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Wall Street and other stock markets experienced a rough ride again last week, in large part due to investors’ fears concerning the U.S. property market.
Of particular concern are the rumblings that several mortgage companies are experiencing financial difficulties caused by overexposure to the formerly hot U.S. real estate market through sub-prime mortgages. In other words, during fierce competition, too many firms lent too much money to those willing to borrow too much.
And now with falling real estate values and rising interest rates (particularly in mortgages that were front-loaded with attractive lower rates), foreclosures are at an all-time high, up 42% from a year ago according to a Voice of America report.
Ivy Zelman, with investment banker Credit Suisse, said this was bound to happen: “Home prices were surging, and everybody was drinking the Kool-Aid, and life was good, and the guys were making tons of money on the mortgage business, and people were making money, investors were flipping houses [buying and quickly reselling for profit]” (ibid.).
New Century Financial, the second-largest dealer of sub-prime mortgages, “ran out of money” last week and stated that it was no longer in the position to make loans. Rick Sharga, with RealtyTrac, a company that analyzes real estate trends, expects there will be more of this: “There have been between 25 and 35 companies who have either gone out of business or have announced plans to go out of business” (ibid.).
Commodities investment guru Jim Rogers (George Soros’s partner since the 1970s) described the situation to Reuters in starker terms: “You can’t believe how bad it’s going to get before it gets any better,” predicting a real estate crash that would trigger defaults and spread potential disaster elsewhere, including emerging markets. Incidentally, this prominent U.S. fund manager is putting his $15 million mansion on Manhattan’s Upper West Side up for sale, and planning to move to Asia.
“Real estate prices will go down 40-50% in bubble areas. There will be massive defaults. This time it’ll be worse because we haven’t had this kind of speculative buying in U.S. history,” Mr. Rogers said.
“When markets turn from bubble to reality, a lot of people get burned. This is the end of the liquidity party. Some emerging markets will go down 80%; some will go down 50%. Some will most probably collapse.”
A slightly different real estate phenomenon is taking place in Michigan, home to Detroit and the primary center of America’s struggling auto industry. According to a Reuters report, while the average U.S. house price rose by 6% in 2006, Michigan was the only state where prices fell. Unemployment in Detroit runs at 14%, and currently 7.1% statewide, the second highest in the nation, behind Mississippi. A weekend auction of about 300 Detroit area houses featured at least 16 selling for $30,000 or less. Properties that were considered bargains at $70,000 just two years ago are now selling for $35,000. A four-bedroom mansion from the city’s glory days, with a magnificent stone entrance, sold for $135,000.
Could Detroit be a harbinger for things to come for other cities across the U.S.?
The recent financial “boom” in the U.S. (and other parts of the world, but primarily English-speaking countries) was largely driven by rising real estate values and easy credit. It appears as though those times are over, and that the near future will be financially difficult for some.
Driven by extreme greed, excess and an unbridled desire for endless enjoyment whether personal or corporate, these societies are bound to fail. In fact, according to the Bible, the future for most in these countries will be extremely hard.
For more information, you will want to read our in-depth analysis The Pleasure Seekers – Part 1: An Addiction to “Fun”, as well as the popular book America and Britain in Prophecy.