You Mean We've Been Here Before?

Rate Rise Pushes Housing, Economy to `Blood Bath'

By Kathleen M. Howley

June 20 (Bloomberg) -- The worst is yet to come for the U.S. housing market.

The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported.

``It's a blood bath,'' said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. ``We're talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.''

...

The primary cause of the 1990 to 1991 recession was a real estate boom and bust similar to the past seven years, Roubini said. A real estate ``bubble'' in the mid-1980s led to speculative buying and lower credit standards that resulted in widespread foreclosures, he said. The defaults triggered a credit crunch that turned into an economic recession in the spring of 1990, said Roubini, who is an economics professor at New York University's Stern School of Business.

He put the chance of a recession this year at ``50-50,'' above former Fed chief Greenspan's 33 percent estimate. A recession is a decline in gross domestic product for two consecutive quarters.

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Housing Chain
Making it harder for those people to buy houses is going to create trouble all the way up the housing chain as people who own starter homes find it more difficult to sell their real estate and buy bigger properties, said Neal Soss, chief economist at Credit Suisse Holdings USA Inc. in New York.

``The subprime market has changed character dramatically, and that takes a number of entry-level buyers out of the picture,'' said Soss, who was an adviser to former Fed Chairman Paul Volcker.

Gee, it kind of sounds like there was a housing bubble before.



As you can see the bubbles in the 1970's and 1980's both came back to were they started. If the current ones follows the historic trend, there will be some VERY sad people.