What was the housing bubble? In a nut shell, it was a run up in house prices that became unsustainable. In the early 1950s, my grandparents built their first house. It was a simple Cape Cod style post war house in the suburbs. It was under 1000 square feet in size. It cost them around $3000 to build this house. In the early 1980s when my last grandparent died, we bought the house from the estate. It appraised at just under $60,000. roughly doubling every seven years in value. We owned the house until 2005, when we sold it the price was over $200,000, doubling in about every 4.5 years. Meaning inflation in housing doubled over the previous period. How did the market get out of whack?
Over the last 20 to 30 years there has been a push to make home ownership, some say a major part of the American Dream, a reality for as many people as possible. Neighborhood organizers, the President, and Congress pushed for relaxed loan requirements. It was an attempt, and probably with good intentions, to help marginal families finally own their own home. The problem was with more buyers in the market, prices went up. As prices went up, the move was to lessen the requirements even more. When I was rather young, possibly in the early 1970s, I remember hearing a "rule of thumb" that said you should not spent more then 25% of your take home pay on housing. By the time the bubble burst, that rule was out the window. People were spending as much as 45% on housing, meaning any little blip could cause insolvency.
In 2007 and 2008, globally there was a downturn in productivity. That blip caused the very marginal to go in to default on their mortgages. From there it snowballed as the economic conditions worsened to a major loss in property values. With property values down, those who were meeting their mortgage could not sell, they were upside down. Housing stopped selling. Interest rates did fall as a result, but being upside down precluded owners from taking advantage of the lower rates. As unemployment rose more people fell in to default, and a banking crisis was upon us.
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Big banks bought smaller competitors, and we lost competition as a result. The top 5 banks today control almost 40% of the market. As late as the 1990s, in our town, not one of those banks had a branch. Now they all do. Bank of America owns the assets of the formerly largest bank in the state, and US Bank the second largest. This took most lending decisions away from local people. Which will contribute to the next crisis.
So what did I read that set me off? Didn't you see something about history? Yes you did. In a total disregard, or maybe lack of understanding, President Obama last week called for loosening of lending regulations. It is noble to yearn for ownership of a house, in many parts of the world it is near impossible to impossible to imagine owning land. That ownership is enhanced when it isn't easy. When there is a major investment of sweat and nerves, the payoff is much sweeter. When was the last time you went to a mortgage burning party?
Government intervention in the housing market has pushed up prices, in the past, many people owned their house free and clear by retirement. Now reverse mortgages are all the fad. Government loves rising housing prices, as it increases property taxes. They are not in it to help people achieve their dream, just to take more money. If our President achieves the goals he stated, there will be another housing crisis.
None of this is to say ignore your dream. Just understand the costs. Research what you need for ownership. Minimize the amount you borrow, either through a larger down payment or smaller house. Work towards paying any loans as quickly as possible, so the next bubble doesn't burst in your house. And as we like to say...
Spend Wisely!
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