Back in January 2006, I authored a post entitled “Is the Housing Bubble Really a Credit Bubble?” I wrote: “I’ve seen some persuasive evidence, both scholarly and anecdotal, that a major factor driving the ‘housing bubble’ is historically loose credit standards: no money-down (or even negative money down) mortgages, cursory (or even non-existent!) checks of reported income levels, qualification based on teaser rates that rise substantially after a year or two, and so on.”
With the subprime meltdown, an Alt-A meltdown potentially on the horizon, and evidence of historically unprecedented levels of mortgage fraud, I think it’s fair to say that the answer to my original query is “yes.”
I also added a prediction: “when the teaser rates expire, and prices stabilize (which they seem to be doing already) so that mortgagees can’t simply ‘flip’ their properties when their monthly payments rise, this is going to get very, very ugly. And the regulators who’ve dropped the ball on managing credit standards are going to look a lot like the regulators asleep at the switch in the ’80s with regard to S&Ls.” The ugliness has started, especially in the former Ground Zero of the housing bubble, South Florida, but it will likely take a recession–perhaps itself brought about by the end of the bubble–to get to the “very, very ugly” stage.
Not irrelevantly, my wife and I are going to look at a bank-owned foreclosure property tomorrow night, selling for 100K less than both its county assessment and the most recent (100%) refinance. The house next door, I’ve discovered from the public records, which had a different owner, has also been foreclosed upon. Bank-owned properties are suddenly popping up in the MLS all over Northern Virginia. [Note: This is not a recommendation to buy now if you’re looking for a “good deal.” It’s way too early in the cycle for that.]
UPDATE: One of the more interesting aspects of the credit bubble is how many people seem to have had no idea about their mortgage terms. Many buyers approached buying a house in the same (foolish) way many buyers approach buying a car: “what’s the monthly payment?” They seem not to have taken into account the carrying costs of owning real estate, much less inquired closely as to whether the relevant monthly payment was guaranteed for the life of the loan. If they did inquire, they were told, “don’t worry, you can always refinance before the reset,” and many didn’t inquire beyond that.