The two-step crisis

One of the things that is very confusing about this crisis is that it is at least a two-edged sword. The first edge is the huge bubble created in the housing market. People who live in california, or florida or las vegas have visible evidence of this every day and can see the devastation all around them.

In my neighborhood, though, we didn't have land to build, so there are no new developments, no new houses. Turnover is relatively slow, so we don't have a lot of people who bought/built in the last couple of years, borrowing bubble-amounts of money that they can no longer pay back. Most people have been in their houses for at least 5 years, if not 15 or 20 (or 25, like me). Unless they pushed home equity loans to the max, the falling of housing prices simply means that they will make LESS on their investment than they thought, a disquieting thought, but not terrifying.

People in my neighborhood, unless some crisis presents itself, have no real reason to sell, and can afford to tell themselves that the market will improve, and so they will wait.

It's an uneasy quiet. It's astounding how few sales one can find on zillow. In a town of nearly 8000 homes, zillow shows that 6 or 7 have sold in the last couple of months. Those sold at reasonably high prices, so our politicians and such are all patting themselves on the back like they have averted all the troubles.

The real mortgage crisis will hit us in the second wave. The fact that seems to be missing from much of the analysis is that the BANKS have all gone national and their lending was heavily concentrated in the go-go areas of california, nevada and florida for the last couple of years. Even worse, as the market got saturated and competition got stiff, more and more of them found ways to get around the inconvenience of finding a buyer for the mortgages they were creating and kept them on their balance sheets (or so barely off their balance sheets that they are quickly finding their way back home.)

The BANKS are insolvent. They are hemming and hawing and such, but bottom line is that their assets are less than their liabilities. They were so leveraged that a crisis less than this one could have brought them down, but this crisis is so big that there isn't anyone out there big enough to prop them up.

That leaves no one to lend, and that is when we will begin to see the crisis hit us. When someone finally does need to sell, the pool of likely buyers has been greatly reduced by tighter lending standards, requiring bigger downpayments and higher incomes.

This credit crunch will take no prisoners.