As you're all no doubt aware, there was an, shall we say, economic hiccup in the global markets over the past few days. We have no illusions that you come here for news and updates on these issues, so we're not going to inundate you with details of the fallout—you've probably heard it all already from other sources.
What's worth discussing here is what effects the bankruptcy of Lehman Brothers, the Bank of America purchase of Merril Lynch, the impending collapse of AIG, and the healthy losses that the stock market is absorbing will have on the housing market. After all, that's our wheelhouse.
The ultimate impact on housing remains to be seen, but you can bet that we won't escape this unscathed. The giants doing the tanking in this current financial episode are so large—and their collapses represent such an obscene amount of total wealth vaporized—that to expect no effect is unrealistic.
In the short-term (and probably long-term), we can expect the credit standards to either hold steady or continue their tightening as global banking institutions focus on fundamentals and conservatism while riding out the storm. In other words, zero down mortgages are now officially going the way of the dodo for a long time. The events of the last few days seal that deal. And expect additional use of risk-based interest rate pricing for consumers with lower credit scores.
We can also expect a decline in consumer confidence, which is already at a rocky juncture. When consumers aren't confident, they hold back on spending -- especially on big ticket items. This could extend to the first-time home buyer segment of the market, who may become more wary of diving into waters that seem increasingly cold, even when signs point to good news for housing. Big, bold headlines trumpeting the collapse of major financial institutions tend to have more sway in the emotional recesses of our brains than the less sexy news of a recent uptick in home sales.
Obtaining a completely thorough understanding of the economic events that transpired the past few days requires a PhD in Finance. Higher education is expensive, so let's take the low-rent route and sift through some links on the subjects at hand:
- Alex Stenback says the Lehman bankruptcy will bring mortgage rates down even further. "...the immediate impact on main street will be lower mortgage rates, as money runs to the safe haven of (now Govt guaranteed!) mortgage bonds and other securities (treasuries also are rallying today) to wait out the storm."
- Robert Reich, former Secretary of Labor blogs about the mess: "Two years ago I asked a hedge fund manager to describe the assets in his fund. He laughed and said he had no idea."
- A New York Times editorial: "Lehman’s bankruptcy filing may even provide much-needed transparency to a financial system that has been hamstrung for more than a year by a lack of good information — on who owns what and who owes how much and to whom." Hat-tip to John Watne.
First, I am a suburban rap apologist, and now, the low-rent route.
My degree is absolutely nothing to do with finance is offended.
Posted by: Alex Stenback | September 16, 2008 at 01:49 PM