Friday, July 15, 2011

SOME MORE PERSPECTIVE ON HOW WE GOT INTO THIS ECONOMIC CRUNCH

This is another in a series of blog posts in which I intend to excerpt and expand upon portions of a recent book, "Reckless Endangerment".

The authors of this book investigate and take apart the various factors that led to the current recession or depression (you pick the term) in the real estate market.

From 2000 through 2006, the average price of a single family house in Delaware County increased by 61%. (From $160,000 to $257,000 as per MLS, Trend). Since then we have had a market correction that has driven the average resale price down by 27% nationally. In Pennsylvania, the average decline since 2006 has been 13% (Freddie Mac, 05/11).

One of the predictable results of that kind of a decline is a glut of houses on the market. As per MLS Trend, in Delaware county, there are 4,103 single family houses for sale as of June, 2011. Back in the height of the good old (or was it really) seller's market, the inventory of single family houses was around 1,600. Wow, a 256% increase in inventory. No wonder prices are down.

One other indicator of stress in the housing market is the rate at which single family houses are either 90+ days behind in mortgage payments or in foreclosure. According to CalculatedRiskBlog.com, the rate for Fannie Mae purchased loans was under 1% until late 2007. Since then, in 2010, it spiked to a heretofore unheard of 5+%, a five fold increase.

Along with this glut has come the now all too familiar litany of high unemployment, declining incomes and immense pain on the part of a lot of people.

What caused this dramatic shift and all of the corresponding misery? More on that in the next blog post which will be out next week. Suffice it to say, it came about because lenders made way too many easy loans, with standards that were way too lax.

However, was it because of the "Greedy Bankers and Wall Street Sharks" who
"Took Advantage of Government De Regulation to mess up the economy? That is the basic line that has been pushed by most of the major media in this country.

However, as I think you will see, the answer is Not Really. It was caused by deliberate policies of our federal government interfering in and, in effect, over regulating the loan market.

I would welcome your comments and thoughts.

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