Friday, March 03, 2006

Waiting To Jump Into Real Estate? Sorry To Tell You This..

Suppose that you want to buy a house, but you are waiting for the bubble to pop. You are hoping that prices will go down 20% and then you'll jump in and buy. But suppose when home values do go down 20% you find that no one, not one single bank, will lend you anything. Suppose several banks have already gone under and there are not that many to choose from anyway. Suppose that all the surviving banks can do the math: that they will most likely lose tens of thousands on any loan they write, on top of the huge portfolio of bad loans they already have. This scenario is not so unlikely. It happened in Japan not too long ago after a very similar real estate bubble to ours. I am not talking about some vauge possible future event. I am predicting banks to be in serious trouble, and a near complete halt in lending in 2006. The real estate bonanza is over and gone!

And why would this dreadful scenario come to pass? Because interest rates are inverted. They are unlikely to come back. A continued inverted yield curve will completely wreck the home mortgage business, making virtually all lending unprofitable. This inversion has been building for a long time, and seems to be a long cycle trend. It is very likely to invert more deeply. The reason that the mortgage business will end is that banks borrow short term to get the cash to lend to buy houses. The mortgage itself is a long term loan. To be profitable, there has to be a good spread between the long and short lending rates.

Now think what will happen to Americans when they not only can't get mortgages, but they can't get LOCs on the houses they do own, and they can't even get a lousy 20% interest rate credit card. Americans may be addicted to oil, but they are heavily addicted to credit. Commerce comes to a halt. Businesses close up. Plywood on the storefronts.

This is depression, folks. Very few houses get bought or sold (very little of anything gets bought or sold). When houses do sell, they go for all cash to the real estate barons who are just waiting for the chance. Or maybe a seller will accept a monthly payment plan from you. A few ounces of gold will make a useful down payment.

1 comment:

Peterbart said...

I know that I am hording a few gold kopecks in anticipation of just such a scenario. The key question, of course, is when. Ah, if only I could get the mud off of this damn crystal ball....