Friday, January 25, 2008


the final straw keeping the US housing market from crashing has been the belief that homeowners wouldn't walk away from loans in large numbers because of a social stigma attached to people not paying their debts. that they would choose to pay their debts because they felt responsible for them.

turns out, that stigma has reversed. now, people who stick with a loan despite their property having lost significant value are starting to be seen as stupid instead of moral. and those who walk away from their loans as smart. this link is from the LA Times Blog, so it seems to represent ideas present in the general consciousness.

so, if you're $50k underwater on a loan that you only got because you saw real estate as a great way to get rich, your bank just increased your monthly payment by 15% because you have an ARM, you expect the house to lose more value in the near future because every economist not paid by the real estate industry is saying that real estate values are heading downhill for at least the next two years, and your friends think you're stupid for continuing to pay the loan, do you keep paying the loan or do you tell the bank where they can stick their bills?

more and more people are going with the second option.

i see this issue as complete now. it has reached the public consciousness and will play out the only way it can: housing price declines will accelerate, household name banks will fail, the Fed will push the reserve rate to 0%, lending standards will increase, the government will make a few very well publicized but ineffectual attempts to help, and the world economy will have at least a few bad years.

time to buy a homestead.

(i'm not sure if any of this is sarcastic or not. i am sure that things will get worse before they get better, possibly much worse.)

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