How we got into the Housing Market Mess

Thomas G. Brown |

Do you ever wonder why prices of homes increase substantially from 2002 to 2006. Well there are several key reasons which all stem from a sole source. This super factor is the Federal Reserve and it’s loose monetary policy. The Federal Reserve in an effort to give the economy a B-12 shot. This shot however turbo charged the housing, credit, and financial markets which looks and feels good short turn but continued used of these policies leads to a hell a withdrawal. This reminds me of the Seinfeld where Elaine takes care of a guy who’s a heroin addict and Mr. Petermen says “Elaine you better get your self a poncho your gonna need it.” Well enough with the silly TV References and back to the show.

As they fired up the printing press and had it working overtime to create a flood of cash their plan for boosting the economy a whole host of other unintended issues arose. The home defaults, mortgage companies went belly up, contractors, builders, and developers lost or are in the process of losing there jobs and businesses that all popped up under a money tidal wave.

The first link in this chain is the ability of more folks to purchase homes due to the low cost of money which created low interest loans. The increase in demand for homes started the increase in price of homes. This started a whole chain of events that has lead to the our current situation of defaults and corporate bankruptcy and future unforeseen crisis. Builders and developers see the price of homes increasing and say to themselves, “hey I can make more cash”, which is not bad if the prices where not caused by a fiat paper being created in ever greater numbers. So they take out loans and start building more homes and condos, mainly in hot spots like Southern California and South Florida. But, they did this in most real estate markets across the country. As these new properties started being built the mortgage brokers decided to get creative and offer (ARMS) Adjustable Rate Mortgages which offer rates at super low rates for a few years and then they reset. These rates where as low as 1% and this opened up a whole new can of worms. Folks started taking out second, and third mortgages to purchase second homes and to purchase homes and condos to “flip” for a profit. Well went this started to really take off and more homes and condos where built. The ol’ gang down at CNBC’s started babbling like idiots started to rant on and on about the great money to be had in investing in the housing market. So more people go into the business of flipping houses, becoming mom and pop property developers as well as starting mortgage companies. Why not the money they loaned was not theirs they came from Wall Street investment banks who wanted in on this pot of gold. They purchased the loans, bundled them up and sold them as investment bonds. Well the bonds where a hit with hedge funds, mutual funds, and Wall Street in general. So the loans got more creative zero down ajustable loans, negative amortization loans. Who cared the homes where not being bought to live in they where going to be resold at a profit as prices sky rocketed through the roof. More condos, and homes being built and not just regular family homes but homes with all the bells and whistles, condos that where bigger then the average American home. Who cares, we are going to make a ton of cash.

Well the money was cheap and plentiful and there where more and more properties going on the market who could loose. Well, I see who can loose the contractors, developers, mortgage firms, the folks purchasing with shaky credit, those who “invested in this sure thing”, and the poor little guys on Wall Street!!! First to go was the sub prime loans as the rates adjusted and these owners struggled to make their monthly payment. The housing prices and the cost of living may have gone up and up but household income remain almost at a stand still.

After this the next set of victims where the set who thought they would make it rich offering sub prime loans to the first casualties. That is to say the mortgage brokers and companies the largest of which was New Century. As, the rates began to reset on the mortgages of peoples second home and properties they wished to make money on by selling. More defaults notices where sent out do to the decrease in price often lower then the price paid for the homes. This softened the housing market demand and the bond interments created to purchase these loans started to dip. This has not been fully noticed yet but in my opinion will show it’s final path as the market plays out. Developers are starting to default on their loans and more people who have deposits down on condos not yet built are walking away from deals instead of paying for something that is worthless then the original price. Many people have been effected by this mess and will continue to loss money, homes, and jobs created by the Federal Reserves need for a growing economy.

Sooner or later the next card in this house will be removed and we shall see more effects of the great economic boom that was created. What is the next card, I’m not sure but I have a sneaking suspicion that it has something to do with the Federal Reserve need to increase interest rates to stop the devaluation of the dollar and the inflation of consumer goods and services while wages sit still. This should be quite a show from the side lines but if your tangled in this web good luck and it’s only money not the end of the world.

Posted by Thomas Brown at 4:39 PM

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