The Biggest Bubble Ever?

There's an interesting article titled The Biggest Bubble Ever that does a good job outlining and summarizing the causes of the current housing bubble. Author Fred Dattolo contends that the major causes of the bubble include:

• Overheated prices - "Until 1995, housing prices largely kept pace with inflation. In the last nine years though, home prices on average have spiked 35 percent after adjusting for inflation. ... In San Diego County, for example, the median price of a home is now $472,000. ... That represents an increase of 129 percent in just five years! Yet the county’s median income, at $52,000, has gone up only by about 11 percent during that time." I've blogged about the affordability of median priced homes and about SoCal's median house price reaching an all-time high in August 2005.
• Over-ownership - interestingly, the percentage of home ownership has gone up slightly over the past few years, from a rather static quarter century average of 65.2% to almost 69%. What's more, sub-prime lending, which is lending to those with less than stellar credit histories, has increased by more than 25% in the past ten years!
• Too much debt - growing up I was always told that one's monthly house payment should never exceed 33% of their takehome pay. (Fannie Mae suggests this percentage not exceed 28%.) Today, however, "about half of the lowest-income households pay out at least 50 percent of what they earn toward housing."
• Speculation - I've shared by views as to why, in my opinion, San Diego's housing costs are so high - pure speculation. Not only does speculation increase housing costs, but it also introduces more risk into the marketplace.
• Complacency - the author argues that it's just too gosh darn easy to buy a home these days. "Lenders are continually coming up with more unusual (and risky) mortgages to allow less-qualified buyers—even those with limited cash and shaky credit—to purchase a home. Many “predatory” lenders are making offers that are practically irresistible. The banks and mortgage companies are often complacent themselves because more than 75 percent of the single-family mortgages they originate are sold in the secondary market to either Fannie Mae or Freddie Mac—government-sponsored private corporations that assume all the risk." Risky mortgage options include things like interest-only loans and option ARMs.
• Denial - "Some economists deny there is a housing bubble, especially if they work for realtor associations. According to cbs MarketWatch, even Freddie Mac’s deputy chief economist insisted there is no housing bubble (September 8). One argument some forward is that housing prices are strictly regional in nature so a national housing bubble is impossible."

The article continues on to look at the impact of rising interest rates and possible economic scenarios that might unfold when this bubble does burst. The article ends with the following ominous message:

Let’s briefly take a broader view of the U.S. economy. The budget deficit this year is a new record, and the gap between what the U.S. produces compared to what it consumes (the trade deficit) is also smashing records. The personal savings rate is at near historic lows. Total homeowner indebtedness compared to disposable income is very close to the highest it’s ever been. Homeowner equity compared to market value is way below normal even though prices have been skyrocketing! Despite ultra-low interest rates, industrial production is dropping and employment growth is stunted to an unprecedented degree. Real wages for the American worker are 6 percent lower than a quarter century ago.

Never before have we witnessed the confluence of so many negative economic factors to this degree. We are truly in uncharted territory. Yet the U.S. economy has been perking along largely because it’s been propped up by the greatest housing bubble ever known. We’ve shown how that simply cannot continue. When it starts to unravel, it will likely lead to the biggest bubble bust in world history, hurtling the U.S. economy into chaos, reminiscent of the Great Depression—or worse! The shock waves could lead to a major global recession like we’ve never seen. Prepare now to reduce your standard of living.