From time to time we hear something on the news about the housing bubble and what is happening to the real estate market across the entire Nation.

We see our neighborhoods bombarded with “For Sale” signs and vacancies due to foreclosures and yet do we really realize why this is happening and when it will end?

I am confident that tons of you have heard of the term “recession” and many of you think we are in one, but did you know that we are actually in a real estate depression, not recession, and that everything will get worst before it gets better? I am sure by now you are telling yourself, here is another article that will point the finger and tell me nothing more than what I already hear on TV and this is where I tell you that my duty is not to change your understanding about who is to blame or you think a certain way. My duty is to provide you with the understanding and resources to be able to think correctly and question what you see on television because you know the facts and what they mean.

Lets begin by describing some important terms that are often put out there and their affect on the housing bubble.

-Sub-Prime Loans: In simple words, sub-prime loans were mortgages that were given to consumers that should not have had them. people wanted to purchase houses but did not have down payments, good credit, good income, reserved funds or any of the other qualifying factors that a regular mortgage has. Due to the limitations that the customers had, these loans usually carried low interest rates and payments for the first 12-24 months and then re-adjusted to very high variables there after, making it impossible for the borrower to pay.

-Predatory Lending: Predatory lending is when a big lender (predator) chooses to go finding and attacking borrowers by offering them loans knowing they can't afford them. To put in simpler terms, they know you shouldn’t have it, but they want to make money so they will sell it to you, even if they know it will damage you on the long run. They also go as far as to target a certain demographic to ensure the degree of education is low so they don’t have the ability to read all the fine print and clearly understand what they are getting into.

-Short Sale: Imagine a short sale as a pre-foreclosure. The lender and you agree that you can not afford to pay your loan, so you both agree that the home needs to go but you don't want foreclosure on your credit report and the bank doesn’t want that large of a loss, so you split the loss in two and attempt to sell the home at a much lower cost. A short sale can be processed in many different ways and typically no money will leave your pocket up front, but taxes are a different story.

-Foreclosure: Bank owns your Home.

So here is the equation so far…

Subprime Loans+Predatory Lending+Target Borrower=Short Sales+Foreclosures

Stated Income deals: Mortgages that didn't require income verification, stating your word was as good as gold. If you claimed to drive a taxi and that you made $130,000 per year, the lender would approve the deal even though they knew it was unlikely. (Side note: Not all stated income deals are bad.)

-The Government’s Role: To produce as many initiatives as possible that would allow banks to put more consumers in homes. President Bush had several initiatives going back to 2001 that concentrated on untying the hands of the banks and allowing them to get creative with their loans. By doing so, more people were able to afford houses. Incorrect, more people were able to afford house payments, not houses.

-Mortgage securities: Lenders always find more ways to make money and minimize their risks of losing any. When lenders were allowed to sell mortgage securities, it only took a minute for them to understand that there was money to be made. Mortgage securities are simply a mortgage loan that a bank owns cut into three pieces and sold on the public market. In other words, even though you make your payments to a certain lender, they no longer own the rights to your properties but three other people do. These three other people also happened to be banks, investors and foreign investors. Think of this, banks now no longer needed to assume a risk for selling you a mortgage, instead, someone else would assume it and both parties got rich. So why would banks care as much if you can’t afford your home? Some banks cared, some didn’t.

Here is another equation to think about:

Greedy Banks+Greedy Investors+Government+Securities=Lots and Lots of Foreclosures.

So now that we recognize what the terms are and their significance in this matter, lets visualize what really occurred to cause the housing bubble.

So how come so many people and lenders are losing money?

Well lets see how it all began…

Back in 1999, the Greater Washington Area was growing at a very fast rate, many IT corporations were booming and coming to the east coast because of cheap homes and major acreage availability. In other words, they were building tons of big buildings for very little money. Government offices followed from Washington DC and then followed the small corporations and the whole food chain.

With all these new businesses came new employees, and these employees all needed homes and so began the start of the housing bubble. Too many people were here, not enough homes were available and compared to other areas that they came from, it was less expensive. What we know about basic supply economics is that the lower the supply, the more the demand, and the higher the cost.

Then came unrealistic inflation from builders. Since prices needed to go up and supply kept going down, houses were selling to the highest bidders with major lot premiums. These premiums made existing homes rise as well since neighborhood houses were selling for $50,000 - $100,000 more than worth because of demand. The good news then was that only qualified people were playing in this game and they were only buying one house to live in but were getting less for their money.

Then arrived the government in 2001 and their challenge to lenders to make it inexpensive and got creative with the loan processes and allow more Americans to own houses. As an incentive the government decided to open the securities market to mortgage bonds and allows banks to package mortgages and sell them to the public as an investment. Imagine it this way, as a lender, you have the right to give people loans, make money off of it and then not even have to fund them, since you are selling them off to another person instantly and get your money back; no risk. This is money for banks and so they decided to do what everyone else that is in business does, make more loans and make more money, even if it doesn’t make sense to put people in homes, its income and growth. What’s the worst that could occur? You foreclose and they get your house worth a $100,000 more than you purchased it and so not only you are out but they make money. No risk involved.

Two years of prosperity and growth occurred, the nation was perfect. You owned a home, you had equity and used it to do what you never thought possible and you think to yourself, I never knew I could afford all these things, lavishness and lifestyle. The banking industry grew by close to 160% year after year, more consumers moved here, more people bought houses, more jobs were created and more money was spent on useless things that no one could afford before.

Then came a different breed of investors and lenders. Predatory lending started getting worse, and becoming apparent and mass marketed. Investors that weren’t really savvy but rather amateurs that wanted a slice of the pie decided to get into the market and buy real estate that they wished to flip and rent. Bad idea! The worst part of it all was that some people in the mortgage business were making $150,000 a yr and didn’t know what to do with their money but waste it in bad investments and lavish lifestyles. Another bad idea!

I constantly think that a good indication that a bubble is coming is when your acquaintances start coming up with unrealistic schemes in how they can make money from a market trend. This to me shows that there are plenty of individuals that are already playing that shouldn’t be playing. At this point, the savvy investors are out of the game and all thats left are the investors that can’t afford what they bought and trust others to make their payments through rent and would be lost without it.

2004 came and the market steadied itself, there was no longer an over demand for houses, and supply was adequate to no longer ask for lot premiums. No lot premiums means that the inflated $50,000 - $100,000 you were making from your house in less than 1 month is now gone and if you were the last horse to cross the finish line, then you just lost $100,000. Losing money on paper is irrelevant unless you have to sell or refinance, and regrettably you happened to have purchased from a predatory lender that sold you a sub-prime loan that adjusted itself and doubled your payment after 12 months of ownership. That is really not fair, but yet no one made you sign knowing you couldn’t afford it, and no one forced you to sign without reading.

The domino effect started and the real estate market started getting infected, as new home costs leveled, used houses were not valued as much. As foreclosure of all those second and rental properties increased, used and new real estate values decreased across the board. Then came the next problem; the large spenders no longer had the power to refinance as their values dropped and so they couldn’t minimize their payments and keep those great luxuries that they thought they could afford.

2005: Short sales and foreclosures were now on the uprise and starting to damage values, the same economics rule applies again: more supply, less demand drives prices down. More mortgages began adjusting, more consumers couldn’t afford their houses and more people left their house. Big spenders were left with luxuries that meant nothing and second mortgages they couldn’t afford.
This was starting to become a big issue for householders. Everyday everyone waited for the comeback of the market and it never occurred.

2006: The banking problems began to show themselves. Huge losses on books and records for banks and huge losses from investors that bought into the mortgage securities that banks were selling. Huge losses mean major layoffs and the first individuals to get laid off are those same individuals that were spending their easy earned money on bogus and useless luxuries and now were losing their house, as they no longer had comparable incomes or any real skill set that earned them their job. They got and lost their jobs because of demand.

Then came immigration. Immigration? It seemed that the government’s plans to deport illegal immigrants couldn’t have came at a worst time. It was bad because most latino families that had been victim of predatory lending were depending on 2-3 incomes within the same home to make ends meet and afford their home, incomes which were not always legally earned and taxed. With these incomes now gone and the mortgages adjusting themselves, the foreclosure rates started surging causing values to come down further. 2006 was not a good year for most people but then came 2007 and unfortunately, the situation got worst.

2007: More of the same intensified. Major losses for banks, major losses for investors, many lay-offs, inflation, energy prices grew, house value decreasing over 20% over the previous year. The nation was coming to an end for many individuals but the truth was that at this point if you had purchased a house before 2002 and didn’t get robbed by paying a premium you were still not upside down. That’s right, for the most part. The market had only corrected the house premiums and the increased prices due to supply and demand, land values had not fallen as hard and dollar per square footage had also not taken a drastic loss. So the reality that most didn’t hear was that the market equilibrium occurred earlier than expected and removed the fluff (fake income and wealth) from the market, and all that was left was real money.

With all the madness, more sub-prime loans began adjusting and caused more individuals to continue down the path of foreclosure, most of which could have been prevented by a simple call to your lender that you chose not to make just as you chose to not read the paperwork in front of you when buying your home.

Then followed the blaming: Government blamed banks, banks blamed lenders, lenders blamed customers and clients blamed banks and the blame game began but no real solution found.

Let me tell you what is the cause of all of the housing bubble: AMERICAN GREED

We all believe in the American dream, the opportunities that exist, and want to believe that the American dream is about making as much money as possible and therefore get greedy when we see chance.

Lenders, house owners and investors got greedy and so did the government. We can blame banks because they made money on your misery and consumers made money on someone else’s misery by working for those particular banks and not worrying for the consequences of their actions, but Main Street also got greedy by trying to make a quick buck without reading the fine print when buying 2-3 houses and reselling them for a profit in less than 2 months. Banks did not do that, individuals did that to other individuals, and believe me when I say that it wasn’t the rich ones that turned on the poor but the smart ones that saw chance and seized it. The morale of this article is that the common goal in this country is to earn capital, and people from Main Street to Wall Street earned capital, and lost money and there is nothing weird about that. Those that made money and got out on time were those that possessed a fair competitive advantage over the others, they educated themselves on what they were doing before doing it and seized the moment.

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