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August 26, 2006

Today's Housing Bubble Post - More News Stories

-- by Dave Johnson

When the Bubble Bursts - Los Angeles Times,

It's too early to say whether the slowdown will turn into a crash presaging a recession, as happened in the late 1970s and '80s, although the economy's other fundamentals remain healthier now than then. But it's worth bearing in mind which homeowners are most likely to be affected by a possible downturn and which ones can lay off the antacids.

... A separate point of anxiety is the prospect of higher interest rates for buyers with adjustable-rate mortgages. The Federal Reserve recently took a break from its prolonged increasing of short-term rates, but lingering risks of inflation could push borrowing costs, and therefore adjustable mortgages, back up. Owners who can't afford the higher payments might be forced to sell their homes at a loss.

The AP story is in most newspapers, Housing, fuel strain shoppers,

Fresh evidence shows high energy prices and sagging home values are pinching the main driver of the U.S. economy: Average Joe's wallet.

Retailers and economists say many Americans are waiting to buy big-ticket items and cutting back on frills.

Homeowners are shelving plans to remodel kitchens. Families are dining out less and tightening their budgets.

OK, look. There are a huge number of interest-ony and adjustable rate mortgages out there. The negative effects of most of these do not hit until next year, when people's monthly payments will suddenly go way up - forcing many to sell. So this thing hasn't even started yet. Combine this with the number of people who bought for speculation and never had any intention of holding on to the property for very long. Then combine those factors with the higher fuel costs that are straining everyone's budgets. And finally add in the federal government's massive borrowing that is pushing up interest rates AND rising inflation rising which also puts pressure on interest rates. This has all the makings of something much worse than a recession.

Posted by Dave Johnson at August 26, 2006 2:24 PM

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