Was It All Just a Dream

It may take until the next multi-year, multi-point rise in interest rates or the next recession, but sooner or later all those 0% down, interest-only, 40-year adjustable-rate mortgages are going to come home to roost and it’s going to be a rude awakening for all those dreamers who think real estate prices can only go up. What will become abundantly clear in hindsight is the fact that…

…Greenspan didn’t save us from the stock market bubble, but only helped shift the exuberance to the housing bubble, which will have been inflated to the breaking point by the overlapping and self-reinforcing trends of shifting demographics, the swing to adjustable-rate mortgages, ever-falling interest rates, ever-slackening underwriting guidelines, ever smaller down payment requirements, and ever extending maturity dates. Of course making it all possible is mother FannieMae and her foot soldiers (realtors, mortgage loan officers, appraisers, title companies, mortgages insurers, lobbyists, and politicians), who are guided by their own perverse, short-term incentives and will be long gone, commission checks cashed and spent, by the time people realize what happened and how. For a little prologue check out the following article from the most recent Economist magazine:

The great illusion
Sep 30th 2004
From The Economist print edition

MOST American economists will tell you that the Federal Reserve did a brilliant job in preventing a deeper and longer recession after the stock market bubble burst. Monetary policy has certainly been successful at keeping up consumer spending, but it has been less good for jobs and incomes. America’s non-farm payrolls have risen by only 0.5% since the trough of the recession in November 2001, the weakest jobs recovery on record.…

Click here to read the rest of the article: Download The_Great_Illusion_10-2-03_The_Economist.pdf