Wednesday, June 04, 2008

Credit Crunch and Housing Bubble Update: Ain't Over Yet

This is mostly an anecdotal post, but I don't think that housing is going to recover until at least 2010 in most of the hardest hit area's. Out in Riverside, CA there are places where you can drive and in a one block stretch see 10 homes for sale and 10 more in foreclosure. There are still a lot of people living in homes that they won't be able to afford very soon. In the Riverside and San Bernardino area there are many people who moved out their for a lower priced home and commuted into Los Angeles, Orange County or San Diego - that commute is now costing them in many cases over $1,000 per month in gas bills. These people are upside-down in their home and don't have much to loose by walking away - most of this is not reflected in bank balance sheets. I owe probably $150,000 more on my home than it is worth......I'm still making my payment and will continue to do so - I love my home and my neighborhood.....but what if suddenly my great neighbors all moved away? If you don't think there are a lot of people out there who can make their payment, but don't feel it is worth staying because they are so upside down (and still paying top dollar in real estate taxes) you might soon be in for a surprise. What if these good credit risks walk? These are people who have good credit, can make the payment, but simply can't stomach the fact that their home is worth so much less than what it is worth. They just might walk - the banks are on the hook.

I called the housing bubble - but still got caught in it. I probably didn't lose as much money out here in Murrieta as I would have had I bought the same home in Orange County - but the % decline has been steeper.

What if the run up in housing wasn't our fault? What if we were duped? We paid higher prices for homes only because there were buyers in the market that never should have been there in the first place - thus creating a false demand and higher prices. This was all fed by people who had no stake in the process - Mortgage Brokers, Appraisers and Lenders to repackaged and sold the loans as quickly as they could. There was no grand conspiracy - just a lot of money to be made....unfortunately the mechanisms that should have been in place broke down.

Should you be worried? Probably not. The markets may swoon again or they may not, but we'll all eventually make it through. I don't know if the stock market will go down due to a second "credit crisis", but I wouldn't be surprised - though I wouldn't take my money out of the market betting on it. What I do believe is that stocks will be higher in years to come than they are now as our inevitable march of progress continues. Housing booms and busts will happen again and we'll find that we never learned our lesson in the first place. Who knows, perhaps we are in our next bubble already - Commodities (and Treasuries).