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What can We Learn from the American Housing Crisis?

Updated on October 19, 2012

The Pains of Financial Gluttony

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Domino Effect of Bad Financial Choices

January 13, 2010 the U.S. Congress opened hearings of America's top financial institutions searching for answers to the housing crisis debacle that sent the U.S. economy over a disasterous edge.

To his credit, the CEO of Goldman Sachs opened his testimony with a confession of his firm's guilt; apologizing for his organization's role in the mortgage disaster. No doubt Goldman Sachs and the other major players on Wall Street are culpable.

Those who should have and probably did know better led the folks of Main Street astray.

Together big man and little got caught up in a severe round of fiinancial gluttony in which financial responsibility was set aside for instant gratification. When offered jumbo loans at low interest rates, the American Dream was made a reality for nearly everyone who could pass the mirror test.

If they breathed on the mirror and it fogged up, they qualified for the house of their wildest dreams. What they did not realize was their new mortgage was a ticking time bomb set to blow up their found financial status to smithereens at an inopportune time.

The American Dream became the American Drain, the ultimate end of each family's financial gluttony.

However, the ill effects of the poor financial choices did not begin with the massive foreclosures. Larger loans led to higher home values which pushed up the value of other homes. Families living in these other homes then had huge amounts of equity. However, they did treat these value gains as mere paper gains. No, they took home equity loans against the new values to fix up their homes and buy toys like boats and motor homes. Instead of owing $200k they now owe $400k, even $600k. Their $1500 per month housing payments were replaced by $2500 to $3000 per month payments and the financial dominoes began to fall.

It Was the Best of Times

Your Dream House Now!

Who wouldn't want to move into their dream house? If there was a way to experience that dream now, wouldn't you jump at the chance? Isn't sooner better than later? It seemed like the best of times. From 2000 to 2006, folks all over the country were given their chance to own their dream house now. The whole thought of discipline and personal responsibility was overruled by a sudden flare up of a financial sweet tooth egged on by home mortgage sugar daddies.

And It All Came Crashing Down

The Financial Dominoes Fall

However, those who chose to participate in this temporary slide into financial ectasy did not realize what was about to unfold due to their impetus behavior. With house payments dominating their household budgets, they began to have money problems and less discretionary funds to buy other things.

Since folks had less money for other things, state and local governments like California and the County of Riverside in California were left with taking in less sales tax. Furthermore, as families begin to default on loans they could not afford, the financial institutions had to foreclose and those same government entities began taking in less property tax funds. Simultaneously, the housing construction industry came to a screeching halt and less money was spent at retail establishments. These led to downsizing and business closures and the loss of jobs. The loss of jobs closed the loop of a triple whammy because the loss of jobs meant less income tax taken in by state and local governments, too.

Since the state and local governments are unable to collect sales, property, or income taxes at the same pace as before, they are forced to cut services including education.

The long-term effects of instant gratification and financial gluttony is more people out of work and less educational services for our children.

The current economic crisis is the result of poor financial choices by everyone who chose to participate in this round of financial gluttony including financial institutions and individual investors or homeowners.

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    • izettl profile image

      Laura Izett 7 years ago from The Great Northwest

      California is ridiculous, but I also believe that about WA state where I live-and we don't even get nice weather like CA. This article was really good and spurred some conversation with a few of my friends today.

    • ecoggins profile image
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      ecoggins 7 years ago from Corona, California

      izetti thank you for your comments. It is so easy to get sucked in. We lived in Cambodia until 2006 and returned at the top of the real estate market. In 2000 before we sold our home, our house payment was $1300/mo. In Cambodia, we rented a 2800 sq. ft. home for $400/mo. Since we returned to California in 2006, our rent for a four bedroom has been $2200/mo. And, neither my wife nor I have found permanent full-time work. It's crazy.

    • izettl profile image

      Laura Izett 7 years ago from The Great Northwest

      this whole financial situation that has played out the last couple of years is sickening. I was laid off in '08, but my family and I rent a home and have only one credit card so we were not as deeply effected as some of our friends. It was a bubble ready to burst- I wrote similar hubs to this, but more on the psychological viewpoint, of why our spending habits got out of hand. It's so easy to do. Financial gluttony is a clever title too!

    • ecoggins profile image
      Author

      ecoggins 8 years ago from Corona, California

      James, I appreciate your comments. I know you're struggling right now and I am praying for your financial recovery.

    • James A Watkins profile image

      James A Watkins 8 years ago from Chicago

      Outstanding analysis. I was right in the middle of this foolishness, I am sorry to report. I was utterly stupid when I took out a floating interest rate jumbo loan (interest only) for more than I could afford if my financial conditions declined even slightly. What can I say? What's done is done. But I surely learned valuable lessons.

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