Friday, January 11, 2008

Housing Market Decline: Who's To Blame?

While the media has called it a housing "crisis" and refers to the so-called housing bubble crashing, the housing market decline is just another cycle in the industry. What goes up, must come down after all. And while most homeowners are pretty secure in their home loans, there still are a large number of foreclosures going on, mostly because of bad mortgages. But that's probably an unfair assumption. There are several parties who are responsible for the current problems with the housing market and I think you'll be a little surprised by who:

1) The lending industry is definitely to blame. I know, this isn't the free-market thing for me to say, but it is true. These folks willing sold loans to people they either knew could not pay or were lazy and didn't bother to check their income levels. Either way, they screwed up royally and lent out to people who were not able to pay them back, once the terms of the mortgage changed. Also, they dealt in adjustable rate mortgages, interest-only mortgages, and/or subprime lending (I'm not too clear on the differences, but I'm sure some of those terms overlap). Instead of demanding the buyers make a downpayment, which is sane and logical, they just asked them to sign a paper. Quite frankly, the consequences of their irresponsible actions should lead them to face heavy losses. Look for your credit card interest to go up soon for no reason at all.

2) The people who bought these loans are to blame as well. They should have known better and not just gone out and bought a house because they wanted one. I currently rent. I want to own a home someday. I probably could go out and buy a home with a 30-year mortgage somewhere. But such a thing would be immature. True financial wealth takes time to build and maintain. I am going to be saving my money for a while until I have enough to place a downpayment on a home. Home prices will hopefully stabilize and I will be able to beat the inflation rates with interest.

3) Congress really dropped the ball on this one. They have created an environment that encouraged bad lending via the mortgage interest deduction, among other things. Also, at every turn they have, essentially, bailed out the lending industry at one time or another. Expect them to do the same for most banks that are losing money. Part of the reason that the banking industry continues to operate the way it does is because the government has insulated them from a fundamental principle of economics that creates efficiency and better products/services: losses.

4) Predatory Realtors. Not all Realtors are to blame for the current problems. Just the ones who knowingly sold homes that were bigger than what the customer could afford. I know, there was a profit motive involved, but they could have easily made money by selling their clients affordable homes. Instead, they used convoluted logic and bad mathematics (via the Interest deduction) and convinced people they would actually make money with a larger mortgage. While I doubt any law passed by any level of government could fix this, the fact that they did this will affect their reputation as a Realtor. I doubt many of these folks will be in business in a few years once many of their clients stop recommending them to their friends and family.

Basically, everyone who was involved in the cocaine-induced home buying is to blame. Even President Bush touted the high rate of home ownership as an accomplishment without checking to see if they were stable mortgages or the crazy ones. In any case, the chickens are coming home to roost in the housing industry and I doubt it will be very long before home prices go down drastically. I don't mind and anyone who owns a home shouldn't mind either, unless you are planning on selling it soon and your mortgage is more than your house's assessed value.

As for myself, I've got a lot of saving to do over the next 5-10 years or so. But I know I'll be able to buy a home that I can call mine. I am hoping to buy one without a mortgage at all, but if that doesn't happen, I will be making sure that I have a very low, fixed-rate mortgage.