The Sky is Falling

3 minute read

I was thinking about writing a lengthy post a while back discussing what people should do regarding financial developments at that time. This was a few months back when the sub-prime mortgage crisis was being unearthed. Initial estimates at total losses on subprime and similar mortgages ranged from $150 billion to $400 billion. This was comparable of rivaling the Savings and Loan meltdown (1986-95). Even now the damage is still not known. Just this past week the government had to bail out Bear Stearns. Bear Stearns got in trouble by investing heavily in securities backed by pools of subprime mortgages. If this happened to one of Wall Street’s biggest firms could there be others too? Don’t expect the subprime mortgage crisis to be over anytime soon. The government is trying to help but they can only to so much. There will still be more home foreclosures. House prices will continue to slide.

Last summer I thought that right now would be around the right time to buy a house. While I think right now is not a bad time to buy, I still think it is taking an undue risk. I reformulated my prediction into thinking a great time to buy would be about a year from now. The housing market is a slower beast than I once thought.

Builders have built an overabundance of houses these past few years but people have stopped buying, now you see an oversupply on the market. Yet prices are sticky, homeowners don’t believe the prices of their homes are down. Conditions are occurring now that will lower the average consumer’s bottom line. Homeowners who think they can wait it out will find out they cannot. My family realizes that we cannot hold onto our 2nd house and I am actually helping us sell it through an online auction. Financial instability will have to trickle down before you start seeing any effect on the selling end of the housing market. Eventually this will occur and you will see the prices developing into what houses are really worth. I wouldn’t be surprised if you will see prices drop 10 percent.

What about the rest of the economy?

Well the subprime crisis has drained liquidity from the markets. One of the responses from the government is slashing interest rates. If the interest rates sinks much lower then inflation will start increasing. Our Dollar is weak enough as it is and our 3 trillion national debt is only increasing. Don’t expect much to change this year as it is an election year. Oil prices are at an all time high. There is a slim chance that oil prices will be going down this year, Bush already tried.

Most analysts now believe we are in a recession. The average consumer will see higher prices for just about everything including food, gas, utilities, health care, cars, furniture, and household equipment. On top of that the Labor department reported the net loss of 63,000 jobs for February, the worst job losses in five years. Predicting how long this downturn will last is too difficult a task. The best I can do is to put it in perspective. The average bear-market decline has been around 35%. Presently the Nasdaq has been around 25% off its high. The average length of a bear market has been 18 months, but more recent ones have been shorter. This one is already 4 and a half months old.

In these times having patience is the key, lay low for a while. Don’t needlessly throw your money away. It is dumb to throw your money away on a McMansion or a monster gas guzzler SUV. Instead save that money and pay off your loans. Maybe invest some money in companies that develop solar panels. If you are young you can take bigger risks. Start your own business. If you fail, you’ll have plenty of time to pick yourself back up.

The sky will not fall, but the forecast looks stormy.