In 2005, the first signs of a crisis in the US housing market began to appear. It wasn’t economic: in fact at that point economists were mostly happy to boost the US Fed’s joy at increasing residential property prices because that feeds into "consumer confidence.″

No, the first sign of the crisis was e-mail spam.

Although at the US Fed, Alan Greenspan’s crew hadn’t done their history lessons, exactly the same situation had arisen in the UK in the 1980s and as house prices started to rise, so did the number of ill-advised and downright fraudulent mortgages. And, not long afterwards, so did interest rates.

The ill-advised and fraudulent mortgages were promoted by all kinds of advertising but not, because it hadn’t been invented, spam e-mails. They promised loans that started with low interest rates – with the plan to churn the loans when the low rates reached their end. They offered ″self-certification″ loans which, in essence, said ″if you tell the lender that you can afford this loan, it will believe you without evidence.″ And they offered to obtain loans based upon fraudulent documents: fake contracts of employment, false wage slips, even references on letterhead of non-existent companies. They even bribed bank officers to grant loans that did not qualify and, of course, as all lenders were in competition, internal controls became lax both to ensure business was obtained and that offices were so overwhelmed with applications that corners were cut.

In 2005, that all started to happen in the USA. And that caused a spiral in property prices and, eventually, chickens came home to roost and the housing market collapsed. Borrowers went into massive negative equity i.e. they owed more than their homes were worth. Those debts had to be repaid even though the bank repossessed and sold their property.

We all know the consequences of that, a large slice of which can also be laid at Greenspan’s door: during the last days of the dot com bubble, he said Collateralised Debt Obligations will be of great benefit to Wall Street″ or something very similar.

Talk about the law of unintended consequences.

All of this is ancient history, right?

Well, no. Not exactly. In fact, not at all.

In a paper by the highly respected Federal Reserve Bank of St Louis it said ″House prices in the United States were 14.1 percent lower in the first quarter of 2008 than they were a year earlier, according to a widely cited measure of U.S. house prices, the S&P/Case-Shiller (S&P/CS) National Home Price Index.″

https://files.stlouisfed.org/f...

The St. Louse Fed, as it likes to style itself, was aware of the risks to the banking sector of a falling property market as early as 2006 – and of its causes. (https://www.stlouisfed.org/new...) and by 2007 it was questioning what effect falling house prices would have on the US economy (https://www.stlouisfed.org/new...)

Statista.com says that, according to the St Louis Fed, ″median prices for U.S. houses rose from approximately USD323,000 at the start of the coronavirus pandemic to around USD429,000 in Q1 of 2022. Over the same time period, U.S. inflation hit 11.5 percent.″

The US Federal Housing Finance Authority was, also in March, of a similar mind (https://www.fhfa.gov/AboutUs/R...)

But now we are in Q2 of 2022. And if we look at the regional not national picture, it’s far from rosy. First, as of the beginning of June, the St Louis Fed says ″U.S. inflation is comparable to 1970s levels.″

In early May 2022, the US made its biggest interest rate rise since 2000. Even so, it increased to only 1%. The prime loan rate remains at 4%. Inflation in March was the worst since 1981 at 8.5%. Home loan rates of three percent above the base rate is itself a recipe for disaster because if central bank rates are the primary, or only, tool used to cool the economy, those with bigger loans find their payments increasing very rapidly.

And here’s where the trouble begins. Central Banks seem to be stuck in a trap where the only two tools available to them are interest rates and quantitative easing. Well, that and dishing out money willy-nilly in poorly executed loan and grant schemes.

But interest rates are a blunt instrument that are also regressive. Worse, they don’t take account of different causes of inflation.

Most of the inflation around the world is cost-push, it is not demand-pull. Increasing interest rates discourages spending using borrowed money – and that’s what fuels demand-pull inflation.

Cost-push inflation affects those things that people can’t live without. Food, power and the like. In short, household expenditure goes up while household incomes, at best, remain the same.

Credit comes in many forms but in most cases, the lenders which are most lenient as to re-arrangements or even postponement are mortgage lenders - provided that some equity remains in the property. So that is the credit most likely to be pushed back because the penalty that will be paid is still decades away. But this approach becomes untenable when home loans are close to 100% of property values – and when prices are falling.

History shows that slowly reducing interest rates do not create a sudden increase in borrowing. But slow increases do not act as a disincentive. So creeping up a fraction of a percentage at a time will increase the burden on households while not discouraging them from borrowing elsewhere.

This is a regressive form of monetary policy which, in a laissez-faire economy, creates a roller coaster economy.

There are figures to show that the GDP of the USA is growing. But that’s not quite as it seems.

In 2015, it was 18.24 million million (which is not a trillion – it’s actually a billion as Websters’ American Dictionary and the US Department of Defense) used to get right).

It was 21.43 mm in 2019. But in 2020 it had fallen to 20.94. Yes, of course, the pandemic had an effect and we might be surprised at how little effect it had. Then in 2021, it grew again to 23.00mm. So someone’s making money. The people that aren’t making money are many of those with ordinary jobs. And that’s the group that is most affected by even small increases in mortgage rates. This is from The Economist.

That begs the question: what’s the prognosis for the housing sector? US real estate company RedFin has produced the following graphic:

Redfin is actually quite bullish on the housing market and this image does not give any information as to how much prices are falling.

But the stars are aligning, as they did in 2006 when the increase in US repossessions began as documented in various finance industry papers at the time.

Inflation is inflation so far as homeowners are concerned: they just know they have to juggle their money more.

What’s different since 2006?

Two things: the first is the hope that crypto brought to many. Those who ″invested″ in crypto are now seeing their ″savings″ wiped out or locked-in just as they were when so-called hedge funds failed or closed their withdrawals.

The second is that the range of available borrowing has increased with the development of FinTech. Buy Now Pay Later and various other schemes are now the last line of credit – before the pawnbroker and the street corner loan shark. Add in the resurgence of pay-day lending with its flashy TV ads and an app and the stage is set for a crisis. Default rates on FinTech loans have caused consternation around the world.

Banks are far more cautious about home loan lending so remortgages (which was the stated preference of Ben Bernanke, Greenspan’s successor) are likely to be more difficult. Bernanke's suggestion that people borrow against the equity in their homes while prices were falling was further evidence of how disconnected the US Fed was from the real world that most Americans live in.

While there is not the same global interlinking created by the CDOs that were the root cause of the USA's crisis going global, banks are connected. There are those which are keeping very coy about their losses in crypto. The big question is this: how long is it going to be before the US housing market breaks and mass repossessions start again?

All the signs are there: the home loan spam started up again in 2019 but was quickly squashed by the pandemic. That’s the only missing element although it's not entirely absent. Rapidly rising home prices, mortgages at imprudent proportions of income, increasing cost of interest, increasing inflation. And a glut of ″for sale″ properties pushing vendors into what many would consider realistic, not discounted, pricing.

All it needs is a little push and then the spiral will begin.

There is already a crisis and, just as in 2005-6, no one wants to admit to it.