Why Another Great Real Estate Crash Is Coming

ForeclosureThere are very few segments of the U.S. economy that are more heavily affected by interest rates than the real estate market is.  When mortgage rates reached all-time low levels late last year, it fueled a little “mini-bubble” in housing which was greatly celebrated by the mainstream media.  Unfortunately, the tide is now turning.  Interest rates are starting to move up steadily, even though the Federal Reserve has been trying very hard to keep that from happening.  A few weeks ago, when Federal Reserve Chairman Ben Bernanke suggested that the Fed may start to “taper” the rate of quantitative easing eventually, the bond market had a conniption and the yield on 10 year U.S. Treasuries shot up dramatically.  In an attempt to calm the market, the Fed stopped all talk of a “taper” and that helped settle things down for a brief period of time.  But now the yield on 10 year U.S. Treasuries is starting to rise aggressively again.  Today it closed at 2.71 percent, and many analysts believe that it will go much higher.  This is important for the housing market, because mortgage rates tend to follow the yield on 10 year U.S. Treasuries.  And if mortgage rates keep rising like this, another great real estate crash is inevitable.

This wasn’t supposed to happen.  Federal Reserve Chairman Ben Bernanke said that he could use quantitative easing to control long-term interest rates.  He assured us that he could force mortgage rates down for an extended period of time and that this would lead to a housing recovery.

But now the Fed is losing control of long-term interest rates.  If this continues, either the Federal Reserve will have to substantially increase the rate of quantitative easing or else watch mortgage rates rise to absolutely crippling levels.

Three months ago, the average rate on a 30 year mortgage was 3.35 percent.  It has shot up more than a full point since then…

Mortgage buyer Freddie Mac said Thursday that the average on the 30-year loan rose to 4.39% from 4.31% last week. Rates are a full percentage point higher than in early May.

And as the chart below shows, mortgage rates have a lot more room to go up…

30-Year Fixed Rate Mortgage Average in the United States

As mortgage rates go up, so do monthly payments.

And monthly payments are already beginning to soar.  Just check out this chart.

So what happens if mortgage rates eventually return to “normal” levels?

Well, it would be absolutely devastating to the housing market.  As mortgage rates rise, less people will be able to afford to buy homes at current prices.  This will force home prices down.

To a large degree, whether or not someone can afford to buy a particular home is determined by interest rates.  The following numbers come from one of my previous articles

A year ago, the 30 year rate was sitting at 3.66 percent.  The monthly payment on a 30 year, $300,000 mortgage at that rate would be $1374.07.

If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage at that rate would be $2201.29.

Does 8 percent sound crazy to you?

It shouldn’t.  8 percent was considered to be normal back in the year 2000.

And we are already seeing rising rates impact the market.  The number of mortgage applications has fallen for 11 of the past 12 weeks, and this has been the biggest 3 month decline in mortgage applications that we have witnessed since 2009.

Rising interest rates will also have a dramatic impact on other areas of the real estate industry as well.  For example, public construction spending is now the lowest that it has been since 2006.

And I find the chart posted below particularly interesting.  As a Christian, I am saddened that construction spending by religious institutions has dropped to a stunningly low level…

Total Construction Spending Religious

So what does all of this mean?

Well, unless interest rates reverse course it appears that we are in the very early stages of another great real estate crash.

Only this time, it might not be so easy for the big banks to swoop in and foreclose on everyone.  Just check out the radical step that one city in California is taking to stop bank foreclosures…

Richmond is the first city in the country to take the controversial step of threatening to use eminent domain, the power to take private property for public use. But other cities have also explored the idea.

Banks, the real estate industry and Wall Street are vehemently opposed to the idea, calling it “unconstitutional” and a violation or property rights, and something that will likely cause a flurry of lawsuits.

Richmond has partnered with San Francisco-based Mortgage Resolution Partners on the plan. Letters have been sent to 32 servicers and trustees who hold the underwater loans. If they refuse the city’s offer, officials will condemn and seize the mortgages, then help homeowners to refinance.

If more communities around the nation start using eminent domain to stop foreclosures, that is going to change the cost of doing business for mortgage lenders and it is likely going to mean more expensive mortgages for all the rest of us.

In any event, all of this talk about a “bright future” for real estate is just a bunch of nonsense.

You can’t buy a home if you don’t have a good job.  And as I wrote about the other day, there are about 6 million less full-time jobs in America today than there was back in 2007.

You can’t get blood out of a stone, and you can’t buy a house on a part-time income.  The lack of breadwinner jobs is one of the primary reasons why the homeownership rate in the United States is now at its lowest level in nearly 18 years.

And we aren’t going to produce good jobs if our economy is not growing.  And economic growth in the U.S. has been anemic at best, even if you believe the official numbers.

We were originally told that the GDP growth number for the first quarter of 2013 was 2.4 percent.  Then it was revised down to 1.8 percent.  Now it has been revised down to 1.1 percent.

So precisely what are we supposed to believe?

Overall, since Barack Obama has been president the average yearly rate of growth for the U.S. economy has been just over 1 percent.

That isn’t very good at all.

But remember, the government numbers have been heavily manipulated to look good.

The reality is even worse.

According to the alternate GDP numbers compiled by John Williams of shadowstats.com, the U.S. economy has continually been in a recession since 2005.

And now interest rates are rising rapidly, and that is very bad news for the U.S. economy.

I hope that you have your seatbelts buckled up tight, because it is going to be a bumpy ride.

It Is Happening Again: 18 Similarities Between The Last Financial Crisis And Today

It Is HappeningIf our leaders could have recognized the signs ahead of time, do you think that they could have prevented the financial crisis of 2008?  That is a very timely question, because so many of the warning signs that we saw just before and during the last financial crisis are popping up again.  Many of the things that are happening right now in the stock market, the bond market, the real estate market and in the overall economic data are eerily similar to what we witnessed back in 2008 and 2009.  It is almost as if we are being forced to watch some kind of a perverse replay of previous events, only this time our economy and our financial system are much weaker than they were the last time around.  So will we be able to handle a financial crash as bad as we experienced back in 2008?  What if it is even worse this time?  Considering the fact that we have been through this kind of thing before, you would think that our leaders would be feverishly trying to keep it from happening again and the American people would be rapidly preparing to weather the coming storm.  Sadly, none of that is happening.  It is almost as if they cannot even see the disaster that is staring them right in the face.  But without a doubt, disaster is coming. The following are 18 similarities between the last financial crisis and today…

#1 According to the Bank of America Merrill Lynch equity strategy team, their big institutional clients are selling stock at a rate not seen “since 2008“.

#2 In 2008, stock prices had wildly diverged from where the economic fundamentals said that they should be.  Now it has happened again.

#3 In early 2008, the average price of a gallon of gasoline rose substantially.  It is starting to happen again.  And remember, whenever the average price of a gallon of gasoline in the U.S. has risen above $3.80 during the past three years, a stock market decline has always followed.

#4 New home prices just experienced their largest two month drop since Lehman Brothers collapsed.

#5 During the last financial crisis, the mortgage delinquency rate rose dramatically.  It is starting to happen again.

#6 Prior to the financial crisis of 2008, there was a spike in the number of adjustable rate mortgages.  It is happening again.

#7 Just before the last financial crisis, unemployment claims started skyrocketing.  Well, initial claims for unemployment benefits are rising again.  Once we hit the 400,000 level, we will officially be in the danger zone.

#8 Continuing claims for unemployment benefits just spiked to the highest level since early 2009.

#9 The yield on 10 year Treasuries is now up to 2.60 percent.  We also saw the yield on 10 year U.S. Treasuries rise significantly during the first half of 2008.

#10 According to Zero Hedge, “whenever the annual change in core capex, also known as Non-Defense Capital Goods excluding Aircraft shipments goes negative, the US has traditionally entered a recession”.  Guess what?  It is rapidly heading toward negative territory again.

#11 Average hourly compensation in the United States experienced its largest drop since 2009 during the first quarter of 2013.

#12 In the month of June, spending at restaurants fell by the most that we have seen since February 2008.

#13 Just before the last financial crisis, corporate earnings were very disappointing.  Now it is happening again.

#14 Margin debt spiked just before the dot.com bubble burst, it spiked just before the financial crash of 2008, and now it is spiking again.

#15 During 2008, the price of gold fell substantially.  Now it is happening again.

#16 Global business confidence is now the lowest that it has been since the last recession.

#17 Back in 2008, the U.S. national debt was rapidly rising to unsustainable levels.  We are in much, much worse shape today.

#18 Prior to the last financial crisis, Federal Reserve Chairman Ben Bernanke assured the American people that home prices would not decline and that there would not be a recession.  We all know what happened.  Now he is once again promising that everything is going to be just fine.

Are the American people going to fall for it again?

It doesn’t take a genius to see how vulnerable the global economy is right now.  Much of Europe is already experiencing an economic depression, debt levels in Asia are higher than ever before, and the U.S. economy has been steadily declining for most of the past decade.  If you doubt that the U.S. economy has been declining, please see my previous article entitled “40 Stats That Prove The U.S. Economy Has Already Been Collapsing Over The Past Decade“.

And the truth is that most Americans already know that we are in deep trouble.  Today, 61 percent of all Americans believe that the country is on the wrong track.

It isn’t that so many people are choosing to be pessimistic.  It is just that an increasing number of Americans are waking up to the cold, hard reality that we are facing.

Decades of incredibly foolish decisions have brought us to this point.  We allowed our economic infrastructure to be gutted, we consumed far more wealth than we produced, our politicians kept doing incredibly stupid things but we kept voting the same jokers back into office again and again, and over the past 40 years we have blown up the biggest debt bubble in all of human history.

We have been living so far above our means for so long that most of us actually think that our current economic situation is “normal”.

But no, there is nothing normal about what we are experiencing.  We are entering the terminal phase of a colossal debt spiral, and when it flames out the economic devastation is going to be absolutely spectacular.

When the next major wave of the economic collapse comes and unemployment soars well up into the double digits, millions of businesses close and millions of American families lose their homes, I hope that those that are assuring all of us that there will not be an economic collapse will come back and apologize.

There are tens of millions of people out there right now that are not making any preparations at all because they have been promised that everything is going to be okay.  When the next financial crash happens, most of them will be absolutely blindsided by it and many of them will totally give in to despair.

Don’t let that happen to you.

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