June 12 Analysis

June 12 Weekly Analysis

The loss of home equity with a continued slide of home values will further diminish the ability of the rest of the economy to recover, and simultaneously the ability of the rest of the economy to recover diminishes the ability of the home values to stop sliding.

Admittedly, the ability to take second trust deeds both fueled a strong consumer economy and at the same time placed homes underwater as prices started to slide.

Apparently, borrowing against equity was overdone – but there is no economic yellow light to indicate when so much is too much.

The continued home value slide places still more homes underwater – even homes that had reasonable value remaining just a few months ago. Now, there is no room left to take a loan against many houses to keep a small business alive, and more and more vacancies appear in local shopping centers. That translates directly to more homes going on the auction block because as businesses fold, the business owner is unable to repay the trust deed he or she used to secure the loan to open the business.

The amount of surplus one has in their home determines to a huge degree the feeling a family has about their financial worth – and that is reflected in the confidence they have in the economy. Almost everyone sees their home equity diminishing along with their confidence in the economy, and that feeds upon itself.

Obviously, an outside force needs to be instituted and quickly, because housing markets, like all markets, tend to overcorrect. In the Great Depression, FDR tried pump-priming without success, but a World War was sufficient to do the job, at a very high price.

Both exuberance and fear are contagious. Entropy has set into the system, and a shock of considerable magnitude will be necessary. Working around the edges will not do the job.

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