Home sales fell more than expected in July. Much more. And the financial media is full of opinions about it. Some say the housing crisis has been discounted. Others think it will be much worse than analysts think.
How bad it will be, we don't know. But it is surely a long way from being over. Next month, a peak in ARM adjustments for 2007 will be reached. Then, in March of 2008, the ultimate peak will come. This will mean as many as two million homeowners with substantially higher monthly payments to make – and a mortgage industry unable to bail them out by refinancing their homes. Fifty mortgage lenders have already closed their doors. Others have turned cautious.
House prices nationwide, says Jeremy Grantham in Fortune Magazine, are pushing six times family income. Ultimately, after the speculation fever subsides, families have to be able to pay for their lodgings. And historically, they've been able to do so at house prices of no more than four times family income. House prices are coming down, he says.
When house prices come down, it sets off a whole chain reaction of explosions – in the financial industry...the homebuilding industry...the retail industry...and ultimately, even the manufacturing sector! The result is recession...lower consumer spending...lower asset prices...less speculation...more fear/less greed.
Is that a bad thing?
"Sometimes it sounds as though you WANT stocks to crash...it sounds as though you'd be happy if a recession were to hit," writes a concerned Dear Reader. "Isn't that a little mean spirited?"
Yes, we would like to see a real crash on Wall Street. And yes, we would like to see a real recession. Is that mean spirited? Not at all. Au contraire, it comes from the deepest, most public-minded, most generous impulses of our entire idealistic nature.
This boom is a fraud, we keep saying. The sooner it ends, the better. It is a fraud because it is not based – at least not in America – on greater output, capital formation or wealth creation. Instead, it is a wealth destroying boom...one that rests on consumption, speculation and debt. Speculators and Wall Street itself get rich. But most people merely go deeper in debt...and become poorer.
What's worse, the longer this humbug boom goes on, the more popular attitudes and habits are shaped by it. "Prices always go up," say the lumpen, "so buy now." "You can't go wrong in stocks and real estate," say the turnips. "A nice young man just offered to refinance our house," say the homeowners. "Don't worry...Ben Bernanke is not going to let us lose money," say the speculators. "Deficits don't matter," says the Vice President.
Corrections, like revolutions, confessions and forest fires, are unpleasant. But they are often necessary. They clear away the dead wood.
Bill Bonner
The Daily Reckoning Australia
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
