US Housing Crash Continues – Part 2

Published on: Sun, Jun 14, 2009

Classified as: Bankruptcy, Banks, Loans, Mortgage

It is not possible to recover the US economy unless house prices are allowed to fall to such levels that can be easily paid by an individual on a normal salary. Housing “affordability” programs are the prime evil of the economy due to which debt is encouraged; this makes prices higher, not lower.

True Affordability

What true affordability means is not more debt but it rather means lower prices. More debt has been created by the government’s false affordability programs that can ever possibly be repaid. Credit rating agencies are speaking falsely about the value of this debt, scaring off investors.

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The economy will work again when house prices finally fall to affordable levels, instead of investing on financial speculation, there will be investment based on real production, jobs will be created, and people will earn and spent money.

Currently, we have no investment and the reason behind this is that the government is punishing savers and investors with policies that becomes the cause of wastage of their honestly earned money and to cover the foolish gambling losses of others.

House Price depends on GDP

Prices have been disconnected from Gross Domestic Product. The value of housing in the US has a huge dependence on the value of US actual production. Not only there is a decrease in the GDP but also jobs are being lost in large numbers. It is not a sensible decision to buy when more jobs will be lost and the price that the people can pay will decrease. Unemployment is the cause of downfall in housing prices. It also does not make sense to buy when your own job is in danger.

Government Plans are increasing Debt

Too much money is borrowed by the buyers and they cannot pay the interest. Now there are huge foreclosures, and in order to pay the mortgage investment losses for banks Congress is using a trillion dollars of your money. The plan that was followed by the government is that they will overpay the banks for bad mortgages, and the government maid the claim that this will support the housing market. But the fact is that it will not work, housing prices has nothing to do with bank profit.

Moreover even well-justified foreclosures have been stopped by the modification of legal contracts. No one was has been forced to borrow money. It is up to persons own choice, although a very bad choice, but completely voluntary. Grownups should be responsible for their own actions. To prevent a justified foreclosure is also to prevent a deserving family from buying that house at a low price. It will not be mentioned by anyone in government or the press that due to the voluntarily borrowing too much money has made them to come to their current condition. Massive evil is caused by debt.

Who will pay the Debt?

Is it good to pay the debts of irresponsible borrowers, no matter how much they over-borrowed or overpaid for a house? Should savers be forced to pay the debts of other people who cannot afford “their homes” irrespective of what price they paid or how far it is beyond their actual financial means? If yes then this means that you are simply allowed to buy the most expensive house you can right now! Or you are able to borrow as much as you possibly can and you are not required to pay it back, as the Congress will force the real repayment obligation onto others, on those people who are living their lives within their means.

Banks will be happy to give loans as long as the banks could then sell the loan, no matter how much amount borrowers wanted, this pushes the default risk onto Fannie Mae (taxpayers) or onto buyers of mortgage-backed bonds. Now this fact has become clear that a trillion dollars in foolish mortgage loans will not be repaid, Fannie Mae is under pressure to refuse to buy risky loans and investors do not want mortgage-backed bonds. This means that the available money for mortgages is decreasing, and probably house prices will continue to fall for another five years or more. This is not just a subprime problem. It is hard to get all kind of mortgage.

The meaning of a return to traditional lending standards is a return to traditional prices, which are far below current prices.