Here in Germany, you are always liable for the house loan with your entire personal wealth...
What I still don't understand, though, is how prices could go up so high? Did rents also go up? If developers were selling overpriced housed didn't anyone check what the costs of building a house were compared to buying one from a sleazy developer?
However, the time had come, as in all periods of speculation, when men sought not to be persuaded of the reality of things but to find excuses for escaping into the wide new world of fantasy.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
But then banks stopped holding most of the mortgages they originated and in many sectors non-bank lenders became the dominate lenders.
In the main areas of the housing bubble, the presumption was that the housing prices were only going to go higher, so if you found you could not afford a payment, you could always borrow against the capital gain in the interim, or if you found that you could not afford the mortgage entirely, you could always sell out again at a profit.
Now, why were the lenders lending when surely they should have realized that the presumption is nonsense: that when the house price was so far out of line with rental prices that house prices were almost certain to experience a downward correction?
Because they were not expecting to hold the mortgage long term. With CDO's, they bundled the mortages into a stream of repayments, and sold off positions in line to get the money used for repayments. If not enough CDO's attracted an investment grade rating, they were put into a pile and positions in line to get their earnings were sold off.
Since the mortgage originators were not holding the mortgage long term, but rather making their money as income to create the loans, they started acting like shonky used car salesmen. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Of course, different monetary policies can add fuel to the fire or siphon-off your tank altogether. Europeans think a hundred miles is a long way. Americans think a hundred years is a long time.
But you're right in the sense that speculative bubbles are fragile things: Monetary policy can puncture them, if it is applied with some care; fiscal policy can puncture them with ease; a depressed public mood can prevent them altogether; and even a dose of vigorously voiced pessimism from someone who enjoys a reputation for being Serious can snap some people out of it. So the presence of a speculative bubble indicates failure on several level, from cultural myths to regulatory inaction.
The policy solution was to give people more control over their housing through ownership entitlement to their homes instead of through rental contract entitlement, but the problem was that no bank in their right mind would lend more than 5 years out to working homebuyers on modest wages and salaries, and home building prices required mortgages of 20 to 30 years before middle class families could expect to be able to buy and own their own homes. Thus the federal government created long term mortgages through establishment of secondary market for them by copying the already successful federal farm credit system model of GSEs (government supported enterprises) of a generation earlier, which was itself an adaptation of the 19th century German Landesbank model. Fannie Mae and Freddie Mac were born and to this day remain the only stable market which provides for home mortgages. Despite all the problems such as the recent crisis, mass homelessness has never returned to the pre-1930's levels again.
Besides, there's nothing wrong with increasing rent that can't be solved with better public housing provision.
That's a cute story, but it does not explain the recent push to expand the "ownership society."
You live in the pwn3rship society.
(part of the ET's ClassicalTM Series)
The housing bubble has been indeed very useful: unlike the previous Internet bubble that only enrolled the stock owning people, housing bubble allows to enroll just about everyone. And this "wealth effect" was sorely needed to offset wages than have been stagnant or declining since "Morning in America". Europeans think a hundred miles is a long way. Americans think a hundred years is a long time.
