Chicago Tribune columnist Bill Barnhart has an interesting article today on what came first, the real estate problems with foreclosures or economic troubles?
I tend to think that the answer is neither. The problem occured because the mortgage brokers got a new way to finance mortgages, and homesellers had a new market to exploit. There jobs were to market to people who could get mortgages when previously they could not. And Wall Street provided a river of money that had never been there before.
As with any change in markets, there will always be an expansion and a correction as the market finds itself. While this is painful to those caught in the correction, typically most are benefited by the new market and once it finds its equillibrium the market becomes even more effective and efficient.
There is one great quote from Barnhart’s column though. He states
The boom-bust story about real estate speculation in hot housing markets needs to be augmented by more conventional analysis of regional economic trends.
For investors, it’s wise to remember that the subprime mortgage mess is largely a Wall Street story, not a community banking story. The Nasdaq index of banking stocks has not collapsed, as the subprime scare might suggest.
To that I say amen.
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{ 3 comments… read them below or add one }
I disagree with this article. If you look at the Fed's estimates of mortgage equity withdrawal and it's contribution to GDP (Calculated Risk publishes charts on this), it's clear to see that since about 2002 we have been largely an economy built on the back of housing, not the other way around. In many of these markets where foreclosures are skyrocketing (look at California where the "economy is strong") you'll see a rather healthy employment environment. People are losing their homes because they bought into a can't-lose attitude about real estate. And even when it got too unaffordable to participate, they participated anyway with exotic financing products. It was only a matter of time before ARM resets hit borrowers (homeowners and speculators) with "real" carrying costs. Suddenly, even though still employed, they can't make the mortgage payments… Also the "analysis" of looking at the NASDAQ banking index completely ignores the fact that many banks sell off crappy mortgages to the secondary market and collect money on the fees. This failure to consider the CDO/ABS/MBS reality of today's market is myopic and too old-fashioned to have any relevance. That's my $0.02.
Mortgage financing was made readily available by investors and the homebuyer, however marginally qualified, saw an opportunity to jump in to make money on the ongoing appreciation frenzy. Well, uncle Buck got in, so why not me. Many of them failed to carefully analyze what they were getting into with these exotic loan products. If the market keeps on chugging along upward, no problem. But no market that gets overheated like the housing sector did can sustaing the pace and will get mauled sooner or later. Now, those who bought a property early on are doing fine, but those who did so halfway through or later in the cycle are the ones who got really burned. Unfortunately.
The exotic financing schemes that people bought into are the problem. What people who bought in 2000 – 2003 need to be educated on is how to refinance / pull a HELOC / get into a more comfortable lending situation.
Those who bought 2003 – present are the ones at highest risk… if they bought in these exotic financing schemes. These individuals need to find ways out of their financing plan. However seasoning rules may prevent that.
If lenders were staying on the ethical side of things, they would see that they need to reach out to former clients, and help them with this situation. Realistically, it is another round of business for them if nothing else.
The problem will be resolved, and hopefully it can be done in a way that prevents too many people from losing their homes.
I agree with CA Dave. This problem started back in the early part of this decade with the emergence of risky financing methods and people buying beyond their means.