It’s March Madness in the media as people are jumping off the rooftops—metaphorically—over the collapse in the sub-prime lending market. The recent housing boom was fueled, in part, by people chasing the American dream of homeownership when they were in no position to do so—and a complicit industry of bankers and brokers who were willing to bend the rules for them. Many are now recognizing that there is a difference between the American Dream and the American Fantasy.
Representing about twenty percent of the mortgage industry, sub-prime lenders offered credit where it was not due. In exchange for higher interest rates, people gould defraud the lender by using “stated income”. People could get homes with little or no money down by piggy-backing loans on top of each other. It was also possible to get a low initial interest rate which would later balloon once the mortgage went adjustable. Some folks, I imagine combined all these tricks and more just to get into the real estate markets.
Bubbles, by their very nature, pop. That’s the sound you’re hearing in today’s housing market.
Newspapers, which have traditionally been boosters for the advertising-friendly Real Estate industry, are going wild with the story. Today’s Los Angeles Times has four, yes four, stories and one editorial on the story…today! The fish in Long Beach have got to wonder if anyone will be able to afford to eat them tonight.
For once I agree with the Times that borrowers who are caught up in the sub-prime mess should not be bailed out by the government. Those who bought homes they could not afford should not be propped up by the government. Otherwise, markets won’t work.
For all of the hullabaloo and market mayhem over the sub-prime crisis and the housing bubble bursting, for most hard-working Americans this correction can be a good thing.
Many people will lose their homes in the coming months and years and the investor class will feel the squeeze of credit tightening across the board—but unless you’re rich enough to be heavily invested in the markets and fail to invest wisely or unwise enough to have entered into a mortgage you cannot pay, you’ll actually be better off once this housing crisis plays out.
A decade ago, I moved to Los Angeles at the nadir of the last housing downturn. One bedroom condos could be bought for less than a hundred grand. I didn’t even consider it, since the cost of a place was roughly equal to the cost of my parents’ house in Texas, and I knew that on my income at the time, I could not afford it.
Real Estate boosters would tell me that I could not afford not to get into the market. Indeed that one-bedroom condo today is selling for three, four or five-hundred thousand dollars.
But who can afford to live here? Apparently, almost no one. Los Angeles’ housing affordability index is among the nation’s lowest. Only 2 percent of homes sold in Los Angeles were considered affordable for the average Angeleno in the latest report.
Rising housing prices—propped up by sub-prime lenders—have made the American Dream out of reach for honest, working class Americans. The boom in housing has led to significant construction, including, for once, an increase in urban density.
When new housing stock comes on-line and the sub-prime shake-down sorts out, the market will have corrected itself—without government intervention—to make homeownership possible for many more Americans. I can’t see how that would be a bad thing.