[joseblanco]

Jeffrey,

Very good article/point. I am surprised this has not generated any responses. As I understand it the so called housing bubble was created to avert a feared economic collapse after the dot-com stock bubble burst. Economics has a significant psychological component to it and the last 10-15 years a wealth affect from various something for nothing investments has unfortunately become the cornerstone of the Western Economies.
The stock run up of the mid-late 90's created it (de ja vu 1920's) and a sudden slamming of the brakes was feared. Enter significant interest rates drops to give the masses a new wealth affect high to keep them spending. Both are the same in terms of being paper gains . Now the time has come where the housing run up need to be addressed before it creates the same problem the internet stock bubble was predicted to cause. The situation is complex because the quality of lending dropped, the stability of the lending products dropped and the prices paid for housing when beyond what was anticipated. Stabilization requires a healthy, expanding economy that keeps people employed so they can pay their mortgage payments. The mortgage products themselves make this a challenge. Add to this the need to keep inflation in check with increasing interest rates but you will actually exacerbate the problem because of the massive ARM lending. The mortgage products were made predicated on continued asset appreciation in the realty sector, the very thing that we are trying to cool. The new fed chairman has a serious soup sandwich to deal with. Only those people who bought pre-bubble and stayed and did not make a massive equity pull are safe. Sellers who leveraged their gains and did not overextend themselves are also safe. Renters also should be fine, but they may experience pain in the form of increasing rents, now that buying is no longer significant competition. Home buyers who borrowed more than they can afford due to lax lending standards and exotic mortgage products and owners who got sucked into the home equity ATM psychology are the one's in greatest danger as rates rise and their loans adjust. Lending standards will tighten so they may be precluded from refi/consolidation, rates will be higher than they can afford, selling will be problematic because they will need to bring a check to the table. Rent's will not cover payments. The concept that people will do whatever it takes to make mortgage payments will hold for awhile, but the reality of inability to keep up with payments will set in after owner's strip away all other discretionary spending and cut necessities to the bone. This will be because such a contraction will in the aggregate slow the economy and case job creation/sustainment instability. This does not have to happen, but I do not know what tricks the fed has up their sleeves as dropping interest rates would be out of the question and ramping up federal spending to keep the economy going can't be sustained now that the debt as doubled to 8 trillion under this administration and to attact borrowers will require higher interest rates at a time when manditory outlays (SS, Medicare etc.) are ramping up to service the baby boomer generation. We live in interesting economic times, I long for the boring economic times of the 50's which you eluded to in your write up. The best way to insulate yourself from all of this is good old fashion conservative thrift. I was caught by this housing bubble bug a bit myself but I've since pulled back and I am on a course/glidepath to the traditions/values of my parents. Good luck. Joe