Friday, November 06, 2009

Ta da.....

Broke dicks don't need loans. They need to clear the decks and start over. Many of us have done it and have done just fine. House expense, as I and anyone who has sold real estate will tell you, is very easy to formulate:

3 times your yearly salary with payments totaling about 25 % of your monthly gross for your mortgage payment. Such as if you make 4000 a month you can afford 1000 a month.

Which means you can afford a house for around 150,000-175,000. Same with everyone else in the market. If average household income is 50,000 then the average family can afford a new home built for 150,000.

Not 300,000, 500,000, or 2222 million for God's sake. This is econ 101 in every college that I know of.

Since speculation generated by "free" money handed out by the Fed leads to "gambling" which leads to bankruptcy which leads to enormous poverty which leads to desperate solutions which always leads to ...


The Warning Shot Fired Yesterday - The Market Ticker
Yes, this means interest rates will rise to a market rate.

We have spent more than two years trying to avoid recognition of fundamental mathematical facts - average home prices cannot exceed 3x average incomes, and on balance home prices cannot rise faster than income over long periods of time.

Mean-reversion isn't a suggestion, it is a mathematical reality. As a homeowner with a fully-paid-off house, bought with cash, I certainly would prefer my home to have a value closer to 2005's price than 1995's.

But what I prefer has nothing to do with what is mathematically sustainable or what can be supported by the broader economy, and my personal desire to be able to "flip" my house or use phantom "wealth" to extract a lifestyle I cannot afford does not and cannot change the reality of what stability in the economy, on balance, requires over the intermediate and longer term.

Property prices must contract to sustainable values. If this causes banks to fail, so be it. If this causes consumer bankruptcies for those who used their homes as ATM machines, so be it. If this causes me to lose half of the "value" in my home, so be it.

I believe The Fed sent a message to Congress yesterday in recognition that the wall is fast approaching at 120mph: do the right thing and do it now - or else.

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