If it was so damn obvious, why weren't major alarm bells going off in 2004? 2005? 2006? Why do we STILL have so many in "denial" today? Why is the Fed saying "all will be well" and why are so many saying "we've hit bottom".
Why? Because what's been obvious to HP'ers for so long is just now becoming obvious to others. The Late Great Housing Bubble was a classic financial mania, a classic Ponzi Scheme. And the Great Housing Crash of 2006 - 20XX? will be a classic crash and unwinding.
Here's a column by Marketwatch's chief economist. Enjoy. And be happy that you knew what was coming all along and prepared the best you could, even when others didn't, and still don't know what's about to hit 'em.
End of housing bubble should have been obvious to everyone
End of housing bubble should have been obvious to everyone
Why are so many people so surprised that the housing market has weakened and that a growing number of loans are in default? It should have been as plain as the noses on their faces.
Since short-term rates were well below long-term rates, many people borrowed at adjustable rates, believing that rates would stay low indefinitely, or that housing prices would continue to rise indefinitely, thus enabling them to refinance at a fixed rate at some future date.
Needless to say, home prices rose even faster than before, as these lower rates (along with new types of loans and creative sales tactics) increased the effective demand for housing faster than supply.
In some areas, homes wound up costing five times the average family's income or even more. Nationwide, average home prices shot up 50% from 2000-2005 - clearly exceeding household income growth by a considerable margin.
Few were disturbed by these trends. Indeed, no less an authority than Alan Greenspan said in early 2004 (when short rates were at their lowest) that homeowners might have saved "tens of thousands of dollars" over the past decade had they held adjustable, rather than fixed-rate mortgages.
Coming from the person who, as head of the Federal Reserve, had the most control over short-term rates, this might have given borrowers and lenders alike the feeling that it was safe to borrow on a floating-rate basis, since the Fed was unlikely to raise short rates after giving them such a ringing endorsement.
All good things must come to an end, and the end to the housing bubble (which Greenspan belatedly characterized as "froth" by 2005) came as the Fed began hiking interest rates starting in the middle of 2004.
Rising rates reduced the demand for housing, causing prices in some areas to top out and start falling. Readers of this column were informed that the party was over and that some homeowners would soon have difficulty paying off their loans.
Others missed this sign until it was too late. Now they are trying to shut the barn door after the horse has escaped.
