Falling real estate prices have nothing to do with anything other than the ponzi finance has run out. A couple with a job each making $50,000 a year each and buy a $200,000 house easiy under qualification. It isn't the payment but the amount of debt. As houses sell, the debt keeps getting pushed forward. There are fewer and fewer people that can pay the debt and the boomer can no longer look at 2 or 3 years income and say, well its 30 years. You just can't ponzi something forever. Debt is rarely paid on a house, but is rolled into the next mortgage and debt was consuming more and more.
This is copied and pasted from Doug Nolands Credit Bubble Bulletin of October 19, 2001.
http://www.safehaven.com/article/209/fr ... l-planning
With this in mind, I would like to highlight some of the comments made Monday by Franklin D. Raines, Chairman and CEO of Fannie Mae, at the Mortgage Bankers Association's 88th Annual Convention.
"Bottom line, we project that consumer demand for residential investment could double in this decade, from $11 trillion today, to $21-$25 trillion by the year 2010. This would cause demand for mortgage capital also to more than double, from the current $5.4 trillion to $11-$14 trillion by 2010. The 1990s were a terrific decade for housing. This decade could be even better. Let me walk you through how we derived these optimistic projections. First, in the near term, while the economy is in a downturn right now, the economic stimulus from Washington - the rate cuts, tax cuts, and the boost in spending - will probably make any recession we have short and mild. At the same time, because interest rates are already low and still falling, the impact of a slowdown on the housing market is expected to be less than typical. And the surge in home refinancing is giving a boost to the overall economy. In fact, a New Economic paradigm seems to have taken hold. Traditionally, whenever the economy caught a cold, housing got pneumonia. Now the opposite is occurring - housing tends to do better than the economy. One explanation is that in good times and maybe even more in bad times, owning a home is a powerful draw and a safe, strong investment…"
"The third driver (in addition to population growth and rising homeownership rates) that will boost residential investment in this decade is that we expect continued healthy growth in property values. History is on our side. Since World War II, property values - on a nationwide basis - have grown almost every year, and often faster than inflation. This trend will probably continue…we could see total home price gains of between 5 and 6.5 percent per year over the decade…your average $150,000 home today would be worth over $250,000 in 2010. In total dollars, consumers right now have about $11 trillion invested in residential housing. If that amount grows by 7-8.5 percent a year, by 2010, residential investment will reach a total of $22-$25 trillion. That raises an important question for the mortgage industry. How will homeowners choose to fund this $22-$25 trillion investment?"
"Over the last 50 years, homeowners have steadily increased how much of their home they choose to finance. In the early 1950s, the average debt-to-value ratio in America was just about 20%… By 1980, the average debt-to-value ratio had grown to roughly 30 percent, and by 1990, it was 40%. Now the ratio is 47%. What is driving this trend? There are two major factors. First is the revolution in flexible, low down payment lending, thanks chiefly to automated underwriting and the success of mortgage insurance. Nowhere else in the world is it more possible for the average family, without a vast reservoir of cash reserves, to become a homeowner. Low down payment lending has democratized homeownership in America. Secondly, in the meantime, the average homeowner has become more sophisticated about managing his home equity wealth as it grows, and our housing finance system has been making it far easier to do that. Where it used to take a month or more to refinance your mortgage, for instance, it now takes about a day. This has been great for the economy. And because property values have continued to grow, homeowners can tap their equity wealth without increasing their overall debt burden…
"The trend of increasing debt-to-value ratios is likely to continue as homes continue to appreciate, and our industry offers even better ways to allow homeowners to harness that wealth. And this trend will further boost the demand for mortgage credit. In fact, if you take the projected growth in residential investment, and factor in the projected growth in debt-to-value ratios, the demand for mortgage credit - the demand for what everyone in this room supplies - would grow an average of 8-10 percent per year for the rest of the decade. In other words, our market will grow faster than many of the country's fastest growth industries…At this rate, bottom line, mortgage debt outstanding, our market - which right now totals about $5.4 trillion - would more than double in size and reach $11-$14 trillion by the year 2010. So much for the talk about the decline in housing. Not with 13-15 million more households, a homeownership rate climbing beyond 70%, and home values rising over 65 percent in this decade… In fact, mortgage origination would average $1.6 trillion each year. If that doesn't seem like much after the year we're having, it's 71% higher than the yearly average in the 1990s. This could well be the best decade our industry has ever had. But there is an 'if.' A big 'if' is, we could have the best decade for housing ever IF the supply of mortgage capital can keep up with the demand. As the demand for mortgage capital doubles, we have to make sure that the supply doubles too. All of us will have to step up and do more. And no provider of mortgage capital is more committed than Fannie Mae is… What you get with Fannie Mae is the assurance, in good times or not, that we are there when you need us."
I did a little reading up on Mr. Raines. He graduated from Harvard in the late 1960's and went to Oxford as a Rhodes Scholar. He worked in the Nixon Adminisration, went to work on Wall Street and was Clintons director of OMB. I have heard the book Mania's, Panics and Crashes" which is about systematic risk is required reading on Wall Street and it is clear Raines should have know he was creating a systematic risk for personal profit. The casual statements he makes here, where he is acting as if Americans are actually choosing to pile up debt on housing, while in fact FNMA was booking huge profits from blowing a mortgage bubble. This Credit Bubble Bulletin, more than anything I have read since, frames the 1990's and beyond and the role of the extraction of home equity in all the bubbles we have seen in the US and around the world. Money from housing went into creating the stock bubble. Mr. Raines bankrolled the career of Barack Obama. Regardless of what Obama says in blaming Bush, the biggest culprits in the whole mess wasn't Bush and Paulson, but Summers, Raines and Rubin. Citi and FNMA were the 2 debt bombs that blew in 2008. Any of the big 5 Wall Street firms could have folded, it was merely by chance or selection it was LEH and BS.