We in America are usually six months to a year behind the UK markets. The UK has a crisis of confidence regarding appraisals and sales have fallen 30%, which is the mark of a market in denial. It may be of interest to you that during this five-year period prices have fallen in Germany and Japan.
America's ratio of house prices to rents is 35% above the average during 1975-2000. In comparison, England, Australia and Spain are overvalued by 50%. In order to reach equilibrium, rents must rise or house prices must fall or both.
The American market is driven by interest-only loans and adjustable rate mortgages.
Thirty-six percent of purchases are for investment or are second homes.
Forty-two percent are first-time buyers, and 25% of all buyers made no down payment on their home purchase last year. In the hot areas in the US, 52 to 64% of mortgages are interest only or adjustable.
The Netherlands, Australia and England have cooling markets and it is only a matter of time before the US, Ireland and Spain follow. Sooner or later first-time buyers will be frozen out of the market and that will spell the end of rising prices.
In San Diego only eight percent of borrowers can qualify for a first time 30-year fixed rate loan because prices are so high. Real estate is certainly a very risky market at this juncture.
All of this madness has been compounded by the use of unbelievable personal and government debt and derivatives. Most of these derivatives trade over the counter, they vary in structure, have limited liquidity and they are totally unregulated.
Nobody really knows the size of the derivative market. We believe it is between $250 and $300 trillion. The annual turnover is said to be close to $900 trillion. Annual trading in these instruments is 50 times more than economic activity. We consider derivatives ticking time bombs. Eventually derivatives will devastate the world financial system.
Home prices in the San Francisco Bay area climbed in May with the median price up 17.6% y-o-y at $595,000.
Golden West Financial, the ARM giant, says May loans expanded 21%. Mortgage operations rose 15% from a year ago. Over the past year total assets increased 28% as borrowings rose 27%. Total deposits were up 21%.
The problem that owners of ARMs, adjustable rate loans, and interest-only loans face is potentially for higher payment in future years. The bill will soon start to come due in a serious way, as the initial period of fixed payments, typically, set at artificially low rates, expires for millions of homeowners with ARMs.
This year only about $80 billion, or 1% of mortgage debt will switch to an adjustable rate based largely on prevailing interest rates. Next year some $300 billion of mortgage debt will be similarly adjusted. In 2007, the portion will soar, with $1 trillion of the nation's mortgage debt, or about 12% of it, switching to adjustable payments. If consumers are paying more monthly to service debt they cannot be spending it in the economy. Coupled with staggering credit card, revolving and vehicle debt we can guarantee an economic slow down, which will also affect the value of real estate.
This year the beat goes on in the condo market, which is super hot. The total volume of apartments purchased for conversion increased an astounding 350% last year to $13.3 billion. These loans given the elements of construction renovation risk, conversion stage risk and market risk make them extremely risky.
We are currently experiencing the same kind of inflationary buildup seen in the 1920s and in the 1970s. Currently we are in an inflationary mode that will carry forward over the next few years as the Fed and the Treasury attempt to keep the economy flourishing. During this period stagflation will occur and that will be followed by a difficult adjustment period known as recession and depression.
This will be needed to purge the system of financial excesses. Eventually the system will regain economic stability, if we do not experience revolution, and the nation will begin rebuilding although at an entirely different level. Sustaining booms historically has been a losing proposition and Sir Alan Greenspan is well aware of that.
Those who are profiting today from rising asset prices are financially unsophisticated. They do not realize it but they will become victims of creative destruction.
What that means is when you have a house of cards it eventually collapses if generated by cheap money and credit and inflation. Today that is what we have in stocks as well as real estate. Inflationary booms have to be deflated to ensure the sustainability of the existing monetary system.
There is no painless way to rebalance the unprecedented balances in the US economy. What we have experienced is unsound management again. The world's global reserve currency, the US dollar, has been turned inside out losing its value day, after day, after day. The dollar cannot tolerate these excesses indefinitely. That is why, as with the euro, the dollar is in the process of losing its preeminence as a monetary unit to gold.
There will be no painless adjustment. The dollar and dollar related assets have to be purged in order to stabilize the system and those who do not believe it will happen and that it s not on its way, are sadly mistaken.
You may not want to recognize them, but just look at the excesses around you. A booming commodity market with copper prices of $1.60 a pound and oil selling close to $60.00 a barrel; a fiscal deficit of some $650 billion and a current account deficit of some $800 billion annualized, or 6.8% of GDP.
Non-financial debt is increasing at more than 10% a quarter and the homebuilding index is up 76% y-o-y. Does any sane, thinking person really believe this can continue indefinitely? We have a system with no discipline, a system running amok. We have problems far worse then those of the 1920s and 1930s. The excesses are far greater and so will be the correction. This is why central banks and governments have tried so desperately to suppress gold prices over the past ten years. It is because gold is the only real money. It is the common denominator of value and has been for over 5,000 years. Gold has survived over the centuries simply due to the excesses of fiat money. We are again in the midst of an unparalleled global monetary inflation.
We are in a giant financial bubble. Almost everyone is leveraged. Higher asset prices do not create growth, nor do unreasonable low interest rates. Sooner or later rates will rise and stocks, bonds and real estate will fall. Please prepare yourself because the outcome is absolutely inevitable. The financial system is already hopelessly bankrupt. There has been no turning back for over four years. All we can do is try to preserve our assets.
As house prices rise in Massachusetts, foreclosures have jumped 28% this year. Between 2000 and 2003 house prices rose by 50%, a bigger rise then in any other state. In 2004, the median sales price for a single-family home in Boston was $387,400 more than double the US median. Due to high housing prices, many first-time homebuyers have been using new, risky mortgage products that hold down costs in the early years of a loan, but they can face difficulties if payments rise later. Homes have also become piggy banks for second home purchases, college tuition, home improvements, credit card debt or other financial needs.
You may not want to hear this but the people who rule the US under the guise of a constitutional republic are totally corrupt. Their entire lives are devoted to their wealth and control of the system and the pursuit of ever more power and wealth. Their main instrument of control is the Federal Reserve System, which they privately own. They control both government and big business from behind the scenes and use economic pressure, media control, the CIA, wars and psychological warfare to control the people. They believe they are better fit to rule us then we are to rule ourselves. They should remember driven by greed inevitably ends in despair.
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