The Housing Bubble That Kicked Us In The Face

After doing some diligent research for this piece, I’ve come to one conclusion that I hope you take with you.

Americans are some greedy mother truckers. Seriously.

Not to get all biblical, but sometimes, our greed can damn us. It’s a scary thought that a perfect storm caused by the green eyed monster can spell a sense of ruin for an entire economy. Much of the ruin can be traced back to a single source: mortgages and foreclosures.

Every thirteen seconds, someone files for foreclosure on a house. Thirteen seconds. That’s roughly 7,000 foreclosures a day, nearly 50,000 foreclosures per week. But that’s the tip of the iceberg – the foreclosures can’t keep up with the fact that millions of Americans can’t pay their bills.

But we need to take a look and investigate where this mess came from. So, it’s time to time travel. Ready? Let’s go to a time when everything was different… when the sky was brighter and there were two rainbows in every garage. The end of the 20th century.

Most people don’t think about it but there’s this huge pool of money out there, which is basically all the money the world is saving now. Insurance companies saving for a catastrophe, pension funds saving money for retirement, the central bank of England saving for… whatever central banks save for. All the world’s savings.

Adam Davidson, NPR

This ‘giant pool of money’ gets invested in various stocks and bonds, expected to grow and turn these savings into profit.

And the investment managers who had control over all that money saw a new investment: mortgages.

During this time period, safer investments weren’t really giving much of a return. These investment managers decided to plunge money into the field of mortgages, allowing for more money to be spread around by the banks. As a result of this, many saw this as a fresh chance: banks were aggressively pushing mortgages. You’d be dumb not to invest in the home you’d dreamed of, and competition for mortgages on new construction began to become tight.

According to a broadcast of This American Life, entitled ‘The Giant Pool Of Money’ (which you can listen to, by clicking here), mortgage brokers were getting cleared by banks to make riskier and riskier loans, even blatantly lying about how much money they made in order to get a mortgage to go through. The crown prince of the risky loan was called the NINA Loan: No-Income-No-Asset loans.

There was a good reason for this, though. These mortgages were paying loads and loads of money. Return for brokers and banks was huge. Everyone was happy and the prosperity was huge.

During the last few years of the 20th century, new construction of homes was booming in the US. And no place saw more new constructions than in Florida. On the coast of Central Florida, cities would even appear out of virtually nowhere: like Palm Coast, Florida for instance, which nearly doubled in population over the past 15 years.

However, the riskier the loans got, the higher the rate of default became. And housing prices kept going up. And up. And up. The higher prices got, the higher the rate of default.

The higher the rate of default, the lower money coming into the bank, the lower the likelihood of the bank to give out money for loans.

Then suddenly: crash. Mortgage brokers were so deep in debt that they were going under. Banks started to refuse loans by the pile. There was really not much more money to go out.

And the worst part: homeowners – those with the dream – couldn’t pay their bills, and faced foreclosure.

So here we are today: a foreclosure every thirteen seconds. Low income and minority communities with double digit foreclosure rates. Houses on the market going for 25 percent of the original asking price.

There it is: it’s not just the bankers’ fault, it’s not just our parents fault. Consistently, we, as Americans, try to live beyond our means and wind up falling flat on our faces. It is up to us to keep this lesson in mind: we must learn from these lessons and not make the same mistakes that our parents did. We’re taught that we can have it all, right now, but sometimes the most progressive thing we can do is slow down and go with our instincts. ‘Quick fixes’ fall apart before we know it.

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Steve Romain