Friday, October 22, 2010

Is This a Housing Crisis Or a Financial Crisis?

By John Sprague
One built the other, I would say and it was then encouraged by still other factors. Many people are apt to tell you that this is not a worldwide problem and was created in the United States. Yes, our government contributed to the problem but greed by owners and investors was the main cause after inflating prices. The out of control housing costs caused this financial situation. It definitely is a world wide financial crisis caused by an overinflated real estate market that has spread over nearly the entire globe. European realty costs are as inflated as American pricing.

Real Estate locations all over the world have seen unprecedented market prices that had never previously been reached. Property from Ireland to Russia as well as Eastern Europe went way out of control as did pricing in places like Australia and the Far East. Possibly greed is more a human condition than just something that occurs in America. If the cause began in the US, investors and property owners went along with it everywhere else. They were just as happy to go along for the ride and line their pockets like everyone else. Profit is never left on the table for long. Regulation in other countries may not have been solidly in place as well as at home in this country.

This crisis was constructed from such a long stretch of increasing inflated costs just about everywhere. There wasn't a sign of a possible correction for this run away train and it was allowed to go haywire. It jumped the track and rolled over a few times. Most intelligent people and economists especially, could see that at some point, this expanding unstoppable bubble would have to burst eventually. Many of these same people believed it wouldn't happen for a few more years and it wasn't their problem anyway. Many modern day speculators turned to the real estate market for investment. It was more reliable than the stock market and their change of profit required less risk.

Banks and investment houses were involved in increasing the problem merely by encouraging the borrowing of money against the equity in people's homes. Some businesses like special realty mortgage companies were created just for the purpose of buying and selling mortgages. Their main function was to do nothing but the refinancing of properties and this was their line of expertise. These businesses became a whole new industry unlike anything we had seen it the past. People were encouraged to refinance loans at low interest rates and take their profits to spend on travel, investment or anything that caught their fancy. So, homeowners would just take the money out and spend, spend, spend. The money financed cars, toys, computers and boats.

There was no end in sight. The money provided by banks and financial organizations should have gone into housing enhancements but did not. This seemingly free money did not go into renovations or expansion of the properties to be quite frank. Once in a while, some people did the right thing and did the housing renovations but they were not required to by these banking institutions that had few rules. It was no rules, just right! Where there is no control, there is bound to be corruption and the rest is history.

Even the government got into the task of encouraging banks and lending institutions to relax their loan requirements and policies so more people could own homes. They sought perfection in an imperfect word. Put all the poor people that couldn't afford home ownership into their own places. Many individuals that were not adequately qualified or could not hope to repay those loans were given the ultimate opportunity to purchase their dream house and enter the housing market. They would now be a proud owner and could move out of their rental units. The government, in addition to these relaxed banking regulations, had encouraged ownership thus helping the housing industry to go further out of control. Some of the regulations that were relaxed had been put into operation long ago following the great depression of 1929. This was the crash of 1929 that our parents and grandparents may have told you about.

In those days, they had suffered so badly that they didn't ever want that financial crisis to ever rear its ugly head again. They had known the sacrifice brought on by mismanagement of financial assets in an earlier time. Did we forget about that historical masterpiece? Well, history always seems to repeat itself, doesn't it? We should never ever let our guard down again. By removing regulations or at least relaxing them, has helped this bad situation to re-emerge from its entombment.

The current housing market and now its realignment had built the very basis for this current financial meltdown. Human greed and government interference have spun the wheels to new heights. Hopefully, we can get our priorities straightened out and the necessary regulations back in place. Many years from now, I'm sure it will happen again but for now let's get our house in order.

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