Constant's pations

If it's more than 30 minutes old, it's not news. It's a blog.

Monday, October 18, 2004

UK Housing Bubble -- Signs it is deflating, a warning for the US housing market?


During times of great euphoria, people pay high prices for things that do not have much value. When the price is expected to rise, few care how much debt they take against that asset. They hope to sell the asset at a higher price, pay off the loan, and walk away richer, wiser, and happier.

If only it were so, Toto.

The ugly truth with asset-backed securities is that, well reality hits. Those valuations prove inflated, the debt behind that asset far higher, and so go the dreams of fortune.

It is with this in mind that we see the continued erosion of prices in the UK. Is the same thing happening in the US markets?

Perhaps the real question the public should consider is, "Do they really know what they are getting themselves into?"

We've seen the inviting bait the prospect of ever rising prices will have on Fannie Mae; allegations that earnings were tweaked to justify commissions.

Yet, below the politics, there is a greater tragedy. That is the rude awakening of how quickly real estate markets, indeed markets in general can turn. The wrong way.

With time, we will come to understand whether the recent interest rates prick the housing market in the US. And with time, we will find to what extent the "loose valuation methods" is a phenomena not isolated to the auditing industry.

We saw the Asian bubble burst in 1996-7. We also are living with the fallout of the early 1990s real estate bubble. Asset classes remain mired in bankruptcy, still selling for pennies on the dollar. Indeed, the lawyers enjoy the dispute as they dig a formidable trench between once happy dancing partners.

Buyer beware. That debt can be an anchor. Those assets can become liabilities.

Indeed, what you do not know today could destroy your financial security. If you survive, let's hope you take the time to figure out what you missed, and then get up to fight again.