More and more news stores are hitting the media about the problems with the American housing market. Doom and gloom stories with headlines like, “Housing woes hammer Home Depot, Wal-Mart” seem to be popping up all over the place. And the gloom is spreading world-wide.
The latest crisis in financial markets has once again served as a reminder of how vital and interconnected the health of the U.S. economy is to that of the rest of the world.
From New York to Frankfurt to Tokyo, markets were jolted in the past week by fears that Americans are failing to keep up with their mortgage payments and the ripple effects that could have on the global banking and financial system.
The fallout could further depress U.S. housing prices by making it harder to find buyers for a glut of foreclosed homes. That, coupled with a drop in the value of investments, could leave U.S. consumers feeling poorer and less likely to spend on domestic and imported goods.
Yes, the problems in the housing market can ripple across other markets, but what is the cause of this woe? Part of the blame can be placed on the low interest rates the U.S. has had for years. The low interest rates have allowed more people to afford loans. That isn’t a bad thing by itself, but the lower rates meant that the lending market needed more customers to keep up their profits, so the lending market responded by relaxing their standards. They relaxed their standards on subprime loans, and they relaxed their standards on Internet ads. I will be very happy when the really annoying Flash animation ads will disappear. I don’t need another dancing alien ad. *shudder*
With an increase of subprime loans being made to people with a crappy credit history, is it any wonder that some of these bad credit risks are failing to keep up on their loan payments? They got their bad credit ratings for a reason.
Quick! Send in the government! Matt Carrothers of the North Star Writers Group penned an article about Hillary Clinton’s call for government intervention and aid, and he compares her to Vito Corleone of The Godfather fame. The whole article is well worth reading, but I’ll excerpt two parts:
The concept of borrower responsibility is obviously lost on Clinton. She then cites the plight of her own Signora Colombo, a woman named Kristi Schofield. Kristi and her husband can no longer afford to live in their home, because their adjustable-rate mortgage payments grew from $2,400 to $6,000 per month….
In truth, Clintons plan would heap onerous and needless new regulations on the mortgage industry and establish a $1 billion housing trust fund to help at-risk borrowers avoid foreclosure. In other words, Clintons plan requires responsible taxpayers to subsidize the mortgage payments of deadbeats unable to comprehend the concept of adjustable mortgage rates.
“Save us from our own stupidity!” appears to be the rallying cry of Kristi Schofield and others like her. But stupidity should be painful to inspire people to learn from their mistakes. But as dumb as people are for asking for loans larger than they can pay, and as dumb as lenders are for handing off money to bad credit risks, I can’t lay all the blame for our current housing situation at their feet. I believe that pump-and-dump house flippers have much to be blamed in driving housing prices up.
James Lileks linked to a site that showed a house for sale in San Jose, California, that asks the question, “Affordable starter home or Fallujah-replica in the Bay Area – you decide.” The picture to the right is an interior shot showing missing light switch plates, crappy carpet, and holes pounded in walls and the door. When the blog was written in March 2007, the selling price was $419,900, but here’s what I find very telling — the past sale history.
What could justify the $156,000 increase in the price of the house in a 48 day period? Is putting in new carpet that good of a sales deal? I doubt it. Almost certainly, this house was flipped by someone greedy for money. The poor sucker who bought the house in August of 2004 took it in the shorts. Not only did he pay more than $150,000 more than the previous owner did less than two months before, but when it was sold two years later, he lost $40,000 on the property. Ouch. The last owner has held the property for a year now, and put it up on the market for $75,000 more than the purchase price, which makes me wonder what sort of improvements have been made to the house. After all, based on the pictures placed on the house listing site, there are visible holes in the walls and door, and the kitchen is missing a window. The list price at this writing is $399,900, which is still $55,000 more than the sale price last year, so my question about improvements still stands.
If you listen to pump-and-dump house flippers like Carleton Sheets, you will believe you can make unlimited money buying properties and turning right around and selling them for more money. But this only works while there are
suckers people willing to buy the property at ever increasing prices. Like a hand grenade, you win as long as you are able to dump it off on some other fool. Buy that property! *grab* Sell that property! *toss*
Or you may find yourself stuck with an over-inflated property that you can’t sell without losing lots of money. *boom*