How Will It All End?

Even though I hold a Ph.D. from an elite university, my predictions in the previous post are nevertheless meaningless. This article, on the other hand, in the SF Gate, written by Michael Abrahams, Ph.D. (managing director at Hoefer & Arnett, a San Francisco investment banking firm, and an adjunct professor at the USF School of Business), is meaningful and furthers the theme of prognostication by asking "how will it all end?"

Some choice quotes:

"...the housing bubble is not just a Bay Area, let alone a U.S., phenomenon. Housing prices have been appreciating worldwide across markets of widely varying demographics, economic growth and location. Prices in South Africa, Hong Kong, France and New Zealand have been rising more quickly over the past year than in the United States."

"This boom has been heavily dependent on record low interest rates and, in the United States, a growing ability of borrowers to leverage their income. Because these low rates are a product of unsustainable economic events in the markets of international finance, interest rates and the ensuing housing bubble hang in a precarious balance."

"And where that trend in interest rates has reversed, as in the United Kingdom during the past year, prices have turned down. A U.S. decline is likely as well, particularly in markets such as the Bay Area, where price increases have been so strong and affordability is so weak."

"We appear to be repeating history: Interest-only loans were the dominant home finance instrument before the Depression. Sharply declining property values, coupled with the fact that the principle was never paid down, contributed to widespread foreclosures in the 1930s. That led to the introduction of the amortizing loan, in which the principle is paid off during the life of the loan."

"How will it end? Regulatory dissatisfaction with interest-only mortgages, rising interest rates and the financial inability of consumers to incur any more debt, or service existing debt at higher interest rates, may combine to end the housing party more rapidly than many expect."

"With consumers taking on record levels of variable-rate debt, many homeowners may find paying their debt, let alone increasing it to finance a more expensive house, difficult or impossible. In addition, a growing number of investors -- in place of owner/occupiers -- raises the risk of a more rapid price decline. Last year, 23 percent of all U.S. home sales were made to investors, who are driven by a need to profit from a house rather than simply to occupy it. Investors are much more likely to hit the exits when prices fall."

"While we should be able to watch the housing market bulls on "Flip That House" for some time, a year of two from now it will be running on the History Channel rather than the Discovery Channel."

And another article from the SF Gate by Robert B. Reich reiterates the China connection:

"China will let its currency rise against the dollar and America's housing bubble will burst."

"A major reason mortgage rates have stayed low is there's a lot of money around. And much of that money has been coming from abroad. China and the rest of Asia have been putting their spare cash into America, in order to prop up the dollar and make it easier for them to export to us."

"But that's about to change. We've been pressuring them to let their currency rise, and they're getting the message. We don't know yet how much they'll let it rise. But the writing's on the wall, in Chinese characters. And other Asian nations are following China's lead."

"You don't have to be a Zen master to see this means less money from Asia money flowing into the United States. Which in turn means long-term interest rates, including mortgage rates, will start to rise. It's just supply and demand -- less money around, and the cost of borrowing goes up."

"As a result, the housing bubble bursts."

"The moral of the story, as told to American policymakers who have been pressuring China to revalue: Be careful what you wish for."