The Collapse of the Housing Market

Since my blog has basically become an NBA blog in the last coupla months, I decided it was time to get back on track and look outside the world of sports. As such, we're going to discuss two things: the collapse of the housing market and its effect on the economy, and the top five animated characters of all time. I know; they have a lot to do with each other. But versatility is one of the most admired traits at PJ's Place! So here we go. Today is the housing market, tomorrow we’ll do the top five.

----------------------------------------------------------------------------------

You know, it's not very often that two words can be used to describe a position in a complicated issue like the collapse of the housing market. It's also not very often that the same two words can be used with regards to all parties involved. However, in this case, I think these two words can fairly accurately be applied to all parties involved:

"Tough shit."

Harsh, isn't it? C'est la vie. Let's look at each group and how that phrase applies:

The Displaced Former Homeowners
Here's your situation: you've never been able to afford a home. However, banks suddenly started offering "variable rate mortgages" with ridiculously low interest rates to begin with. Sure, they charged high fees (more on this later), but didn't demand that you put much--if any--money down, and did no credit check on you. They might have checked to see if you're currently employed, and that's it. You looked to see if you could afford the house right now, and the monthly payments were about the same as your apartment rent. So you know what? You bought a house, even though you have a low paying job and have credit problems.

You moved in, and things were good for a while. You found out that houses are a lot more expensive than apartments; you have lawns to upkeep, you have to pay to have things repaired instead of calling your apartment complex and having it fixed for free, you need more stuff/shit since you have more room, and your utility costs have gone up. But you're making it--barely, but you're making it.

And then your rates changed.

You knew this was going to happen. I mean, that's what "variable" means. Your lender probably even made you sign a sheet of paper that said, "I've been told that variable means my rates will change, with the potential to go up drastically." You didn't worry about that then, because that would happen later--hopefully a lot later.

Well, later is here. Now you can't make your hourse payment, and as more people like you can't make their house payments, the rates keep going up as the banks try to recoup their losses, which of course just makes it worse. After awhile, the bank reposses your house. You are upset because you've lost your house.

"Tough shit."

I've ranted and raved here before about how much I hate the "No credit/bad credit/no problem!" commercials. While there are flaws with our credit system, it still does the basics of its job. And if you have bad credit, you usually have it for a good reason. You have it because you can't afford to live the lifestyle you're living. And then you went up a lifestyle! You bought a house!

The problem here, sadly, isn't that your house was taken away. The problem is you were ever given a house in the first place. You couldn't afford it, your past shows you couldn't afford it, and the overwhelming percantages that said you would end up defaulting simply played their part. The market worked.

The Builders
Here's your situation: due to current low interest rates and the fact that banks are handing out money like free pens, there's suddenly a HUGE demand for homes. So you start building.

But you want to make as much money as possible, and a lot of the upturn in this market is first time homebuyers who don't really know what they should be looking for...so you start to cut corners to make some extra cash.

You make smaller lots. Then you don't use brick on the back of homes, and pretend that that is okay. You offer "guarantees" that are really just admissions that you're not making quality homes, but will fix the problems later if the homeowner throws a fit. Then you make even smaller lots. You build "communities" before anyone has purchased houses in an area so you can make the same house over and over again, which helps your economies of scale by removing any differentiation in the homes. Then you make even smaller lots. And all of this is okay, because the price of homes keeps rising, and people keep buying them.

But then the sky falls, the prices of houses start falling, and people stop buying houses.

Now you're left with houses that are really worth a fraction of what you were planning on selling them for, because they're not really good houses. And there are a lot of them. You're worried you're going to go under.

"Tough shit."

You're smart enough to know this was an overinflated market. Hell, you're smart enough to know that, which is why many of you decided to but out the middleman (banks) and start financing your homes yourself. You wanted to get in on those fees (more on that later :-) and those variable rate loans where these poor people are really just paying interest, and not any principal, so you can keep sucking money out of them forever. And now you want the government to come in and help you out because--like deep down inside, you always new--it came to an end.

The Banks
Interest rates were ridiculously low, and people started borrowing more and more money to buy more houses. Well, it's the old quantity versus quality debate: "How are we going to make a better profit if rates are so low?" Easy answer: get more people to borrow money.

So you do two things. First, you start dreaming up fees. Fees for everything. Courier fees. Document handling fees. Ink fees for the pens. If there's a way you can charge a fee for it, you do. Why? Because that's your profit: your one stop, fixed cost, "this is our money and we have it immediately" profit. Your not adding an extra service; Hell, some of this shit is totally made up. But because A) the people your lending money to aren't good at this (because no one's ever been dumb enough to lend them money before, because their credit scores prove they can't handle it), and B) the rates are so low that people are getting a good deal right now, so they don't care about some fees that along the life of a loan look small in comparison. So you start ripping people off literally from the start.

Second, you start loaning money to anyone who comes in. You do do credit checks, but you do that as an excuse to give the people that you shouldn't be loaning money to variable rate loans. What this means is yes, you're taking a bit of a hit right now--though like we've said, you've covered yourself with the extra fees you charged--once this person is locked in to his home, you can raise his rates. Oh, you have to have a reason, of course, but you right in vague reasons that essentially give you the power to raise his rates whenever you want. Anyone with good credit would laugh at this and walk away, but these people don't know any better; they just know that they've been turned down loans many times, and now a bank is offering money, and it looks good right now. And you know that you'll be okay, as long as everyone doesn't stop paying at once. Deep down inside, you know there's a chance that will happen, but you're making so much money RIGHT NOW that you can't resist--your profit is inflated thanks to your accounts receivable, which is driving your stock price up, and is making you rich right now. So you quiet those doubts and little voices telling you that this is Business 101 and won't work, and you go make as much money as you can right now by giving away as much money as you can, right now.

Like we said, economies of scale.

Inevitably, the interest rate starts to rise. So you raise your variable rates. This causes you to lose some of your lenders who can't pay. Well, you don't want to lose that money; if you report a loss in profit, your stock price will drop! You won't make as much money! So what do you do? You raise the rates of your other variable rate leases to cover the ones you lost. This, in turn, causes more of them to default, as they were barely making it, which causes you to...

You get the picture.

Now, your nightmare has happened: everyone is defaulting at once. Your "accounts receivable" which you were using to drive up your profit to your stockholders has vanished, your reporting huge losses, Wall Street has bailed, and holy shit, you're facing bankruptcy. You need help.

"Tough shit."

It's business 101: don't lend money to people who can't handle it. Remember credit scores, which is the system that YOU set up, which is slanted to give not the consumer, but YOU an advantage? Yeah, those things, where we get penalized just for asking what our score is? Well, YOU choose to ignore them. And that led to this happening...AGAIN. Because this is not the first time in history that this has happened.

The market is doing what it was inevitably going to do: right itself. It's punishing those businesses who made poor business decisions. And you made poor business decisions.

The Government
A patsy and an evil oil barron are running the country. They're allowing rampant collusion among oil & gas companies so they can make as much money as possible. How can they get away with this, though, without the country throwing a fit? The answer is fairly simple: keep the economy running in spite of the rising price of gas, which affects EVERYONE.

So what do they do? The keep interest rates low. They see that the economy is going down a bad path: inflation is rising, too many loans are being handed out, it's been a bull economy for too long. But you are desperate to keep the economy going, so consumer confidence will remain high and people will stay happy. You even get a few economists to buy into it and start making ridiculous claims like, "Huh, it seems the price of gas doesn't effect the economy at all!" As time goes on, it becomes even more important to keep the ecomony running, because you're coming up on an election and you want your party to stay in power, and you know there's no way that will happen if you go into a recession.

But like the dam where everytime you plug a hole, another two pop up, you're having problems. Too many bad loans have been given out. The industry you're favoring keeps raising prices to keep their ALL TIME RECORD HIGH PROFITS going even higher, so people who were given loans are squeezed even tighter. They start to default.

It's the snowball that starts the avalanche.

Now you have some of the biggest names in business--Bear Sterns, Bank of America, etc., etc.--either in danger of going under completely, or posting their worst statements in their history. And what do they do first? Why they come to you, of course, and demand to be bailed out. You don't really want to do that, of course. You feel that this is their fault.

"Tough shit."

You were the ones who had Greenspan & Bernanke keep inflation rates too low for too long in order to keep the economy running at its breakneck pace. Instead of easing the economy into a "recession"--which would really just have been a slight adjustment in the market, let everyone pay some bills, and come out better in the end--you decided to stay glamorous and rob Peter to pay Paul.

The Recession, or Where This Leaves Us
So what does this mean? Is America doomed? Is the sky going to fall on everyone? Is GDII about to hit?

Of course not—as long as we don’t panic and do anything stupid.

A little recession—like revolution—now and again is not a bad thing. A small recession is simply the market righting itself—returning to a level of normalcy, as it were. It also means that the individual consumer (you and me) are taking the time to pay our bills and are stepping back and taking a breather from our spending sprees. This, of course, is also a good thing to do after a spending spree. So therefore, a mild recession is not only not bad, but necessary every few years.

I don’t worry about the people who lost their homes, either. As we discussed earlier, they shouldn’t have been in those homes to begin with. Look back fondly on your time in that house, and be happy with the smaller home/apartment you have now.

I don’t worry about the businesses that got hurt in this. Capitalism is survival of the fittest, and another will quickly rise to take your place, or you’ll recover and (hopefully) learn from this experience.

I don’t worry about the party that allowed all this to happen. The negative feedback from voters will cause them to have a better candidate for President, and will keep them from having control of both Congress and the Presidency, which is a good thing.

AS LONG AS PEOPLE DON’T PANIC, we’ll all be fine. And since, in spite of all the gloom and doom that the media is gleefully reporting, the dow is over 12k today, that tells me that people aren’t panicing. We’re just settling in for a little bit of a recession, which is exactly what we need.

So don’t worry about the housing market, people. If you want to worry about something, worry about how the oil & gas execs aren’t rotting in prison right now.