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By: Home Buyer, Wed May 26th, 2010
Housing prices are subsidized by the government. 8K tax credit will go away. In desperate need of tax revenue, federal government may remove the mortgage interest deduction for income tax some day.
Case Shiller index suggests we are still 20% above long term averages. Housing bubble is still alive. These long term average prices are the result of bank credit inflation that lasted for 50 years. It is a hughe bubble that is deflating now. Whenever credit reaches multiples of GDP as we have it at 350% now, it implodes taking down the economy with deflation. As the money dissapears due to deflation, we should expect substantially lower home prices going forward. You cannot rely on current rent prices. They will come down too. You cannot rely on your salary, it will come down too.
When we borrow, we create money. This money stimulates the economy. People can earn more because there is simply more money to earn. But when we pay back, the money dissapears in the banking system just like the way it was created.
Conquer the Crash predicted this bust years ago:
http://www.tradingstocks.net/html/forecasting.html
The herd behavour of the population causes these boom and bust cycles. When things get better, people start borrowing. They look at each other and do more of the same. If each person acted individually in a vacuum, while one person was borrowing, the other would be paying back debt and it would be a smooth sailing. But when the entire population borrows and goes on a shopping spree, this creates a boom. Then borrowing flattens and growth stops. And then the bill comes due. People have to pay back what they borrowed. However, almost all money in the economy is bank credit. It has principal + interest. And the principal exists, but the interest is not created yet. As people pay back debt and the money supply shrinks, it becomes harder and harder to earn enough money to pay principal + interest.
Let's put it in numbers. Monetary system has 60 trillion US dollars. Almost all of this is borrowed money. Let us assume, when people borrowed this, they promised to pay back 100 trillion. The assumption was that through non-stop borrowing, some day there would be 100 trillion in the economy, so that we could earn it and pay it back. However, now that the music stops and everybody stops borrowing, how will the additional 40 trillion be created? So bankruptcies soar, foreclosures happen.
Not only that, as we pay back the debt, the deflation shrinks the money supply. Instead of having 60 trillion, we end up with 30 trillion of money supply. That creates an imbalance where prices, salaries were based on an expected 100 trillion, but now we have 30 trillion.
You figure the rest. The stock market crash will be worse than Great Depression this time. We have not seen the stock market bottom yet:
http://www.tradingstocks.net/html/near_bottom.html
It will take down housing with it. It is simple math. It has happened to past generations. They were as smart as we are.
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"Business, property investments and more" Comprehensive article catalog |
 
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