Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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From: russwinter8/19/2006 7:28:35 PM
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Key take away from Barrons article this weekend:

The No-Money-Down Disaster

Some money quotes:

“Extrapolating housing prices from their current level based on wages and inflation is like saying a $100 Internet stock with no cash flow and negative earnings will rise as long as it is able to narrow the loss. The analysis ignores the fact that the stock never should have been trading at $100 in the first place.”

“By any traditional valuation, housing prices at the end of 2005 were 30% to 50% too high. Others have pointed this out, but few have had the nerve to state the obvious: Even if wages and GDP grow, the national median price of housing will probably fall by close to 30% in the next three years. That’s simple reversion to the mean.”

He quotes these numbers:

-“32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000.

-43% of first-time home buyers in 2005 put no money down.

-15.2% of 2005 buyers owe at least 10% more than their home is worth.

-10% of all home owners with mortgages have no equity in their homes.

-$2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007.”

And ends with:
“What happens after the decline depends on our financial policies. When Japan went through a similar situation in the early 1990s, the right advice was clear: Bite the bullet and get the bad loans off the books. Eventually the Japanese acted, but it took them 15 years of trying everything else first.”

“If we have the courage to take the right medicine right away, the effect of a market collapse could be very sharp and painful, but relatively short-lived. If, like Japan, we fail to act, the coming decade could be very bleak indeed.”
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