Economic doom and gloom

In all bubble markets, many things overshoots. In the current housing bubble, it's not just the home prices going up but tax revenue expectations and insurance premium income and interest income.

The problem is when they all come due!

I personally think S&L crisis of the 80's will be nothing compared when things start falling apart now, since so much is tied to the home mortgage.

There is the big expectations for bank and mortgage companies to get extra income from all those IO and Neg Am ARMs when they reset [some are starting to reset but I've read that they will peak in 2007 or 2008].

The municipal governments are also salivating over their supposed tax revenue increases of the "rising" appraisals.

And what the Feds didn't collect on capital gains of the homes, they [more than ?] made up for it with all those income/SSN taxes from realtors, contractors, mortgage brokers, appraisers, etc.

And insurance companies, which pay lots of money to mathematicians [actuaries] to get the premiums right, will over estimate income since their calculations always look at the past [hard] numbers but not any of "what if?" [Someone correct me if they're more forward looking now due to 9/11 and Hurricane Katrina, but I doubt it.] That is, the home prices and appraisals were on the rise until recently [the cooling really started mid-2005 but not consistently with the median prices] so their income projections [premiums are based on home values] will be higher this year [and maybe next year too?] than last year.

Unfortunately, all these increases aren't matching the wage increases so something has to give: and many people will turn to bankruptcy, get foreclosed and/or walk away from their homes.

And that's only the home and home sales. If you factor in all those HELOC and HE loans with associated spending, those will slow down and stop since the home prices have started to fall and the equity part is disappearing [if not underwater already]. Decline in home sales and less spending through debt will contract the economy enough to bring on, I think, a depression [not just a recession]. The only question is when and how bad. And it's unfortunate that the government [including the politicians] don't/didn't learn the lessons of the 30's and we'll repeat the same craziness of the extended depression as before....

Update 6/4: U.S. Office of Federal Housing Enterprise Oversight put out a report on housing bubble: Fresno housing prices went up 145% since 2001 (5 years ago, when the NASDAQ peaked). So, did the wages go up 145% over 5 years? It didn't go up for me: I'm making not much more than what I was making back then. And I'm sure US Labor stats will show it didn't go up that much, either. So it seems that the dotcom money moved to housing and created yet another bubble. How bad will the crash be is anyone's guess but as I wrote above, I think things will be grim...

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