| Worst Housing Drop Since the Great Depression |
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| Tuesday, 30 December 2008 20:32 | ||
In the book I co-authored—The Big Gamble: Are You Investing or Speculating—I wrote a chapter during the first quarter of 2008 entitled, The Mother of all Crisis: Haven't We Learned? The following appears on page 86:
Since writing that, things have gone from bad to worse. Today there are nearly a million repossessed homes on the market. Statistics reveal that on average, foreclosed homes are priced almost 40 percent lower than normal real estate listings. Home prices in 20 major U.S. cities declined at the fastest rate on record because of increasing foreclosures and slumping sales. None of this should come as any great surprise. For the past two years we’ve seen the same question being raised over and over again, “Is the housing bubble about to burst?” That question in and of itself implied that we all knew that the big party going on in the housing market was unsustainable. The Fed are unquestionably implicated. Back in January 2001, former Fed Chairman Greenspan attempted to jump start the economy out of recession by slashing the federal funds target from 6.5 percent down to a ludicrous 1 percent by June 2003. Then they steadily ratcheted back up to 5.25 percent by June 2006. By then, the build up had generated more than $8 trillion in housing bubble wealth and it was inevitable that we’d end up in this mess. Not only did Greenspan do nothing to halt the growth of the bubble, he actually encouraged it by recommending that we all take out adjustable rate mortgages. He even dismissed those who warned of the impending bubble, assuring us that everything was under control. Was it just coincidence that these interest rate moves ran parallel to the pumping up and popping of the housing bubble? Or was it a case where artificially low interest rates lead to poor investment decisions that would require a recession to correct? It’s now obvious that Shiller was optimistic when he estimated a 30 percent drop in housing prices. If that figure is now at 35 percent, what’s going to happen when you factor in the record job losses, consumer paralysis, retail and other business bankruptcies. We are probably looking at an even worse scenario in the coming year. This country is placing an inordinate amount of hope and trust in the incoming administration. But in our opinion, it’s going to take a team of super heroes to come up with a workable plan to get the housing market stabilized and back on track. And until we get our house in order here at home, the economies around the globe could continue to suffer and slide further into the abyss. |
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