Housing Bubble is Really a Credit Bubble?

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. Here’s a nice anecdotal example:

Nevertheless, maintenance worker [name deleted], 30, and his wife, [name deleted], who cleans homes, were able to purchase their first home last year for $475,000 with no money down.

“It was a good price for us, and this is the house we wanted,” said [name deleted], whose monthly mortgage on the 25-year-old house is $3,600. “We wanted four bedrooms, and everywhere else in the county it was too expensive. I don’t know how we got this house, but we came in and saw it, and me and my wife said the first moment we saw it, ‘Hey, this is our house.'”

Unless maintenance men and cleaning ladies get paid much better in San Diego than anywhere else I’ve ever lived, $475K at $3,600 a month is a heck of lot to lend this couple, especially since they’ve shown no previous ability to save (no money down).

At some point, 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.

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