credit cards to pay their mortgages, and as this source of funds runs out they’re defaulting on their mortgages and/or declaring bankruptcy.

This affects the global economy in two ways. First, American consumers will buy far less stuff from overseas, so we’ll see the massive trade surpluses of China and Japan melt away, along with many jobs and much tax revenue.

Second, because our trading partners have accumulated trillions of U.S. dollars—which is what we give them in return for all the nice stuff they sell us—they lose when the dollar falls. They understand this and are desperately trying to swap those dollars for stronger currencies and real assets, which is pushing the dollar down even further. This process is gathering steam and will culminate in a “death spiral” for the dollar and most other paper currencies. It’s going to get very very ugly on a global scale.

This is the problem in a nutshell. You have to understand today that we are living on borrowed money. And when you borrow, someone else has to lend.

The money that is lent comes from China who ships stuff to the US so we can buy it at Wal-Mart. And it comes from OPEC who ships us oil in return for dollars.

The mortgage that you obtained: that was funded by foreign money. Dollars that foreigners ended up with, recycled back into investments in U.S. mortgages.

Sooner or later, nobody knows when, foreigners will choose not to loan more money to the U.S. They will instead try to buy stuff with those dollars. They will buy stocks in American companies, they will buy gold and silver, they will buy copper and zinc, they will buy corn and wheat.

They will be like you would be if you had a suitcase of hundred dollar bills but only 10 minutes to spend it and you were let loose in a mall.

The U.S. dollar has been dropping like a stone. At some point, if it continues dropping, the foreigners who have bought U.S. mortgages and continued financing the U.S.  extravagant government budget will want to dump those dollars and stop accepting new ones. They can’t do that right now, as that is not in their interests.

It may not be a choice. The credit systems that keep things going are gumming up just now. Banks can become insolvent quickly. If a big bank becomes insolvent, it presents risk to all the other banks and brokerages. Commerce can just grind to a halt one day when wire transfers don’t clear and nobody is sure if a bank can honor its promises or not.

The Federal Reserve will of course continue to provide all the dollars needed to prop up the banks and brokerages. But they cannot fight the markets. If foreigners do not accept more American dollars, or if foreigners do not buy American mortgages, then there will be a credit crunch.

And that’s precisely the situation today.

What does that mean to you? It means you must deal with your debt. You must get liquid. Negotiate credit card debts. Reduce your mortgage payments without getting a new loan. Don’t count on waiting for things to improve next year. Get out of a crushing mortgage now, even if you have to negotiate a short sale with your lender. Waiting will make things worse, I am afraid.

More from Mr. Rubino:

Just last week Fannie Mae announced a huge loss due to the declining value of it mortgage portfolio. Fannie and Freddie never should have existed in the first place, since the government has no business in the housing market. Now we’re seeing the inevitable result: They’ve issued guarantees on literally trillions of dollars of mortgage-backed bonds, and they don’t have the capital to make good on those claims. One or both will be bankrupt within a couple of years. And because they’ve historically been the main buyer of mortgages that banks originated—which gave the banks cash to make more loans—banks will pull back even further on their mortgage lending. The result: Home prices in yesterday’s hottest markets will keep falling for years. Yesterday’s million dollar Orange County bungalow will go for $200,000 or so in 2010.

Mr. Rubino is pointing out that the bottom is fast dropping out of the entire economy in the U.S. today. It’s all housing. And housing is crashing. The last thing you want to do is be waiting for things to improve.

What can happen is that the U.S. government essentially prints more money and more money. And they drop interest rates lower. All in a desperate attempt to rescue the U.S. economy. That drives the U.S. dollar down further. Every import becomes more and more expensive. $100 per barrel oil, as I write, is only a few dollars away. Gas at $4 and $5 per barrel is just around the corner.

Mortgages that are not government guaranteed? Today, if you need one, you must have very good credit. That means that all the buyers who were flocking to buy houses — they can’t qualify anymore. So the pool of possible buyers is much smaller. And those houses that are selling — they are the forced sales. The foreclosures. Driving the values down in the whole neighborhood.

Housing sales are a chain of sales. One elderly person dies. Their house becomes empty. Their children put up the house for sale. Someone tries to buy it. But they must sell their house first.  Someone tries to buy that house, but must sell still another house first. It is common for 20 houses to be in a single chain. Right now, today, these chains are broken. There are few buyers who qualify. Those who do are taking their time. Why hurry to buy an asset whose value is falling every day?

And it will get much worse. Let me suggest that you do everything in your power now to reduce your debts. Stay tuned and learn all you can.

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