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As housing market falls
Is $10 trillion bubble ready to burst?
By
Milt Neidenberg
Published Oct 5, 2006 8:20 PM
Is the biggest real
estate bubble in history about to burst? Wall Street pundits and commentators
are concerned that the industry’s downward spiral could exacerbate the
slowing down of the general capitalist
economy.
The $10 trillion housing market
is on the skids. Sales of new homes have plummeted, and now prices are
following.
According to an article
posted Sept. 25 on MarketWatch.com, a Dow Jones Web site, “The collapsing
U.S. housing market crossed another milestone in August, as the median sales
price of existing homes fell for the first time in 11 years and for just the
sixth time in the past 38 years, the National Association of Realtors said
Monday.”
On Sept. 2 it reported
that new home sales had “plunged 21.6 percent in July from the year
earlier, inventories of unsold homes soared and prices fell—there is
little debate that the housing market is stumbling much faster than most
expected.”
This is another way of
saying that the real estate market may be in for a crash, not merely a
“soft landing,” as market optimists have
hoped.
The National Association of
Realtors covers a wide array of real-estate investors, speculators and banks
heavily invested in all types of
mortgages.
Over the last five years,
housing prices had been rising at a hectic rate. Now the day of reckoning has
come. “The deceleration has been the fastest in the history of the
[Realtors] survey,” says
MarketWatch.
Developers have cut back on
construction as overproduction in residential housing has led to big-time
inventories of unsold new homes. However, plummeting prices may bring buyers
back into the market, temporarily relieving the
glut.
Mortgages that allow homeowners to
take out equity based on the assessed valuation of their homes have been a key
driver of continued strong consumer spending—accounting for two-thirds of
the Gross Domestic Product. The GDP is the total value of a country’s
goods and services. But declining home prices will cut into this, meaning bad
news for the overall capitalist economy.
Current consumer debt has reached
record-breaking numbers. Spending levels of consumers can no longer be
sustained. Homeowners will spend less and tighten belts to save the homes they
have.
An Aug. 10 Wall Street Journal
survey was headlined: “Outlooks for GDP and Employment Are Cut, While
Concerns About Recession Edge Up.” The newspaper’s economists have
raised to 26 percent “the probability of a recession over the next 12
months.”
Wall Street economists
who predict an impending recession are behind the times. The recession is
already here for a large part of the multinational workforce.
Plants are closing, wages relative to
inflation are dropping, benefits are disappearing, and layoffs are spreading
throughout the industrial and service sectors.
The capitalist economy is drowning in
debt, deficits and the virus of hyper-speculation in non-traditional mortgage
lending. These dire developments were only worsened by a recent announcement of
the Federal Reserve Board that the economy needs to slow down to contain
inflation.
Not true. A slowdown will
develop into stagflation—stagnation on top of inflation. The workers and
oppressed nationalities now face a slowing economy, soaring prices for food,
health care and other necessities of life, and a housing bubble about to burst.
The tycoons of Wall Street, however,
prefer a slowing economy to inflation. They reacted favorably to the Fed’s
announcement, sending the stock market up to new highs during the week of Sept.
25.
Lenders run wild
In a revealing Sept. 1 Wall Street
Journal article headlined, “Housing Chill Begins to Pinch Nation’s
Banks,” Robin Sidel wrote that “[B]anks have begun to warn investors
that the housing slowdown is starting to hurt their business.”
The article explains that financial
institutions are already grappling with “a difficult interest-rate
environment, competition for traditional banking customers, a saturated
credit-card market, and expectations that strong consumer-credit quality will
soon show signs of weakening. ... As a result real estate, including mortgages,
home-equity loans, and commercial loans, represented a record 33.5 percent of
the U.S. banking industry’s $9,298 trillion in assets in July, according
to the Federal Reserve. The numbers represent the highest level in the
Fed’s database going back to 1973.”
Since then, this dependence on real
estate assets has continued to
rise.
Sandra Thompson of the Federal
Deposit Insurance Corporation, speaking on Sept. 20 at the opening session of
the Senate Banking Committee on Banking, warned of the dangers of nontraditional
mortgage loans: “According to the publication Inside Mortgage Finance, an
estimated $432 billion interest-only loans and payments-option ARMs were
originated during the first half of 2006,” she said. ARMs are adjustable
rate mortgages.
Dreams turn into
nightmares
In a frenzy of real
estate loans, bankers and financial institutions have created mortgage
portfolios that include ARMs. They feature no down payment, no interest, and
what is called negative amortization: the buyer pays less than the interest due
and the unpaid principal and the interest rates will grow exponentially. Down
the road, the increase in mortgage payments will force homeowners to ante up big
bucks far exceeding their incomes. This likely will lead to record levels of
mortgage defaults and foreclosures, which are now beginning to rise. Homeowners
are helplessly trapped as their home values
fall.
The banks and financial
institutions have spread the risk to the secondary mortgage markets—Fannie
May and Freddie Mac—which are government-sponsored enterprises and
big-time speculators. Hedge funds, pension funds and insurance companies are big
players in this market.
Will there be a
rerun of the 1987 stock market crash? That’s when many savings and loans
banks—primary lenders in mortgage financing—went belly up. It cost
the worker/taxpayers $ 150 billion to bail out those banks and financial
institutions. Will the current housing bubble throw the economy into another
such crisis?
The warning signs are
there.
Housing is a multiplier
industry. The impact of the growing housing crisis affects a wide range of
industries and workers. Steel, lumber, home furnishings, financial institutions,
construction and other related industries are dependent on this bubble, which
has reached an unprecedented
size.
According to the June 16, 2005,
Economist, the housing bubble has become a global phenomenon. “The
worldwide rise in house prices is the biggest bubble in history. ... Property
markets have been frothing from America, Britain and Australia to France, Spain
and China. Rising property prices helped to prop up the world economy after the
stock market bubble burst in 2000. What if the housing boom now turns to bust?
... It is larger than the global stock market bubble in the late 1990s ... or
America’s stock market bubble in the late 1920s.”
That bubble led to the 1929 crash,
which triggered the greatest depression in U.S.
history.
“The housing market has
played such a big role in propping up America’s economy that a sharp
slowdown in house prices is likely to have severe consequences. Over the past
four years, consumer spending and residential construction have together
accounted for 90 percent of the total growth in GDP.”
Interest rates for those years were the
lowest in history and cheap money saturated the monetary system. “And over
two-fifths of all private sector jobs created since 2001 have been in
housing-related sectors....”
The
U.S. $10 trillion housing bubble contains the potential for class struggle.
There is brewing within it a clash of class interests. Within the housing
industry is a multinational workforce in conflict with construction bosses and a
myriad of related companies. At the first signs of a downturn in the industry,
layoffs will spiral. Homeowners will struggle with banks and financial
institutions, which will strip them of ownership as soon as they falter on
mortgage loans. Their dreams of home ownership can turn into
nightmares.
As the institutions of high
finance face bankruptcy—victims of their own greed and
hyper-speculation—the government will bail them out at the expense of the
worker/taxpayers, leading to a conflict between the people and the
government.
On the other hand, real
estate institutions and investors like Fannie Mae and Freddie
Mac—government-sponsored enterprises that package billions of dollars of
mortgage-backed securities—will have the backing of the government when
they fail.
Ultimately, as recession and
further social convulsions ignited by “preemptive” wars engulf the
imperialist government, the predatory interests of the billionaire class will be
pitted against the entire multinational working class. Organized and
unorganized, immigrant and native, poor and middle class, they will be swept
into the raging sea of class struggle, with great consequences for the whole
world.
Articles copyright 1995-2012 Workers World.
Verbatim copying and distribution of this entire article is permitted in any medium without royalty provided this notice is preserved.
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