I’m by no mean an expert on the subject, but as a long time reader of this forum, thought I add my opinion on the subject.
Ever since the financial crisis surface, I had been thinking about this question:
“Who benefit from the bubble and where did the money gone to?”
My opinion: In a sense this is an example of “robbing the rich and give it to poor”, but in this case the Rich is Wall Street investment banks and other credit & insurance institutions and the Poor is the American people.
We all know the root cause of this crisis is due to a burst of housing bubble. Compare to the Internet bubble not even a decade ago, this time around is also cause by high expectation went amuck.
Everything start after 9/11, Yes! Sep 11th 2001. After the attack that was a short recession. Capital around the world sitting on sideline, looking and waiting for a safe haven for their investment.
After Afghanistan conquered and Iraq fall, US had once again demonstrated her military might; confident restored, foreign & domestic investments slowly return to the US market. And what’s the hottest industry to invest? The housing market!
Fuel by low interest rate cause by ample capital, the housing industry single handedly revived the US economy in a post 9/11 world.
I think my friend who is in housing developer in New York said it best in early 2006: “If you brought a house 3-4 years ago for $400,000 and borrow a $250,000 mortgage. You just make whatever you borrow, because your house is worth 650,000 now.
Yes a lot of American especially those lives in rural or suburban area who over leverage and brought their house using Adjustable Rate Mortgage, will find themselves unable to pay for monthly payment as interest rate go higher and likely to lose their house.
But majority of American home owners who “Brought” a house or “Refinance” during the low interest rate years with a “FIXED Rate” will find themselves, although struggling to make ends meet in their daily life, from inflation and lower wages. They will also found their house had a significant increase in value. I’m talking about an average of 30-60% increase within the last 7 years. This is one of highest period increase in housing price since World War II.
True, as most of you heard on news, there is currently a drop in housing price across US, in some area as drastic as 15-20% from 1 year ago. But we’re talking about rural and suburban area. But prime real estate locations within a major costal cities, I wouldn’t be surprise the price will have little or no changed and remain stable.
“Your house is worth as much as the same house next to yours. As long as your neighbors don’t sell for half of what it is worth right now. “
That is why the key is market confident need to be restore and credit market liquidity back in a normal state. These American home owners who find their stock, or 401K portfolio drastic decrease in value in recent months will still come out ahead due to increase of their house value.
As long as the American dream is alive and prospering. The house prices especially those in urban area, near or within a major city vicinity is unlikely to Crash.
That is why the 700 billions bailout plan although widely unpopular among the popular mass in US, I support it.
One thing is certain at this point, the longer the crisis lingers, it will further impact investor confident. The 700 billions is just worth about 5% of total existing mortgage, about same percentage of bad or default mortgage currently outstanding.
However if crisis is unaddressed, market confident further diminish, and causing further drop in housing prices, $700 billions will not be enough to restore investor confident. Then all bet are off.
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