on May 12, 2011 by ZooKeeper in Real Estate Implosion, Uncategorized, Comments (3)
Understanding The Current Housing Market Part 2: The Bubble Inflates
If you have not read part one, you might find it beneficial to click on the “real estate disaster” category link on the right hand side of the page and read it.
Remember from part one that I wanted you to take away one main concept: Banks set up the foundation for the housing bubble by ignoring prudent lending practices and failing to properly determine if those borrowing had the ability to repay the loans they received. It is important to grasp that the lending party has the ultimate responsibility in determining the credibility of the borrower. If you lend a friend that is very irresponsible money, you know that people will ultimately say it is your fault when you complain you were never repaid.
Let us now look at why prices began to rise so rapidly: When the banks started issuing mortgage loans to individuals who would have never previously qualified, it allowed more buyers into the market. Whenever you have a market with more buyers, the prices of the goods goes up.
Picture and EBAY auction. When people bid on an item on EBAY, you typically see the price of the item go higher as more people jump in and bid. As more people were qualified for larger and larger mortgages, they basically bid up the prices of houses on a nationwide scale.
As more people began to pile into the housing market, driving up the prices, it was not just banks profiteering. The media pumped up peoples ambition towards luxurious home ownership by flooding the television with shows promoting many angles of the industry. There were shows that portrayed couples putting a few thousand dollars into a home and flipping it for a huge profits. Advertisers flooded television commercial breaks with ads for the newest must have home appliances and home decor.
The mortgage issuing banks were not the only ones handing out easy money. Credit card companies gave people huge lines of credit in respect to their household incomes. Many of the must have home accessories were being financed though revolving credit card accounts. These debts were piled onto the bottom lines of people who where already into mortgages that were large for there annual household income.
At this point a clear picture starts to develop of a classic inflating bubble, people rushing into a specific market without pausing to look at the fundamentals. Nobody on television was talking about the fact that housing prices only traditionally went up about 6% a year, and the last time they had sky rocketed was right before the Great Depression.
For part 2 you should take away that the bubble began to rapidly inflate as too many people were given the credit to jump into the market. Just like an EBAY auction, the more people that compete for a good, the higher the price goes.
Tags: house prices continue to decline, housing bubble, housing bubble explanation, when will housing turn around
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