What really caused a credit crisis? Many would speculate and blame it all on the rising prices of commodities, especially the unstoppable ever-rising gold and fuel prices, and many others. Home prices actually need to fall back to affordable levels in order for an average person to avail of home acquisition opportunities. That is because, if an average person still needs home financing with teaser rates to be able to acquire or afford a house, then of course, home prices are still understandably way too high.
Credit crisis is basically the result of a nationwide decline in home prices and not the prices of collateralised debt obligations (CDOs) nor the derivative securities. And in order for the said crisis to stop, decline in home prices should end. The further the home prices decline, the more unpleasant the problem becomes as it entails increased delinquencies, more CDO losses, foreclosures, and further stress in the banking system.
J. Bianco of Asia Asset Management illustrated that whole scenario with reference to a classic case of an indebted man to that of boiling a frog—start off with cold water, slowly turn up the heat, and the frog will not realise that he is in trouble until it is too late.
From this I believe I will need to re-assess my financial position once more to determine whether or not I am situated in the plus or minus side of the pole. It’s a thriller!
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