How Low Can It Go?

I am frequently asked the question: How much lower are house prices going to go?

The answer is 80.

If this is reminiscent of the movie, The Hitchhikers Guide To The Galaxy, where the universe was awaiting the The Answer to Life, the Universe, and Everything. In the story, the Deep Thought computer (after taking nearly 7.5 million years) has calculated the answer to the ultimate question to be 42.

When the people are upset with the answer, Deep Thought tells the programmers that they should have been more specific in the question they had asked.

Similar, too, is the answer to the initial question of how much lower will housing prices go?

When I responded with 80 I meant it as a threshold. My reasoning is illustrated with the listing of home on the market in the city of Oakley in east Contra Costa County that was built in 2006, is 2,373 square feet, 4 bedrooms, 3 full bathrooms, on a 8,249 sf lot and is an REO (Real Estate Owned - foreclosure) for $189,000. That works out to be $80 per square foot.

That is a sales price less than what it would take to build the house even if you got the land for FREE. The construction costs, materials, and permits would far exceed $189,000!

So the question should be more specific to areas within the county and city. Some areas (even within the same city) have more room to adjust while others, like Marin County, and San Francisco have experienced very little downward adjustments in value.

Stay tuned for more ups and downs as the Government gets involved in the mess...cause we all know how efficient they are...

ttfn,

Jeff

Who's Fault Is This Whole Mess?

It has always been the American Way to point the finger of blame whenever something bad happens. It is just our nature.

Unfortunately, I am no different...my only problem is that I don't have ENOUGH fingers to point the blame at...(sorry for ending with a preposition)

This current financial crisis has many villains. It started in 1995, when then Federal Reserve Chairman Alan Greenspan endorsed the use of credit derivatives (Credit Default Swaps) as a means of creating additional revenues for the banking industry (which smacks of a conflict seeing that he works for the banking industry).

Warren Buffet had once warned that Credit Derivatives were, "Instruments of Mass Financial Destruction..."

In essence, Credit Default Swaps (CDS) are bets. A buyer of a swap is buying insurance from a seller of the swap against the default of a bond or note that the buyer currently holds. The buyer pays the seller a "premium" for this insurance. In the case of a default, the buyer goes to the seller to be made whole. This all is fine and good as long as the seller has the capacity to pay the buyer for his loss but when cannot pay then it is "Houston, we have a problem..."

Highly leveraged gambling on CDS's created monumental amounts of premium revenue income to the brokers, investment banks, insurance companies (like AIG), and hedge funds involved in this Las Vegas style of financial feeding frenzy.

It has been estimated that the total notional value of the Credit Derivatives outstanding contracts are in excess of 1.4 quadrillion dollars!

That is a thousand trillion. It is 10x the U.S. GDP or 2x the entire worlds GDP!

Yikes!

The $400 billion bailout, unless carefully managed and regulated, will not be sufficient to bring us out of this mess...especially when you consider the Treasury Secretary Henry Paulson was Goldman Sach CEO prior to his appointment...hmmmm....

For more info on the role of CDS's in the crisis read Ellen Brown's great take on this whole mess.

ttfn,

Jeff