Bubble Trouble - Is the U.S. Economy Bushed?
by Marvin Wolf, Esq.

Forget Al Qaida. America may soon fall victim to its own home-grown weapon of mass destruction. Our nation’s future rests on whether or not there is a housing bubble.

Competing economic forecasters have in recent years been acting like schoolgirls, taking turns picking daisy petals, saying “There is a bubble. There is no bubble. There is a bubble, etc.” in an attempt to predict the economic future of the United States.

On the one hand, there are record foreclosures and debt is at record levels. There is a bubble.

On the other hand, some economic signs have been good, such as low interest rates and increases in Gross Domestic Product. There is no bubble.

What should you believe? Believe your gut instincts. It should be telling you that there is a bubble, it’s huge, and it’s going to pop so loudly the world will hear it.

According to Time Magazine, notwithstanding historically low interest rates over the last three years, “[t]he number of mortgages more than 90 days past due is up 20 percent, the number of foreclosures is up 18 percent, and the number of household bankruptcies is up 33 percent.”

What do you think will happen to that number when interest rates start to rise as they are now doing?

Mortgage debt has increased at a faster rate than home values. Banks and mortgage companies are lending buyers money to buy homes based on 103% of the home’s value. They don’t care because they take no real risk – they resell the mortgages in the secondary market as fast as they can get them signed.

About 35% of new home mortgages this year are adjustable rate mortgages (ARMs), up from 19% in 2003, because it’s the only way many people can obtain a mortgage at current inflated home prices. These homebuyers either can’t afford or don’t have good enough credit for a fixed rate mortgage. Even if some of those mortgages contain caps, even capped interest rate increases could cause monthly payments to double.

What do you think will happen to the ability of people to get mortgages or pay them as interest rates climb? What do you think will happen when people will no longer be able to afford to treat their houses as automatic teller machines and must pay the piper?

What do you think will happen when the choice is pay the mortgage or pay for food?

I’ve heard the counter-arguments. The biggest one is that there may be small regional bubbles but that nation-wide, housing values are strong. However, a recent article in the Economist referred to a study that shows home prices are overvalued in 20 states that represent more than half of America’s population. A domino effect could occur when enough regional bubbles collapse, triggering a home price avalanche on a national scale.

The best argument, however, is common sense. Panic buying eventually ends. If housing prices continue to rise, no one will be able to afford to buy. 25-year mortgages became 30-year mortgages. Now there’s a 40-year mortgage. At some point, it has to stop. I’ve heard that Japan has 100-year mortgages, but would you pay for one?

What do you think will happen to the U.S. economy when growth in the housing sector, which has supported a record federal deficit, collapses?

I think a house of cards collapses with it. Pop.

Marvin Wolf is a Newark attorney who specializes in consumer and bankruptcy law, real estate transactions and immigration. He practices in New Jersey and New York, and is admitted to the bar of the United States Supreme Court in Washington, D.C. He is a member of the National Association of Consumer Bankruptcy Attorneys, the Union, Essex and Middlesex County bar associations and has served as a volunteer consumer case arbitrator for the Better Business Bureau of Metropolitan New York. This article is intended to convey general legal information and should not be considered legal advice.