How bad can the residential housing market get?

With all the discussion about the foreclosure crisis in the media and on business networks, there can be some confusion about how bad the situation is in the housing market. The media has an admitted big government bias, so it is often quite difficult to separate truth from propaganda, especially in times of economic crisis.

Unfortunately, the foreclosure problem is actually a bit more serious than the media makes it out to be. They are only focusing on the foreclosure crisis and how homeowners and lenders are affected during the credit crunch, while ignoring many other related issues.

The housing market was filled with inflated money and easy credit for at least the decade from 1997 to 2007, and began to accelerate after the “mini-recession” of 2001-2002. A residential real estate bubble was inflated to keep the party going after the collapse of tech stocks, and now there are no markets left to inflate.

The Federal Reserve has been lowering interest rates for the past six months, but this hasn’t helped homeowners save money on their reset adjustable-rate mortgages. Any money they “save” by having mortgage payments lower than expected, but higher than what they originally paid at the teaser rate, does not reflect actual money savings, but simply an opportunity cost. If rates had stayed higher, they would have to pay more, but the expiration of the teaser rate is causing them to pay more anyway, just “less more.”

Also, lower interest rates mean that the dollar is devaluing and the costs of imported goods (and anything made with imported goods as inputs) will rise. Everything that is made with oil has been going up, like plastic items and items that need to be transported around the world and across the country. Trucking companies are feeling this pain especially acutely, as the price of diesel has been above $4.00 a gallon for some time now, closely followed by gasoline.

Homeowners are also seeing food prices rise in the US and around the world, with riots and general shortages in some Third World countries already happening, and rice shortages reported in the US. The dollar is becoming less and less valuable, so producers of real goods like food raise their prices or produce crops that are worth more like ethanol to fuel pickup trucks than food to feed families.

In this inflationary economic environment, homeowners with a mortgage payment that has increased by 50%, with a 30% increase in the cost of feeling their car in a year, and a 20% increase in the cost of feed your family in a year, you may be running into some real trouble. A total personal financial collapse is likely the loss of a job or a medical emergency for families already living on the edge.

But even if homeowners fall behind on all their bills, the banks and the government won’t do anything to help people; in fact, quite the opposite has been happening. The Federal Reserve is bailing out the banks with billions of dollars freshly printed every week now, and this inflates the money even more, driving up costs even more, pushing more homeowners into foreclosure as they struggle with rising costs. food, energy and health care.

But with the free money banks receive, they have no incentive to work with homeowners to come up with payment plans, mortgage modifications, or other programs that stop home foreclosures. The biggest banks know they can sit back, do nothing, let the foreclosure process take over, and offset their losses with help from the Federal Reserve, paid for courtesy of the people whose homes were robbed.

Things are bad in the housing market, and will remain so at least until the summer of 2009, if not much longer, when the mortgages that reset will have mostly adjusted by then. But by then, how much will gasoline cost? Seven dollars a gallon? How much will the food cost? Will there be enough to feed everyone? And how will people be able to pay for transportation or food, when their mortgage payment has almost doubled?

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