Friday, August 18, 2006

What Happens Next?

Let’s say housing hits 50,000 units for sale in San Diego. What happens next?

At some point, we have second trust deed holders going ga ga. Then we have the trust deed market increasing in trustee sales. At that point, we will see REO's with 20% drops in purchase price offered for sale.

This is where things get dicey in stage two. You want to sell your house because you can't make the payment and there is an REO down the block $150,000 less that what you are selling for. Well it isn’t going to sell! So you go to the bank and get a "been there, done that, routine."

What happens next? The buyer walks or declares bankruptcy. If you walk, that means that other than the house, your financial state is not bad.

From here, its conjecture on my part. Bankruptcy should give you a few more months in the house, but from what I’ve read, that’s a false assumption. But either way, credit card consumption would continue, and lets face it, if you are going down, go down in style. Get the root canal done, the crown, dental bridge, tummy tuck and breast augmentation. Use your imagination; your card has instant pleasure at your beck and call.

Ask yourself one question, “Why would a lender loan money to just about anyone?” Could it be the easy monthly payment? It couldn’t be the FICO score under 400 could it? The answer to that question could be yes—hey we can charge 26% interest on this turkey, go for it.

So let’s see if we’ve got this right, the strapped homeowner needs something, he has to use his credit card at 26% interest because of a missed house payment. The question arises, at what point is the individuals credit card balance so far out of whack that the lending institution has to throw in the towel. I personally think that they keep raising the bar. Otherwise, as a lender you would have to confront the issue

Credit Bubble? Not on your life (if you issue credit cards).

“Hold on tight, it’s only a bump,” said a crew member of the Titanic.

I personally think that its the retirement assets of a nation that will go down the drain. I sincerely hope that I am wrong.


Anonymous said...

I think you're right. All the "wealth" that boomers think they have in pensions, 401Ks and personal retirement portfolios is about to evaporate.
The fact that paper assets have appreciated so much, and at such a constant rate, is not due to fundamentals of the physical economy. Rather it is the false dreams of a very large generation with delusions of grandeur. When "experts" say that housing will always go up, and that the stock market will always come back, it is only a self-fufilling prophecy. Boomer experts, and their students, expouse this nonsense pointing to the past 30 years as the proof that the regulated economy of yesteryear does not dictate how things should work to day. Thus they keep feeding money into it, like a sure thing, forgetting that investment (as dictated by the long history of economics--long before their time entails risk)
When they finally realize it it will be too late. They will be to old to contribute to the physical economy, or do anything. Their dreams of a golden retirement will turn into a nightmare.

Jim in San Marcos said...

Well put. You need to give yourself credit for your remarks. I suggest you choose an identity, check the "Other" box and choose a handle to your liking when making posts.

That way when you skip from blog to blog, we'll all get to know you better.

Anonymous said...

This guy was right, two years ahead of time.

Anonymous said...

Sadly you were/are right. There have been many commentators predicting this situation, they were accused of "talking down" the economy. I think that 2009 is going to be "Annus horribilis", as the Queen of England would say. Here we are seening in 2009, and I am already looking forward to 2010. I am a small business owner and terrified for my assets. Please keep the blog going. The only good thing about loosing money in a recession/ that so is everyone else.