I saw this coming four years ago. [downside.com] It took longer than I expected, which made it worse. The subprime mortgage bubble was allowed to grow. If it has been punctured around 2005, we'd be in less trouble now.
Interest rates are far too low. Historically, banks pay about 2%-3% real interest (above inflation), and mortgages cost about 6% above inflation. Right now, dollar inflation is at 5% if you use the CPI, and at 11% if you recompute the CPI the way it was computed until 1982. [shadowstats.com] So savings accounts should be paying about 8%, and mortgages should be selling around 11%. Instead, actual numbers are around 3% and 6%, as if there were no inflation.
Why is this? Because low interest rates have been driven by the Fed funds rate, which is kept low for political reasons. In particular, the huge cuts in the Fed funds rate since last year [moneycafe.com] kept real interest rates negative, in what appears to have been an attempt to postpone the collapse until after the 2008 elections. That didn't work.
There's no "credit crunch". We're just seeing a return to financial sanity. This is painful for all the parties who bet on negative real interest rates continuing. But that couldn't last.
One wonders if more people would have gotten fixed mortgages and mortgage lenders who played by the rules. There are plenty of people out there on moderate incomes who could afford homes under $200k at interest rates under 7%. Like me (5.5%/30 year WOOT).
Can you predict when credit will be available again?
We live comfortably in alabama in a house we bought for $70k in 2000. It was 8.5% then, we refi'd about 4 years ago to 6.4. We've been living off my salary alone, and just paid off all our credit cards. So, we have no short term debt, but don't have much for savings either. We were going to put our house on the market in Feb for $110k (pretty conservative, houses in the hood are going for $120-$135 now. My wife finishes Nursing school in May, so we'll
Think by then, the $30k we have from the sell of our house, plus our then combined incomes (I'm thinking $125k/year) we'll be able to score a loan? Or will it still be too locked up?
If you are pulling in 60k/year, and want to take a loan for a $200,000 home (if you are sticking in the same area) and are looking to put in 20% upfront? Not only that, but your wife is going into nursing (a field suffering from an employee drought).
Yup, same area. We're not THAT good a find though. I manage to keep a 735 credit score, but we blow way too much money on eating out or take out... So we joke that we 'ate that check.' There's no savings, other than a little life insurance. I don't want to sink her entire check in there, we do want to start saving, but if we put half of hers in savings, and then put the other half, plus what I'm alreadying putting, into a house... That should allow us to afford something decent. ($200k gets you about 220
Think by then, the $30k we have from the sell of our house, plus our then combined incomes (I'm thinking $125k/year) we'll be able to score a loan? Or will it still be too locked up?
Traditional mortgages for people with verifiable income and good credit will be readily available as soon as the bailout issue is resolved, one way or another. That's a bank's bread and butter, and they can't just stop that indefinitely.
Unless all hell breaks loose as Bush and Paulson warn. In that case it's all moot because y
In fact I know people who could see this coming from the 1970s. I myself started building defences against an economic depression (and WW3!) from 1998 (especially after the Kosovo War, which when it ended it really surprised me that no WW3 had happened as I was really expecting such an outcome, and I still cannot comprehend how we reached 2008 with no WW3 yet, albeit I'm not sure about the future!), and got completely out of the stock markets for good just a few days before the crash and volatility in Janu
But yet, I can see people who see a potential opportunity to make a financial killing after the crash.
I can start with Warren Buffett, potentially our generation's equivalent of Joseph P. Kennedy in terms of investing. Buffett--probably one of the most astute investors on Earth--could end up buying a lot of stocks at depressed prices and making a financial windfall down the road just like what Kennedy did in the early 1930's.
"Flattery is all right -- if you don't inhale."
-- Adlai Stevenson
I predicted this. (Score:5, Interesting)
I saw this coming four years ago. [downside.com] It took longer than I expected, which made it worse. The subprime mortgage bubble was allowed to grow. If it has been punctured around 2005, we'd be in less trouble now.
Interest rates are far too low. Historically, banks pay about 2%-3% real interest (above inflation), and mortgages cost about 6% above inflation. Right now, dollar inflation is at 5% if you use the CPI, and at 11% if you recompute the CPI the way it was computed until 1982. [shadowstats.com] So savings accounts should be paying about 8%, and mortgages should be selling around 11%. Instead, actual numbers are around 3% and 6%, as if there were no inflation.
Why is this? Because low interest rates have been driven by the Fed funds rate, which is kept low for political reasons. In particular, the huge cuts in the Fed funds rate since last year [moneycafe.com] kept real interest rates negative, in what appears to have been an attempt to postpone the collapse until after the 2008 elections. That didn't work.
There's no "credit crunch". We're just seeing a return to financial sanity. This is painful for all the parties who bet on negative real interest rates continuing. But that couldn't last.
John Nagle / Downside
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Can you predict when credit will be available again?
We live comfortably in alabama in a house we bought for $70k in 2000. It was 8.5% then, we refi'd about 4 years ago to 6.4. We've been living off my salary alone, and just paid off all our credit cards. So, we have no short term debt, but don't have much for savings either. We were going to put our house on the market in Feb for $110k (pretty conservative, houses in the hood are going for $120-$135 now. My wife finishes Nursing school in May, so we'll
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Think by then, the $30k we have from the sell of our house, plus our then combined incomes (I'm thinking $125k/year) we'll be able to score a loan? Or will it still be too locked up?
If you are pulling in 60k/year, and want to take a loan for a $200,000 home (if you are sticking in the same area) and are looking to put in 20% upfront? Not only that, but your wife is going into nursing (a field suffering from an employee drought).
Give me a call, I'll loan you the money.
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Yup, same area. We're not THAT good a find though. I manage to keep a 735 credit score, but we blow way too much money on eating out or take out... So we joke that we 'ate that check.' There's no savings, other than a little life insurance. I don't want to sink her entire check in there, we do want to start saving, but if we put half of hers in savings, and then put the other half, plus what I'm alreadying putting, into a house... That should allow us to afford something decent. ($200k gets you about 220
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Traditional mortgages for people with verifiable income and good credit will be readily available as soon as the bailout issue is resolved, one way or another. That's a bank's bread and butter, and they can't just stop that indefinitely.
Unless all hell breaks loose as Bush and Paulson warn. In that case it's all moot because y
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I knew something was up when the banks / creditors successfully lobbied for more stringent Bankruptcy law.
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In fact I know people who could see this coming from the 1970s. I myself started building defences against an economic depression (and WW3!) from 1998 (especially after the Kosovo War, which when it ended it really surprised me that no WW3 had happened as I was really expecting such an outcome, and I still cannot comprehend how we reached 2008 with no WW3 yet, albeit I'm not sure about the future!), and got completely out of the stock markets for good just a few days before the crash and volatility in Janu
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But yet, I can see people who see a potential opportunity to make a financial killing after the crash.
I can start with Warren Buffett, potentially our generation's equivalent of Joseph P. Kennedy in terms of investing. Buffett--probably one of the most astute investors on Earth--could end up buying a lot of stocks at depressed prices and making a financial windfall down the road just like what Kennedy did in the early 1930's.