Housing Bubble Stays Afloat

Whenever prices surge for a particular product, others try to jump on the bandwagon and produce the same product. Additional supply rushes to the rescue. That's what markets do. When housing prices were exploding, developers were turning out new homes, new subdivisions and new communities in droves. I repeat, that's what markets do. Because of the explosion of housing activity, people who never before could afford a home (and frankly, still couldn't in true financial terms) rushed to the buying scene before prices climbed too high.

And risk-friendly lenders were willing to take on the risk, because they were backed by the federally subsidized Fannie and Freddie. "It's not MY money", they thought. When the government is willing to back these mortgages (thanks to my favorite Reinvestment Act, they had to, since no bank wanted to hold onto these toxic mortgages), the lenders thought "heads I win, tails the taxpayers lose". No wonder they took on more risk. There was no downside.

Well, here we are. It is what it is. Now what? People realized soon after moving into their new homes that they couldn't afford to live there. So they needed to sell. Supply side started to surge (see new development comments above). Demand waned. And prices dropped. Soon, people who put 0% down and were paying interest-only loans owed more than the home was worth. The same could be said for people who put 3% down and had sub-prime mortgages. Etc. Etc. And prices continued to drop. That's what markets do.

Meanwhile, there were people on the sidelines ready to benefit. A recent article on CNN.com titled "For one man, foreclosure a shot at his housing dream" (Linked Here) told a wonderful story of a young man and his family on the verge of closing on their first house. It would not have been possible had it not been for the depressed housing market. Depressed? This guy was ecstatic about the housing market. As prices dropped, demand came to the market. That's what markets do.

And there's more demand out there. There are young couples with high school educations, a couple of children and one of the parents working two jobs. They are living modestly, renting and saving their money, hoping that they may have the opportunity to do something that just 18 months earlier, they never thought possible. They are hoping to buy a home. Prices have dropped 40% in their neighborhood. And if it comes down just 5% more, they will be ready to afford the home they always hoped to own.

But there's a problem. A certain bill was just passed to help keep people in "their homes". The expression that our president uses "their homes" is kind of funny. FYI....if you put 0% down and pay an interest only loan, you don't own the home. You don't own it until you own it. Simple math. Anyhow, we have a government that defies that math, chooses to defy that common sense. And that government, the very leaders that the aforementioned young couples helped elect, is now PREVENTING them from buying a home. That's right. They are artificially keeping home prices higher by allowing the guy who decided to throw caution to the wind and buy a home he could not afford, to stay in "his house" that he doesn't own. And our government will take money (higher taxes) from the people who did everything right (i.e. entrepreneurs, market makers, 60 hour/week workers), to pay for the people who did everything wrong, including that guy who is still in the home he couldn't afford. And to make it worse, we'll refer to the home in question as "his home".

Just think of what could have happened. We could have rewarded the young couple who did everything right (working, saving, renting, etc.), and allow them to buy a home at the true MARKET price. But instead, we come up with a plan to keep that guy in "his home" (which as I cleared up before, isn't his since he owes more than it's worth). And further, we let him refinance at a better interest rate than the people who did everything right can get, and not to mention, at a price point that artificially inflates the market. So now, the people still paying their mortgages ontime have a higher rate than the guy who faulted. And the couple hoping to buy a home can't, because prices haven't come down enough for them to afford it, due in large part by our saving the guy who faulted.

Whenever the government comes up with another program to bail out someone or some company or some industry who clearly did some things very poorly, ask a simple question about that program, specifically about where the money is coming from. At whose expense? At whose expense will we bail out banks? At whose expense will we bail out people who borrowed more than they could afford? The answer is in your mirror. And once you've come to grips that it's your money that's being used, consider who's distributing your money, and consider who's receiving it.

I have to go. I need to write a letter to my bank letting them know that I've ceased to make payments on my mortgage. I'm going to refuse payment until I get a better rate. Wish me luck!