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As housing market falls

Is $10 trillion bubble ready to burst?

Published Oct 5, 2006 8:20 PM

Is the biggest real estate bubble in history about to burst? Wall Street pundits and commentators are concerned that the industry’s downward spiral could exacerbate the slowing down of the general capitalist economy.

The $10 trillion housing market is on the skids. Sales of new homes have plummeted, and now prices are following.

According to an article posted Sept. 25 on MarketWatch.com, a Dow Jones Web site, “The collapsing U.S. housing market crossed another milestone in August, as the median sales price of existing homes fell for the first time in 11 years and for just the sixth time in the past 38 years, the National Association of Realtors said Monday.”

On Sept. 2 it reported that new home sales had “plunged 21.6 percent in July from the year earlier, inventories of unsold homes soared and prices fell—there is little debate that the housing market is stumbling much faster than most expected.”

This is another way of saying that the real estate market may be in for a crash, not merely a “soft landing,” as market optimists have hoped.

The National Association of Realtors covers a wide array of real-estate investors, speculators and banks heavily invested in all types of mortgages.

Over the last five years, housing prices had been rising at a hectic rate. Now the day of reckoning has come. “The deceleration has been the fastest in the history of the [Realtors] survey,” says MarketWatch.

Developers have cut back on construction as overproduction in residential housing has led to big-time inventories of unsold new homes. However, plummeting prices may bring buyers back into the market, temporarily relieving the glut.

Mortgages that allow homeowners to take out equity based on the assessed valuation of their homes have been a key driver of continued strong consumer spending—accounting for two-thirds of the Gross Domestic Product. The GDP is the total value of a country’s goods and services. But declining home prices will cut into this, meaning bad news for the overall capitalist economy.

Current consumer debt has reached record-breaking numbers. Spending levels of consumers can no longer be sustained. Homeowners will spend less and tighten belts to save the homes they have.

An Aug. 10 Wall Street Journal survey was headlined: “Outlooks for GDP and Employment Are Cut, While Concerns About Recession Edge Up.” The newspaper’s economists have raised to 26 percent “the probability of a recession over the next 12 months.”

Wall Street economists who predict an impending recession are behind the times. The recession is already here for a large part of the multinational workforce.

Plants are closing, wages relative to inflation are dropping, benefits are disappearing, and layoffs are spreading throughout the industrial and service sectors.

The capitalist economy is drowning in debt, deficits and the virus of hyper-speculation in non-traditional mortgage lending. These dire developments were only worsened by a recent announcement of the Federal Reserve Board that the economy needs to slow down to contain inflation.

Not true. A slowdown will develop into stagflation—stagnation on top of inflation. The workers and oppressed nationalities now face a slowing economy, soaring prices for food, health care and other necessities of life, and a housing bubble about to burst.

The tycoons of Wall Street, however, prefer a slowing economy to inflation. They reacted favorably to the Fed’s announcement, sending the stock market up to new highs during the week of Sept. 25.

Lenders run wild

In a revealing Sept. 1 Wall Street Journal article headlined, “Housing Chill Begins to Pinch Nation’s Banks,” Robin Sidel wrote that “[B]anks have begun to warn investors that the housing slowdown is starting to hurt their business.”

The article explains that financial institutions are already grappling with “a difficult interest-rate environment, competition for traditional banking customers, a saturated credit-card market, and expectations that strong consumer-credit quality will soon show signs of weakening. ... As a result real estate, including mortgages, home-equity loans, and commercial loans, represented a record 33.5 percent of the U.S. banking industry’s $9,298 trillion in assets in July, according to the Federal Reserve. The numbers represent the highest level in the Fed’s database going back to 1973.”

Since then, this dependence on real estate assets has continued to rise.

Sandra Thompson of the Federal Deposit Insurance Corporation, speaking on Sept. 20 at the opening session of the Senate Banking Committee on Banking, warned of the dangers of nontraditional mortgage loans: “According to the publication Inside Mortgage Finance, an estimated $432 billion interest-only loans and payments-option ARMs were originated during the first half of 2006,” she said. ARMs are adjustable rate mortgages.

Dreams turn into nightmares

In a frenzy of real estate loans, bankers and financial institutions have created mortgage portfolios that include ARMs. They feature no down payment, no interest, and what is called negative amortization: the buyer pays less than the interest due and the unpaid principal and the interest rates will grow exponentially. Down the road, the increase in mortgage payments will force homeowners to ante up big bucks far exceeding their incomes. This likely will lead to record levels of mortgage defaults and foreclosures, which are now beginning to rise. Homeowners are helplessly trapped as their home values fall.

The banks and financial institutions have spread the risk to the secondary mortgage markets—Fannie May and Freddie Mac—which are government-sponsored enterprises and big-time speculators. Hedge funds, pension funds and insurance companies are big players in this market.

Will there be a rerun of the 1987 stock market crash? That’s when many savings and loans banks—primary lenders in mortgage financing—went belly up. It cost the worker/taxpayers $ 150 billion to bail out those banks and financial institutions. Will the current housing bubble throw the economy into another such crisis?

The warning signs are there.

Housing is a multiplier industry. The impact of the growing housing crisis affects a wide range of industries and workers. Steel, lumber, home furnishings, financial institutions, construction and other related industries are dependent on this bubble, which has reached an unprecedented size.

According to the June 16, 2005, Economist, the housing bubble has become a global phenomenon. “The worldwide rise in house prices is the biggest bubble in history. ... Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000. What if the housing boom now turns to bust? ... It is larger than the global stock market bubble in the late 1990s ... or America’s stock market bubble in the late 1920s.”

That bubble led to the 1929 crash, which triggered the greatest depression in U.S. history.

“The housing market has played such a big role in propping up America’s economy that a sharp slowdown in house prices is likely to have severe consequences. Over the past four years, consumer spending and residential construction have together accounted for 90 percent of the total growth in GDP.”

Interest rates for those years were the lowest in history and cheap money saturated the monetary system. “And over two-fifths of all private sector jobs created since 2001 have been in housing-related sectors....”

The U.S. $10 trillion housing bubble contains the potential for class struggle. There is brewing within it a clash of class interests. Within the housing industry is a multinational workforce in conflict with construction bosses and a myriad of related companies. At the first signs of a downturn in the industry, layoffs will spiral. Homeowners will struggle with banks and financial institutions, which will strip them of ownership as soon as they falter on mortgage loans. Their dreams of home ownership can turn into nightmares.

As the institutions of high finance face bankruptcy—victims of their own greed and hyper-speculation—the government will bail them out at the expense of the worker/taxpayers, leading to a conflict between the people and the government.

On the other hand, real estate institutions and investors like Fannie Mae and Freddie Mac—government-sponsored enterprises that package billions of dollars of mortgage-backed securities—will have the backing of the government when they fail.

Ultimately, as recession and further social convulsions ignited by “preemptive” wars engulf the imperialist government, the predatory interests of the billionaire class will be pitted against the entire multinational working class. Organized and unorganized, immigrant and native, poor and middle class, they will be swept into the raging sea of class struggle, with great consequences for the whole world.