Is The U.S. Heading Towards A Recession?
Mar 17th, 2007 by Wealth Builder [This post is written and copyrighted by Wealth Building Lessons (http://www.wealthbuildinglessons.com).]
Jim Rogers, successful hedge fund manager, investor and author of incredibly interesting books is so certain that real estate prices are going to drop in certain “bubble” markets that he’s putting his $15 million Manhattan home for sale. Its not that he needs the money, but he’s probably a value investor. And like many value investors, he can’t bear not taking advantage of selling obviously over-inflated assets. Warren Buffett, probably the most famous value investor on earth, also believed that his Laguna Hills house was over-priced and sold it a while ago.
So why do Jim Rogers and Warren Buffett think property prices in some parts of the country are about drop? Probably because of the melt-down in the sub-prime lending sector. Companies like New Century Financial, Accredited Home Lenders Holding Co. and Novastar Financial Inc. made millions from loans to people with lousy credit. And instead of holding on to their loans like lenders they turned around and resold them on wall street and thus become more like mortgage brokers. Now the actual lenders on wall street are demanding that they take back their lousy loans.
Since they don’t have enough money, a lot of sub-prime lenders are going bankrupt. The result is that there will be a lot fewer loans available for people with bad credit. Since the sub-prime loans were 25% of the market, this means that 25% of potential buyers will probably not get loans and won’t be able to purchase or refinance a house in the near future. Essentially, 25% of the buyers just became non-buyers. This will put a downward pressure on the house prices in places where there is excess supply and excessive pricing.
Also, a lot of sub-prime borrowers had adjustable loans that are going to adjust upward in the next 18-24 months. Since the 100% financed loans have almost disappeared, if they don’t have equity in the house, they won’t be able to refinance. So when the loans adjust, they could easily face an increase of $400-$1000 per month. If they haven’t budgeted for this, or just can’t afford it, they’re probably going to go into foreclosure.
There’s also a good chance that the other “lenders” who do alt-A and prime loans (basically non-sub-prime loans) will also have a higher default ratio than they’ve estimated. If this happens there’s a good chance that it will probably be more difficult for everyone to get loans.
As if this wasn’t enough, since 2001 40% of all new jobs were related to the real estate industry. (This includes agents, mortgage brokers, escrow officers, appraisers, construction workers, framers, painters and so forth). As this sector slows down and mortgage companies go out of business, a lot of people will lose their jobs. Many of them will be forced to move from the over-priced areas putting further downward pressure on already deflating home prices.
If this scenario plays out, theres a very good chance the economy will go into recession. At these times, people with a lot of cash make out like bandits. Thats probably why Jim Rogers is selling his house. He’ll probably be able to pick up an excellent deal from a bank and get more bang for his buck.
Even Alan Greenspan said that the housing malaise may spread to other sectors of the economy and push us into a recession. After the stock market dropped the next day, he modified his statement and said that a recession was possible but not probable.
There is a very good chance that Ben Bernanke and his buddies at the Federal Reserve will lower interest rates later this year. If this happens, it may slow down the inevitable. But Jim Rogers is selling his house and Warren Buffett have already sold his. (Incidentally, so have I).
This doesn’t mean that national home prices will fall. But considering that a majority of the population lives on both the coasts, and these places have experienced incredible home price increase, a fall in coastal property prices will definitely skew the national averages. And will “probably” push the U.S. into a recession.
Related Reading
- The Best Investment Advice I Ever Received: Priceless Wisdom from Warren Buffett, Jim Cramer, Suze Orman, Steve Forbes, and Dozens of Other Top Financial Experts
- Investment Biker: Around the World with Jim Rogers
- Adventure Capitalist: The Ultimate Road Trip by Jim Rogers
- Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market by Jim Rogers
- Crash Proof: How to Profit From the Coming Economic Collapse
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4 Responses to “Is The U.S. Heading Towards A Recession?”
But Jim Rogers is selling his house and Warren Buffett have already sold his. — Wow I did not know this.
I feel they put the blame on sub-prime mortgages but in fact it is all adjustable rate mortgages will affect families.
I wanted to wait at least 3 years until I sell. Now I fear it will hurt me in the long run.
I have been considering selling my house here in the UK, Where house prices are way above the affordability of most people.
But even if they do go down short term they’ll rise again in the long run.
People have been saying house prices would fall here for years but they’ve kept rising, it would be a gamble to sell as if prices kept rising at their current levels I’d never be able to get back on the property ladder.
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