Saturday, May 27, 2006

Soft or Hard Landing

There is a lot of discussion about whether the housing bubble will or has popped, and also whether or not the housing market will have a soft landing. The common perception, is that this is a one item event. This is probably a too simplistic approach.

Take any house approaching foreclosure or a motivated seller putting his house on the market. There is a good chance of a divorce, and also a bankruptcy. The house payment is not going to be the only bill not payed.

The rate at which the real estate housing supply is increasing, should indicate that there are people already heading for the exits.

The idea that the housing market can fall flat and nothing will happen to the rest of the economy seems too much like wishful thinking.

Somebody loaned us all of this money.

Just as a lark, lets say its 100% foreign banks. American banks wouldn't be that stupid (believe that and I'd like to be the first to sell you a bridge in NYC). If a foreigner, holding a $1,000,000 bond paying 6% wanted to sell fast, they could discount it say 50%, in order to sell it. So the seller gets the million dollar bond for$500,000. The discounted note is now paying 12% interest. Now in the United States, which bond would you buy, one from Fannie Mae paying 6% or one held by a foreign banker paying 12%? The bridge is still for sale if your still interested.

At this point, interest rates will be determined by the panic of foreigners trying to get their money out of US financial instruments. It won't take much to realize that Bernanke and the Federal Reserve are out of the loop.

Here is where 1929 and 2006 are different. The speed of the collapse will be faster. And all of those investment trusts in 1929 that dropped dead???--Hold On! The ride is about to begin!

1 comment:

RaduBT said...

Greetings from Romania!!!