Why Did the Housing Market Crash and Will It Happen Again?

The real estate industry has rocked the foundation of America’s economy. The real estate markets nationwide are suffering because of lack of lending and unregulated mortgage lending over the last few years. I know that everyone is saying that it will get better and we are coming out of this whole thing but lets look at the facts.

The U.S. banks are overrun with foreclosures. The government has stepped in and helped out the banks but the banks took the money and did not place it into the economy. Now the banks are doing okay but even with that help there is still all this property just sitting around waiting for someone to live in it. Even if someone wants the property, the same bank that owns the property is not giving out loans to most families. On top of that, the job market is struggling. So there isn’t even a strong demand for housing because people are concerned with what they have right now, not so much with what they want.

More families are looking at how to make their current home work rather than trying to go out and buy a new place. Even new families are weighing the difference between renting and buying. In many cases renting is winning. At least with renting you know that you can get out of the place when you want without owing some huge back-end loan like most home sellers do right now. So have you ever heard the old saying “Learn from your mistakes or you will be forced to repeat them”? Well that has many people wondering, once we get out of this mess how can we avoid this happening again?

To figure out if this can happen again, we must look at how it started. The first part that caused this market collapse is greed. Greed from people in general, from the bankers and investors on wall street to the mom and pop homeowners that used their house as a piggy bank. Banks violated the first rule of investing which is to check the facts when giving someone money. They didn’t care who wanted the money or whether or not they could pay the money back because before the ink was dry the bank had sold the debt to someone else and it wasn’t their problem. This kind of financing creates a snowball effect and when it finally hits the ground there is our crash.

The second part that caused this crash in my opinion is marketing. Marketing has turned everyone crazy. We are constantly bombarded with images of what a good life is and why we need so many things. Marketing even knows how to make you feel bad if you can’t afford certain things. It all gives way to a desire for instant gratification. People stopped waiting for things and saving for things. Instead people had to have things now and when they get them, they still felt inadequate which forces them to go out and get more things. Our need for instant gratification coupled with many Americans lack of savings created a recipe for disaster.

Now to get out of this situation I feel that we need to do something that we as Americans haven’t done in quite some time. We need to tell the truth. We need to be truthful with ourselves and truthful with those around us. Gone are the days of trying to impress your neighbors with that new toy. Gone are the days of overspending on credit just to keep up with the Joneses. Once we start being truthful about what we can afford and what we are spending then we can begin to stop making excuses to others or trying to keep up a facade or a certain image. As lending institutions go, banks can go back to loaning money but they need to be honest about what someone can actually afford. Tell a family of 4 making 60k a year that they can’t afford a 300k house.

The easiest way to do this would be for the government to put tighter restrictions on what loans can be bundled and sold to the general public. Once a bank is forced to hold on to a loan they will be much more careful about who they loan to. In addition, the government should require that the lending institution that sells the loan is still liable for a portion of the bundled loans no matter who ends up with them. This would force banks to police themselves and the loans that they put out to the public.

As a final step, the government could make it so that bundled loans could not be insured from losses. Or at least losses over what the originating lender is liable for. This would force the original lenders to look long and hard at what paper they put into the market and at the same time it would make the market feel much more comfortable about accepting bank paper. In other words, we need to stop lenders from selling mortgages unless they are willing to offer some sort of guarantee on the quality of those mortgages. I know these ideas are a little technical but all in all they are just common sense ways to protect families, and more importantly families money from taking on huge unnecessary risk.

Until next week good luck and God bless.