[partypup]

Yes, my typo — I meant $30/barrel. But my point is that oil held steady for 16 years until we went into Iraq. I’m sure demand from China and India contributed to the run-up in price, but let’s not forget that Dubya (and Cheney) are close pals with most of those “greedy oil companies.” I don’t recall Al Gore or Clinton being on the board of Halliburton, Exxon or any of those other energy-sucking giants.

[partypup]

What I think is thoroughly fascinating is that the price of oil per gallon in 1991 was $30.07, and the price of oil per gallon in 2003 (on the eve of the Iraq war) was $30. In 2007, however, oil is now $67/barrel. A sad commentary on the purchasing power of the U.S. dollar since the arrival of Dubya…

[partypup]

Interesting that you choose to rebut my arguments with nothing approximating facts or data. Perhaps sarcasm gives you some sense of comfort in a world where there is increasingly little comfort to be had.

You’ve heard the doomsayers before, but because the world as we know it is still spinning, and people are still buying jet skis and driving Escalades, economic disaster is neither realistic nor possible in your mind. Because you’ve never seen disaster, you refuse to accept that it is a possibility; that you’ve never lived through a depression somehow gives you comfort that you will never experience one.

I don’t know what you term “general economic disaster”. Perhaps you care to elaborate? Is it when manufacturing and capital goods expenditures slow to a standstill, or even reverse themselves? Is it when foreclosures hit record highs? Is it when a country’s currency depreciates 60% in 7 years? Is it when increasing number of former members of the middle class seek public assistance? Is it when its people rely on credit cards to keep the engine of growth churning? Why don’t you tell me what “disaster” means to you, because I’m quite sure I can find plenty of early signs now — or if not, in the VERY near future.

I think it is a uniquely American trait that permits us to ignore the span of thousands of years of history and monetary lessons taught to us by countries far greater, wealthier, stronger and wiser. In fact, there is really nothing special about the United States, nothing that makes us immune to the fate that has claimed every country through history that has chosen the monetary, military and political decisions we have made. To believe otherwise is simply foolish, ignorant and arrogant.

I don’t “fantasize” about the demise of the country I was born and raised in, and have invested 40 years of my life trying to grow and prosper in. But I will tell you this: if we escape disaster with the storm looming upon us, it will be the first time in recorded history that a country in our predicament has managed to do so.

Only time will tell, and I think this time next year it will be very apparent which one of us had the foggier crystal ball.

For your sake, Oak, I hope you are better prepared than you are letting on and have at least planned for some very heavy rain, if not a tsunami.

[partypup]

“1. The pending sales can’t guarantee that all houses will be closed. The fell out subprime and the sentiment of buyers (changing their mind) may affect the percentage of houses being closed.”

Excellent point. Care to guess how many “pending” buyers (especially subprime, but maybe even Alt-A) will find they have been locked out of loans when they discover their favorite lender is out of business or in the process of shuttering its doors?

That Wall Street is creaming over this feeble morsel of “good” news is just a sign of how pathetic and desperate they have become. Thsi isn’t a dead cat bounce; it’s a dead elephant roll.

[partypup]

“Partypup, you write that you are “flabbergasted that the author thinks that a return to 2001 prices is out of the question.” I’m not certain who “the author” is in this case, but if you mean me (as the author of the post that started this thread), then I would point out that I said no such thing in my posts. I said that such predictions lack a foundation in the historical data.

You say that the situation we face is “completely unprecedented in the modern financial world” and that “Gauging the impact of the coming housing crash based on past downturns will be of no use this time.” So it seems that you consider the past data to be of little relevance.

Regardless of how relevant you think the past is, you should avoid making false statements about it, such as, “But prior to 2001, we had seen steady 5 – 7% appreciation.” Appreciation in San Diego was far from steady. Instead it showed considerable up and down swings. Here is the year-to-year average appreciation from 1987 to 2000 (from the Case-Shiller Index data):

87-88: 12.3%
88-89: 22.2
89-90: 8.8
90-91: -3.8
91-92: -2.8
92-93: -5.4
93-94: -1.7
94-95: -2.2
95-96: -0.7
96-97: 3.8
97-98: 13.1
98-99: 12.4
99-00: 15.1

Perhaps this downturn will be much worse than any prior one. Perhaps not. Either way, I can say with confidence that generalizations about impending economic collapse combined with falsities about historical appreciation are not going to convince me of it.”

Three points, Oak:

First, the author I was referring to was the assembler of data in the index;

Second, the 5-7% rate of appreciation I was referring to was based on my knowledge of Southern California real estate as a whole over the last 3 decades; it wasn’t limited to San Diego.

Third, even with respect to the data you supplied, taken over 13 years, I calculate an average rate of appreciation of 5.46%.

Fourth and finally, you have focused on one part of my post to the exclusion of what I believe to be the more important point: the unprecedented macroeconomic sword of Damocles hanging in precarious balance over the neck of the colective global financial community.

We can debate till the cows come home the finer points of San Diego housing data, the Case-Shiller index (for whatever that’s worth) and all manner and variety of real estate trivia. My fundamental point remains the same: this downturn will be deeper, longer and more frightening than any in recent or distant memory. The basis for that assertion has nothing to do with the data you cite, but rather with a fundamnetal understanding of the unwinding of the yen carry trade, China’s increasingly public reluctance to finance our debt, a brewing war that threatens to consume the entire Middle East, a recession looming in our rear view mirror, and a Federal Reserve caught between the Scylla and Charybdis of lowering interest rates to stave off a recession (thereby dooming the dollar) or raising interest rates to breathe life into the greenback (thereby dooming housing). These are all seismic financial events that have never happened before TOGETHER in U.S. history. We are, as they say, in uncharted territory.

The problem is so much bigger than San Diego, than California, than the U.S. The post-1971 global financial system that we have all come to know and love has been slowly unraveling for the past 30+ years. Now the unravelling has begun to accelerate — just as we are tipping into recession, just as geopolitical tensions are rising in a part of the world upon which we are dependent upon for our existence. Query: what do you suppose will happen when (not if) the U.S./U.K/Israel strike Iran? How resilient do you think the U.S. consumer and the equities market will be when faced with $80-$100/barrel oil?

We are facing a perfect storm of unprecedented magnitude. No previous housing downturn in U.S. history has ever occurred in the midst of so many disturbing and magnificently devastating factors. You can choose to focus on the “falsities” of housing data you think I have cited, but you are really missing the forest in your fascination of the trees. If I have made “generalizations about impending economic collapse”, please point them out. I believe I have only highlighted what any observer of macroeconomics knows for a fact: the days of the dollar and a bloated empire built on credit are quickly coming to an end. And when that happens, the housing market — yes, San Diego included — will never be the same.

[partypup]

Couldn’t agree with you more. What we’re looking at here is completely unprecedented in the modern financial world. I lived through the housing downturn in SoCal in the early 90s — it took me 6 years to regain my equity, and that was when there were only 30 year, fixed loans, before we had creative financing, before illegal immigrants could getno doc loans. I’m also flabbergasted that the author thinks that a return to 2001 prices is out of the question. 2001 is when the bubble began in California (don’t know about other regions). But prior to 2001, we had seen steady 5 – 7% appreciation. It is insane to think that prices won’t return to their historical norm.

But there are other reasons to believe that what is coming is without precedent.

There is a perfect storm of macroeconomic variables that could absolutely crush the U.S. economy and the world economy — starting with housing: an unwinding yen carry trade that is already causing volatility in the global stock markets; an impending war with Iran that will drive oil prices through the roof; and a dollar that is taking a serious dumpster dive. Gauging the impact of the coming housing crash based on past downturns will be of no use this time.

It is foolish to focus on housing as if it were some distinct, independent part of the global economy. The post-70s Western global financial market structure is teetering on the brink of collapse. That wasn’t the case in the early 90s. We are in for the wildest ride the world — not just the country — has seen in the last 100 years. Fasten your seatbelts, familiarize yourself with history and use a little common sense.

[partypup]

I still think she will be facing a problem when she is competing with others who are also discounting. What will put her at an advantage over other sellers? As yourself this: if you were in the Great Depression, would you want to be in the position of trying to unload a house to the masses of unemployed and destitute? An extreme example, but you get my drift. Not the market a seller wants to be in…buy low, sell high. NEVER sell low….

[partypup]

Re Analyst, I’m sorry to tell you, but we are all in much worse shape than you seem to want to believe. I am curious how and why you think this country will recovery from the perfect economic storm that is brewing, as one would from a surgery. To continue your medical analogy, I don’t think we are going in for outpatient surgery; I think this patient is in trauma and is on life support.

Questions for you:

***A recent CNN survey revealed that the average American household has NINETEEN credit cards. Moreover, most of these people are using credit to purchase necessities such as food and gas. You have to ask yourself why this is happening. I’d be interested in your take on this. My take on this is that people are drowning in debt, are one paycheck away from bankruptcy and cannot remotely tolerate any major disruptions in their lives — be they layoffs, general inflation or skyrocketing fuel costs from oil disruptions.

Consumerism is the engine that drives this economy. But if you are carefully watching the leading economci indicators of late, you will notice that consumption is conspicuously DOWN…and dropping fast. People are literally tapped out. Equity lines are tapped out. Credit cards are tapped out. The U.S. — which needs to borrow 57B per day just to keep this ship afloat — is tapped out. So my question for you is, on what do you base your belief that we will merely suffer a period of stagflation from which we will recover as usual? What we are witnessing is an absolutely UNPRECEDENTED level of debt, by U.S. standards and by the standards of any country that has ever been in existence.

What is the light at the end of the table? Where will Americans suddenly find income that will allow them to (a) resume their spending on the basis of cash flow, NOT credit and (b) reclaim the middle class jobs that are moving overseas or simply being phased out altogether?

I am in one of the most recession-proof businesses — entertainment — and studio executives are fighting for their lives now. Hollywood is living in fear. They are battoning down the hatches. Disney has just laid off 850 employees, and article in the business section of yesterday’s LA Times sounded the alarm for an industry fighting to stay alive. Why? Because it depends on leisure dollars and advertising. People have to spend to make that happen. Historically, no matter what, people have always coughed a dime or two for entertainment. But all that is changing. Whether you want to believe it or not, the masses in this country are fighting to keep their heads above the waves — but no one wants to admit that this is happening.

*** We are not only dependent on others for oil, but also for our very financial existence. If foreign investors — principally the Chinese — didn’t show up to buy bonds one day, we’d be up a creek without a boat or a paddle. Powayseller is 100% right; this is not the position any super power has historically found itself in. Was Rome beholden to any of the lands upon which it cast the shadow of its empire? Did England rely on the good graces of India to survive? No. This is a fundamental sign of weakness, and it is simply delusional to believe otherwise.

Ah, but you say the Chinese have to keep buying dollars because they are dependent upon our appetite for their cheap goods. To that I say (a) our appetite is still strong, but our stomachs are full. We can only buy so much, and as Americans near their credit limits and interest rates invariably rise, China will face the reality that Americans simply can’t consume as much as they want indefinitely. The laws of economics will eventually prohibit this; and (b) China, like India and Russia, is not a fool. It knows that the dollar’s days are numbered. But rather than shift all of its reserves out of dollars immediately, it is accomplishing this same feat over time. Do your research and you will see that central banks all over the world have been gradually lowering their dollar reserves for the past 24 months. THIS IS A RECENT DEVELOPMENT. They are buying gold, Euros and other foreign currencies. Not coincidentally, the dollar has been steadily falling…

And more food for thought: Iran and Russia are now selling their oil exports in euros and rubles. It matters not if these exports amount to only 20% of world consumption; what matters is that this means that there is a need for 20% fewer dollars in the world. That means that we suddenly have more useless dollars floating out there. Coincidentally, shortly after Iran and Russia began their euro and ruble oil exchanges, the Federal Reserve — for the first time in U.S. history — decided not to publish M3, the measure of the national money supply. Re Analyst, why do you think our government would take such an unprecedented step at that particular time? If you think this is a coincidence, then I have some beachfront property to sell you in Nigeria.

The writing is on the wall. No one wants to be caught holding the funny money when the hammer falls. Faith, alone, keeps the dollar afloat, and all it takes is one major global disruption to challenge that faith. Information is shared instantaneously now, and markets can plummet in one business day. Make no mistake, the day will come when foreigners reach a level of security such that a dollar collapse will not spell doom for them. What they are slowly, quietly doing behind the scenes is preparing for the inevitable day.

***Lastly, with regard to your contention that we are only running out of cheap oil: cheap oil is the only oil that matters to the U.S., my friend. Because when the cheap oil is gone, the expensive stuff will easily cost us $100+/barrel. Do you really think Americans who are barely making ends meet and living on credit cards can stomach gas at $5.50/gallon? How much will it cost to bring food to market? What will become of airlines? Because that is the future. If you disagree, I’d love to hear your thoughts as to why you think Americans — and the economy and general — can withstand this paralyzing shock when we are virtually stagnating at $3.25/gallon.

And by the way, I am old enough to remember the price shocks of the 70s. Prices at the pump tripled when supply dropped by 10% — and that was more than 30 years ago. Imagine what our energy needs are now! So even though the Mideast only supplies 25-30% of U.S. oil, just think about what a 10% disruption will do to this economy today. Gas at $9/gallon? Fugghetaboutit. Americans would thrown in the towel. Social unrest wouldn’t be far behind. And if you doubt the last sentence, I have one word for you: Katrina. If a category 5 hurricane send one city into chaos, imagine what a category 5 financial hurricane all over the country could do. There’s a thin line between order and disorder. Think about it.

[partypup]

Powayseller, your response hits the nail on the head. I have been having this conversation with colleagues for months now. The U.S., like all empires that have risen since the dawn of mankind, will one day collapse. Our dollar, like tghe pound before it, will one day be replaced by a stronger, healthier currency. And the U.S., like the U.S., will relinquish its leading role in world affairs. This is not to say that the American Empire was not once a phenomenal beast. It was! But let’s face it, we’ve been here 200 years and change — which is a drop in the bucket when compared to the Roman, Greek or even Mayan civilizations. Their is an astounding book called the Collapse of Complex Societies (by Joseph A. Tainter). He recounts literally endless examples of societies — all which bear striking resemblance to the U.S. in its current form — that literally collapsed under their own weight. Taken from a historical perspective, it seems almost inevitable: as societies become more sophisticated, complex, and prosperous, its constituents increasingly consume more than they produce. The formula seems to work at first, but then there is a tipping point at which the society begins to fray under the demands of the machine. Competing interests (business vs. social welfare, the environment vs. business, upper class bs middle and lower class) literally tear the complex society apart. And your Easter Island example is spot-on. Except, instead depleting timber, we are depleting the fossil fuels upon which this society (and all complex societies in this age) currently depend. When the Babtboomers start to retire in the next few years (read The Coming Generational Storm if you really want to get the crap scared out of you), our society literally will not be able to meet the overwhelming level of entitlements that will come due to this aging portion of our population. Our coluntry is becoming older, not younger (as is also the case in Europe). The burden of the young to support the old will be yet another stress of this complex society that will quite literally be too much for it to bear economically.

To think the U.S. will continue to exist forever in its current form is to literally deny and ignore 10,000 years of world history. I know we all like to think that we are special and that we are smart enough to “build a better mousetrap.” But seriously, if the Romans couldn’t keep it together after 1000 years, how do we think we are going to make iteven half that long if we are showing serious signs of stress on the joints after less than 250 years? Like the Romans before us, we carry exorbitant debt — although by historical standards, current U.S. debt far exceeds that of any known society known to man. You might be interested in knowing that to cope with its mounting debt, the Romans steadily devalued their currency and launched manyh fruitless military campaigns to maintain the consumption levels of its empire. In the end, Rome collapsed under hideous inflation and social disorder ensued. The Roman Empire is the single greates example of societal achievement to date. Given our current course, who can plausibly argue that we will not meet a similar fate?

Collapse is inevitable; I would only hope that it occurs at a measured pace. However, given the current political leadership, I am gravely concered that the timeframe for the inevitable U.S. collapse is being fast-tracked.

I am late for an appointment, so please excuse the typos. And please don’t accuse me of being apocalyptic. I am an avid stuent of history, and the unfortunate byproduct of that is to become acutely aware of how utterly insignificant man truly is. That doesn’t mean we should stop enjoying life or having kids or buying CDs. it just means that we would all do well top better understand our place in the world and in history. For that matter, a simple course in astronomy might teach one the same lesson 🙂

[partypup]

This makes sense at first blush, Powayseller. But think about it: if we are in the midst of a housing depression, buyers will be few and far between because no one wants to catch a falling knife. We will see much more of what we are starting to see now: a glut of homes on the market.

Your friend is fooling herself if she thinks she will be able to easily unload her home during a crisis. What makes her home so much more special than the many others that will be on the market in her neighborhood? I stand by what I said: when the hammer falls, you will want to be a buyer with no existing property to unload.

[partypup]

This makes sense at first blush, Powayseller. But think about it: if we are in the midst of a housing depression, buyers will be few and far between because no one wants to catch a falling knife. We will see much more of what we are starting to see now: a glut of homes on the market.

Your friend is fooling herself if she thinks she will be able to easily unload her home during a crisis. What makes her home so much more special than the many others that will be on the market in her neighborhood? I stand by what I said: when the hammer falls, you will want to be a buyer with no existing property to unload.

[partypup]

If you sell your home and take the equity while it’s still available, that’s not using your home as an ATM; that’s just prudent when you’re sitting on equity gains that have no place to go but down.

Those who use their homes as ATMs actually keep their homes, draw out cash and steadily increase their debt. So no, my advice doesn’t conflict with the position I took because I am advising that homeowners reduce their debt by selling, not that they incur more debt by taking out a home equity loan.

You may be one of the very few So Cal homeowners that doesn’t steadily draw cash out of their homes; kudos to you. But even so, the price of your home will nevertheless be affected by those who have chosen to use their homes as ATMs, and if you decide to stay you run the risk that as they fall behind on their payments and become despereate enough to bail, your home value will be affected by their price reductions. Do you really want to be in the position of having to stay in a house for 10 years in order to recoup your equity? That’s what happened to me in 1992.

As for skyrocketing interest rates, think of it this way: if the price of a home falls far enough — and it will in the next 3-5 years — 9-1/2% won’t be as punishing. If a 750K home falls to 300K, your payments have been reduced from $5K/mo to $2500/mo. Do the math. Meanwhile, you’re looking at the neighbor who refused to sell — who owes twice as much as you do on a house that’s worth half of what he paid for it. It’s all about timing. And it is the smart play IF you believe the market is headed for a steep decline.

Which brings me to the question: do you have any response to the other points I made in my last point, because that really will determine what the smart play is. If, based on the points I made, you really feel like we are in for a soft landing, then by all means sit tight and don’t make a move. If, however, you are disturbed by the signs we are already witnessing — price declines of $25 – $50K/per month on the same house — and you are compelled by the evidence I presented about the future of this economy, in general and the housing market, in particular, then I believe the smart play is clearly to get out while the getting is good and wait on the sidelines.

[partypup]

If you have re-financed or taken out a home equity line of credit, the consequences are severe. The lender can seek a judgment against you and pursue recourse in all of your other assets, including stocks, savings, other real estate and wages. This is precisely why I believe that 1 out of every 3 homeowners could be royally screwed.

[partypup]

I think my advice is pretty clear, DC. We are no longer living in a time in which you can have it all.

I realize thousands of San Diegans love their homes, have lovely families in those homes and have good jobs. My advice is to prepare. “Renting” is obviously anathema to you, but are you telling me that downsizing is not an option? You don’t have to take your kids out of school or leave your job. There’s no need to take such drastic action. But are you really so wed to a plot of land and four walls that you wouldn’t be able to part ways with it and live in another abode to weather a coming storm? For most of mankind’s history a house served as shelter; now it has become shelter, investment, retirement, ATM and a conspicuous display of status. That’s simply not healthy.

That said, it is absolutely critical to realizethat the lifestyle we have built as Americans over the past 30 years is quickly coming to an end. The housing bubble is just the tip of an enormous iceberg. It is a lifestyle that has been built on faux wealth (inflated home prices), faux productivity (eliminating well-paying jobs and hiring independent contractors and consultants w/o benefits) and faux income (credit cards).

So you think rates won’t skyrocket? On what do you base this assertion? We have amassed a level of debt (as a nation and as individual consumers) that simply cannot be sustained. For the first time in our nation’s history we have a negative savings rate. The average American household (per a CNN survey) has NINETEEN credit cards. People are routinely using credit to purchase food and gas. Our debt is simply unsustainable. And THAT is why interest rates will and must skyrocket. The party is over, and we partied way too long. The thing about this party is that the longer it went on, the more trash we created, so the longer it’s going to take to pick the crap up.

If you think for a nanosecond that the real estate boom we have experienced would have existed if interest rates where anywhere near their pre-2000 levels, you are sorely mistaken. My parents bought their first and second homes (between 1970 and 1980) at 10 – 18%. I bought my first condo in 1991 at 9-1/2%. Interest rates have historically been much higher than they have been for the past 6 years. Would you buy a $750K house at 9-1/2%? Would you? I want you to ask yourself this question, because as you cling to the vestiges of your So Cal dream and hang onto your faux wealth, you will have to find some sucker who is willing to do this.

What we have done is attempt to duck a recession by artificially lowering rates. But you can’t cheat the laws of economics for long. Like death, eventually they will come to claim you. Sadly, our need to have it all and keep the party going means that what might have been only a recession may now erupt until a full-blown depression.

DC, you simply can’t continue to borrow $57 billion a day from foreign investors and expect that there won’t be severe repercussions for the economy. We are finally witnessing those repercussions. Interest rates must rise — to continue to attract foreign investment in our dollars — but that will kill the stock market (notice how we’re seeing 200+ market swings based on the mere speculation of a possible rate hike?) Conversely, if we don’t raise rates, the dollar will continue to fall, in which case foreigners will eventually start dumping their dollar reserves. Either way, it spells doom for you and me. Why do you think Bernanke is agonizing over this? Because he knows he faces a choice between Scylla and Charybdis. Death by fire or death by ice.

And do you honestly think $3.50/gallon gas won’t be a factor in this unfolding saga? Do you really think gas is going below $3 — ever?? We are at or nearing peak oil — so prepare yourself for $100/barrel oil in the near future. And yes, that will affect homebuyers and homeowners in San Diego, too. Because every penny you put into your tank means one less penny toward your mortgage.

One good hurricane? Another well-timed terrorist attack? Can you really factor these things into the history you seem to be relying on? I think not, because there IS no historical precedent for the uncharterd waters we find ourselves in now.

And speaking of history, does it really tell us that home prices — no matter how high — will simply dip a little, then stabilize? What happened to San Diego — or most of So Cal — in the early 90s? I recall that prices did plunge and took years to recover. Are we conveniently ignoring this piece of history? And by the way, as per my earlier post, we didn’t face half the crap in the 90s that we are looking at now. Compared to the crap storm brewing in 2006, the early 90s seemed like a night at Studio 54 in retrospect.

And here’s one more thing to wrap your mind around: as of March of this year, Iran is now selling its prodigious oil reserves in EUROS. That’s right. They are dumping the dollar. And other countries — Venezuela, Bolivia for starters — are following suit. And Russia just opened its oil bourse in rubles last month. What does this mean for San Diego? I will spell it out. It means a lower demand for dollars, which means higher interest rates on the gazillion dollars of debt we have accumulated, which means homebuyers will think twice about buying $750K at 9-1/2%, which means your coveted market with fabulous weather will be hit with price reductions like you can’t even imagine.

So you want me to clarify my advice? My advice is to get real fast and stop dreaming. Your life is about to change. My life is about to change. I hardly think by posting on an obscure board, I am giving an open call to 950,000 residents of San Diego to dump their real estate. I think most of us head to these boards so we can share information to stay one step ahead of the herd. There will be victims in any collapse. Maybe I’m wrong, but isn’t the point of this exercise that the victim NOT be you?

He who fights, then runs away lives to fight another day. I’m not by a longshot suggesting you never return to real estate. I am simply advising to take your equity while it is still there, then pounce on the bargains that will inevitably present themselves when the factors I listed in my last post come into serious play.

But know this: before you make your long-term plans, realize that the housing market is simply one part of a much bigger play with many moving parts. You can’t fully understand where this market is heading without a full appreciation of the marcoeconomic forces in the background.

And if I am wrong and you have so much faith in the intrinsic value of your house, then stay put and hang on. I’ll check with you in 6 mos and we’ll see whose advice was better.

[partypup]

Respectfully, I must disagree. Adjustment alone will not get us through this time. I think that the crash that is about to hit the real estate market will be absolutely unprecedented — simply because the bubble is equally as unprecedented. As an owner of 3 properties (one of which I am desperately trying to unload), it pains me to say this.

I remember the slump in the 90s — when I bought my first condo and waited nearly 7 years to regain my equity. I recall owners simply walking away from their homes. But as bad as that was, there are many fundamental reasons why the coming downturn will be far, far worse and last far, far longer:

*** ARMs were virtually non-existent prior to 2000, as were interest-only loans and other creative financing. During the 90s, the worst thing that happened was that owners lost their equity; this time, they’ll get the double-punch of falling equity AND higher mortgage payments.

*** In CA, only purchase money loans (the initial loan you take out to buy your home) are non-recourse loans. That means that if you fall behind in your payments, you can simply walk away and drop the keys off at the lender’s office.

Not so when you re-finance or get a home equity line of credit. The lender can and will come after you, your savings, your stocks, your other property, your salary. And don’t think you will be able to seek the shelter of bankruptcy. Thanks to Bush, the most recent round of changes to the bankruptcy laws mean that your only real alternative will be debt re-organization, not liquidation. And since 1 out of every 3 homeowners in CA (perhaps lower in other states) has an ARM, this is a disaster waiting to happen because people will simply never be able to recover from their bad property investments and move on with their lives. Desperate creditors will stalk them relentlessly. Their financial futures will be obliterated for years to come, perhaps forever — and with scarred credit and judgments against them, they will not likely invest in real estate again any time soon. This was simply not the case in the 90s; most had purchase money loans because rates were so high it didn’t make sense to re-fi.

*** The so-called “bubble” of the early 90s pales in comparison to what we have witnessed over the past 7 years. It’s like comparing a condom to a hot weather balloon.

*** When the cracks really start appearing, Fannie Mae is going to bust. It holds only a fraction in actual dollars of the outstanding debt it has loaned. It is fractional reserve banking at its worst. And when Fannie Mae tanks, all hell will break loose.

*** The rest of the economy — and in fact, the global economy — is slowing suddenly and dramatically. In the 90s, the other sectors of the economy were relatively strong. Now we are being hit by skyrocketing fuel prices that simply won’t subside, a potential world war, the ongoing spectre of terrorist attacks and the effects of global warming that are finally manifesting themselves (in the form of more violent and more frequent destructive hurricanes that disrupt oil supply).

All of the above are unprecedented and earth-shaking factors that simply have not existed during any other real estate downturn.

Make no mistake, what is coming is no ordinary downturn; it will change our live’s forever. Many people who lose their homes will simply slip from the middle class and will never return. Sadly, I fear most will not realize what is upon them until it is too late. My advice: get out while you can and get as liquid as you can. Now.

[Author]

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