2008: A Perfect Storm of Economic Catastrophes for the USA
Source:
http://boiserealestateinfo.net
Publish Date: 8/02/2008
Any one of a number of different factors would have been enough in and of itself to create some serious problems for our domestic economy. But what we got this year was a convergence of several simultaneously explosive situations.
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The value of the dollar has been sinking precipitously, thanks in large part to historically low interest rates.
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Those low rates initially sparked a surge in real estate sales, but the competition for housing created such a strong demand that home prices nearly doubled within a few short years.
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To afford those pricey homes, Americans asked lenders for larger amounts of mortgage money, and lenders justified the jumbo loans by securing them with property that seemed to get more valuable by the minute.
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Investors unhappy with the stock market pulled their money from Wall Street and poured it into real estate. Then Wall Street lured much of the money back by packaging mortgages and selling them like stocks.
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To fill those bigger and newer homes with consumer items, we bought more and more goods from rapidly developing foreign markets like those in India and China. We bought more energy from Saudi Arabia.
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Those nations needed somewhere to spend all that newfound wealth, and many sent the money back to the USA by investing in our hottest new commodity – mortgage backed securities.
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Homeowners across the USA saw their net worth increase dramatically, and became rich almost overnight because of the market value of their homes.
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Many borrowed against that equity and used the cash to buy another home. As the market peaked, for example, the majority of all residential property transactions involved not primary homes, but second homes and vacation property.
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Then the unexpected happened. People began to default on their loans in record numbers, because they had borrowed with risky loans. Monthly payments of $1,200 became monthly payments of $2,000 or $3,000, and it became harder for homeowners to make ends meet.
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Gas prices quadrupled and the cost to heat homes in winter and cool them in summer skyrocketed.
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To help support the mortgage market, the Fed lowered interest rates, which made the dollar weaker. That meant that we had to pay more for imports – including basic staples like food and oil.
- A snowball effect began, and continues to gain momentum. To turn the tide, the Fed
will soon start to raise interest rates – just when Americans need to borrow their way out of debt. - You do not add, remove or edit any part of the article, including the title.
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T. Boone Pickens is a seasoned investor and market observer– and one of the nation’s most legendary oil industry tycoons. His name is synonymous with the oil business. But in July of 2008 he began running expensive ads on primetime TV. His message is straightforward. He explains that he has been in the oil business for many decades, and that dependence on foreign oil is killing the USA. He says we need to invest in solar power and wind power. He is essentially condemning and getting out of the business he is famous for engaging in over the past decades. Soon we can expect the whole nation to do a similar 180-degree turnaround, as we adopt a new vision and strategy for going forward. Americans will emphasize saving over spending, conservative investments over get-rich-quick schemes, and conservative conventional mortgages over exotic high-risk loans. In the end, the country will be stronger and Americans will be more secure and prosperous. But for the time being we have to endure the pain which creates the wake-up call we need to realize that – as the old Chinese proverb explains – “If we keep going in the direction we’re headed we will end up where we’re going.” ### You have my permission to republish the “In My Opinion” articles in your web site, newsletter, or ebook, if you follow these terms and conditions: |
