ANOTHER DEEPER DIVE: The Detonator for another 2008 Housing Crisis Has Arrived!
We have now deployed all the essential pieces to completely blow up the housing market and take banks down with it on an even grander scale than last time.
For several years, when writing about the next housing collapse that would be part of the nation’s economic decline into the “Everything Bubble Bust,” I have written that housing would not lead the way into collapse this time as it did in 2007/2008. Times have changed a lot, however, bringing a massive transformation to the housing market since Covid, to where we are now perfectly restructured to create the possibility of another major bank-busting collapse.
What has changed is this: Goldman Sachs reported today that adjustable-rate mortgages (ARMs) have climbed to record levels, beating their highest mark in 2008. Proving that we learned absolutely nothing, as usual, even from our worst economic mistakes. 41% of the mortgages now held by US banks are ARMs!
These were the ticking time bombs that caused me to accurately predict the 2008 Great Financial Crisis, including particularly the global destruction it would create in the banking industry due to the scale of the ARM problem and number of loans that would go underwater. That is one prediction I cannot prove because I was not writing about economics at all when I made it toward the end of 2007, saying a housing bust so big it would wipe out global banks was imminent.
I have nothing in writing because that prediction and the terrible response by the US government and Federal Reserve to bailout banks and banksters in that crisis, creating the moral hazard that banks would learn nothing, is what got me started writing about economics. (You can find a collection of my earliest writings on economics, often humorous (I hope), in my little book DOWNTIME: Why We Fail to Recover from Rinse and Repeat Recession Cycles (It was about how the same characters who created bailout bonanzas for banksters in the Great Recession learned nothing because of the moral hazard created by just bailing out the trouble-causers, so they predictably started doing it again, particularly as they started back down the ARM and mortgage-backed-securities path.)
I remember arguing with a real-estate agent who said the slump in 2007 in Hawaiian Real Estate sales was nothing, as I explained to him why ARMs would destroy the housing market and banks. He laughed at my utter foolishness, telling me he had been selling high-end resort properties in Hawaii for years, so he news from seasoned experience 2007 was just another minor slump like all previous slumps—that Hawaii alway quickly recovered from such slumps because home prices in Hawaii always continue to rise.
I did, at least, successfully warn my ex-wife’s family to rapidly sell the small estate left to them by their mother. They had been holding it because houses were soaring in value, so holding it and fixing it up and renting it out while prices rose was an investment for all for the future that was better than money in the bank. They sold just a month ahead of the first bank—Bear Stearns—to go down in the housing collapse.
Adjustable Rate Mortgages are meaningfully abbreviated as ARMs because they are truly the detonators that armed the neutron bomb that went off throughout global finance. My key realization about what was about to come in 2007 came when I thought about the huge number of ARMs that had a five-year timer.
Adjustable rates were a big help to desperate buyers, and the program worked fine under the assumption that housing prices always rise; so, you always build equity in your home. Well before the five-year promised change in your mortgage interest, you would be able to refinance to a low fixed-rate mortgage because of all the equity built into your home—not equity due to having paid the loan down, but equity built by the constant rise in home values.
When home values had been sinking for the better part of the year in 2007 and I could see that those declining values were building momentum, not settling down, it dawned on me that the formula that kept ARMs safely unarmed was about to flip as mortgages started to enter the five-year mark at a time when the home had negative equity. The mortgages were just starting to show signs of trouble with refinancing because banks didn’t want to refi at a low fixed rate when home values were sinking.
Up until that time, there was a second built-in safety: you could always sell your home in a heartbeat for more money than you paid for it. So, even if a bank would not refi the home you were living in, you could sell it quite easily and pay off the loan before the new, much-higher interest rate kicked in on the ARM. That safety was also being removed by falling values.
The rest is history. From there the long list of major banks and minor banks to crash in 2008 began:
2.1 Washington Mutual Bank, Henderson, NV
2.2 IndyMac Bank, F.S.B., Pasadena, CA
2.3 Downey Savings and Loan Association, F.A., Newport Beach, CA
2.4 Franklin Bank, SSB, Houston, TX
2.5 PFF Bank and Trust, Pomona, CA
2.6 First National Bank of Nevada, Reno, NV
2.7 ANB Financial, National Association, Bentonville, AR
2.8 Silver State Bank, Henderson, NV
2.9 Integrity Bank, Alpharetta, GA
2.10 Columbian Bank and Trust, Topeka, KS
2.11 Community Bank, Loganville, GA
2.12 Haven Trust Bank, Duluth, GA
2.13 Security Pacific Bank, Los Angeles, CA
2.14 Alpha Bank & Trust, Alpharetta, GA
2.15 Freedom Bank, Bradenton, FL
2.16 First Georgia Community Bank, Jackson, GA
2.17 Ameribank, Inc., Northfork, WV
2.18 First Priority Bank, Bradenton, FL
2.19 First Heritage Bank National Association, Newport Beach, CA
2.20 Main Street Bank, Northville, MI
2.21 Douglass National Bank, Kansas City, MO
2.22 First Integrity Bank, National Association, Staples, MN
2.23 Meridian Bank, Eldred, IL
And, of course, the failures did not stop with 2008. They continued for another two years, through a period of massive bailouts.
Now that we have more ARMs than the climax we hit in 2008, we also have the same kind of deteriorating housing market, setting the stage for another global crisis exactly matching 2008:
Prices are starting to decline.
Homes are almost impossible to sell if you want to get out from under a mortgage where your equity is going underwater.
Interest rates have risen above what they were at the time the home was bought and far above the low ARM introductory rate that teased people into buying.
AND … we have gone right back into bundling all these mortgages into mortgage-backed securities, which became the delivery vehicle or the widespread explosives, distributing the nasty little bombs into asset holdings all over the world.
All the mechanics of this atomic time bomb are fully back in place to where, we could be near the start of another bank-busting housing crisis.
In the remainder of this article, I will lay out the details about the big turn in the housing market that can be seen right now and the building ARM crisis and lay out the likely timing for the next bust (for my paying subscribers who appreciate my work enough to support it). Along with that, I’ll also provide my best time-tested advice for both buyers and sellers in this transforming market based on sound past experience.