What caused the last housing bubble? In two words, easy credit. You could buy a six-hundred thousand dollar house basically without a job, or the means to pay the mortgage. The banks just raised the interest required and issued sub-prime loans. Wall Street took these toxic borrowing arrangements and packaged them into financially engineered bonds that magically got rid of all the risk by managing the correlation. These newly minted AAA bonds were sold to banks all around the world with the huge interest rate streams attached. It was a house-of-cards to end all house-of-cards. The rest is history.
What started all of these problems? How did the easy credit gravy train get rolling? It all began with government interference in the private housing market starting with the Carter administration to be exact. The Community Reinvestment Act was a push by the Left to force banks to make non-commercial loans to primarily minority applicants in poor areas. In other words, the government forced banks to loan money to people who had no chance in Hell of paying it back. The was another form of wealth redistribution.
The Clinton administration, upon entering office, put this program on steroids. Credit to obtain a mortgage became easier and easier to come by. Loans that required no documentation were to become the norm. However, in 2007, the music stopped–and the house of cards collapsed. We are still trying to recover from the destruction of the housing market. The recovery has been so anemic primarily because of more and more government interference in the economy. Now the federal, state, and municipal governments around this country have their hands in every piece of the economic pie. You name it: healthcare, financial markets, energy, et cetera, et cetera.
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But easy credit is not the reason the housing market will collapse again. Credit is still very tight, and it’s difficult to get a mortgage– although the restrictions are starting to ease as banks are starved for qualified loan applicants. The problem now is that credit is almost free. Again, with the government’s hand in the economy, interest rates are near zero, have been for a while, and will be for the near term at least. People are able to purchase houses that are far above their means because they are paying arbitrary, next to nothing rates of interest. They are expecting that they will be able to sell these homes for much more money in the future. Because house prices always go up right?
Well, at some point, the Federal Reserve will have to stop buying the bonds they have been purchasing to try and keep longer rates low; and they will have to raise short term rates to stave off inflation. This will crush the market for housing. People will be stuck in homes they cannot afford if they have a variable rate loan. The next buyers will have vanished into thin air as the market for credit will have normalized. There is no way any logical, intellectually honest person can say that the Fed ballooning its balance sheet to four trillion dollars to buy bonds to keep rates low will have no unintended consequences. Government interference always has negative effects. How severe this will be is yet to be seen.
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