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Your thoughts on the US mortgage/stockmarket crisis?

Discussion in 'Safety valve' started by bellarine, Sep 1, 2007.

  1. bellarine

    bellarine Member

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    I'm not trying to start anything political here, so I sincerely hope the mods wont delete this thread. I'm an Aussie with an interest in world events, including financial.

    I dont have much of an understanding of the big picture, so just asking here for some informed opinions and comments really.

    From what I can tell is that some of the small banks/credit unions in the US had been handing out housing loans to lower income earners, who were in all probability, going to eventually default on those loans due to their limited means of repayment. And very possibly due to the loan repayments being way beyond the reach of income and cost of living expenses.

    I have no prejudice against low income earners (being one myself). The part of the story that I dont get is why this has affected the stockmarket. Here in Oz, the rule is that if you default on your mortgage, the bank/credit union/lending institution, changes the locks and sells you out - to put it bluntly. They re-coup their money, and you receive the balance from the sale (if any). No need for the Oz stock exchange to get nervous. Unfortunate as the scenario is, I'm sure it happens multiple time daily around the country.

    I was listening to a US financial analyst last week on the radio. His opinion was that the US had just experienced a 'mini' recession, but was far from being 'out of the woods' so to speak. He feels that while there has been some recovery on Wall Street, it could very easily happen again in an instant. He mentioned that another 'adjustment' in the stockmarket is very possible, and could be serious enough to cause a full blown US recession. Which would obviously lead to a world economic recession.

    Sorry, not meaning to be a doomsayer. I personally feel as a home buyer myself, that it will pay to be cautious in the coming year or two.

    Anyway, if I have any of the above facts (as I know them) wrong, please feel free to correct me. So give me your enlightened opinion, I'd love to learn some more.
     
  2. wolfmanz

    wolfmanz Regular member

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    Houses in the U.S. are way overpriced. The Enron style Mortgages that been allowed by our Politicians IMO are about to bring a Rude Awakening to the American public!
     
  3. Deadrum33

    Deadrum33 Active member

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    When I married my wife 2 years ago we both owned homes here in Ohio USA.
    We bought one together to have room for teen kids and infant kids in the same house cause both our old ones were too small for all that. We havent been able to sell either of our old ones yet after all this time. With the market crashing like this I wont be able to get much equity from anything we have even if I can sell, and in the long run it will be just like renting with nothing to show for all that. You own something and do the right thing for 11 years and poof, life happens.
    Anyway if China ever cashes in all the markers we owe 'em EVERYONE in the states are screwed.
     
  4. abuzar1

    abuzar1 Active member

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    I live in Florida and prices went UP round here. I remember three years ago a builder was selling 3200 square feet houses for 180,000. Guess what happened after one year, same house now for 325,000, it was crazy. We bought a house just before that started so we did profit from it. The prices have stabilized now though and are starting so go down.
     
  5. djscoop

    djscoop Active member

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    talk about housing prices?? I live in LA. my friend bought his house in the San Fernando Valley (the "valley") in 1979 for $82k. just priced last year at $850k. thats just sick.
     
  6. Davedough

    Davedough Regular member

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    I have a house for sale that remains unsold in the Washington DC area and I live in Arizona, paying all kinds of bills here as well. Currently, I'm the only one working between my wife and I. The market definitely sucks.

    To answer the original poster's question about how it affects the stock markets. It comes down to projections of profit from companies. Mortgage companies, lenders, banks, etc, all bank on guaranteed monies to forecast how their fiscal years will shape up. Now, when someone defaults on a loan, they lose that potential cash flow, or the potential for another lending agency to buy that mortgage from them. This, in turn, screws up their forecast budgets. Now, you ask how can they cater to low-income communities if they know they'll more than likely default. Well, with a strong market, they count on that. Its free money for them. If say, for 2 years someone makes the payments, then defaults, the lender gets to foreclose on the property, kick the people out and resell it to another person. They've just gained 2 years of free money as well as whatever dividend they received on the house. When a market is bad, such as it is now, they are unable to turn around the houses that they once were, so not only are the houses that they were betting on falling into foreclosure remaining open, but the houses of the good honest people who got caught at the wrong end of a deal also remaining unsold and foreclosed upon. So now, the lender has a surplus of unsold homes, thereby investors in the company are less likely to play stock market money games with them, so the stock market as a whole suffers. Less and less companies show interest in these organizations so the market shares drop.

    Hope that really long winded description cleared things up a tad.
     
  7. abuzar1

    abuzar1 Active member

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    You can't sell it in the WASHINGTON DC area? Wow things have really changed! We have a family friend who was around the area(He lives in Maryland), and he bought a townhome for 130,000. Two years later he sold it for 360. I guess house prices have been crashing everywhere. Here in Florida it has become a buyers market again.
     
  8. Davedough

    Davedough Regular member

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    Yeah, the DC area has clammed up. No one is buying anything. House prices got so out of whack that people are scared now. My parents had a house that they bought for 330k and sold it for 650k 3 years later. I got into the housing market right before the decline and bought a house for 185k, trying to sell it for just 210k (to cover closing and such) and it just sits. =(
     
  9. bellarine

    bellarine Member

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    Thanks everyone for your replies. I can certainly see the bigger picture now.

    @Deadrum, I certainly feel for you with 2 unsold homes. Its what we call asset rich, cash poor. Just hang in there though. If there is a recession, I'm sure the market will start righting itself. You may not get your full asking prices, but they will sell.

    The reason I say that is because I bought my first home (was single at the time) in the middle of the 89-90 recession here. The interest rate was 17.5% at the time, and the house price was $46,000. It was just a basic 2 bedroom with a great backyard, just right for a single. It was definitely a buyers market at the time. Two months after moving in, the recession was lifting and interest rates were dropping every month. I kept the repayments going at the original rate and payed it off in 6 years, instead of the original 20 year term.

    @Davedough, thanks for your detailed explaination. I can now see the connection between potential cash flows > forecast budgets > investments > stockmarket rise and falls. Very eloquently put. Its been an interesting learing curve.

    @djscoop & abuzar, similar inflated housing prices are happening here also. A basic 40 year old, 3 bedroom timber home sold in Melbourne last week for $800K. While new estate developers are selling fully optioned 4/5 bedrooms for $500K. Hard to find the justification there. I feel for those who have bought at inflated prices, as when the market does correct itself, they will find themselves in a pickle.

    There is a real housing shortage here in Oz, which is also pushing the prices to ridiculous levels. Go to any home auction here in the metro areas and it is an absolute frenzy. Prospective buyers are bidding $2-400,000 over the reserve price just to get the sale. First home buyers are being pushed out of the market by the prices. One of the many reasons, is because various state authorities are not releasing their crown land for development. Which is fair enough in a way, as there is barely enough water to go around now. Everyone is on stage 3 water restrictions, with 2 solid years of winter drought.

    Again, thanks everyone for your input, its been very enlightening.
     
  10. aabbccdd

    aabbccdd Guest

    most high dollar houses have been overpriced/valued for a long time whats happening now is just a correction of the market. same thing happens with the stock market also from time to time
     

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