Housing Bubble Damages American Economy — Caused by Delusion
July 22nd, 2008
Ironically, I projected the housing price decline in my book, Achieving Prosperity, a couple years ago, but was too early. Indeed, the party was just getting started.
What caused this bizarre situation and in turn those at the banks and Freddie Mae and Mac, and even threatens the foundation of our economy? As usual, it not black and white, but here is a few key reasons:
1) The false claim that real estate “never goes down” was pushed so hard by the industry, that folks, banks, etc. felt little risk.
2) In truth, many people knowingly agreed to borrow much more than they could afford to pay.
3) Some banks, real estate agents, mortgage companies, etc. let, even encouraged, folks buy too much house.
4) Bizarre loans, like for 100% or more of the appraised value, etc. Even now with the meltdown in full swing, I saw an ad recently offering to let people “Move in Now and Get Cash with a 103% Loan”.
5) Some people don’t feel tied to the mortgage or house like they used too, and are walking away from negative equity situations, though it severally damages their credit rating. Meaning some people default when they realize their loan is more than their equity, and this in turn pushes down neighborhood values as the house is priced low to sell immediately.
How can we fix this situation? The politicians would love to sell us on a silver bullet, but there just is no easy answer. In the meantime, no one should be able to borrow more than 90% of the value of a home at move in, proof of income and/or assets should be concrete before loans are given, and buyers expectations about rising home values needs to come back to earth.
It will take time, and could get significantly worse in some local areas before it gets better.
Todd Lipscomb
MadeinUSAForever.com
Tuesday, July 22nd, 2008 at 12:03 amand is filed under Uncategorized.
You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.
The last standout of the bubble - Seattle - is finally showing pretty big leakage in their over inflated prices. It won’t be long until we are back to reality in pricing:
http://www.geldpress.com/2008/07/seattle-condo-pain/