Lazy Sunday: Real Estate Bubble-ology

Filed in National by on July 29, 2007

There have been a few “how’d it happen?” type posts around. This one (via eschaton) is particularly clear and cogent.

Potential home buyers for the most part don’t really care what the sticker price is on the house; they care about the monthly mortgage payment. In the early days of the house price boom, the “culprit” was simply low long term interest rates. People with good credit were getting cheap 30 year fixed rate mortgages, allowing them to buy a more expensive home for a cheaper monthly payment. As housing prices started to go up, subprime lenders started to jump in and widened the pool of people for whom cheap money, at least temporarily, was available. Uncle Alan Greenspan blessed the use of ARMs, and lenders began offering very low teaser rates that would balloon after a few years. People either didn’t understand what they were getting, other than that promised home, or assumed that they’d be okay because continuing positive housing price trends would always give them a way out. Later, more corrupt lending practices grew, with lenders handing out high rate no doc loans to anyone who asked. And then, of course, there were the flippers, the amateur investors who dove in towards the end of the boom, as always happens in bubbles, further driving up prices.

He adds that since houses are not a liquid asset the bubble is bursting in slo-mo but left out the fact that the reckless lending practices were blessed by Greenspan in order to prop up the “tax cuts work” myth that supply siders are always trying to shove up the public ass.

I have to wonder how many people here in MOT-land owe much more on their houses than they are worth. My guess: many.

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Jason330 is a deep cover double agent working for the GOP. Don't tell anybody.

Comments (2)

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  1. Quite a bit of this potential disaster can be traced back to action taken by the Congress and President in the 90’s. In order to make home ownership “easier” many, many programs were started to offer loans to folks who should have never been in the market.

    Forty year loans with no pay down in the hopes of houses going up in price plus many of the ARMs and enticing offers were good initiative but bad headwork.

    Greenspan had little if nothing to do with this mess. In fact, Greenspan often said tax cuts must be accompanied by spending restraint. I agree with the former chair.

    If consumer spending were not linked to the use of this “paper” wealth it may not be so bad.

    Look out for more credit card use to fuel consumer spending which is a real bad thing.

  2. jason330 says:

    Look out for more credit card use to fuel consumer spending which is a real bad thing.

    No doubt that would be bad, but I don’t see BOA extending more credit whil eevryone else is tightening.