Friday, June 02, 2006

root cause of the housing bubble, pt. duex

From The Dallas Morning News Danielle DiMartino Column: Housing Troubles? Bank on It

The answer gets to the root cause of the housing bubble -- the credit binge.

Consider that only one of the 53 banks surveyed by the Federal Reserve through the three months ended in April said it had tightened lending standards. About 10 percent had the gumption to loosen standards further.

With no lending standards to speak of, it's been almost impossible to corral the speculation that drove sales and home prices to their bubbly heights.

"The Credit Binge"
- I love it!

Related to this issue is, of course, demand. Home sales are dropping and mortagage applications dropped, which obviously go hand in hand. But why? Fixed interest rates haven't gone up that much - their still in the mid-sixes. Well, 1.) the speculators are gone 2.) too many first time buyers have been priced out (esp. compared w/ the cheap rents). The Lenders loose standards (no-doc) and "creative loans" (I/O, neg am) have been the great enabler. It has in effect raised the ceiling of affordability, allowing people to buy homes they couldn't really afford. So as crazy as it is, the lenders who have loosened their lending standards, are doing so because their business is drying up. It's a downward spiral and a self fufilling prophecy of the worst sort.

My advice - Live Free. Debt free, that is!


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