Housing Crash Unaffected By Fed Actions

The housing crash, currently in its infancy, will soon grow up into an economy killing monster that the Federal Reserve has no weapon strong enough to defeat. A housing crash is unlike a stock market crash in that there is no easy way out.

Let’s take a walk back in time to the tech stock crash just 8 years ago and compare it to a housing crash.

Is A Housing Crash Worse Than a Stock Market Crash?

The tech stock bubble crashed in the spring of 2000 and the Fed then went on a rate cutting spree ending in June of 2004. The Fed dropped rates something like 15 times to stave off recession. The tech stock bubble and crash could be managed said the Fed with an increase in liquidity to the economy in the form of cheaper money. The banking industry helped him out by offer anyone with a pulse a mortgage flooding the economy with even more money.

And it worked…or did it?

Beginning in 2004, the Fed reversed its position and started raising interest rates, leaving in its wake an unprecedented housing bubble. Home prices around the country rose further and faster than in history between 2000 and 2004. In some area, 100% increases in prices were not unheard of. For example, a house in San Fransisco in 2000 selling for $300,000 could sell in 2004 at $600,000 without a problem.

But by any measure, that is the quintessential definition of “bubble”. For every bubble there is a corresponding “crash”. And a crash in the housing market dwarfs a crash in the stock market in both scope and size.

Fast forward to today and we find the housing crash in full swing in most of the country…and it’s still early in the cycle.

Foreclosures are up, existing and new home sales are down, and house inventories are exploding…forecasting that this is only the beginning in what could be the worst housing market since the Great Depression.

What Can Bernanke Really Do To Stem the Housing Crash?

Unlike his predecessor, Mr. Greenspan, who only had a stock market crash to contend with which is less in scope and does respond to monetary manipulations, Mr. Bernanke has NO effective tool to deal with a housing crash.

Even though we must give Bernanke kudos for inventiveness when he decided to turn the central bank into a hedge fund to support the JP Morgan (JPM) takeover of Bear Stearns (BSC) last week (the first time in history the Fed gave access to an “investment bank” rather than a “depositor bank”), it won’t stem the underlying problem of plummeting home prices.

The credit crunch combined with a housing crash is the “perfect storm” and Bernanke is no George Clooney. This combination curtails any borrowing by consumers and since they pulled out of the stock crash by buying big screen TVs with home equity, we are dead in the water.

With consumer sitting on the sidelines, a recession …or dare I say depression, is almost a guarantee.

The Housing Crash Domino Effect

The domino effect comes into play. Housing bubble leads to housing crash, housing crash leads to credit crunch, credit crunch perpetuates housing crash and leads to lower consumption, lower consumption leads to layoffs, layoffs leads to even lesser consumption and perpetuates housing crash and tightening credit standards equals more credit crunch.

Once the dominoes start to fall…there is nothing anyone can do to stop it…

Not Bush’s stimulus package and not the Federal Reserve cutting rates, since there is no market left to inflate.

Only time will unwind this mess the banks and the Fed put us in. Remember, it took Japan over 16 years to come out of their housing crash when Japan’s rates went to zero and yet know one could or would borrow any money.

So the Federal Reserve lowering rates to stop the housing crash is like trying to put out a fire with an eyedropper. The Fed taking on billions in subprime mortgage risk in the Bear Stearns takeout won’t help either…and all of us, including Mr. Bernanke, will soon see that first hand.

Prepare yourself…

Comments

[Smalltownba...:]

I guess you skipped the ending on the movie "The perfect storm" because everyone including Georgie boy died. They steered their boat directly into the storm and went down with the ship so to speak. I am still hoping for a "Miracle" but you could just call me a "Dreamer."

2008 Mar 24 08:22 AM

[Bhakta:]

I could not have said it better. They are trying to pull the wool over our eyes and ears, but they cannot stem the tidal wave of defaults and losses, layoffs, and recession/depression. The rest of the world is no longer enamored by our Greenback, so interest rate will also have to rise if the Govt expects to sell their bonds.

2008 Mar 24 08:59 AM

[ChuckG:]

While I agree that the whole situation of housing bubble pop/credit crunch is like some absurd comedy, I'm not so sure the "real" economy will be as hard hit as folks on this site think. I'm feeling a bit smug because I sold my house in 2006 for a ridiculous profit, took my 7-digit portfolio to 80% cash, TIPS, Yen, and gold about a year ago, and have been sitting by waiting for the dust cloud to settle to buy back into equities(not time yet). However, what is really starting to scare me is that the Fed will create inflation so high that all this will all be for naught. Yes, the fed can make debt worthless via inflation. They can effectively increase the nominal value of a house this way, slowing down the walkaways because folks are dumb enough to think they are no longer "under water". I think this strategy will work to shore up things long enough for the markets to stabilize because Americans are too dumb to compute the effects of inflation.

2008 Mar 24 09:06 AM

[Bhakta:]

I think the FED and the GOVT want inflation. They are deathly frightened of a Japan style deflation. I played golf the other day with a Japanese gentleman in the gem business, prices in Japan now are cheaper than they were 18 years ago.

2008 Mar 24 09:12 AM

[pacalis:]

The fed's actions will be useless because banks no longer make money on the interest spread. They've been structured to make money on the fees which are unaffected by the feds move.

Even if banks were lending cash, which they're not, people can not simply not afford the HUGE fees associated with refinancing.

Points should be made illegal. And congress should put caps on refinance fees.

2008 Mar 24 11:25 AM

[tradeking13:]

First our currency was backed by gold/silver, then by US gov't debt. Now it's backed by subprime mortgages. We are so screwed!

2008 Mar 24 03:11 PM

[vaduz:]

sounds not very cheering. but unfortunately one comes to very dark conclusions reading and thinking about the state of the fincance sector.

2008 Mar 24 05:06 PM

[dink:]

how do you get across to the great american public that you are all dealing in fiat money?
The motto on your money should be "In god we trust, all others pay in gold or silver!"
Every time the television news discusses the economic problems they show the goverment printing presses rolling out at high speed big sheets of paper dollars.which causes me to think....THIS IS JUST PAPER !!

2008 Mar 24 05:48 PM

[Rhett:]

We are in uncharted territory - in a storm!

2008 Mar 24 06:15 PM

[mythoughts:]

ChuckG, I have you beat easily. I sold my six figure house in SF Bay California in early 2007 for a 400% gain in 3 years. I then bought China and Brazil stocks and held them until dec 2007. Another 200% gain. I'm now living in Florida with the nations second lowest tax rate. I shorted everything by Ultra Short Pro Funds in early Jan 2008 and still hold most of these. I'm now buying silver as fast as I can. I don't feel smug though, because I'm worried our Feds are on the verge of ruining our country financialy.

2008 Mar 24 06:34 PM

[jimbomo:]

I agree with the logic of this article but I also believe the Fed and government will bail out those homeowners who are not too far under water and will start backing mortgages (new and old) which are marginal. As some evidence, I offer the following post from a mortgage broker on www.patrick.net :

www.fhahomeloanmortgag...

FHA is easy to qualify for, the program was created to help to increase homeownership in the United states. FHA program makes buying a home easier and less expensive than other types of real estate mortgage Programs. Some examples include,

Minimal Down Payment and Closing Costs.
• Down payment less than 3% of Sales Price and 100% Financing options available
• Gift for down payment and closing costs are allowed up to 6% of Sales price.
• No reserves or savings required.
• Easy Credit Qualifying Guidelines
• No minimum FICO score or credit score requirements.
• FHA will allow a home purchase 2 years after a Bankruptcy.
• FHA will allow a home purchase 3 years after a Foreclosure.

www.FHAmortgageProgram...

THIS IS THE SAME BS THAT CAUSED THE BUBBLE IN THE FIRST PLACE.

THERE IS ALSO SOME PRECEDENT FOR BIG BAIL OUTS IN THE U.S. - CHRYSLER, SAVINGS & LOAN MESS, AND GREENSPAN'S LOW INTEREST RATE BAILOUT OF WALL STREET.

EOM

2008 Mar 24 10:16 PM

[johngonole:]

I've slowing been buying silver and gold. Its still a small part of my portfolio. I'm guessing I'm about 40% cash, 35% stock, and 5% other. Not including our modest house which is almost paid off.

It seems the only way to protect yourself is to borrow against your assets to protect you from the Fed's inflationary position. The Federal reserve has gone to extreme measures to protect us from the tiniest of recessions. I'm willing to bet they will be willing to completely devalue the currency to try save us from a real depression. I also agree that there will come a point when people will be unable to borrow even at the lowest of interest rates.

So how does one protect themselves when government taxes property, devalues the dollar the most liquid of assets which as we all know is backed by primissory notes, that tax spending, ....

Like I said I've been buying silver and gold but even that could go down in a depression. I've seen this coming for a very long time as early as 2002 but I still haven't quite figured out how to play it. I also thought stock might be a good place to be since that paper is in theory backed by hard assets. That's assuming you can get in around book value without most of it coming from that BS called Goodwill. If asset prices rise that might be good. In either case even a case could be made for real estate. If the Fed and Govt are hellbound on protecting us from a deflationary spiral than the investment with the most risk is dollars. Everything else is good relatively speaking.

So what are the rest of you doing??? Any good ideas???

2008 Mar 24 11:54 PM

[cynic69:]

You forgot to add peak oil to your perfect storm. High energy costs are going to throw gasoline on the fires of inflation in dramatic fashion.

2008 Mar 25 12:29 AM

[GodSend:]

There is one little detail which must not be overlooked. Greenspan & Bernanke are no Zionist Dummies when it comes to Depressions - understanding them AND creating them. Their fingers never left their hands as they played the 'Death by 1000 Cuts' game! All the current flailing about to avoid the inevitable Grand Depression should not fool anyone. The Grand Depression was PLANNED and will provide a wonderful excuse to start the illegal invasion of Iran - or any other convenient country. It's all part of the Zionists' "Greater Israel" and New World Order scenario, as advertised long ago in the 'Protocols of Zion'. Masseltoff, America!

2008 Mar 25 01:33 AM

[Mel Lindley:]

The pain could be eased by mortgage holders taking an equity interest in the property. The householder would still have a roof over his head and an incentive to pay his reduced mortgage, probably no more than he would have to pay in rent elsewhere and he would be bolstered by the dream of prices increasing once again.

2008 Mar 25 06:16 AM

[MR SIDELINE:]

Been waiting for this market to crash. i bought Gold in 1999 at 277.00 a Oz MS graded st gaudens sold most last week for 1175.00 on the graded coins, dont think its a good time to buy at this high, this will be intersting to see. I have been making a house payment to myself the last 10 years. Now I am almost ready to walk in and pay cash, I am putting in my first lowball offer this week. We will se how it goes.

2008 Mar 25 09:44 AM

[GodSend:]

Here is some bad news for all the gold bugs:

"Go to now, ye rich men, weep and howl
for your miseries that shall come upon you.
Your riches are corrupted, and your garments are motheaten.
Your gold and silver is cankered;
and the rust of them shall be a witness against you,
and shall eat your flesh as it were fire.
Ye have heaped treasure together for the last days."

James 5:1-3

2008 Mar 25 10:21 AM

[GodSend:]

The time has come (finally) to replace 'Investment Strategy' with a 'Salvation Strategy'. Salvation is not to be found in gold, silver, commodity options, Credit Default Swaps or anything else of the sort. It's high time to seek and go to 'High Ground'. Calvary is 'High Ground'. Happy Easter!

"Come, take up the cross, and follow me"

2008 Mar 25 10:55 AM

[txteamtech:]

Another thing to add to the perfect storm: the baby boomers starting retirement. More govt welfare and less people to pay.

2008 Mar 25 12:54 PM

[Hyman:]

The reality is that almost everyones house is going to nosedive in value. We can expect to see late 1990s home prices before this is all over. Will the economy be clobbered? Of course it will, and many businesses will fold and we'll see tons of unemployment. We will be unhappier, poorer, and our standard of living will crash, but the bottom line is that we will survive.

2008 Mar 25 03:06 PM

[johngonole:]

Godsend has a point! We can't take it with us guys. And too much concern over earthly treasure will blind us and distract us from all the good we can do that cost us nothing and provides infinite treasures.

Thanks Godsend for the grounding

2008 Mar 25 11:09 PM

[GodSend:]

You have fast scissors, Rob - but you can't snip all the truth out of cyberspace, no matter how fast you cut!

2008 Mar 26 03:03 AM

[GodSend:]

Good night, Rob!

2008 Mar 26 03:06 AM

[stoneray:]

With all the gloom running about here the positive energy for a direction will never come.
Congress maycahnge law.. "One term President for 6 years."
Two term membership of House and Senate.
Oil companies develop alternative energy in 5 years or they will be
dismantled.
IRS is abolished.
You get the idea................
"Good Will" no longer added to balance sheets......
Stock Options eliminated
Any attack on US will result in elimination of all Arab Nations capital
cities..period
All US troops everwhere withdrawn
Foreign Aide ended until national debt paid

2008 Mar 26 07:10 AM

[GodSend:]

It's a new day, so one more time: The Housing Crash, when it comes in spades, will NOT be an accident. There are no accidents when it comes to the global agenda (economic, geo-political or social) of the Illuminati (aka Banksters - mostly Zionists). The Housing Crash will just be one in a series of dominoes about to fall - intentionally! Is it an 'accident' that all 3 leading candidates for president grovel and worship at the feet of their Zionist masters in Israel (represented here by AIPAC, et al)? There is a lot more to this horror story - in the past, the present and the future. Get Ready! (and that does not mean buy gold, silver or platinum and hope for the best possible outcome - it means Get Ready spiritually, before it is too late).

Rob, I'm here on a mission from God. It behooves you not to interfere. Remember that there will be 'gnashing of teeth' for many. Gnashing of teeth makes a horrible sound! ;) Perhaps a few teeth (and more) can be saved?!

2008 Mar 26 11:08 AM

[GodSend:]

In case anyone thinks I'm shooting from the hip with my prophecy of the Grand Depression - I hold an MBA from UCLA with a Major in Real Estate and an A+ in Macroeconomics.

"God is not the author of confusion"

2008 Mar 26 10:04 PM

[Laker:]

GodSend, i don't know how, but you managed to erase my comment.
Anyways, i think you are racist and anti semitic.
Your MBA from UCLA does not mean nothing. Only shows what this once great school managed to produce.

2008 Mar 27 01:06 AM

[Laker:]

Godsend, the great zionists forgot what you will never know.
Go to school and learn something. What the state of Israel has accomplished in 60 years, you will never even begin to understand. You don't know what freedom is, what is the will to live for free. You are truly a Nazi in a mask of civilized person. Shame on you.

2008 Mar 27 01:09 AM

[ouchstop:]

Heya Godsend
I'm hip to what yer sayin'. But still, folks must prepare for hard times NOT JUST spiritually, but also mentally and physically. Remember, the righteous have almost always suffered along with the unrighteous. Most evangelicals that I know live in a dream world. No preparation for hard times. They believe it shows a lack of faith. What scripturally ignorant morons. They clearly have never studied history. Also, I doubt you're a racist, as Laker believes. Clearly he does not understand that the term Zionist has multiple levels of meaning and complexity and in it's darkest is connected to the Illuminati.

2008 Mar 27 08:46 PM

[ShowMeFox:]

The state of the economy is a direct result of greed, plain and simple. It's like the house that Jack built except disguised as a sugar coated treat, that is sweet to the taste, yet bitter in the stomach. I wish someone would start thinking up solutions instead of complain...complain.. complain...

2008 Mar 28 01:51 AM

[GodSend:]

About greed:

"...and lead us not into temptation...". Then it's a matter of our will.

ouchstop: You're right about the need for physical and mental preparation, as well as spiritual preparation. However, spiritual preparation comes first. When you have the right relationship with God, He can and will engineer your circumstances (take care of your needs). I'm speaking from personal experience here - lots of it!

2008 Mar 28 10:09 AM

[Deacon:]

The EU and the coming North America Union are products of the 1940s GATT formulations, and very few analysts are aware of it.

My missive to Ron Paul’s staff, regarding my view that this financial crisis is not by happenstance nor mismanagement—but BY DESIGN!:

The Honorable Ron Paul is ignorant of an ongoing conspiracy to topple, financially, the West, in order to equalize the world’s economies; for building one-world government under GLOBAL ECONOMIC SOCIALISM. // The conspiracy began in the 1940s with the GATT formulations. // Ask why Greenspan had violated his chairmanship duties by advising prospective home-buyers to take out an ARM. // Ask why Greenspan had sent out fed regulators to warn banks that they’d be charged with RACISM if they didn’t loosen home-loans for minority, HIGH RISK home-buyers. // Ask why Greenspan recently, TRAITOROUSLY, had advised OPEC oil producers to de-link from the U.S. dollar. // Greenspan - the FEDERAL RESERVE - has embarked on a purposeful set of monetary policies designed to destroy the West’s financial underpinnings. // Read about the WHO, the HOW, and the WHY of it in my below article (first one): Planned Destruction of America: planneddestructionofam.../ // Corporate America: What Went Wrong?: corporateamericawhatwe.../

This helps to confirm efforts to PURPOSELY trash America’s financial underpinnings: www.321gold.com/editor...

2008 Mar 30 11:46 AM