Every cloud has a silver lining. So it may be time to see who gets the cloud and who gets the lining.

     We know who gets the cloud. It’s anyone who has been making a living from building, selling or financing residential real estate. It’s anyone who has depended on being able to use their house as an ATM with serial cash-out refinancing. And it’s lots of people in the financial services industry.

     Jobs are disappearing.

     Some of that cloud will also cover the rest of us because there is a growing probability that 2008 will be a recession year. If you listen to the Chicken Little crowd, it will be a monster recession. If you listen to the Happy Talk crowd, it will be just a growth slowdown.

     What’s missing in most discussion is the fact that our financial markets are shadows on the wall, erratic representations of the day-to-day world that geeks call “meat space.”

     The question is what all of us meat space residents are going to be doing to adapt and cope.

     Enter, the Yard Sale Economy. That’s the economy where once-new goods go back on the market to be sold as either used (as in clothing at a consignment store) or “pre-owned” (as in the purchase of an aging Ferrari or vintage Patek). Lots of people are going to take stuff out of their closets and garages and try to sell it.

     You can understand why this will happen by thinking about two things. The first is the sea change in thinking we’re undergoing. The second is what regular people can do to stay afloat once they figure out that a new supply of credit cards won’t be in the morning mail.

  • The sea change in value thinking. It’s really comfy to live in a world of rising object values. We’ve been enjoying it for a long time. But if home values continue declining, we’ll start looking at houses as related to cars and other consumer objects. Cars depreciate every year. They typically lose about 20 percent of their value a year. Other stuff is even worse. Basically, most consumer stuff loses 50 percent to 100 percent of its market value the moment you take it out of the store.
  • Staying afloat. If your mortgage is about to reset to a higher interest rate and you try to figure out where you’ll find the payment money, it probably won’t be a higher salary or a second job. But the cash might be found by selling something. For example, you could sell a car and pay off its loan.

     Here’s a very rough example. Suppose you own a $240,000 house with a $200,000 adjustable-rate mortgage. The mortgage currently has a 5 percent rate and requires a monthly payment of $1,074. Suppose you also have two $25,000 car loans at 7 percent. Then you’ve got two car payments, $495 a month each. And suppose you’ve also got a credit card balance of $10,000 and make a minimum payment of 2 percent or $200 a month.

     Query: Where do you find the money to cover your mortgage when it resets to, say, 7 percent and a new monthly payment of $1,331? That’s another $257 a month.

     Answer: You cover the increased payment by selling a car. You replace it with a less expensive car. Hopefully, a no-payment car. That can reduce monthly debt service by as much as $495.

     Will everyone do this? No way. But enough will do it to shift the supply/demand balance and make it a buyer’s market.
The basic relationship here is simple. It costs $6.65 a month to support $1,000 of home mortgage at 7 percent. But it costs $19.80 a month to support $1,000 of 7 percent car loan. If you owe money on a depreciating house, you can improve your position by getting rid of faster-depreciating things like cars. Then you apply the liberated income to the house payment.

     Cars, boats and other “stuff” eventually depreciate to zip. But houses usually appreciate. Millions of financially strained households will empty their closets and garages before they give up their houses.

     That’s why I think a substantial portion of the ongoing real estate story will play out in other markets. That’s where the solutions are. Those with cash get the silver lining: 2008 will be a good year for bargain-hunting.