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Mike Cooper's Blog

By Mike Cooper | Broker in 22602

What caused the housing bubble to pop?

What really caused the housing bubble to pop? My take on it. 

There is still a great deal of anxiety when people approach the housing market.  One major reason we're having a hard time getting past this period in US housing is because people don't understand why the housing bubble burst to begin with, and that alone has them worried about it happening again.  The explanation is easier than you may realize.

Even in a down economy, people need to have a place to live.  So, if someone is thinking about a place to invest money, they should consider real estate.  The most recent real estate bubble had it's birth in the political arena in Washington, D.C., and it popped when the realities of failed political policy slammed head on into actual economic reality. 

When politicians began putting pressure on lenders to loan money to individuals (late 90s - to early 2000s) who were never qualified (remember 'No doc' loans) they created a large jump in loan originations which ultimately resulted in a avalanche of mortgage failures.  The bundling of bad loans ultimately weakened numerous large Wall Street firms who received tax bail out money, but that's a topic for another blog.

The entrance of unqualified buyers into the market caused a shortage of available properties which ran prices up.  Prices well exceeded their true market value, some times by 100%.  Out of fear, people scrambled to buy over-inflated houses, stretching their budgets to the limit and demanding that many borrowers have two income earners to maintain a mortgage.

When unqualified buyers started to default, the entire house of cards started collapsing; washing away millions of homeowners.  Over-inflated prices were demanding 40-60% of a households income.  If one wage earner lost his/her job the odds of default were multiplied.  As the number of defaulting borrowers grew, the value of homes in practically every neighborhood began to decline.   Suddenly, families who did everything right,  found themselves upside down on their mortgage.

The loss of a job, a reduction in working hours, a company shutting its doors, an increase in gas and grocery prices and a dozen other things finally brought a second tier of borrows down.  The housing bubble collapsed like a building of dominoes.  First were the unqualified buyers, followed by the homeowners who lost income, then investors who scooped up properties only to rent them to tenants who also lost their jobs and finally the perpetually unemployed whose life savings finally ran out.

What will it take to fix the housing problem?  A reality check.  Whenever politicians get involved in business the economy suffers.  Remember the incandescent light bulb.  How many jobs were lost over that legislation.  GE, Sylvania and others took their lamp production to China and Mexico because US companies don't make CFLs.  Political correctness drove good US companies out of this country and delivered a light producing product full of mercury to our homes and landfills.  Hence, my frustration with government tinkering with business.

When the powers that be in Washington, D.C. quit tinkering with the US housing market, housing will have the opportunity to rebound.  That's why it's so important that every American vote, and every American needs to vote for men and women who have business sense.  That doesn't include college professors who have never held a job outside of an ivory tower.  Theory and reality can be far apart.  We need true leaders who know what they're doing.  The US economy is not something you can learn on the job.  You either know how it works and work with it, or it eats you alive and people suffer.

Also, anyone who is making policy that affects an entire industry should have some idea of what that industry does.  Make your voices heard my friends, so our housing economy can recover, and when it does the rest of the economy will recover.


Give me a call for all your real estate needs, and let's make something amazing happen. 

Mike Cooper @ Cornerstone Business Group, Inc., 888-722-6029

Real Estate Sales and Property Management

(Disclaimer:  All grammatical mistakes, punctuation breakdowns and misspellings are purely for your amusement and entertainment.  Feel free to cackle.)


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