If you listen to the underground media, you’ll hear often that the housing bubble is about to burst for a number of reasons:

1. Too many houses have been built
2. Too many speculators are sitting on houses with little demand
3. Housing prices are way overvalued due to easy credit and low interest rates
4. Homeowners with ARM and interest-only loans can’t make payments
5. The economy is stagnant and inflationary meaning we make more money with less value

These are all true in my mind, and I do believe we’ll see a bubble collapse of some sort. Yet we have to look deeper at the realities of the economy before we can make any hard theories. The money in housing today does exist, it just isn’t in the homeowner’s pockets. When the dotcom bubble burst, they said that millions lost much of their savings, but that money had to go somewhere — stocks were purchased with money. The money that went from the middle class to the wealthy who sold off their dotcom stocks very high was money used in other markets — primarily housing in the US and manufacturing and housing in foreign markets. This money was returned to the economy in the form of investments — causing the inflation in consumer pricing we’re all familiar with.

If the housing bubble was to collapse, money wouldn’t disappear overnight. It would disappear from the housing market — a market that is currently overinvested because of years of easy credit. Houses that were previously bought by developers may drop in value if sold, but the developers still made the money. They paid that money to their workers, to their investors and to the cost of goods used to build the homes. That money is back in the economy, just maybe not our economy.

If the housing bubble bursts, we may see some odd situations. A lot of US dollars find their way traveling overseas, where they tend to stay in the foreign markets (primarily black markets). These dollars are part of the inflation problem in foreign countries — especially in India and China. We should be happy that they’re using our money, if that money found its way back to the US, we’d see even worse inflation. Yet how would the Indians and Chinese ever send dollars back if they’re not buying any of our exports? As the Indians and Chinese build their infrastructure, their farming and distribution markets will grow, meaning they’ll import less from the US, meaning that more dollars will likely stay in the foreign markets, not bringing as much inflation to the US market as the M3 supply would tell us.

I wonder what the next big market will be — will it be a dotcom and housing boom in Asia funded primarily with the US dollars in circulation over there? If that’s the case, an increase of price and wage inflation in the East can be “good” for the US — it will equalize prices better so that we might be able to compete by exporting goods in the opposite direction.

Of course, that may be the secret to the Fed’s plan with the US dollar — force other countries to devalue their own currency enough that we can start selling products again on the world market. This sounds good, it sounds like it should fix years of wealth destruction and economic favoritism. Yet the problem with this theory is that it still continues to rob the wealth of the lower and middle classes, and puts an incredible amount of power in the hands of the elite and the banking cartels.

I’m not sure that a bubble burst would be so bad — it would require people to stay in their homes rather than flip houses every 3-7 years, it would require people to get extra jobs to pay the mortgages, and it might teach the next generation not to accept easy money at low interest just to buy a huge home without thinking of the future. Yet we did experience a bubble barely 25 years ago, and it seems like our parents forgot to remind us about the mistakes they made. I guess that might be part of the reason we’re facing a housing bubble today — our parents want to make up for the mistakes they made a quarter century ago, and they figured the problem wouldn’t repeat itself. Considering the Fed is repeating itself 3 decades later, you’d think someone would learn.

Have you learned?

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The Rocky Mountain News: Foreclosure Shock: Rising interest rates, a glut of unsold homes on the market and falling home prices in some submarkets drove up Denver-area real estate foreclosures by more than 30 percent in the first quarter of this year compared with the first three months of 2005. Even worse, a bigger glut of speculators waiting to list their unoccupied homes is waiting around the corner.

Charlotte Observer: Lenders: No need for new laws: They acknowledged that some of their colleagues have inflated the cost of loans or the price of homes, or imposed unnecessary fees, helping push people into foreclosure. The banking industry took advantage of the power they have in their cartel: cheap and easy money and rewards if they continue to find people to borrow it no matter the risk. The laws are already full of loopholes, new laws would only make it harder for investors (foreign and domestic) to protect their investments.

Sacramento Business Journal: Mortgage defaults to rise as housing market slows: ForeclosureS.com President Alexis McGee said several one-time fast-rising housing markets are slowing down, especially in the West, and the residential real estate industry is returning to normal. Returning to normal would actually mean that people would buy homes with 20% down, extend their credit term to 25 years or less, and not spend more than 20% of their gross income on their mortgage. It would also mean realistic interest rates of 9-11%.

The Enquirer: Lending clampdown gets last-minute work: Ohio had more than 3.2 percent of its mortgages in foreclosure at the end of 2005 - higher than any other state, according to the Mortgage Bankers Association. The national average was just under 1 percent. As if more laws will really fix the problem of an oversupply of money at ridiculously low interest rates.

The Desert Sun: Mortgage payments coming a little late: In the Coachella Valley, most experts agree there is no imminent danger of a mortgage foreclosure crisis, although notices of default - indicating overdue payments - have recently been on the increase. The reason why we’re seeing more defaults but fewer foreclosures is that banks have access to more funds themselves (from the Fed and foreign investors) giving them more options to “help out” those in trouble — interest only loans, longer term refinances, and some are even starting to wait 6 months before sending foreclosure notices. 6 months of no payments isn’t what I consider default, it is what I consider squatting.

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