Homeowners are still Suffering in the Housing Market but Speculators are Profiting

Posted by PITHOCRATES - February 3rd, 2013

Week in Review

Housing sales drive the economy.  Because it takes a lot of economic activity to build houses.  And even more for homeowners to furnish their homes.  This is why the government gave us the subprime mortgage crisis and the Great Recession.  They kept interest rates artificially low.  And the Clinton administration forced lenders to lower standards to put as many people into houses as possible.  But, alas, they put a lot of people into homes that couldn’t afford them.  Using subprime mortgages to get them into those homes.  Like the adjustable rate mortgage.  And when interest rates went up so did their mortgage payments.  And they defaulted.  Which kicked off the subprime mortgage crisis.  Giving us the Great Recession.

These low interest rates created a great demand for housing.  Everyone was borrowing money to buy.  Because money was so cheap to borrow.  And with those lower standards borrowing money was never easier.  Especially for investors.  Who bought houses.  Fixed them up.  And put them back on the market.  House flippers.  With all this demand housing prices soared.  Creating a great housing bubble.  Which burst.  As all bubbles do.  And housing prices plummeted.  Leaving people with mortgages greater than the new value of their houses.  Some walked away.  Especially those who put little to nothing down.  Like those house flippers.  And those subprime borrowers.  Flooding the market with more homes.  Putting further pressure on housing prices.

It was a huge mess the government gave us.  The damage was great.  And we’ve been waiting a long time for the housing market to recover.  Housing prices are finally rising.  But not for the right reasons (see Home prices on the rise, but not ownership by Alejandro Lazo posted 1/29/2013 on the Los Angeles Times).

The sharp increase in home prices — particularly in regional markets such as Phoenix and Las Vegas, which had been so decimated by the bust — is raising concern among some economists…

It is those kinds of big increases that could fuel speculation.

“It does concern me a bit,” Zillow.com chief economist Stan Humphries said. “It encourages people to think about housing as a short-term investment, instead of a long-term investment…”

While prices may be rising, homeownership is struggling, an indication that investors are playing a big part in fueling the market’s rebound. The Census Bureau said Tuesday that national homeownership fell 0.6% to 65.4% in the fourth quarter over the same period a year earlier…

The spike in prices is masking the trouble that borrowers with underwater mortgages are facing. In fact, it’s precisely because so many borrowers cannot get out from underneath their upside-down homes that prices are rising so much, economists have said, because those people are simply hanging on and not putting their homes on the market.

People underwater are hanging on because they don’t want to take a huge loss by selling.  When you lose some 25-40% of your home’s value there’s only one way to get it back.  You keep living in it.  For a long time.  For only time can restore a home’s value.  Which a homeowner will lose if he or she sells.

So house prices are coming back up.  But like elsewhere in the economy it’s the rich who are doing well.  Not middle class families.  Those who want to live in their homes.  Furnish their homes.  These people who drive real economic activity.  Not the house flippers who are just trying to profit off the misfortune of others.  Who are picking up houses on the cheap thanks to those lost their homes or sold them at a loss.  And flipping them to make a profit.  These are the people doing well in Obama’s America.  Not middle class families.

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The Great Housing Bubble and The Subprime Mortgage Crisis

Posted by PITHOCRATES - December 27th, 2011

History 101

Putting People into Houses trumped Sound Monetary Policy, a Sound Currency and good Lending Practices

Housing has for a long time been the key to economic prosperity.  Because to build a house you need a lot of economic activity.  Industries produce lumber, concrete, sheetrock, brick, shingles, door frames, doors, windows, glass, flooring, plumbing pipes, plumbing fixtures, sump pumps, furnaces, heating ducts, insulation, air conditioners, electrical wiring and fixtures, carpeting, tile, linoleum, etc.  The bigger the house the more of this stuff there is.  Once built people have to buy them (stimulating the mortgage banking industry) and then furnish them.  This triggers a monsoon of economic activity.  Drapes, shades, blinds, paint, washers, dryers, stoves, refrigerators, freezers, microwave ovens, toasters, blenders, food processers, plates, dishes, knives, silverware, ceiling fans, televisions, home theaters, sound systems, computers, cable and internet services, utilities, shelving, furniture, beds, cribs, art, etc.  And, of course, the exterior of the house creates further economic activity.

This is why one of the most important economic indicators is new housing starts.  For each new house we build we create a whirlwind of economic activity.  So much that it boggles the mind trying to think about it.  That’s why governments do whatever they can to stimulate this particular economic activity.  They encourage borrowing by allowing us to deduct the interest we pay on our mortgages.  They use monetary policy to keep interest rates as low as possible.  They’ve created federal programs to help veterans.  To help low income people.  And to remove risk from lenders to encourage more risky lending (as in Fannie Mae and Freddie Mac).  They’ve even used the power of government to force mortgage lenders to qualify the unqualified (Policy Statement on Discrimination in Lending).

You see, putting people into houses trumped everything else.  Sound monetary policy.  A sound currency.  Good lending practices.  Everything.  Because that was the key to a healthy economy.  A happy constituent.  And healthy tax revenue.  Not to mention you can score a lot of points with the poor and minorities by helping them into houses they can’t afford.  So this coordinated effort to put people into houses did two things.  Made money cheap and easy to borrow.  And created a boom in new housing starts.  Which resulted in a third thing.  A housing bubble.

Subprime Mortgages were for those who didn’t have Good Credit or Stable Employment with Reliable Income

Builders couldn’t build enough houses.  People were buying them faster than they built them.  And the houses they bought were getting bigger and bigger.  As they qualified for ever larger mortgages.  Poor people and people with bad credit could walk into a bank and get approved without documenting income.  House flippers could walk in day after day and get loans to buy houses.  Fix them up.  And put them back on the market.  Without using any of their own money. The market was soon flooded with new McMansions.  And refurbished smaller homes that people were moving out of.  Demand for homes was high.  And interest rates were low.  So the supply of homes swelled.  As did home prices.

Interest rates were low.  But they didn’t stay low.  All this coordinated effort to put as many people into homes as possible created a lot of artificial demand.  Heating up the economy.  Increasing prices higher than they had been.  Leading to inflationary worries.  So the Federal Reserve began to raise interest rates.  To temper that inflation.  Which didn’t sit well with those low income house owners.  Who got into their homes with the help of the Policy Statement on Discrimination in Lending.  Which forced lenders to get creative in qualifying the unqualified.  To avoid undo federal attention.  And legal actions against them.  So a lot of poor people had subprime mortgages.  As did all of those house flippers.  People who used little of their own money.  Who put little down.  And had little to lose.

What is a subprime mortgage?  In a word, risky.  It isn’t a 30-year fixed-rate mortgage at a good interest rate.  No, for those you need a good credit score and years of stable employment with reliable income.  And enough money saved up to put close to 20% down.  Subprime mortgages were for those who didn’t have a good credit score.  Years of stable employment with reliable income.  Or any savings.  These people didn’t get the ‘prime’ mortgages.  They got the expensive ones.  The ones with the higher interest rates.  And the higher monthly payments.  Why?  Because risk determined the interest rate.  And the higher the risk the higher the interest rate.

In their Effort to sustain Economic Activity the Government caused the Worst Recession since the Great Depression

But this posed a problem.  Because of the Policy Statement on Discrimination in Lending.  Making loans available to the unqualified was no good if the unqualified couldn’t afford them.  Enter the adjustable rate mortgage (ARM).  These mortgages had lower interest rates.  And lower monthly payments.  How you ask?  By making them adjustable.  A fixed-rate mortgage has to account for inflation.  And adjustable-rate mortgage doesn’t.  Because if there is inflation and the interest rates go up the ARM resets to a higher value.  Which is what happened right about the time housing prices peaked.

When the ARMs reset a lot of people couldn’t make their monthly payments anymore.  Having put little down and having made few monthly payments, these homeowners had little to lose by walking away from their homes.  And a lot of them did.  Including those house flippers.  And that was just the beginning.  With higher interest rates the new home market contracted.  Those artificially high house prices began to fall.  And when the ARMs reset they caused an avalanche of defaults and foreclosures.  The market was correcting.  There were far more houses for sale than there were buyers looking to buy.  Home values began to fall to reflect this real demand.  People who bought the biggest house they could afford because they thought real estate prices always went up soon discovered that wasn’t true.  People were making monthly payments on a mortgage that was greater than the value of their house.  Some walked away.  Some got out with short sales.  Where the lender agreed to eat the loss equity.

The housing market was imploding.  Thanks to a great real estate bubble created by the government.  In their quest to put as many people into houses as possible.  By making mortgages cheap and easy to get.  Relaxing lending standards.  And encouraging risky lending.  None of which would have happened had they left the housing market to market forces.  Where the market sets interest rates.  And housing prices.  The irony of the subprime mortgage crisis is that in their effort to sustain economic activity the government caused the worst recession since the Great Depression.  The Great Recession.

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