Home Price Bust More Damaging Than Stocks
This OpEd piece by a writer in Baltimore echos the realization that is occurring all over the world. "My earlier perturbation turned to concern as I listened to my friends' responses and saw new, disturbing trends emerge."
"When I asked one friend about her methods I noted a second trend, and it raised hairs on my neck. 'The real estate market always goes up.'The classic bubble indicator, 'irrational exuberance.' A twentysomething law student with no training in economics or real estate speculation just told me that the market always goes up."
"The third trend: too much credit. 'You can take out a junior mortgage to pay down your credit card bills. That's what my parents did.' I grimaced."
"The fourth trend: insolvency. A default brings down neighboring home values. So homeowners who expect to pay down credit card bills and a second mortgage with appreciation could be surprised."
"'Well,' some say in their last-ditch effort to overcome economics, 'the government can't let the market fail.' And there it was: the elephant in the closet."
"Fannie Mae and Freddie Mac are leveraged into the trillion-plus dollar range with complicated derivative securities. At the same time, mortgages comprise almost a quarter of bank holdings, and most insurers and pension funds are heavily invested in mortgage-backed securities. So, Fannie and Freddie are not only giant hedge funds, they are effectively the largest mortgage bankers, S&L's and portfolio managers in the world."
"If Fannie and Freddie haven't done a good job ensuring creditworthiness, sniffing out fraudulent valuations, or matching risk, they could become insolvent (if they aren't already)."
"The great irony would be that we never recognized the true origins of the Great Depression. The stock market wiped out Wall Street, but it was average people defaulting on mortgages that sank our economy."