The economy needed a catalyst to help get us out of the doldrums of the derailed internet bubble. Real estate came to the fore since nothing says, “ wow, we have a great economy” like the availability and affordability of single family dwellings. It seemed like a good idea. What was needed for things to get going were financial tools aka new mortgage options.
The options included zero down with interest only loans, adjustable rate mortgages, and we also have to remember interest rates were at historically low levels. These gave many folks the opportunity to get a home of their own. The government was on board and pushed financial institutions to help those that wouldn’t normally qualify for a home loan through a number of government backed programs. The real estate market was catching fire.
People were taking loans that in years past would seem ludicrous, such as interest only loans. How did these loans make sense. The market was feeding on itself. Because the value of houses were going up so fast that the equity was increasing fast enough to make these loans work, and supply was unable to meet demand. It was all working so well; people were being told to take the equity out of their homes and many did exactly that.
The credit market was going crazy. The influx of participants with their pockets full of cash was pumping up most sectors. The stock market was good, builders, banks, and retailers of all types had hit the mother load. Flipping houses became the new American past time. Everyone wanted in on the real estate boom and brokers were taking on new agents as fast as they could pass their exams. The American Dream was available to more of the population than ever before.
It didn’t stop there. Others wanted in on the fun as well such as insurance companies and retirement funds for example. How do we get in there? Real estate derivitives seemed to be a great way of gaining exposure to this market. Corporations had to keep pace with the market even if they had little to do with real estate. If they didn’t their stocks would be sold and investors would buy stocks with better performance. Capitalism was in full effect. But in reality the whole country was overleveraged. The government, corporations, banks, and yes the general public were all overleveraged.
It isn’t clear exactly what happened but the credit market began to teeter. Somehow there were companies and banks getting cold feet and they may have been ready to take their profits off the table, which could have started a ripple effect. It became apparent that the housing values may be a little high. No problem, a little correction could bring things back in line. But once things started ”correcting” they just kept going. Home loan seconds were starting to become a burden as the value of homes were not worth as much as previously thought. Folks were going upside down with no way to refinance their debts. Real estate derivitives were becoming almost impossible to value as the housing market was slipping and investors were treating these instruments like a hot potato.
So home loans and their seconds were going into default, derivitives are of an unknown value, 401ks are dropping like a rock, builders are still building to meet the now nonexistent demand and home values continue to drop. It looked as if we were headed for another full-on depression. President Bush started to pump money into the economy to try to stabalize the markets. After President Obama was elected he really cranked up the printing press, but in my opinion, he had no choice. Although most fiscal conservatives believe that the free market should have been left to sort things out, the aftermath of watching countless American businesses and citizens go down for the count would have been a depression none of us would want to see. We can argue about the continued support the government is providing the markets, but the economy had to be helped, and like it or not Obama made the right decision.
So what’s next? Has greed the very heart of capitalism, finally become the ultimate enemy of this country? Are we going to try to compete with third world nations and risk the very real possibility of becoming a third world nation ourselves? Or are we all just waiting for the next bubble?
