Housing Next?

I'll never forget the raspberries Gold Eagle writers used to get, when we accurately predicted the stock market crash. "You guys are nuts," is basically what our dire warnings were greeted with, by the 90% who disagreed with us. At my Kiwanis club, 2 years ago, when I warned a speaker who was stock-broker about PE ratios, everyone laughed at me. CNBC continued telling everyone how the Dow would go forever, and that this was a 'new age' in economics, with a wonderful future for one and all. Since then, it is estimated that 7 TRILLION DOLLARS has evaporated. We were right. Last week, I said that housing could easily be next. I put it mildly, because even though I knew it was a possibility, I didn't think it had already begun, other than in super rich places like Aspen, Telluride, and Vail. I was wrong. It has begun other places. Other writers disagree. I hope I am wrong, but I doubt it. I also disagree with a prominent writer and columnist who says interest rates will go up, and make the housing market collapse. Interest rates won't go up. Housing can go down even with low interest rates. If there is no money to pay the mortgage, what difference do interest rates make?

The E-mails and calls I have received, are a wakeup call, if there ever was one. As a typical example, was a call from a Denver suburb. A beautiful area, with fine homes and middle class households, is what that area is. The call was from an engineer, who told me at the beginning, that he wasn't going to buy anything from me, but if I could talk to him, he would appreciate it. Surely! The facts are these, according to the engineer. His home was originally built for about $150,000. He bought it for $210,000, owes $200,000 on it, and watched as sales in the area went to $280,000. He thought he was in fine shape. New lots were being cleared, and new homes built. All seemed to be fine. Not so. In the last few months, prices have fallen from $280,000, to $220,000. The newly graded lots have never been built on, and several new homes in the mid-construction, have been sitting there for some time now, and never been completed. If he listed his house at the going rate of $220,000, after commission and settlement costs, he would be left with $203,000. He owes $200,000. If the $220,000 couldn't be met, and an offer of less was all that could be achieved, he would then owe more than the place was worth, which will probably happen. He wants to sell to someone as an investment, and rent it back.

Another call came from 100 miles west of Denver, from a fellow in a ritzy, yuppie ski area. He is in fine shape, agrees with me, and he told me of falling prices all around him. I got lots of calls, all saying the same thing. It has begun in spots. Another call from a client in the east, who says the demand around him, in an expensive New Jersey suburb of New York, is intense. I hope so, but after 9/11, why would want an expensive home in that area, with its huge property taxes? He may be right. May it not happen, or be gradual, but it could signal the bitter end of many financial institutions, and here's why.

When stocks plunge, even with the efforts of the Plunge Protection Team, the money simply evaporates, and the pieces of paper with ink on them become worth less and less, and maybe even worthless. (World Com from $60 to nine cents.) There is nothing tangible about a share of stock. It's just a piece of paper, indicating a ten millionth ownership of a corporation. The corporation will still exist, only be worth a lot less, and there will be layoffs, without question. The layoffs can easily trigger the housing crash, and maybe already have done so, in places. Without a job, payments can be difficult to make. With a housing decline, and people walking out on what is owed, what is to happen to the foreclosed or empty homes? The auctioneer will eventually sell them to the highest bidder, which may be 30 or 40% less than is owed, and in the case of a total crash of everything, maybe 20% of what is owed. Bargainsville, yes, but bankruptcy for the mortgage holder. This means trillions more losses in bad debts, and millions of defaults. This means a total upheaval in the housing industry, and bankruptcy for the housing finance and sales industry.

People invest in mortgages, as a secure way of providing for their retirement years. They then have a secure footing on a tangible piece of property, owned by responsible people, and earn more interest than with a savings account. That's the way it is supposed to be, and has always been a nice way to invest. These people could be wiped out, if homes are abandoned. Decay and vandalism could occur if there are thousands of empty homes across the land. The entire home building industry could come to a screeching halt. This means bricklayers, hod carriers, carpenters, concrete finishers, roofers, insulators, sheet rockers, electricians, plumbers, HVAC installers, tile setters, carpet layers, painters, glaziers, landscapers, pavers, and even loan officers, could be out of work, and this is in the hundreds of thousands. Not only them, but the thousands employed to make the roofing, paint, appliances, furnaces, glass, insulation, sheet rock, concrete, etc, could be out of work. Then, the people who make the trucks these trades use, and the machinery that creates the materials, would be out of work. The chain could continue on and on. Laid off workers cannot buy furniture, pay bills, credit card balances, or mortgages. The chain of default and misery, might have been started by the overheated stock market crash, and resultant layoffs. Check at the bottom of this column to view others I have written, and the first was titled "Diary of a Depression." It mostly came true.

Chains connect pedals to wheels on bikes, but also can be illustrative of a hideous falldown of an entire economy. When I was a kid, I remember The Empire Building, at the corner of New York Ave and 9th St, NW, in Washington DC where I grew up. It was a fine old 4 storey building, with butter joint brickwork, lovely bay windows, and a slate mansard roof. I was only about twelve, but I remember it well. Over the years, various modifications and remodeling had taken place on the first floor, for commercial use. Load bearing walls had been removed or weakened it seems, but nothing happened, and no one was the wiser. Then one night, without warning, the whole building went down. You have seen it happen in other places many times, I am sure. I loved to ride the trolleys in DC when I was growing up, and my favorite line ran past 9th and New York Ave, so I saw it. Deep impression. I can still see the wreckage in my mind's eye.

Isn't that what has happened to the stock market? Its support was gradually eaten away by no profits, hype, glitz, and publicity. Its support had been weakened, till the whole thing went down into a pile of rubble, just like it did in 1929-31. It took 54 years for the Dow to recover, after the 1929-31 crash, and yes, it took at least 2 years for the dust to settle, and the market to wallow in its ashes for several decades. It took farms, homes, and businesses with it then, but it could be far worse now. Then, there were no second mortgages, no credit cards, and no large first mortgages. That cushion does not exist now, as it did then. Today, people are strung out like a fiddle string, and it takes very little more stretch to make them snap and go down into bankruptcy, which already are at record numbers.

I just cannot tell you of the response to my last column on housing. It has begun, and that's a fact. How long before the builders, workers, speculators, and financiers go down? I hope it doesn't happen, but like the Empire Building, the supports have been weakened. The chain may have begun, with the loss of retirement plans, jobs, and liquidity, from the stock market woes, which we writers for Gold Eagle predicted. I seem to be a voice crying in the wilderness, and I hope I am wrong. But with tens of thousands laid off, tourism sick, airlines bankrupt, and now even Budget Rent A Car going down, thanks to the airlines and tourism problem, isn't this a sort of chain reaction? Yes. Disney resorts and parks are off 26%. How many layoffs there? Fires everywhere, have caused layoffs in the west, but it is the stocks that are the main ruiners of fortunes, retirements, and security.

What to do? Stay out of paper instruments, for one thing, and get out of debt, other than long-term mortgages, if you are assured of being able to pay them and the property not going down below the amount owed. The engineer wanted me to advise him as to whether he should list his home and try to rent it from a buyer. I had to say yes. It isn't going up in price with empty lots and half-built houses in his neighborhood. I try not to be gloomy. I try to be upbeat. I really do, but I must observe what's happening, and draw logical conclusions. Sorry. I hope I am wrong. Protect yourself, that's all.