There were a lot of interesting stories in the news this weekend, but the one that deserves attention before the rest is the latest editorial gem from Mark Trahant.
This region ought to be one where we are comfortable with the boom-and-bust cycle. It is inevitable — and it is reflected in our stories. Yet when we are in the cycle (or nearing the end), we think this time it's different.I believe Mr. Trahant has hit the nail on the head yet again. With the ridiculous financing that many people have resorted to in this housing mania, even stagnant prices could lead to serious trouble. If people are unable to refinance their way out payments that have adjusted out of the reach of their budget, they won't have the option of waiting until the next boom.
I certainly thought that in 2000 and 2001. I couldn't see the end of the cycle — and even when it started to turn I kept thinking that any losses would be temporary. The boom was just in a temporary interruption, soon to return.
Last week the U.S. Senate heard testimony on "The Housing Bubble and Its Implication for the Economy."
But what if it's not a housing bubble at all? What if we've been living through a credit bubble? I would define the credit bubble as an era when slick mortgage packages make the unaffordable home seem within reach no matter how much we've saved or how much we earn. (And savings is a twisted word here -- since Americans have a negative savings rate right now.)
What stands out in this housing boom is that average U.S. housing prices grew three times faster than disposable incomes.
How could that be? It became easier to tap into loans with adjustable rate mortgages or ARMS.
The FDIC economist [Richard Brown] says there are only two possible outcomes: A period of stagnation and weak housing prices or a sharp decline in housing prices "with severe adverse consequences for homeowners, lenders and the real estate sector as a whole."
Brown testified that the second alternative is "unlikely" for a variety of reasons. But before you celebrate, consider that a long period of price stagnation will be painful, too.
(Mark Trahant, Seattle P-I, 09.17.2006)