The news out of everywhere this past month, whether it be in print, on TV, or basically every general news source on the web has been a daily “Sky is Falling!” headline. Which then leads to it’s respective story, which of course is “Are we in a recession”. So and so expert says ‘yes’, but yada yada economist says ‘not yet’. Is anyone really sure? Does anyone know, and when they do, will they tell us? The big news this month was the bailout/buyout of Bear Stearns. To those who don’t follow the financial world all that closely, this may be the first time they’d heard of Bear Stearns. But when coupled with the terms ‘Bailout/Buyout’, everyone’s ears perk right up. And it all comes down to the housing bust. A company that was worth 170$ a share a year ago, was sold to JP Morgan last sunday for 2$ a share, with the federal reserve financing the transaction and backing it up as much as 30 billion.
What do we know for sure?
1. - The housing bubble was the largest economic bubble in recent history. Of course the financial world felt comfortable gambling with everyone’s chips when the housing market had done nothing but go up since…well, since always.
2. - When’s the economic downturn gonna stop? Who knows. If you find the guy that knows, have him/her e-mail me. Me and about 100 million other people are looking for such a person. Many of the creative/sub-prime mortgages had a 3-year ‘teaser’ rate to get buyers in before someone had to pay the piper. The bulk of those 3 year teasers will be ending sixth months from now in September ‘08. I’ll probably follow this up in September to update on how this has affected us all, and once again in March ‘09 for the same topic.
3. - The housing market was really good for a relatively long time. Before there was a bubble, you’d always read about housing market anomolies, a month here and there every couple of years when home value would pep up, and everyone would notice, but the market would go back to it’s usual pace by the next month. A few years ago, however, some markets would see values increase at an incredible rate for consecutive months. You’d look at your neighbor’s house and think “no way they’ll ever get what they’re asking for” and then they did just that. Everything was good, and it was good for a few years, I wouldn’t be surprised if it was bad, and bad for a while, until prices come down to the point where the average home buyer is able to afford the average home with a traditional mortgage, because the days of the creative mortgage are gone.
Still confused? Is the news getting you on the hook with big headlines of “Housing Bust”, then leaving you with no real explanation?
The best article I’ve seen explaining the current housing downturn and how it relates to the economy was published last week by the New York Times.
“As is often the case with innovations, though, there was soon too much of a good thing. Those same global investors, flush with cash from Asia’s boom or rising oil prices, demanded good returns. Wall Street had an answer: subprime mortgages.
Because these loans go to people stretching to afford a house, they come with higher interest rates — even if they’re disguised by low initial rates — and thus higher returns. The mortgages were then sliced into pieces and bundled into investments, often known as collateralized debt obligations, or C.D.O.’s (a term that appeared in this newspaper only three times before 2005, but almost every week since last summer). Once bundled, different types of mortgages could be sold to different groups of investors.”
Read article here.
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