Housing price conundrum (part 2)발음듣기
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Housing price conundrum (part 2)
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Before I go a into an explanation of why housing prices skyrocketed from 2000 to 2006, I think it's a good idea to give a little history of what the housing market and the mortgage market used to be like before things got out of control.발음듣기
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And back then, to buy a house - and actually, for a while, until more recently - in order to buy a house you had to put 25% down.발음듣기
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So I'm going to pay a little over $4,000 a year in interest. Or if I divide by 12, about $340 a month in interest.발음듣기
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And I remember at the time, we actually moved out of our house and we rented it out, because we needed cash.발음듣기
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And we rented out that exact same house - and I this is in the late '70s or early '80s - we rented out that exact same house for $900.발음듣기
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First of all, the big question is, why did those people who rented our house - I mean, they paid $900 a month.발음듣기
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Why were they willing to pay rent, when they could have bought a house, where the mortgage would have been - interest plus a little principal - it would have been no more than $400 a month?발음듣기
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So why would you just throw away - this is the classic rent-versus-buy argument - why would you throw away $900, where you could actually build equity paying $400 a month for the exact same place?발음듣기
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Maybe these people had really good cash flow every month, but they just never had the circumstances, or maybe even the discipline, to save up $15,000.발음듣기
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Maybe the people who were renting, they were working odd jobs, or they didn't have a steady income.발음듣기
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And they just couldn't find a bank that was willing to give them a loan, despite having a steady job and the $15,000 down.발음듣기
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If you have to ask me, I think the biggest barrier for this family at that time was probably the $15,000 down payment.발음듣기
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And frankly, they probably had trouble saving $15,000 because they were busy paying $900 in rent.발음듣기
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That it did make sense, that the conventional wisdom that it is better to buy than rent held.발음듣기
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It's just, everyone knew that, but a lot of people just couldn't buy, even though they wanted to, because they didn't have the down payment.발음듣기
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But it got more and more, I guess we could say, flagrant, as we went through the decade - is that people started lowering these standards.발음듣기
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But let's say then, in 2001 - and I'll explain later why this might have happened - the standards were lowered.발음듣기
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That if you wanted to buy a house, all of a sudden you could actually find someone who was willing to give you a house for 10% down, maybe kind of a steady job, maybe just need a job.발음듣기
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Back when they were doing this, back in the '80s, if the standards got a little bit freer, like they did in the early 2000s, those people could have bought a house.발음듣기
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So you can imagine, there's a whole set of people who maybe had a decent income, but they couldn't save any money.발음듣기
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So all of a sudden, without people's incomes going up, without more jobs being available, without the population increase, there were more people who could get financing.발음듣기
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By 2004, 2005, you had a situation where they had these stated income - they had these things called liar loans.발음듣기
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So even though the mortgage might require an income of $10,000 a month, and your income is only $2,000 a month, you could say your income is $10,000 a month.발음듣기
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And every time credit got easier, there were more people who, despite the fact that they weren't making any more money, they were able to get financing.발음듣기
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And so the pool of people who were able to bid on homes, or the demand for homes because now there was this financing, became larger and larger.발음듣기
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And why did they get to this unbelievably absurd level, where by 2004 and 2005 - you hear stories, especially in California and Florida, of people who were making maybe $40,000 a year.발음듣기
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Why were people willing to give their cash to people to buy a house that had a very low likelihood of getting paid back, and for a house that had a very low likelihood of being able to retain its value.발음듣기
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