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"Chuck Norris doesn't read books; he stares them down until he gets the information he wants out of them."
- ChuckNorrisFactsdotcom

Friday, June 10, 2005
this in mind when people are accused of talking the economy down during the next round of furious finger pointing if the economy does indeed slump. This book will do more to explain the underlying cause of what I anticipate than any economic formula or political pundit. The Fundamental rules don't change just because everyone around you has gone nuts.

On some level, everyone understands that home prices are ridiculous. (IMO the bubble began in '97-'98 and turned a corner in '01. ) The problem is that the liability is spread across the 70% of the population who own homes and use them as a main store of personal wealth, municipalities whose revenues are tied to property taxes and values, and banks who've issued all those 100% $500,000 mortgages on 3 bedroom homes, to consumers carrying historic personal debt/savings/income ratios, and financed to the hilt carrying adjustable rate mortgages. What do we expect to happen?

The two options are: to inflate those mortgage debts and that price imbalance away, (the cost of everything else rises short term to match housing or housing prices go flat for a decade,) or home prices can drop. If prices drop, money invested in real estate evaporates and the overall money supply shrinks. Moreover, people get really cautious about consumer spending, further stalling the market. The question will be whether interest rate increases can flatten housing without popping it in time to prevent a panic. I'm hopeful but not optimistic. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 may well go down in history on the same page as the Smoot-Hawley Tariff Act. (If you have the slightest inkling that you might need to file, do it before october.)

posted by Rachel 6/10/2005
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