(Conspiracy Nation, 5/19/04) -- The foreclosure rate began to rise dramatically in 1999. It is now at an all-time high. These increasing foreclosure rates have occurred concurrently with a rapid rise in housing prices. So, the question is, since the housing prices keep escalating, why aren't those having trouble making mortgage payments simply selling their homes at a profit?
In other words, Joe Schmoe buys a house for $200,000 in 1999. Three years later, the house has a value of $280,000. Joe Schmoe loses his job and can't keep up with the mortgage payments. Why doesn't Mr. Schmoe sell his house at a profit, use the money to pay off the original mortgage, and have a bit of money left over besides?
Housing values are greatly inflated. That is why, although Joe Schmoe's house is valued at $280,000, there is no one who will actually pay that amount of money. This is the "story behind the story" of home foreclosures occurring throughout the nation.
A bubble is characterised by buyers who pay, not based on what the item is worth now, but based on what they think it will be worth in the future. Purchasers of houses see that the value of homes has shot up dramatically over the past three-or-so decades. They believe that this trend will continue. They bet that the house will be worth a lot more in the future.
The reason why the abovementioned Mr. Schmoe cannot find a buyer for his house valued at $280,000 is because the housing market is not a real economic market, argues John R. Talbott in his book, The Coming Crash In The Housing Market. In a real economic market, the value of Joe Schmoe's house would be proven by persons willing to pay around $280,000 for the property. Since no one will pay that much, Mr. Schmoe cannot just sell off his mortgage at a profit. So, the property is foreclosed.
"Market theory predicts that the current high home prices are a good predictor of future home price performance... real markets are less susceptible to bubbles and crashes because of efficient pricing..." But the U.S. housing market is not a true market. Talbott explains why.
What screws up the reality of a market in housing is that a relative few lending institutions are unduly influencing prices. A potential home buyer sees how much of a loan they will qualify for. Suppose they qualify for a $300,000 mortgage. This translates in effect to the house they eventually purchase costing (abracadabra) around $300,000. A purchaser of a house is not apt to buy one at a price significantly less than the amount of mortgage they qualify for.
More magic occurs when mortgage interest rates drop. The above qualifier for a $300,000 mortgage now qualifies for a $350,000 mortgage. This is followed (abracadabra) by an overall increase in housing prices.
Suppose the interest rates go back up. Aren't the banks worried about that? They've got some risky loans out there, don't they? Not at all. The banks have long since sold those mortgages to Fannie Mae and Freddie Mac. Well then, what about Fannie Mae and Freddie Mac? Aren't they worried those loans could default? Not at all. Fannie and Freddie have already "packaged the mortgages into pass-through securities and sold them to investors." As syndicated columnist Scott Burns exuberantly informs us, home mortgages "are pooled and turned into securities that trade on public markets. This [mutual funds] market is now larger than the U.S. Treasury market... The result is that you and I have a constantly increasing pool of investment assets..." (Burns column, May 12, 2004) In other words: (a) the banks increase their assets by pushing loans; (b) the banks avoid risk by selling the "assets" (loans) to Fannie Mae and Freddie Mac; and (c) Fannie and Freddie avoid risk by selling these "securities," packaged into mutual funds, to investors like you.
Because of Fannie and Freddie, true free market discipline is eradicated. The banks need not be so cautious about making loans, since they face less repercussions if the loans go bad. More loans mean greater "assets" for the banks. Low interest qualifies potential buyers for larger loans. The flush-with-credit buyers pay ever more for the houses, and the house values rise. Buyers aren't worried: they bet that home values will keep rising.
Adding to the incipient mess are tax laws which make mortgage interest deductible. Why not transfer the interest payments on credit cards (not tax deductible) to the mortgage interest (tax deductible), reason many. So, homeowners consolidate their unsecured credit card debts and save money on taxes -- but, have thereby given up a security interest in their home. "Now, if he has trouble paying what was his credit card balance, his home is at risk." (Talbott, op. cit.)
-------
Conspiracy Nation. Think outside the box.
http://www.shout.net/~bigred/cn.html