Roger Nusbaum submits: Barry Ritholtz articulated this issue very well when he paraphrased Lon Witter's piece in Barron's from last weekend, saying 'Witter observes that we don't have a Housing bubble, what the U.S. has is a lending bubble.' Nouriel Roubini goes into some greater detail that you should read as well.
I have written quite a few times that I don't think there can be a nationwide crash in home prices, but this lending bubble seems like a much better way to describe the situation.
Anyone with an interest-only ARM, facing a reset they cannot afford is in trouble. Even a refi to a fixed rate will spell trouble for some over-leveraged homeowners.
Here's the thing as I see it; there has been an excess. Excesses get corrected. I am not sure I need to correctly predict the magnitude of the correction to successfully navigate it. Chances are you are just trying to avoid something ugly in stocks. If so, you do not need Nobel Prize winning accuracy in predicting what will happen.
I do not think the worst case scenario is the most likely scenario as consistent with my thinking on these things. Usually the best and worst possible scenarios are wrong; the real outcome is usually in the middle.
Here I think the middle is a recession, not depression, consistent with a normal economic cycle. If correct and if it turns out that the lending excess is a driver behind the recession then yes the consumer will be hurt a little worse than in most recessions.
To me this is just common sense, not clever thinking. I live in a little cabin we bought as a weekend place in 1998 for $87,000. There are lesser cabins (my wife has redone the entire interior with a little help from me) near by listed (but not selling yet) for $300,000. More than a tripling in eight years is an excess. I don't think this is debatable. The debate, in my mind, is the consequence of the correction.
The 40 year old (my age) guy with $7000 in mortgage payments who makes $10,000 a month is in a much riskier position than the guy with an $800 mortgage making $3500 a month. The first guy won't last too long if he loses his job.
If Jimmy Rogers is correct and housing prices drop by 30, 40 or 50% it will be too bad but won't hurt the homeowner who is properly leveraged. While the bank does not want to take back houses from people what do you think a borrower with a barely affordable, interest only $600,000 mortgage will do if the house is worth $400,000? I don't think declines will be that big but if they are....
