Tuesday, May 19, 2009

The Housing Bubble has Popped? You don't say.

I was listening to NPR in the car on the way home (KQED again. didn't have any fresh podcasts for the commute. I wanted them when they started into fundraising, let me tell you.), and they were discussing, yet again, the housing bubble.
What gets me is that everyone is still scratching their head over the fact that it popped! "We could have never predicted this!" and "Isn't hindsight 20/20?" and "I thought it would never end!"
Funny thing is, I know jack shit about economics, finance, banking or real estate, but if you'd asked me a year and a half ago, I'd have told you that the housing bubble was going to burst. I couldn't have told you when, but frankly I was hoping for sooner rather than later, and I couldn't have told you how. But I could have told you that the housing bubble was dangerously overinflated, and dependent on a large fraction of money which simply didn't exist.
Now that I think about it, I can't understand how anyone with any sort of umbilical cord to reality could have *not* seen this coming.
It's like totaling your car in an accident where you hit a cow. They're not camouflaged and it's not like the cow jumped out in front of you. You had to be blind or high or stupid or drunk or all of the above to have a car smash with a cow.
I grew up in one of the cheaper parts of the midwest. My family was upper middle class at the time, and we lived in a small house, which my parents sold. They put the money towards a bigger house. My family had loans, but my mom always found enough cash in the till to make the monthly payments. My father's income was such that he could afford to pay off the house in less than thirty years.
Cut forward twenty years. I've moved to California. I make about what my dad made when I was a kid, and don't tell him this, but I think I have roughly the equivalent "rank" at work that he did. My friends are starting to get married, and with marriage comes the purchase of their fist house--they usually try to find one in a good neighbourhood with a preschool, just in case they find themselves with kids in the comming years. The problem is, with what they are paid, around 60K a year apiece, 120 K with both husband and wife maintaining a fulltime job, they can't afford to make any sort of normal monthly payments on ANY houses in the area. This includes the ones near the train-tracks on the bad side of town. House prices in California in 2007 are greater than 10 times more expensive now than your average Utah house twenty years ago (lest you think this is an invalid comparison, houses all over the west have increased in price by large factors. Of course, we all attribute this to the damn Californians).
But wages are about the same.
So my friends would take out these massive loans which they knew that they could only pay off through selling the house at a price that was significantly greater than the exhorbitant price that they had paid for it. The only thing keeping these people out of massive debt was the faith that their house was worth more than what they paid for it, which was sold for more than the previous person paid for it and so on. These houses hadn't actually had anything valuable added *to* them. In some cases, I reckon the wear and tear of 20 years of family usage probably devalued the houses.
So, the question comes down to--what's going to happen when one person can't pay off this debt they've gotten themselves into? What happens when they can't afford the expanding interest on their "bubble" loans because these loans are given on the premise that they have money that they cannot possibly have with today's wages? What happens when this happens to a bunch of people? What happens when the bank finds out that a lot of money they'd counted on having from these loans simply doesn't exist? What happens when people who are already scrambling to pay their mortgages get laid off?
If you didn't see that one coming, you weren't looking, and if it was your job to *be* looking, then you'd better get to work finding a solution. Hint: the solution is not doing anything and everything in your power to raise house prices again, and it doesn't involve giving loans or credit to people who cannot by any arithmetic trickery afford the loan they want.

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