Wednesday, January 21, 2009

No One Could Have Known

About the housing bubble, and the over-leveraged U.S. consumer.

The Coming Financial Tsunami

By George Mullen
June 9, 2005
World economies, including that of the United States, have been built not only on a house of cards, but on a foundation of beach sand as well. The tide, which had been going out for some time, convinced us of the soundness of our financial structure and the brilliance of our government stewardship and individual decisions. However, the tide is now coming in again (via the Federal Reserve), and we are failing to grasp the magnitude of the danger before us. It is a tsunami.
According to the National Association of Realtors, 36 percent of all new homes purchased in 2004 were secondary homes either for investment (23 percent) or vacation (13 percent). This is evidence of rampant speculation.
I knew many middle-class people in California that were buying houses as 'investments', using cheap credit and the equity on their primary residence.
Over the three years of this "supposed" economic recovery, wages have increased a meager 4 percent, a startling 10 percentage points behind the 14 percent average wage gain of the five preceding cyclical recoveries.
By February 2005, Americans were carrying a record $803 billion in revolving credit card debt, up $40 billion in the past year alone. (Note: debt levels typically do not increase in economic recovery periods.)
Long-term wage stagnation is one of the key factors to this unwinding. The only way to grow an economy with stagnant wages is to make credit cheap and accessible. But eventually, if the money is not paid back, there will be a period of liquidation to cleanse the system.

This article is still one of the best primers for explaining the housing collapse and its domino effect on an over-leveraged consumer, and economy. Not a surprise that it was written from San Diego, which was probably the first housing market to peak and begin crashing.

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