More on the Housing Crisis
I need to start posting on this electronic journal again - things of interest and whatever comes to mind.
More on the Housing Crisis
Timeline of how the economy and housing market collaspe. Note: All times are approximate. This opinion is based on experience, and talking with older people.
1985 - 1992: 80's housing crisis.
Early 1990s: Perhaps due to the 80's housing slump, congress passed a law that capital gains tax is no longer paid for real estate gains. So, you could buy real estate, sell it a few years later, and if you make a profit, no taxes are paid on that profit.
1992 - 2006: Since there was no longer a capital gains tax, people started to see real estate as not just a normal residence but an investment. People built properties, "flipped" properties, built lots and lots of homes on a small piece of land, and sold them for profits. This was the boom era of real estate. Houses seemed to go up faster than population growth. I call this the "artificial growth". Why? Because it was based on speculation of real estate as an investment and not as a place of residence, so there were more houses being built than people needing (or could afford) to buy a house.
Early 2000's: Financial de-regulation went into effect so banks could pretty much do whatever they wanted. This included two key things: 1. Selling subprime mortgages, so now people who couldn't afford to buy a house could now do so (or shouldn't, because of a poor credit score), 2. "Gambling" on loans (bundling, re-selling). And some other things I don't quite understand.
Mid 2000's: Fuel prices started to rise due to "speculation". Because the economy was doing so well (impart because real estate was doing so well), people were going places, buying gas-guzzling SUVs, and buying fuel. "Speculators" speculated that gasoline would be worth more and more. So, barrels of oil were starting to become very expensive, and people were buying it up because they were taking the gamble (there's that word again, gamble) that oil would be worth more when they sell it. This drove the price at the pump up and up and up. .
May 2006: Housing market peaks.
2007, 2008: Because the US economy is so dependent on oil to run everything - from airlines to truckers to making plastics - businesses could no longer afford to operate like they did before when oil was cheaper. This is when everything came snowballing down. First, people lost their jobs, and because they couldn't buy anything that hurt other businesses and more people lost their jobs. Because people lost their jobs they could not pay their mortgage. Because mortgages had been "bundled and sold, bundled and sold", all that money at the top came crashing down. Suddenly, people were not able to pay for their housing investment much less their primary residence. And Wall-Street, because they had gambled that this boom was going to keep going, fell.
Sept 2008: Official collaspe. Hardest hit areas are areas with housing built in 2005-2006.
This is why gambling at this magnitude is bad. This is why regulation is good. I don't want this to happen again. Why do I care? Because we bought a house in Aug 2006 and we are still incredibly upsidedown in it. Thankfully both Hernan and I have kept our jobs and can afford the payment. But I'm keeping an eye out on the housing market, because once its better we can get out of the bad loan.
My prediction: Housing market will recover to 2006 levels in 2017. Housing recovery will start to model population growth (which is slow). There will not be another housing boom because there is nothing congress can do, like they did in the 90's, to make real estate an attractive investment again. Congress is offering an $8500 tax credit, rates are at all-time lows, and its STILL bad.
More on the Housing Crisis
Timeline of how the economy and housing market collaspe. Note: All times are approximate. This opinion is based on experience, and talking with older people.
1985 - 1992: 80's housing crisis.
Early 1990s: Perhaps due to the 80's housing slump, congress passed a law that capital gains tax is no longer paid for real estate gains. So, you could buy real estate, sell it a few years later, and if you make a profit, no taxes are paid on that profit.
1992 - 2006: Since there was no longer a capital gains tax, people started to see real estate as not just a normal residence but an investment. People built properties, "flipped" properties, built lots and lots of homes on a small piece of land, and sold them for profits. This was the boom era of real estate. Houses seemed to go up faster than population growth. I call this the "artificial growth". Why? Because it was based on speculation of real estate as an investment and not as a place of residence, so there were more houses being built than people needing (or could afford) to buy a house.
Early 2000's: Financial de-regulation went into effect so banks could pretty much do whatever they wanted. This included two key things: 1. Selling subprime mortgages, so now people who couldn't afford to buy a house could now do so (or shouldn't, because of a poor credit score), 2. "Gambling" on loans (bundling, re-selling). And some other things I don't quite understand.
Mid 2000's: Fuel prices started to rise due to "speculation". Because the economy was doing so well (impart because real estate was doing so well), people were going places, buying gas-guzzling SUVs, and buying fuel. "Speculators" speculated that gasoline would be worth more and more. So, barrels of oil were starting to become very expensive, and people were buying it up because they were taking the gamble (there's that word again, gamble) that oil would be worth more when they sell it. This drove the price at the pump up and up and up. .
May 2006: Housing market peaks.
2007, 2008: Because the US economy is so dependent on oil to run everything - from airlines to truckers to making plastics - businesses could no longer afford to operate like they did before when oil was cheaper. This is when everything came snowballing down. First, people lost their jobs, and because they couldn't buy anything that hurt other businesses and more people lost their jobs. Because people lost their jobs they could not pay their mortgage. Because mortgages had been "bundled and sold, bundled and sold", all that money at the top came crashing down. Suddenly, people were not able to pay for their housing investment much less their primary residence. And Wall-Street, because they had gambled that this boom was going to keep going, fell.
Sept 2008: Official collaspe. Hardest hit areas are areas with housing built in 2005-2006.
This is why gambling at this magnitude is bad. This is why regulation is good. I don't want this to happen again. Why do I care? Because we bought a house in Aug 2006 and we are still incredibly upsidedown in it. Thankfully both Hernan and I have kept our jobs and can afford the payment. But I'm keeping an eye out on the housing market, because once its better we can get out of the bad loan.
My prediction: Housing market will recover to 2006 levels in 2017. Housing recovery will start to model population growth (which is slow). There will not be another housing boom because there is nothing congress can do, like they did in the 90's, to make real estate an attractive investment again. Congress is offering an $8500 tax credit, rates are at all-time lows, and its STILL bad.
