I really do not understand what’s going on, that’s certainly a given, but are people still making money on the real estate boom?
Good. A teachable moment.
I donít fully understand whatís going on either. Hereís what I do know:
The Fed was too loose 2003-2004. They pumped money into the system and a lot of it went into home loans. This created a sub-prime bubble.
The Fed got very tight very quickly after that, no more air for the bubble.
The sub-prime market contracted.
The sub-prime market is very small, a burst bubble there is not large enough to cause what weíve been seeing in the markets.
There is a disruption in the financial system, a kink in the hose somewhere between lenders and home-buyers. This is big enough to cause the recent instability.
Iím long homebuilders, but not real estate. I predicted a Ďpop-freeí slowdown a year ago. Weíre still in it. Some people see a bubble bursting, I donít. Home prices are down 2.8% as of a year ago Ė not exactly a collapse. Thatís according to the, more pessimistic, Case-Shiller Index. Some indices see smaller or even no declines.
The bigger problem for the economy is home-building. Itís a big industry and it depends on the home mortgage industry. With a credit disruption, lenders donít want to say yes. If lenders donít say yes to mortgages, builders canít sell houses. If builderís canít sell houses, they stop building them. If they stop building them, they lay off workers.
Hope this helps,
Have PoliticalMavens.com delivered to your inbox in a daily digest by clicking here