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Thursday, December 27, 2007

A decent article on the housing "crisis"

This story is an interesting take on the housing "crisis." At times the story reads as a reasonable accounting of the facts and their implications. At other times the article seems to blame the "mortgage industry" for selling people houses they couldn't afford. At other times the story's author seems to (more correctly) blame consumers for buying more house than they could afford or for being "stupid" and "unaware" of the true cost of the exotic mortgage they were undertaking.

Economists tend to wince when broad strokes of ignorance are applied to the market as a whole or to either side of the market - suppliers or demanders. In the case of a no-interest loan which an individual walks away from, who is the victim? The homebuyer or the mortgage company or the final investor/hedge fund who bought the mortgage in a bundle?

Take a second to think about that. Household's bought houses with interest-only loans, with very low down payment requirements, and if the value of the house falls below the loan value some might decide to walk away from the debt - the household suffers a shot to their credit rating but the mortgage company or final investor/hedge fund is the one holding the bag - the household might well have lived in a house for several years for free (at least in real terms).

Some number of foreclosures are for unoccupied houses - whether second/third homes, investment properties, or so-called "flips." If sub-prime foreclosures are caused by households with significant income/wealth/resources, it would seem less likely that any resultant economic slowdown would lead to a recessoin anywhere near the magnitude of the great depression, as some apocolyptic predictions assert.

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