Housing market outlook for 2009.

• Author: Fisher, Jeffrey D.

November 2008

The Blame Game

Needless to say, the housing industry has taken the blunt of the blame for the financial crisis and the current economic recession. Certainly, the unprecedented growth of subprime mortgages made to people who really couldn't afford a home was a major cause of the problems. It is questionable, at best, whether or not these mortgages were sound loans even when home prices were rising and people could refinance and take equity out of their home to help cover their future mortgage payments--especially when their "teaser" interest rates were adjusted upward to a market rate. When home prices started falling two years ago, millions of people holding these mortgages faced financial trouble. As defaults started to increase, concerns about the impact on banks and the rest of the economy swelled from a ripple to a tidal wave that swept away many financial institutions and resulted in the federal government taking over Fannie Mae and Freddie Mac.

There are certainly others to blame. Mortgage brokers encouraged homeowners to get mortgages they couldn't afford so the brokers could get fees. Lenders thought the mortgages were a good way to increase profits, and they got their service fees while selling the loans to Wall Street, who in turn created securities backed by the mortgages. The securities were rated by the rating agencies, which also received payments on fees, and then the securities were purchased by investors around the world who relied on the rating agencies. While not obvious at the time, it is now clear that the system failed us and the incentives were all wrong. Thus, we are all paying for it through the bailout and the effects the financial crisis has had on banks, retirement accounts, Main Street, and Wall Street. Small businesses have been having problems refinancing loans to keep their businesses going as banks have severely cut back on the amount they are willing to loan and tightened lending criteria to everyone--not just mortgage holders.

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Bailout and Turnaround?

The bailout may help by restoring liquidity in the banking system, removing bad mortgages from banks' balance sheets, and encouraging banks to loan again. Moves by the Federal Reserve Bank to keep interest rates down may also help. And even if inflation comes back as a result, it could ultimately help push home prices back up again.

The question is, when will the housing market turn around? There are many outstanding mortgages...