Housing Bubble and Mortgage Crunch

One of the worst kinds of tragedies is one that can be observed as its happening, predicted exactly, and one which people could be extricated from if they listened to reasonable advice.

That is what is happening right now with the housing market and mortgage companies.

Interest rates are precipitously lowered, refinancing goes up. Borrowing goes up. More people can afford to buy new homes. The dramatic increase in the amount of money available for purchases dramatically raises the prices of available housing. Sale prices go up. Rent goes up. Existing builders expand production of new houses. New builders form. More Realtors are needed. More lenders, more title insurance companies, more title searchers.

As soon as the well dries up, however, everything comes crashing down. All of the business expansion and planning done when times are good usually never takes into account what happens when the demand dries up. New developments are essentially ghost towns. Everyone is overstaffed. Those that wish to remain in the business start undercutting each other's prices. This happens both in the service sector and in the housing sector. The decrease in the price of new homes drives down the prices of existing homes (my own 20 year-old home cost me more last year than new homes with more square footage are selling for in my area now). It is really bad in more crowded housing markets like San Francisco, D.C., and Las Vegas.

What even more insidious about this bust is that lenders had even more creative ways of getting people into the home buying market. I'm not referring to mortgage application fraud which was of course rampant (and for which the consumers are partially responsible) but to the new interest only or negative amortization mortgages that created a false expectation that payments would stay low and that any mortgages could be refinanced in a few years at roughly the same rate.

The opening of the flood gates and its inevitable results were predicted by all during the boom. It has done quite a number on our economy too since so many people have moved into jobs related to the housing boom but who no longer have the customers to keep their businesses afloat. This is the market working inefficiently because it is not really working as a market. It has been artificially created and destroyed.