The Foreclosure Bubble and where its going.

The Foreclosure Bubble and where its going.

Jun 24, 2008 4:51 AM by Paul White

First lets ask ourselves what causes foreclosures?

  • Home owners with variable interest rates, who could only afford the house at this interest rate and were not prepared for the rates to increase.
  • Home owners who loose their jobs or can't work, causing them to not make payments.

The second situation is the only legitimate reason homes should ever get foreclosed.  The first is simply a matter of home owners who don't take the time to educate themselves on how a mortgage works, and honestly should not own a home in the first place.

What is scary is there are alot of people with Variable interest Rates. I predict within the next 2 years 90% of them will end up being foreclosed.  Why would this happend?  Because the Fed has reached a point where it has no choice but to raise interest rates. 

Why does the FED need to raise interest rates?  Because by doing so it will increase the value of the US dollar on the currency markets.  This gives us more buying power of imports, meaning products that we imports ( such as Oil ) will go down.  Interest rates are a way for the FED to stimulate the economy, and control inflation.  The Lower the Rates the higher inflation will be, but the more stimulated the economy will be to buy.  Interest rates have been so cheap it has caused a bubble in real estate.  It has made money so cheap, people who normally couldn't afford a house, could now afford one. But when the FED has to raise interest rates those on variable mortgages are hit with higher payments. 

In the late 1970s  to get inflation under control the FED raised interest rates.  The Fact is to get inflation down you have to raise interest rates to a value higher than inflation.  30 Years ago this resulted in Interest Rates over 20%.  This resulted in the Dollar going up and the economy staying flat with no growth.  However over the 80s Rates slowly creeped down, and we had a boom.  The 80s were thought as times when money was good, everyone was making money. 

What I am saying is we haven't hit the bottom yet.  Foreclosures will continue increase until we have run out of a supply of variable Mortgages.  The fact is we have too many people living on Credit.  They owe more than they are worth, and their minimum payments are more than they are able to make.  We have an entire generation of people who have lived the Bling Bling Lifestyle and the world is going to come tumbling down on them.  The best thing you can do is pay off your house. 
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