Mortgages, housing, interest rates, and all that

I just came back from spending a week in Charlotte NC. Despite the fact that Charlotte is a much larger city with a much larger economic base, housing there is considerably less than what it is here in the Hampton Roads area. I would dare say 50% less, just comparing what I can purchase there versus here with a given budget.

That being said, it is interesting to see some weakness in the housing market, and it is about time. Michigan, is about a year and a half ahead of the curve on this, as their tipping point really started with Delphi declaring bankruptcy in October 2005. After that date, the real estate market in Michigan started to nosedive. At this point, housing is 30-50% off the peaks of late 2004/early 2005. Lenders are lowballing appraisals, taking 10% off the lowest one, and then demanding more down payment. Michigan is also in the top three states for foreclosures, trailing only California and Nevada.

What is happening in Michigan is starting to happen throughout the country. This was an asset and credit bubble, plain and simple. It what happens when there is too much money chasing a finite amount of assets. There is plenty of blame to go around: The dumb schmucks who bought beyond their means have little sympathy from me. Neither do the mortgage brokers who just wrote mortgage after mortgage on "liar loans" and dubious appraisals. They were so greedy with the commissions that they cranked out loan after loan. Well, they sold them all right, but these brokers are often on the hook for any defaults for five years after they sell them off. Seeing these brokers saddled with their defaulted loans will look good on them.

I have no sympathy for the bond rating agencies, who slapped investment grade on these asset backed securities, even though these tranches had a lot more risk than what many were led to believe. Standard & Poors, Moodys and the like have a lot of egg on their faces after telling institutional investors that these MBSs were AAA or BBB grade after all these defaults.

The institutional investors, who were so desperate for yeild that they bought these securities, are just as liabile. Caveat Emptor - all that additional yield leads has some risk, and investors were way too complacent.

These excesses are typial at the end of a credit cycle. We have just witnessed, in my opinion, the end of a 26 year bull market in bonds, dating back to 1981. We are now entering a 20 or 30 year period of raising interest rates. Interest rate cycles are historically very long-term, and we're looking at the start of a new period after shaking out the excesses of the markets from the past few years.

There was too much money out there, and now the rammifications of such excesses are starting to reverborate through the economy. The question is how long will it last for.