The Housing Bubble

“Homeowners account for 68% of all occupied housing units” 

Affordable Mortgages were the keystone to the Housing Bubble.  They:

• Increased demand for housing
• Drove homeownership higher
• Distorted the decisions of home buyers and lenders
• Detached home prices from the fundamentals of value
• Eliminated the value regulating and inhibiting characteristics intrinsic to down payments and requisite cash flow requirements
• Supported unsustainable housing valuations with increasing leverage

The Consumer Spending and Credit Bubbles were close, concurrent relations of The Housing Bubble.  Each was directly influenced by Affordable Mortgages and distortive to the overall economy.  The sequential popping of these bubbles triggered the current financial crisis.  Their combined, continued collapse will perpetuate the Economic Depression.

The Consumer Spending Bubble

“Consumer spending accounts for 70% of U.S. GDP”

Affordable Mortgages drove a dramatic rise in homeownership and fueled rapid, sustained price appreciation.  This phenomenon translated into large and recurring equity gains which spurred increased consumption.  The innovation of HELOCs exacerbated this trend as the hybrid mortgage enabled people to monetize theoretical equity gains, access liquidity and consume in excess of income.  The consistency of leveraged equity appreciation created the expectation of future gains and eliminated the perception that financed current consumption would need to be repaid.  Rising house prices and increasing access to liquidity also distorted the savings rate, which fell into negative territory, further contributing to increased consumption. 

The Credit Bubble

“U.S. mortgage debt is equivalent to approximately 103% of GDP”

Affordable Mortgages were both a function-of and fueled the Credit Bubble by providing mortgages to people who otherwise would not have had to access to them.

These hybrid Mortgages eliminated or reduced the prerequisites necessary to borrow money.  These hurdles include:

• Creditworthiness
• Access to a down payment
• Cash flow necessary to service interest expense
• Funds necessary to finance closing costs
• The requirement that principal be repaid through amortization
• The necessity that interest on debt be fully serviced